In accordance with my promise at the Cabinet meeting yesterday, I am
attaching a memorandum briefly describing the principal current problems
between the United States and Canada.
Over the past few years, our relations with Canada have grown increasingly
sticky. The Canadians have maneuvered themselves into an impossible dilemma.
Their economic prosperity depends on the continual inflow of U.S. capital.
This necessarily brings with it control of their enterprises by U.S.
management. They could undoubtedly improve their standard of living if they
accepted the full consequences of this situation and permitted a gradual
integration of the Canadian market with our own. But because they are so
conscious of the overwhelming size and power of the United States, they tend
to pursue highly nationalistic policies—fearing that otherwise Canada would
become, if not the 51st State, at least a neighbor heavily dependent on the
U.S. Colossus.
The result is that, no matter which party may be in power, every Canadian
Government feels compelled to try to reduce the economic control that
necessarily accompanies reliance on U.S. capital. The Diefenbaker Government pushed such measures
too far and precipitated a balance-of-payments crisis that required us to
mount a costly rescue operation. When Diefenbaker later attempted to renege on his defense
commitments to the United States, his Government was voted out of
office.
[Attachment]
ROUND-UP OF U.S.-CANADIAN PROBLEMS
Petroleum
Imports of petroleum and products from Canada are excluded from the U.S.
licensed import quota program. Since 1962, imports from Canada are
calculated within the total permissible imports into the United States,
and any increase in imports from Canada would therefore be at the
expense of imports from some other source. The Canadian Government has
voluntarily limited expansion of exports during 1963 but has indicated
that they will be unable to do so in 1964 without formal controls.
Imposition of formal controls would be regarded in Canada as making a
mockery of the national security rationale for the program under which
the overland exemption has been justified.
Canadian Softwood Lumber
Exports
Increasing imports of softwood lumber from Canada since the end of 1961
have brought considerable pressure from Pacific Northwest lumber
communities for some restriction of imports. The Tariff Commission
reviewed the problem under the terms of the Trade Expansion Act of 1962
and in its report in February this year ruled that increasing imports
due to tariff concessions were not the cause of injury to the domestic
industry. After failing to achieve quotas or increased tariffs under the
existing legislation, the industry has sought to have Congress pass
various bills which would require that imports of lumber and logs be
marked as to origin or otherwise impose restrictive measures. The
Administration is on record as opposing these bills which are
inconsistent with U.S. trade policy. A House-Senate conference committee
approved the measure December 11 and the Canadian Ambassador has
requested an appointment with Mr. Ball to register
his government’s concern.
Passamaquoddy Tidal Project
Secretary Udall reported to the President July 1 on the results of a
re-study of the proposed Passamaquoddy Tidal Project and development of
the Upper Saint John River, which found the project
economically feasible. The Department is proceeding with necessary
discussions at an early date with the Canadians so that legislation may
be introduced into Congress early next year. Thus far, there has been no
indication of strong interest in the project from the Canadian
Government although the Provincial Government of New Brunswick has been
more enthusiastic. Technical discussions were held with the Canadian
Government December 4–5, 1963, but no negotiations have been
scheduled.
[Page 1219]
Wheat Pricing Policies
Disagreement between Agriculture and the Canadian Wheat Board over
pricing policies has been aired in the press in recent months in both
countries. The Department of Agriculture has argued that market
conditions are good for an increase in the international price which
would benefit the U.S. balance of payments and reduce the cost of the
wheat subsidy program. As the two largest sellers of wheat in the world
market, Canada and the United States have an important effect on prices.
The Canadians believe that a large increase in price would be
undesirable since it would not only encourage future uneconomic
production but would also antagonize regular customers who might be lost
in future years. Compounding Agriculture’s unhappiness is a belief that
the Canadians had failed to keep a commitment to consult closely on
price policies. The matter has subsided somewhat but close consultation
has not been resumed.
Differences regarding wheat policies are a continuing item in
U.S.-Canadian relations which can continue to be controlled by use of
the consultative mechanism.
U.S. Interest Equalization
Tax
This proposed legislation would raise by 1% the effective rate of
interest paid on borrowings by foreigners in United States markets and
is designed to reduce but not eliminate such borrowing in order to
alleviate the U.S. balance of payments problem. There was an immediate
and severe reaction in Canadian stock and money markets reflecting a
fear that Canadian borrowing in the U.S. would dry up and result in
serious balance of payments and internal economic problems for Canada.
The Administration subsequently proposed an exemption from the tax for
new Canadian issues, announcement of which relieved the situation. While
the measure is pending in Congress, foreign borrowing in the U.S. has
come to virtually a standstill. Canadian officials have indicated a
belief that a total exemption for Canada would be needed if it were to
avoid another balance of payments crisis.
Gordon Budget Measures on Taxation of
Foreign Investment
The 1963 Canadian budget proposed discriminatory tax treatment on firms
which are more than 75% owned by a foreign owner (person or
corporation). Considerable opposition was expressed in Canada on the
grounds of practicability which resulted in later administrative
modifications. Some criticism has also been made of the effect which the
measures might have on investor confidence and, in turn, on the economy
of Canada. The discriminatory taxation of dividends paid to
non-residents would raise taxation from 15% to 20% for non-qualifying
firms, effective January 1, 1965.
[Page 1220]
The U.S. rate would automatically go to 30% unless the double tax treaty
between the U.S. and Canada were renegotiated. The Canadian measure
became law December 5, 1963.
