COVER

FRIENDS AGAIN

Susan Riley October 25 1982
COVER

FRIENDS AGAIN

Susan Riley October 25 1982

FRIENDS AGAIN

COVER

Susan Riley

This week senior executives from 25 of the largest corporations in the United States—Bechtel, Standard Oil of California, Mobil, Procter & Gamble and others meet in Ottawa. Their main objective: a 1½-hour conversation with the prime minister of Canada. Afterward, they will be given the chance to mingle with senior members of the newly reshuffled Trudeau cabinet. Organizers of the event—the little-known but powerful Niagara Institute—concede that in ordinary times some of the most influential men in the world would have better things to do than spend an afternoon or two in the woodsy, northern capital. But these are not ordinary times.

Over the past two years relationships between Canada and the United States deteriorated from familiar, easy bickering to ugly name-calling. Recessionary pressures had shortened tempers on both sides of the border. So had some of

the Trudeau government’s economic policies—particularly the National Energy Program and the Foreign Investment Review Act. Now, badly shaken by the depth and passion of U.S. reaction —and the unrelenting pressure of Western Canadian oil interests—Ottawa is desperately trying to rebuild its battered relationship with Washington. To that end, the federal government is urgently dispatching a reassuring message across the border: Ottawa has not turned its back on continentalism and its doors and borders are open to U.S. money.

The recent cabinet shuffle, introducing a new, pro-business look, is one indication of the new mood of appeasement in Ottawa. So is the wooing of powerful U.S. business interests at informal dinner meetings in Ottawa this week. Meanwhile, in a recent interview with The New York Times Magazine, Prime Minister Pierre Trudeau boosted the profile of Ottawa’s appeasement campaign by praising Ronald Reagan as a man who seems to have encapsulated

the mood of the American people at a certain point in history. In fact, for months Trudeau’s most senior advisers have privately been scathing in their denunciations of Reagan’s handling of issues. Meanwhile, cabinet ministers have been flying south to assure dubious investors that Canadians are not socialists in capitalists’ clothing.

In Las Vegas last week Judy Eróla, mines minister, told Americans that Canada has no socialistic designs on the mining industry. Foreign investment is more than welcome, she said. “The position of the government of Canada is that the current ownership pattern in Canadian mining is entirely satisfactory,” said the minister. “It is 66-per-cent Canadian owned, and this represents a healthy situation, far different from that of petroleum, which is about 65per-cent foreign owned.”

Eróla was soon followed by Finance Minister Marc Lalonde, noted more for his powers of analysis than his persuasive abilities. In New York Lalonde, the political father of the much maligned

NEP while he was energy minister, also sought to restore the faith among doubting U.S. investors in Canada as a safe place for their money. “I ask you, just how nationalistic, just how ideological, just how irrational must a country be to set a goal of domestic ownership of 50 per cent of its oil and gas industry 10 years down the road?” he asked. Canada had been sorely misrepresented in the “orgy of economic scapegoating” brought on by the recession. “Quite frankly, I think it is time we stopped taking flak for something we are not guilty of,” declared Lalonde. His remarks drew restrained applause from the roomful of American business executives.

But, if Lalonde’s defensive passion struck more doubt than comfort in the bosom of U.S. capitalism, other members of Trudeau’s recently rejuggled cabinet are more than ready to hold out reassuring hands. For one thing, Lalonde’s successor in energy, Jean Chrétien, has never been an economic nationalist. In fact, despite official assurances to the contrary, it is likely that under his direction the National Energy Program will undergo an overhaul. According to Joel Bell, senior vice-president of Petro-Canada and one of the bureaucrats who worked on the original NEP: “These are dynamic policies. There will be changes as things evolve.” While

few Ottawa insiders expect the government to back away from its Canadianization goal, changes are planned for the NEP’s pricing and taxation programs that may affect, among other things, Ottawa’s policy of limiting domestic oil prices to 75 per cent of world prices. There is little doubt that under Chrétien’s direction the alterations will be

Badly shaken by the depth of U.S. reaction to its policies, Ottawa is desperately tryiny to rebuild the relationship

aimed at making life, and the recession, easier for the oil companies—both Canadian and U.S.

