Business

Saving our $ could mean marrying Uncle Sam

Peter Brimelow December 12 1977
Business

Saving our $ could mean marrying Uncle Sam

Peter Brimelow December 12 1977

Saving our $ could mean marrying Uncle Sam

Business

Peter Brimelow

The elderly American couple had intended to pass through Canada on their transcontinental trip. But after two days in the Prairies, they recoiled south. The reason, they said in a letter to Industry, Trade and Commerce Minister Jack Horner, was simply that Canada was too expensive. These visitors were the human manifestation of the enormous gulf that has opened between what Canadians spend on foreign travel and what foreign travelers can be enticed into spending here. In 1977, this will probably be more than $ 1.8 billion, as opposed to only $284 million three years before.

And that’s only part of Canada’s increasingly worrisome balance of payments problem. Far from being poised to move into a post-industrial leisured society, this country may not have solved the basic issue of earning a living.

Officially, the imbalance of payments is still expected to correct itself with the aid of current policies. But some dissident economists are beginning to mutter in corners that no amount of fiscal or monetary tinkering can start Canada growing again fast enough to reduce unemployment— which may reach more than 8% this win-

ter—or to halt the decline in Canada’s relative standard of living, down from second 10 years ago to a projected eleventh worldwide by 1984. For that, structural reforms are needed. In the current political climate, there is one structural reform that in effect dare not speak its name but is increasingly making its presence felt. This is the notion that Canada should, as the C. D. Howe Institute’s Carl Beigie has christened it, “do a deal” with the United States.

Rather than attempting to duplicate the U.S. economy on a one-tenth scale, why not cooperate on areas of mutual interest, like agriculture and water? Why not move toward free trade, which would give Canada markets for what it can produce well, and cheaper imports to replace what it cannot? Everyone is careful to avoid the word, no one more so than U.S. Ambassador Thomas Enders in recent hopeful speeches on the subject of cooperation. It is unfair simplification. But it almost looks as though the historic Canadian theme of— deep breath—continentalism, with its at-

tendant threat of eventual political absorption, has not been dead, as might have been thought in the early Seventies, but merely sleeping.

Politicians feel unhappy with the whole subject. There are cogent objections—sovereignty and transitional shock—to be dealt with. And they are afraid of emotional storms, such as those that shipwrecked Laurier when he proposed U.S./Canada reciprocity in 1911. But events, while not yet compelling, are beginning to nudge. In the past three years, what Canada sold to other countries has fallen short of what was bought from them by more than four billion dollars annually, after a decade of being more or less in balance, give or take a billion. In theory, the Canadian dollar’s decline against other currencies should restore the balance. Even if a motel room cost 10% more dollars than it would in Minnesota, at least they would be the Canadian kind, worth a mere 90 cents U.S. Canadian goods and services would once more be competitive. But evidence from other countries which have devalued recently suggests that the process is more an acknowledgement of underlying economic weakness than a solution to it.

Meanwhile, Canada’s trade deficit has to be filled by borrowing from foreigners. Interest has to be paid on this borrowing. Rates are high. In 1977, more than three billion dollars will be forked out, a dramatic uptrend from the $400 million or so that was common 10 years ago. Canada is being edged toward having to borrow simply to pay interest on its debt; a slippery slope, as all good bankers know.

“In the summer the tourists stand outside and take pictures,” says the Bank of Canada official, looking uneasily through his new office’s sheer glass wall as if afraid they’ll offer him bananas. Across Sparks Street, the internal workings of the incomplete Department of Industry, Trade and Commerce building are equally exposed.

Life inside the pleasure domes is equally exotic. Top civil servants sway discreetly like reeds in the political currents, and their use of language is much subtler and more treacherous than businessmen’s, one reason for their mutual incomprehension. An official can switch effortlessly from an exposition of the fundamental economic realities of proximity, language and taste, which will ensure that the United States will remain Canada’s basic market, to apparent enthusiasm for the stillborn “contractual link,” an attempt to translate into trade terms the Trudeau government’s

nebulous political vision of the European Economic Community as a counterbalance to the American presence. EEC officials and Canadian exporters have simply continued on their separate courses as before, almost totally unmoved.

With the Quebec issue preoccupying the

politicians, the civil servants are not likely to broach a new problem if it doesn’t demand immediate action. Canada’s balance of payments problem inspires worry rather than terror. Terror was, and to some extent still is, caused by the sensation that the Canadian prices and wages were just getting out of control in 1975, after the economy had been foolishly over-stimulated in 1974 in an attempt to stave off the adjustment to OPEC price rises which our competitors were already enduring. Hence the Anti-Inflation Board, with its debatable impact; the Bank of Canada’s tardy conversion to the doctrine of a tighter control over the money supply, little criticized despite high unemployment; and the talk (at least) of balanced budgets that now pervades all levels of government.. Canada simply doesn’t have pleasant policy options.

These, however, were defensive reflexes. Canada’s more basic problem requires a more studied response. Economic recovery around the world may be faltering. Despite the participants’ frequent protestations of goodwill, the current round of tariff-reduction negotiations under the General Agreement on Tariffs and Trade is plagued by unprecedented gloom. Tariffs and non-tariff barriers, such as quotas, are actually rising. There are predictions that if the world slips into another recession as it struggles to absorb the OPEC revolution, a 1930s-type trade war will break out, as each nation panics and tries to protect its own market and steal others. In such a rush for the exit, Canada would be trampled flat. It is unusually dependent on foreign trade, which represents 25% of its Gross National Product. Yet, alone among major industrial nations, it doesn’t even have informal agreements with its trading partners to the extent that Japan and Sweden have, let alone membership of a bloc such as the EEC. There is no consensus

among officials as to how this threat should be warded off. And, indeed, such a lead can only come from the politicians.

