Foreign Relations of the United States Diplomatic Papers, 1934, General, the British Commonwealth, Volume I
631.4231/912
The Minister in Canada (Robbins) to the Secretary of State
[Received November 24.]
Sir: I have the honor to refer to the Department’s strictly confidential instruction No. 547 of November 19, 1934,19 forwarding a trade agreement proposal received from the Canadian government, and my telegram No. 110 of November 21, and to enclose herewith my comments on the Canadian note of November 14, 1934.
Respectfully yours,
Comment on Canadian Note of November 14, 1934, by the Minister in Canada (Robbins)
1. Our Government might express its desire for a comprehensive trade agreement and its willingness to enter negotiations after certain preliminary information has been received from the Canadian Government. With regard to the expression “comprehensive” and the [Page 861] remarks contained on page 12 of the Canadian note regarding other trade agreements to which Canada is now committed, I feel that we should be furnished by the Canadian Government with a specific list of those tariff items and parts of tariff items in the Canadian tariff
- (a)
- on which Canada is at present precluded from making any tariff concessions to the United States, and
- (b)
- on which Canada could not make any concessions to the United States without making reductions to other nations either members of the British Commonwealth of Nations or otherwise lower than the rates extended to the United States.
2. I believe that it is also necessary to know from the Canadian Government their estimate of the proportion by value of Canadian imports in categories (a) and (b) above, taking as a basis therefor the last Canadian fiscal year ending March 31, 1934.
3. While practically all of this information is already available in the Commercial Attachés office here, I believe it would be useful to have an authoritative list from the Canadian Government and to insist upon being supplied not merely with a list of references to various sections of the Canadian Tariff but with an actual list of items and a statement of their relative import value on the basis of the latest available figures. The Canadian Government will be less disposed to use the publicity value of their note if they feel our reply calls for information which might not be advantageous to them and if they feel that our note contains statements that would not help them politically.
4. In view of the impediments to trade between the United States and Canada constituted by the existing Canadian system of valuations for duty purposes which experience has shown to be arbitrary, discriminatory and, in effect at least, secretive, we feel that no proposal would be complete which did not contemplate assurances that its terms could not be rendered nugatory by the application to imports from the United States of the Canadian valuation system. We should ask for proposals regarding provisions in the agreement to deal with this problem as a preliminary to comment upon other portions of the Canadian proposal.
5. The Canadian note appears to have been written with an eye to eventual publication and political use of the Conservative Party in Canada. One of the main criticisms which the Liberal Party makes of the Conservative Government is that it has diverted its attention in trade matters to the Empire and other countries and has made agreements at the expense of a much more valuable opportunity for an agreement with the United States. Therefore, the Conservative Government is endeavoring to place itself in a position where it can show that it is now in negotiation with the United States for a comprehensive trade agreement on a basis which should be of particular advantage [Page 862] to Canada. The inference throughout the Canadian note is that Canada’s position will be to press for an agreement which ultimately will tend to equalize Canadian exports to the United States and American exports to Canada. See in particular Mr. Cahan’s speech as reported in the Montreal Gazette of November 19th, 1934, particularly the first paragraph after the heading, “55% imported”. This premise will find considerable support in Canadian opinion and if the Liberal opposition is to combat it, it may open the Liberals to some criticism that they are going further than the Conservative Government will go to sacrifice Canadian trade interests and trade prospects in the conclusion of an agreement. In our view it is therefore important that the fallacy of an unworkable agreement, which would have as its objective the equality of exports between the United States and Canada, should be clearly set forth in our reply. In our view it should be demonstrated in words of one syllable susceptible of popular understanding that a world system of economic agreements, in which each country exchanges with each other individual country approximately the same amount of goods, would be entirely out of keeping with practical working economics. Past and present trade between Canada and the United States should be reviewed in this light and coupled with the suggestion that the objective of any agreement between the United States and Canada should be to restore trade to its normal proportions in the normal relation of American exports to Canada and Canadian exports to the United States and to increase that trade in volume in approximately those proportions.
It would be a pity if the Conservatives should disseminate among the public the theory that to be fair commodity exports between the United States and Canada must be equal. If they should then fail to make an agreement with us they might oppose the making of any agreement by the next year’s Liberal government which was not based upon that principle. I believe it will be valuable to us if we can at the outset put a stop to the present Conservative tendency to build up support for such a contention. I enclose herewith a cartoon from the Montreal Star (Conservative) which refers to an address by the President of the Montreal Board of Trade, as illustrative of this tendency.