The latest attempts to forge closer ties with the United States are facilitated by a web of close personal relations that extends across the border. And the Americans’ best new friend in Ottawa is probably Ed Lumley, the silver-haired former mayor of Cornwall, Ont. Lumley—whose cap of white hair and flashing teeth have earned him the nickname The Man From Glad—was recently elevated from the international trade portfolio to minister of industry,

trade, commerce and regional economic expansion. In that capacity he takes over control of FIRA—one of Washington’s least favorite four-letter words. Almost lost in the shuffle was Herb Gray, FlRA’s former patron and the cabinet’s ranking economic nationalist. Gray is clearly upset by suggestions that his nationalist principles have proved inconvenient to the new-look government and that he is being muffled. “I’m not in a basement somewhere,” he said last week. All the same, in his new job as president of the Treasury Board the only tough negotiations Gray will be handling will be with the public service unions—not with the tough-minded Americans. Meanwhile, a few blocks away, Lumley sits in Gray’s old office and muses about continuing the “streamlining” of FIRA, perhaps even taking a second look at the legislation.

Born in Windsor, Ont.—“four blocks from where Herb Gray lives”—Lumley has ties with the United States that are strong and deep. “My mother lives in Florida, my mother-in-law in Idaho, and I had American business partners. I know them,” he says. More importantly for the Liberals’ new policy of appeasement, he likes Americans and their way of doing business. A self-proclaimed salesman of everything from Coca-Cola (he operated a bottling plant in Corn-

wall) to cabinet policy, Lumley shares the billing with the new economic development minister, Donald Johnston, as the cabinet’s leading friends of business. According to one Liberal party adviser: “It was at least partly to appease the Americans that the government wanted some pro-business faces up front.”

Lumley is also a personal friend of Reagan’s main Canada man, U.S. Trade Representative William Brock. The two became so close during Lumley’s tenure in the trade ministry that Brock took the minister—a former junior football coach—to the Superbowl in Pontiac, Mich., last year. Just last week the minister had another amiable social en-

counter: lunch with Paul Robinson, the acerbic U.S. ambassador to Canada who has rankled many Canadians with his stern lectures on the folly of this country’s attachment to social service spending and its hesitancy to increase military expenditures. But, in line with the general easing of cross-border tensions, Robinson has tempered his pronouncements in recent months. Besides, Lumley does not worry much about the headlines. When his friend Brock was reported as likening Canada’s policy on cultural nationalism to “book-burning,” Lumley was called by a Canadian reporter for a reaction. “I just told him he [Brock] had a bad day,” says the minister. “Bill Brock has been much maligned but he is the best friend we have down there.”

Besides the Brock-Lumley friendship,

two other key players go back a long way. External Affairs Minister Allan MacEachen cites a “long, long friendship” with the new U.S. secretary of state, George Shultz. The two studied economics together at the Massachusetts Institute of Technology in Cambridge in the 1950s and they have kept in touch ever since. MacEachen reports that he and his friend have already had several private phone conversations about the “very real difficulties” in Canadian-U.S. relations. And, while the MacEachen appointment may be more a happy coincidence than artful design— he was offered any post that he wanted as a reward for enduring years in Finance—it fits well into the Liberal game plan. In the careful way of diplomacy that plan has never been ex-

pressly stated, but recent events make it clear—take some Americans to lunch, read them a speech, buy them a drink, do not mention socialism.

On the other side of the border conciliation is the new mode, too. Observers in Washington were given their first indication of that change when Shultz eagerly accepted Ottawa’s suggestion that the NATO ministerial meetings earlier this month be held in Quebec. By all accounts, the meeting was a model of harmony.

That does not mean that George Shultz, a philosophical free trader, is any friend of Canadian nationalism. But he does know more about the country and its history than did his predecessor, Alexander Haig. It seems ironic in the current context, but, in 1970, when Shultz was secretary of labor in

the Nixon cabinet, he wrote a report naming Canada as one of the safest suppliers of oil and gas to the huge U.S. market. “The risk of political instability or animosity is generally conceded to be very low in Canada,” he wrote.

But it is going to take more than an outbreak of cronyism between Washington and Ottawa to take all the heat out of the cross-border conflict. Profound differences of ideology remain. On top of that, during the past 18 months Canada’s policies and behavior have earned it a whole new battalion of enemies in the U.S. Congress. As Toronto author Stephen Clarkson points out in his new book, Canada and the Reagan Challenge, it is only two years since Canadians were the “heroes of the Western world” in Washington because of the rescue of six American diplomats from Iran. “A year later,” he writes, “they were caricatured as the hordes of Genghis Khan, descending from the north to plunder innocent American enterprise.”