Most economic problems are pathetically simple. Canada has for years been paying for goods, services and borrowings from other countries with its merchandise exports, mostly raw materials and semiprocessed goods. This is often described, in one of the clichés that abound in the field, as being a hewer of wood and a drawer of water. But it is equally true of the U.S. economy, and anyway there is a limit to how far newsprint can be processed unless The New York Times is to be printed in Montreal. Canada also has a small manufacturing sector. Some of it is outstanding by world standards, like prefabricated houses for mining camps, or certain types

of electronic equipment. Other parts are hopelessly uncompetitive and are indirectly subsidized by all Canadians through higher prices caused by protective tariffs. Examples are Quebec’s textile and footwear trade.

Canada has always had a high-cost because of its distances, climate and small domestic market. Unfortunately, its chief export industries now face significantly sharper international competition from new mines and the exploitation of seabed minerals, and faster-growing forests in the south. With faultless timing, Canadian labor costs chose this moment to soar above U.S. rates by up to 40%—20% higher compensation, 20% lower output per man. This has just about murdered the Canadian manufacturing sector, where labor costs loom large: Canada’s manufactured goods trade deficit yawned from $2.5 to more than $ 10 billion in the period 19701976. The Science Council of Canada has aptly described the process as “disindustrialization.” And the problem will probably worsen when capital imports for pipelines and energy projects drive up the Canadian dollar.

Additional burdens on the Canadian economy are the remarkably high costs im-

posed by all levels of government. The sprawling proliferation of environmental, marketing and now human rights regulations all hamper production in the name of distribution. Irrespective of merit, these policies must be paid for. One expense is the decision of foreign investors to build their factories in friendlier havens. Unfortunately for the unemployed, Canada’s productive base has also been eroded by the impact of inflation on investor confidence and, under traditional accounting rules, on the capital stock.

In 1975, in a move suggesting the depth of Canadian ambivalence, even in official circles, the Economic Council of Canada produced a report called Looking Outward: A New Trade Strategy For Canada. It was bitterly condemned as a simpleminded plea for continentalism. Actually, it was an elegant statement of the case for overall free trade, although it clearly regarded bilateral agreements with the United States as a desirable substitute. Some areas of Canada would do very well, it said, and protectionism had actually artificially stimulated foreign ownership because it became the only way to get at the Canadian market. It is virtually impossible to refute the logic of free trade if the aim is optimum prosperity, regardless of the costs to national survival. Other studies have shown that the standard of living of Canadians would improve on average up to 10%. There would, however, be substantial transitional dislocation as inefficient industries died and competitive ones flourished. There is always the complication of possible political manipulation in non-tariff ways, like the current semiofficial “buy Atlantic” drive in the Maritimes. Canada’s relatively harsher taxes might hamper it. And there’s the fear that economic integration will mean political absorption. Canadian business, with its well-known predilection for a quiet life, generally dislikes the whole idea.

Dr. Peter Cornell, who was responsible for the report and attracted much personal vituperation, argues that all objections can be resolved through negotiation and a carefully planned “adaptation period.”

But studies of the impact on specific industries were switched from the Economic Council to Industry, Trade and Commerce, and Cornell now spends most of his time on Canada’s pension industry (which is an economic pain in its own right). The very function of the Economic Council is being questioned since the labor representatives quit over the AIB. Ottawa has preferred to play with fashionable and pleasing ideas—the “new society,” the “conserver society.” Nevertheless, George Post, acting director of the council, remains quietly convinced of the economic analysis in Looking Outward. The only alternative, he says, is to struggle along trying to get better performance out of specific sectors, and hoping for the best.

Hoping for the best is closer to the heart of the Ottawa machine. A U.S. boom will solve Canada’s problems. Canada has always lucked out, with a mining boom, or a commodity price boom. We’ll be growing in new ways undreamed of by conventional economists. There have been rumored sightings of a fabulous beast called an Industrial Strategy, and one well-placed offi-

cial even speaks of plans to select industries with world potential, such as forest products, and “rationalizing” them by encouraging mergers. Greater efficiency would result. The Japanese government habitually intervenes in this way, although the U.K. attempt with its automobile industry proved a catastrophe.

Paralysis and pragmatism in Ottawa notwithstanding, there are still unmistakable hints that the continental-deal issue is alive. Tory MP Jim Gillies, who was an economics professor at UCLA before returning to Canada to set up York University’s Business School, believes it will surface within a year. Beigie, the politically sensitive head of the C. D. Howe Institute, hasdetected interest high up in the government. He is brooding about writing a paper on key areas in any negotiations. These could be complex. Ideas might include a transition period of up to 15 years with some Canadian restrictions on foreign ownership, agreements on resource policy, flexible exchange rates and regional policies, plus sovereign control over immigration.

Canada and the entire world are facing difficult times. It may be that the postwar era of universal economic growth, unique in history, cannot be sustained. Canadians will have to think very hard about the ways in which they want to differ from the United States and the price they are prepared to pay. It is one of the interesting paradoxes of political history that the elites of Britain and Canada are currently respectively for and against union with their continental neighbors in exactly inverse proportion to its cultural practicability and to the actual links between the populations. In fact, whether or not freer trade means assimilation ultimately depends upon the will of the nations concerned. The Québécois, for example, will probably continue to be French irrespective of any economic arrangement.

Ironically, although a North American trade bloc might be virtually self-sufficient, ultimately the United States too will have to reappraise its social attitudes if it is to meet international competition.