. . . . . . . . . . . . . .
7. The Conservatives might seek to prolong the discussions in order to have a reason to add to other reasons which may crop up to adduce for the postponement of elections from the spring to late summer. It seems unlikely that the mere fact that an Imperial meeting will take place late in May in London will be sufficient reason for such a postponement, particularly as elections immediately preceded the Imperial Conferences in 1926 and 1930. In fact the imminence of [Page 863] the Imperial meeting will be used by the Liberals for an argument for elections. Such elections would have to take place in April or early May. Members of Parliament will wish to sit for fifty days after they meet sometime in January to claim their sessional indemnity. After that a month’s notice of elections must be given. However, weather conditions will hardly be suitable for elections before the middle of April at the earliest. There is no likelihood of elections occurring here in the winter and it is now too late in the fall for them to take place this year, particularly as the necessary election list cannot be ready this year.
8. At the moment I do not see any other reasons which the Government could adduce for postponement of elections from spring until summer, but it is quite possible that if other reasons, such as a major emergency, were to arise by that time a postponement would result. Certainly, if economic conditions seem to be improving in the spring, then the Government will cast about for some method of postponing elections until late summer. With Mr. Stevens’ defection, however, the likelihood that he will press his views on price spreads conditions on the floor of the House and the general feeling of the country, there will be very great pressure on the Government for an election in the spring.
9. Doubtless, one of the first criticisms of the Government to be made by the opposition when Parliament opens in January will be the failure of the Government to negotiate a treaty with the United States, and I believe that it is at this time that the strongest temptation will arise to publish the Canadian proposal and to add to it any comment upon subsequent negotiations which it may then be possible for the Government to make. No doubt if the Government could see its way clear to obtaining a satisfactory trade agreement by January, it will be glad to have that to offer, but judging from Mr. Cahan’s speech and the tenor of the note at hand they may prefer to stand on their position of seeking as an objective equality of trade to conclusion of an agreement predicated on normal trade exchanges between the United States and Canada. I therefore think that it will be sound to clear up this point of policy with them in a definite fashion before proceeding to any negotiations.
10. After reviewing the recent statements on international trade both by members of the Canadian Government and by members of our Government, the Canadian note deals with the volume of trade during various years between the United States and Canada and compares it with Canadian trade and American trade with other countries. At this point Mr. Herridge makes the statement that “from 1927 to 1932, and again in the first nine months of 1934, the total trade between Canada and the United States was greater than the total trade between [Page 864] the United States and any other country”. I have not had the opportunity of checking the accuracy of this statement, but assuming that it is true I would strongly recommend that the Department’s reply point out that for the same periods of time, Canada’s total trade with the United States was greater than Canada’s total trade with any other country, including all the nations of the British Empire put together, and that, further, for the period 1927–1932, Canada’s total trade with the United States was greater than Canada’s total trade with all the rest of the world. In other words, our reply might make it clear that, in fact, trade with the Empire is of secondary importance when compared with Canada’s trade with the United States. Such a remark should act as a deterrent to the present Government, which sponsored the Ottawa Agreements, from prematurely making the correspondence public in Canada.
11. Mr. Herridge argues the existence of an approximate annual balance between the two countries by including in his figures not only commodity trade but interest and dividends, freight payments, tourist expenditures, gold shipments and capital movements, and adding to that insurance, advertising royalties and immigrant remittances. Accurate figures on some of these items may be very difficult to obtain. However, it seems to me fallacious to use these in establishing a case for an equal balance of trade in the commodity field alone and it is this commodity field which presumably would be the subject of the projected agreement. While the investment of capital in the United States by Canadians and in Canada by Americans undoubtedly has an effect in so far as it establishes certain motives in tariff construction, I think in our reply we could well afford to point out that it should be no proper part of a calculation of the normal amount of commodity movement between the two countries. It is obvious that Canada’s ability to pay obligations in the United States is predicated not upon Canada’s selling as much goods in the United States as the United States sells in Canada, but upon Canada’s selling as much goods and services to the world as it buys from the world. It might be suggested to Mr. Herridge that for the purpose of determining the objective of the treaty a study of Canadian and American commodity exports in relation to each other for a period of years, say the past ten years, might be undertaken and the resulting figure agreed upon as illustrative of the normal natural exchange of commodities between the two countries. The objective of the agreement would then be to maintain that ratio and to increase the volume which each country would send to the other in that ratio.