The hysteria may have reached its nadir a year ago when Walter Annenberg, millionaire publisher of TV Guide and a close friend of Reagan, took out a full-page ad in The Washington Post under the headline, CANADA’S UNFAIRNESS DOCTRINE. The advertisement, which was said to have reflected Reagan’s thinking at the time, began by saying, “Pierre Trudeau’s crusade to Canadianize his country’s culture and economy at the expense of the United States is bogging down in the political and financial quicksand.” Since then, the White House has trimmed its rhetoric, but in the press the critical news stories continued. As Marc Lalonde noted in New York * last week, “There is a widespread view, fuelled by certain publications in this country, that Canada has suddenly become a rather undesirable place in which to invest.” Such images are false, said Lalonde, who added that he is “astonished at how tenacious they can be.”

Despite Canadian attempts to debunk them, those attitudes—along with a wave of protectionism in the United States induced by its own shrinking economic might—have led to some disturbing developments in Congress. There is an attempt under way to rewrite the auto pact to Canada’s disadvantage and recent legislation aimed at limiting Canadian truckers’ access to U.S. routes. In the West U.S. lumber producers are pushing for restrictions on softwood imports from British Columbia to the U.S. Midwest on the grounds that the Canadian product is unfairly subsidized. The move could

shut down two-thirds of the lumber mills in British Columbia. “Three or four years ago this never would have happened,” says Kenneth Maclaren, executive director of the Canadian Trucking Association. “But we are the victims of an enormous amount of ill will and hostility that has been generated in the United States through misperceptions of Canada.”

Why Canada became the subject of such passionate abuse in Washington— particularly in 1981—is outlined in detail in Clarkson’s book. It is very much akin to the story of a breakdown in a relationship: lawyers called in by both sides; bitter fights over property; namecalling; and threats of retaliation. Clarkson and others argue that the trouble did not start with FIRA or the NEP or even the arrival of the Reaganites in Washington. Instead, it began with a number of well-publicized attempts by Canadian firms to buy out U.S. companies. In January, 1981, Canadian Pacific Enterprises, for one, made a tender offer to get control of the Hobart Corporation of Troy, Ohio. But the chief executive officer of Hobart, David Meeker, happened to be Reagan’s finance chairman for Ohio. He went to the White House and Congress and complained, “Should we stand idle and watch our economy come under the control of foreign investors?”

About the same time, the giant Seagram Company tried to buy Conoco, the ninth-largest oil company in the United States. Lost in the outrage in Washington was the fact that the principal bidder, Edgar Bronfman, was a U.S. citizen and that Seagram’s—according to Clarkson—was a U.S. company in all but name. Still, for the new ideologues

on Capitol Hill, Canada was poaching on its turf while Canadian companies sheltered behind FIRA—which made reverse takeover bids problematic at least, if not impossible. At the same time, as a result of the National Energy Program, U.S. oil companies were either being hounded out of Canada or forced to sell at “fire-sale” prices. A new term gained currency in powerful circles in Washington: “Fortress

Canada.”

The uproar seemed excessive, even amusing, in Canada, where pervasive foreign ownership of the economy has always been a fact of life. Foreign control of mining in the United States, for example, was estimated last year to be five per cent as compared to about 35 per cent in Canada; of oil and gas, 18 per cent as compared to 65 per cent in Canada. For Canadians, the shoe was on the other foot.

Stanley Meisler, Los Angeles Times correspondent in Canada, talked about the depth and bitterness of the U.S. response to Canada’s new policies at a recent seminar in Toronto. “The problem is that Americans do not really believe Canadians are not Americans,” he said.

“They could accept— they even expect—certain restrictions if Canada was Chad or even Britain. But Americans do not like to feel they are in a foreign country when they come here.”

Whatever the reasoning behind Washington’s reaction, there was no denying its passion. For most of 1981 the two countries engaged in a cross-border correspondence that had diplomatic pouches smouldering. Clarkson, who obtained the minutes of many private meetings between Canada and the United States when tensions were at their height, says: “If Canadians realized what the Americans were saying, they would have been outraged. There would have been a public outcry.”