Automobile Export Incentive
Scheme
The Canadian Government introduced effective November 1 new measures
which would provide for a refund on duties paid on automobiles and parts
imported into Canada to any firm which by itself or through independent
parts manufacturers increased the exports of automobiles and parts. A
potential $200 million of dutiable imports into Canada annually are
involved.
The Canadian measure aims at increasing Canada’s share in production of
and trade in automobiles, particularly vis-à-vis the United States where
the products are similar and parts are virtually interchangeable for
similar models. The scheme is somewhat objectionable because of the
artificiality of the measures and their interference in normal business
decisions. However, they aim at more economic production and an intended
effective removal of Canadian tariffs which average 20% and contribute
to the high cost of cars in Canada. The Canadian Government hopes that
this will lead to lower costs, lower prices, expanding markets and
benefit therefore to industry on both sides of the border. The
applicability of U.S. countervailing duties has been considered by
Treasury. The recent decision of Studebaker to close its U.S. plant but
continue production in Canada appears to be a result of other economic
factors. However, the Canadian scheme has been mentioned as a
contributing factor.
Great Lakes Labor Dispute
The Seafarers International Union of North America (SIU) was expelled
from the Canadian Labour Congress in 1960 for corrupt and antidemocratic
practice. The CLC organized the Canadian
Maritime Union (CMU) and SIU, which
controlled by far the largest number of Canadian seamen, reacted by
instituting harassment, picketing and boycotting within Canada of ships
manned by CMU. The Canadian Government
successfully enjoined this SIU action in Canada. Harassment of CMU ships then took place in 1962 and 1963
in U.S. ports—where injunction was only partially successful.
The report of a Royal Commission (Justice Norris) sustained the charges
leveled by CLC against Banks and
recommended a Canadian Government trusteeship over the five Canadian
maritime unions with power to remove any union officials it deemed
necessary.
Secretary Wirtz with the support of the State Department and Minister of
Labor MacEachen attempted unsuccessfully this year to arrange a joint
trusteeship by the AFL–CIO and CLC. The Canadian Government
[Page 1221]
passed a bill providing for
a government trusteeship. At the urging of the trustees, the SIU of
Canada, continued to work the ships, but sporadic picketing and
boycotting of Canadian vessels has occurred in U.S. ports. Thus far,
however, this harassment has been limited to half a dozen vessels, but
the situation remains potentially dangerous.
Defense Matters
Essentially, U.S.-Canadian defense problems are susceptible of orderly
resolution through existing channels. A major problem in U.S.-Canada
defense relations was resolved by the recent nuclear weapons
agreements.2
The Canadian Government has underway a complete reappraisal of defense
policy. The goal is to attain a more “coherent” defense posture and
reduce defense costs. We can live with the present level of Canadian
defense spending as long as Canada’s defense policies are symmetrical
with our own. We have reason to believe that this requirement will be
met. However, it is important that Canadian leaders and public continue
to be made aware of the vital need for nuclear weapons in the defense of
North America and in NATO.
Canada is greatly interested in the Defense Production Sharing Program.
Secretary McNamara and Canadian
Minister of Defence Production Drury last June reaffirmed the Program at
the highest practical level in balance (thus removing it from the
balance of payments). The program essentially is in balance. The present
problem relates to the Caribou airplane, which has been the principal
Canadian produced item and the visible symbol of the Program in Canadian
eyes. The U.S. is ending its purchases of the present model, but hopes
to continue participating in research and development of a promising
second model. The latter, however, depends on Congressional approval for
reprogramming funds.
Law of the Sea
Canada has announced its intention to proclaim in May 1964 a 12-mile
exclusive fisheries zone measured from straight baselines which would
close off from the high seas certain important areas of its coastal
waters. In an effort to deter any action which would create undesirable
precedential repercussions affecting our defense and commercial
interests, we have offered to recognize the 12-mile zone provided it is
[Page 1222]
measured from valid
baselines and our traditional fishing rights are undisturbed. Further,
we have agreed to acquiesce in the Canadian claim to Hudson Bay.
Baselines acceptable to us being not too different from those drawn by
Canada, we now propose to offer a joint examination of the fisheries
problem before the third negotiating meeting in January in the hope of
reaching further accommodation without jeopardy to our vital worldwide
interests. Deputy Under Secretary Johnson is in charge of these negotiations.
Columbia River Treaty
The treaty providing for development of the Columbia River was signed in
January 1961 and ratified by the Senate shortly thereafter. Canadian
ratification has been held up by a change in policy of the British
Columbia Government which now wishes to sell to U.S. consumers the power
benefits it would receive under the treaty rather than use the power
itself as originally envisaged. Negotiators reached agreement ad
referendum December 11, 1963 on a draft Exchange of Notes which would
clarify the terms of the treaty.3 If the U.S. Government approves the
negotiators’ recommendations vis-à-vis the sale of the power, it is
highly probable the notes can be exchanged before the end of the year
and ratifications exchanged by late spring. U.S. negotiators will be
meeting next week with Secretary Udall and White House staff to
formulate a U.S. Government position.
Civil Aviation
Canada has long wished to renegotiate its bilateral air agreement with
the U.S. to obtain deeper penetration routes into the U.S. instead of
essentially transborder operations now permitted. Ambassador Galbraith did a study for the White
House in the early fall of 1963 and negotiations have been proposed on
the basis of the report. The Canadian Government has agreed and
negotiations are expected to begin in early 1964.