12. This question will be found to be dealt with in the Legation’s memorandum of September 21, 1934,20 paragraphs 5 to 13, inclusive. [Page 865] It may be possible to get away from a discussion of the actual disparity in exports to some extent. As a suggested method of allocating increased exports from Canada to the United States and from the United States to Canada, the objective might be stated to be for each country to recover the percentage of domestic market requirements which obtained prior to periods of excessive impediments to exports. I believe that figures now at hand will show that the approximate proportion two and one out of three, or 66% to 33%, cited in paragraph 8 of the memorandum under reference, may be a little high after deducting re-exports and making other allowances. The proportion would appear to be more like 62% and 38%, according to U. S. statistics.
13. For purposes of estimating the effect of the proposed agreement in the Department, I suggest that the figure used on page 7 of Mr. Herridge’s note of 10 to 7 might conveniently be used as the limit to which our concession should go.
14. It is hardly necessary to point out that while we agree with Mr. Herridge’s remark that there has been no default with the payment of interest on Dominion and provincial issues held in the United States, the market for future financing of Dominion and Provincial issues in the United States has remained open largely because there has been no default. In other words, virtue receives its reward in this case, and continued avoidance of default may be expected largely as a measure of enlightened self interest, regardless of the particular ratio of Canadian exports to American exports. Mr. Herridge does not mention, in his calculations of capital invested in both countries, the constant process of renewal and reinvestment whereby capital payments are currently replaced, thus maintaining them approximately at constant levels.
15. Mr. Herridge mentions freight charges. In commenting on his remarks on this subject, it might be pointed out that freight payments have been made in exchange for full value received in the form of facilities for Canadian trade, particularly in the winter months, and that the United States imposes no such discriminatory measures against shipments to the United States via Canada as have been in effect for a period of years against shipments to Canada via the United States. I believe it would be well to stress the importance of having this discrimination removed as a basis to a closer and more profitable relationship between the two countries. This might mean a greater balance of freight payments in our favor but if the volume of business in both countries is to be increased as the result of an agreement, presumably any loss to Canada would be made up in increased national prosperity. At the same time the Department may wish to consider raising the question of the discrimination now practiced against free [Page 866] and dutiable imports by the discrepancy in excise taxation on imports from non-British countries.
16. In regard to tourist expenditures, it should be pointed out that the United States has at all times facilitated the movement of tourists to Canada and by liberal customs measures made it possible for Americans to make extensive purchases in Canada, returning them without payment of duty to the United States. Recent discussions have led to a marked improvement in mutual customs relations along the border, but it would seem that a measure reciprocal to that now in force in the United States should be envisaged in order that the population of each country have a similar degree of access to the facilities of the other for tourist purposes. It might well be intimated that continuation of the American $100 allowance in the future will necessarily be predicated upon a reciprocal attitude on the part of the Canadian Government.
17. I am not prepared to comment from here upon what might be said regarding Mr. Herridge’s remarks with regard to gold shipments, although it might be noted that the recent development of the Canadian gold industry has been largely due to the ready market afforded to Canadian gold in the United States. I cannot say whether the Treasury will give any indication to forecast the maintenance of the present absorption of Canadian gold by the United States or an increase therein during the coming years.
18. I have already mentioned above Mr. Herridge’s remarks regarding capital movements and interest and capital payments of Canadian obligations in the United States. It might be pointed out that if the volume of exports both from the United States to Canada and from Canada to the United States are restored to normal levels or even increased above those levels the funds available for meeting such payments will also be increased. In the case of the Canadian Government in particular, income from customs, excise and other sources will rise and Canadian credit will be improved, while existing capital charges will remain the same. In view of this it seems that there is a fallacy in the following sentence on page 11 of Mr. Herridge’s note: “If this record is to be maintained, it is clear, in view of the uncertainty as to international capital movements, that exports of Canadian goods to the United States must be increased or the imports of goods from the United States into Canada decreased.” Some exception might be taken to Mr. Herridge’s remarks on standards of living and cheap labor but I doubt the advisability of raising this issue in the Department’s reply. On the latter part of page 11 and the beginning of page 12 I believe there can be no disagreement. It might be advisable, however, in studying this matter, for the Department to endeavor to formulate a provision which [Page 867] will ensure the equitable effectiveness of the agreement in the event that exchange rates should again vary materially between the Canadian and American dollar. Experience has shown that such fluctuations can occur in very short periods of time and that their effect on international trade is extremely disruptive.