But it was Canadian diplomats and politicians, not the Canadian public, who heard what the Americans were saying, and they reacted to the American onslaught by backing down. “There was a sense that this was the scariest situation Canada had faced since the war,” says Clarkson, who interviewed 200 influential people—including Trudeau confidant Michael Pitfield and several cabinet ministers—for his book. Some adjustments were made to the NEP to meet U.S. oil company objections. In particular, Canadian companies would no longer have preference in tendering on the now abandoned megaprojects. The Liberals’ 1980 campaign promise to strengthen FIRA was publicly renounced. That was acknowledged in a dry addendum to Allan MacEachen’s November, 1981, budget speech: “For the time being no legislative action is intended.” But the real bombshell had come in September when MacEachen met privately with U.S. Treasury Secretary Donald Regan and promised him there would be no “son of NEP.” In other words, the government was dropping the key plank in its 1980 package of promises: an industrial strategy aimed at using the new oil revenues to increase Canadian ownership across a wide spectrum of the economy. “That was the most significant retreat of all,” says Toronto political economist Mel Watkins, a well-known economic nationalist. “That meant utter collapse.”

Still, the Americans pressed for more. In a letter that reportedly had Ottawa furious, Brock—a shrewd, bluff Tennessean-thanked Ottawa for backing away from FIRA and NEP but then went on to list six FIRA clauses that he wanted “eliminated or modified.” Ottawa saw the letter as an outrageous interference in domestic affairs. Later, according to Clarkson, when former external affairs minister Mark

MacGuigan met Alexander Haig in Brussels, he told him Brock’s letter seemed “strange and excessive.”

Since then, both sides have maintained an attitude of uneasy watchfulness, and FIRA has been shuffled off to GATT, the international trade body, for a more objective consideration. According to Lumley, that effectively neutralizes the issue. Meanwhile, the new minister is looking for ways to speed up FlRA’s approval process in Ottawa. That is largely why Robert Richardson, a careful bureaucrat with a reputation

ciency, has recently been named the new director of the much beleaguered agency. Richardson says that he is going to concentrate on making FIRA more efficient and leave the selling job to Lumley. But the minister does not display much of an appetite for the task. In fact, his whole attitude toward foreign ownership is marked by ambivalence. As he said in an interview last week, “I think it is important that Canada have control in some areas—like banking, energy—but who cares who owns a hotel or a drugstore?” Lumley—who has already given his blessing to two FIRA applications—wants the agency to be “an instrument of Canadian policy, without being an impediment to foreign investment.”

Some experts wonder just how realistic that goal is, in light of the deep and pervasive U.S. penetration of the Canadian economy. Abe Rotstein, a Toronto economist and legendary fig-

ure in nationalist circles,

says that any move that

Ottawa makes to protect Canadian ownership is almost certain to give offence in Washington. But the alternative-doing nothing at all out of fear of retaliation—means that Canada risks becoming “the eunuch of North America.”

That is not an image that Pierre Trudeau’s government would welcome. However popular the defanging of FIRA may be in Washington, the polls show strong domestic support for the agency—at least in its present, limited role. “Everyone hates economic nationalism but the people,” says Mel Watkins. FIRA

is a clear example of the careful tightrope that Ottawa must walk. In appeasing the Americans it risks offending Canadians—and particularly the liberal left, the very voters the Liberals went after with their 1980 campaign promises to start repatriating Canada’s lost economy. At a recent government-sponsored seminar in Toronto, Marc Lalonde—still energy minister at the time—and his panel of handpicked businessmen tried to convince the U.S. media that Canada was not going the way of Albania. FIRA and NEP may create some administrative problems, he said, but they fall far short of renewing economic nationalism.

That is exactly what skeptics on the left feared when Trudeau began his uncharacteristic flirtation with economic nationalism two years ago. “The Liberals are so rankly opportunistic that the present retreat is perfectly understandable,” says Watkins. They are, after all, members of the party of continentalism and C.D. Howe—the U.S.born cabinet minister who dominated Liberal politics for years. McGill University economist Thomas Naylor says FIRA and the NEP were never anything more than “patchwork nationalism” and, detached from a comprehensive industrial strategy, they become even more feeble.

The facts about FIRA tend to support the criticisms of the left, rather than the fears of the right. Ninety per cent of the applications that come before the agency are approved. It has no power to stop the expansion of existing foreignowned firms—and they include some of the largest. And, when FIRA does act, the result is often an embarrassing, counterproductive muddle. (Recently, 12 employees of a small Ontario publishing plant nearly lost their jobs when FIRA tried to block the transfer of ownership from one U.S. parent to another.) In 1974, in fact, the agency appeared so tame in some circles that, said the U.S. financial weekly Barron’s, the only U.S. company that would not be welcome was “Murder Inc.” Herb Gray mentions this quote in interviews—another odd example of the government defending a policy on the basis that it is ineffective.