19. I have already commented on Mr. Herridge’s reference to the Ottawa Agreements. Mr. Herridge’s note proposes a joint declaration by the Governments of Canada and the United States stating that their common objective is the attainment of the freest possible exchange of natural products between the two countries, that it is recognized that this objective cannot be obtained in the immediate future as important interests in both countries would be disturbed unduly by the removal of existing tariffs on all natural products, and that the Government of Canada favored as a first step the reductions included in the proposals contained in Mr. Herridge’s note to be succeeded by progressive mutual reductions in the duties on natural products leading to the attainment of the declared objective. Such a declaration would undoubtedly be of great political advantage to the Conservative Party in Canada at this time. It would have the merit of holding out great, but entirely indefinite hopes to the voting farmers and other producers of natural products in Canada. It would probably deeply disturb the farmers and natural producers of the United States at the same time. Since the United States is presumably interested in attaining the freest possible exchange of manufactured products with Canada rather than the freest possible exchange of natural products, it might be suggested that manufactured products be included in this statement or that the word “natural” be omitted. Preferably, I think the latter solution would be preferable. Any declaration, however, of this nature would have a tendency to project the contemplated negotiation into political discussion in Canada, particularly in the next session of Parliament. As I have stated before, I do not see that we would derive any advantage in any such discussion. Quite the contrary. The various groups in Canada, headed by the Canadian Manufacturing Association, will argue for their right to protection the moment such a declaration appears. The Conservative Government will find itself obliged to declare that their interests will be protected and will probably slip quite easily into a statement that natural products will be those primarily affected by the contemplated agreement. Would it not be better to postpone the issuance of any joint statement or declaration until the basic principles of an agreement shall have been more closely examined and more definitely agreed upon?
20. Mr. Herridge then sets forth his proposal. To proposal (a) I see no particular objection. Proposal (b) looks rather too good to be [Page 868] true. A detailed study of this is being made and will be submitted very shortly, but from such study as we have been able to make of this to date it does not seem to me that existing Canadian interests would permit the present most-favored-nation tariff list in its entirety to be applied to importations from the United States. It must be recalled that this most-favored-nation tariff could be raised in future since such things can be done almost over night in Canada. Therefore, I think Mr. Herridge should be asked to state definitely whether he contemplates that the present rates contained in the most-favored-nation tariff would be the maximum rates of the Canadian most-favored-nation tariff throughout the life of the agreement. At this point the Canadian valuation system should, I believe, be brought into a reply in a forceful way. The following language may seem to the Department to be too strong, but I submit it as an indication of the line which in my opinion might be taken: “In view of the impediments to United States exports to Canada constituted by the existing Canadian system of valuations for duty purposes which experience has shown to be arbitrary, discriminatory and, in effect at least, secretive, we feel that no proposal would be complete which did not contemplate assurances that its terms could not be rendered nugatory by the application to imports from the United States of the Canadian valuation system. We should be glad to receive proposals regarding provisions in the agreement to deal with this problem as a preliminary to comment upon other portions of the Canadian proposal.” In this connection I refer to paragraphs 26 to 31, inclusive, of the Legation’s memorandum of September 21st, 1934. Suffice it to say that any possible benefit to the United States from the agreement which Mr. Herridge contemplates would be completely nullified by the usual application by Canada of this valuation system during the life of the agreement.
21. Mr. Herridge’s remarks on paragraph (c) of his proposal are obviously incomplete. I am not in a position to comment upon the correctness of the assumption contained in the footnote regarding the excise tax on Canadian lumber. Some studies have already been made on some of the products mentioned and these are in the Department’s possession. See Legation’s memorandum of September 21, 1934, and previous correspondence. If the reduction on the duty of fish is to be considered I believe that consideration should also be given in the Department to the adjustment of various fishery problems on the east and west coast. Paragraph (d) contains a suggestion which may have considerable possibilities for an agreement. I enclose herewith a study21 which was submitted by Mr. Charles Page Perin, representing the Perin Engineering Corporation, Consulting Engineers, 535 Fifth Avenue, New York City, on October 15th, and you will find that extensive [Page 869] studies have been made along this line by Professor W. Y. Elliott of Harvard University. Numerous other products are made in Canada with use of hydro-electric power. It will be necessary for Mr. Herridge to specify more definitely what he has in mind to determine the effect of reduction of duties on such products.
22. Paragraph (e) is wholly vague and naturally so since Mr. Herridge would probably expect our Government to list its own desires for a reduction in this connection. In the Legation’s memorandum of September 21 a number of suggestions regarding such reductions will be found. I believe, however, that a satisfactory list can only be drawn by making in Washington an extensive study of the situation with the help of one or more of the technical staff of the Legation. Further studies are being carried on here along this line, but we would appreciate further guidance from Washington as to what it is desired to have these studies bear upon more particularly at the moment. In this connection I may point out that one of the sorest points in our international trade at the moment is the seasonal valuations placed upon American exports to Canada of soft fruits and vegetables. Presumably, if satisfactory provisions can be included in an agreement covering valuations they would also cover these seasonal valuations. Mr. Herridge might be asked whether, as we assume to be the case, his proposal (e) involves reductions in the existing most-favored-nation rates which the United States would receive under his proposal (b).
23. At this point I would like to point out that the number and degree of reduction of duties upon which each Government will be able to agree will be in direct ratio to the facilities which may be provided in the agreement for the rectification of duties which, when in operation, are found to effect undue hardship upon the domestic interests of either country. I believe that some reasonable system for modification where obvious and unforeseen hardship occurs would greatly facilitate the inclusion of the reduction of duties on certain commodities. This subject is discussed in the Legation’s memorandum of September 21st, 1934.
24. Article 12 of the Canadian Marketing Act appears to make it possible for the Canadian Government at a future date to place a quota upon American imports into Canada regardless of any commitments with respect to duty rates. The Department may wish to consider the advisability of reaching some understanding regarding the application of such measures either American or Canadian to imports during the life of the agreement.
25. While I am inclined to take as genuine the Canadian Government’s expressed desire for a speedy conclusion of an agreement, as well as immediate initiation of negotiations, I would recommend that the questions raised in paragraphs 1 to 5, 10, 14 to 16, 18, 20 and 22 of [Page 870] this memorandum be answered by the Canadian Government before the United States agrees to enter upon such negotiations. This would tend to diminish the possibility of misunderstanding and deadlock and might also have the added salutary effect of restraining the Canadian Government from premature political use in Canada of the existence of negotiations and of their present communication.
For your information I enclose a clipping from the Financial Post of Toronto, dated in advance November 24, 1934.22 This newspaper has evidently had some inkling from Canadian Government sources that negotiations are in the air. The Canadian note appears to imply that their proposed negotiations would be based upon the assumption of obtaining an agreement to the United States Trade Agreements Act, to which they specifically refer. The Financial Post’s remarks regarding a treaty form, however, are in keeping with the position which has previously been assumed by the Prime Minister on the subject and with general feeling in Canada. The Department may already have clarified this feature with Mr. Herridge. In any event there may be no harm in proceeding on the assumption that his note indicates that the trade agreement form is contemplated. To my mind, however, the apparent concession on this point is but one more indication of how badly the Conservatives feel that they need to have negotiations in existence to point to politically. The impression was very widely created in Canada through the publication of an Associated Press despatch referred to in my despatch No. 747 of August 10, 1934,23 that the present administration in Washington is reluctant to deal with a Conservative government. This report was frequently used in public speeches by the Liberals to show that the Conservative government was discredited abroad. The Conservatives need to show that we have actually begun negotiations with them to counteract this impression. I would be inclined to fear the cropping up of unforeseen obstacles to protract negotiations once they were begun. I would recommend, therefore, that as many problems of controversy as possible be solved and agreed upon in principle as a preliminary to agreement on the part of our Government actually to begin formal negotiations.