But, even as the Liberals try to avoid provoking the left, they face powerful opposition from the right in Canada. In some sectors and provinces in the country, FIRA and the NEP are criticized as harshly as they are south of the border. James Gray, executive vice-president of Canadian Hunter Exploration Ltd., a prosperous Canadian oil company, expresses a view widely held in the Oil Patch: “I am as proud a Canadian as you can get,” he says. “I believe in Canada. But I am really worried for the country if our nationalistic fervor results in a deterioration of our standard of

living. If we start to ignore the harsh practical realities of economic relationships, then I have to be worried.”

John Porter, managing director of the Independent Petroleum Association of Canada—which represents 300 companies —says it was U.S. money that originally seeded the search for western oil. And easterners were not even particularly interested in that risk. “Ontario and Quebec didn’t want it, because they could buy more cheaply offshore. Canadians were shunted aside when they went down east looking for money to develop the industry,” says Porter. But having been driven into the wealthy and capable arms of the Americans, many Albertan businessmen found themselves comfortable there. Says Gray: “There are a lot more north-south flights out of our airport here in Calgary than east-west. A lot of our business goes north-south. We have similar business, similar psychology, a lot more in common with one another [than with central Canadian interests].” The Canadian economy, he says, is merely “an appendage” of the American one, and “anyone who pretends otherwise is living in a dream world.” If it sounds “un-Canadian,” Gray is not apologetic—“It is not un-Canadian to deal with reality.” And the reality is that the United States can retaliate against Canada in manifold and painful ways. Gray says current threats to restrict Canadian softwood from entering the U.S. market hurt not only British Columbia but Alberta, too, which exports 50 per cent of its lumber south.

The same kind of fears are close to the surface in Quebec—at least in government circles. Quebec Trade Minister Bernard Landry says Ottawa only started to resist foreign investment after Ontario had profited from full industrialization-much of it financed from the United States. “The automobile industry, for instance, was well established in Ontario before anyone in Ottawa found it necessary to restrict foreign investment,” he argues.

Landry is vigorously anti-FlRA, claiming that when he travels around the world trying to drum up investment for his province, “For every one complaint I get about Bill 101,1 get 10 about FIRA.” He recounts his negotiations with a small, 200-employee company in Alsace, France, that was interested in setting up a branch plant in Quebec. “When I explained to them that they would need a lawyer to work their application past FIRA, they lost interest.”

The Quebec minister says he feels an affinity with the Atlantic provinces. “They don’t like FIRA either.” They feel, says Landry, that Ottawa “closed the barn door after the horse fled ” insofar as

the industrialization of Ontario is concerned. However, the minister concedes that Quebec may have less to fear from U.S. investment and its tendency to bring a lot of cultural baggage with it when it moves north. “Because of our language and history, we are like the blacks sitting on the beach. We don’t have to fear the sun.”

Against that clamorous background of a tight, strained friendliness between Washington and Ottawa and bitter divisions within the country, it is difficult to separate truth from rhetoric. A relatively minor issue may cast more illumination on the muddled subject of where the Liberals are really taking Canada than a trunkful of speeches.

For 10 months the federal cabinet and FIRA have been considering an application from a giant U.S. trucking company, Roadway Express, to take over an Ontario-based Canadian trucking company. If the Roadway application is approved, says Maclaren from the Canadian truckers’ lobby, it will give Americans access to one of the richest domestic trucking markets—the southern Ontario corridor. “It would be like letting a huge vacuum cleaner over the border to suck up all competition,” he says. But, if the application is denied, there is bound to be a new outbreak of hostilities in Washington.

Congress is already smarting over alleged discrimination against U.S. truckers in Canada—largely because this country’s regulating procedure is much stricter. A recent piece of legislation passed in the United States aims at retaliating by blocking Canadians from free access to U.S. roads. But there is a rider attached. It gives Reagan until the middle of next month to determine whether Canada’s plea that it is innocent of discrimination is sound.

If Canada throws Roadway out, it could, some say, herald the beginning of a trade war that would only scratch the United States but leave Canada bleeding badly. Seventy per cent of Canada’s exports go to the United States—much of it by truck. By comparison, only 18 per cent of U.S. output flows northward.

Ed Lumley and Herb Gray are both normally talkative men. But,when the subject of the Roadway application comes up, they fall strangely silent. From the U.S. capital, too, there has been little public comment.

In some ways the situation is a microcosm of Canada’s dilemma in dealing with the United States. If Ottawa capitulates, it will be another clear sign that Canada is now open for U.S. business and eager to seal its newly rediscovered friendship.

Suzanne Zwarun

Anne Beirne

William Lowther