438. Letter From the Under Secretary of State (Ball) to Secretary of the Treasury Dillon0

Dear Douglas: I have the uncomfortable feeling that the Diefenbaker Government is being less than straightforward with us, and I think we must be careful not to let the Administration be put in an indefensible position.

What the Canadians Said to the United States

On the basis of my notes at the time we discussed the Canadian proposal on June 22 and 23,1 it appears that the Canadian Government represented the situation to you as follows:

1.
The import surcharges were to be “temporary.” Temporary meant that it would take three to four months to enact legislation which would enable them to substitute internal taxes for import surcharges as a means of providing the necessary $200 million increment to the federal revenue.
2.
These surcharges were designed primarily to produce additional revenue for the budget. They were the only available means whereby this additional revenue could be obtained through executive action. It was anticipated that the surcharges would have only a “slight” balance of payments effect in terms of the reduction of imports from the United States, since they were to be imposed primarily on luxury items and items that Canada needed but could not produce domestically.
3.
The Canadian Government would discuss with its major trading partners in the GATT the details as to the application of these duties to specific commodities. This would give us an opportunity to protest the application of high duties to sensitive items.

What the Canadians Have Said to Others

The following Canadian statements in connection with the announcement of their financial scheme seem to me inconsistent with the above representations:

1.

In his broadcast to the Canadian people on June 26 Prime Minister Diefenbaker said: “These surcharges I ask you to support in the national interest until the foreign exchange problem has been solved by an increase of exports or by producing in Canada at competitive prices more of [Page 1185]the commodities that we are now importing.” This statement makes no reference to any intention to substitute internal taxes for import surcharges. By suggesting that the surcharges would be continued until Canada is able to produce “more of the commodities that we are now importing”, it clearly contemplates that imports would be supplanted by domestic production.

That this is, in fact, what the Canadian Government has in mind is borne out by Prime Minister Diefenbaker’s further statement: “What is saved on imports will help to balance the foreign exchange situation.”

This sounds like pure protectionism to me.

2.

The Order of Council, issued after the announcement of the financial plan, applied the 10 percent import surcharge to a wide range of consumers goods, including everything from automobiles to television sets, “for which it is possible for consumers to defer some of their purchases or for which additional Canadian production is available.” This group covers about $650 million of annual imports at current levels.

The Order applies the 5 percent surcharge to another group of less essential imports for which either “surplus capacity exists in Canada” or “alternative or substitutable Canadian products are available.” This 5 percent duty covers about $2.3 million of annual imports at current levels.

This language again contemplates that the surcharges will operate to restrict imports. Again this sounds like pure protectionism.

3.
The Canadian Government has notified the GATT Secretariat of the import surcharges. In its message of notification the Government made no specific reference to revenue needs or fiscal objectives. It referred instead to a lack of machinery to administer a system of import licensing and expressed the belief that surcharges would have a less restrictive effect on trade than quantitative import restrictions. The concluding part of the notification used the terminology of Article XII of GATT, which provides for the direct control of imports through quantitative import restrictions.

The Problem for the United States

My immediate concern is with the effect of the Canadian action on the trade bill—which, as you know, still faces the Senate hurdle. Already we are beginning to hear from American producers who fear that they will be hurt by higher Canadian import duties. We have also heard from American producers who are seeking similar protection to that accorded Canadian industry by these surcharges. I think it essential that we demonstrate that we intend to take a firm line with the Canadians.

For that reason I strongly oppose our agreeing to a GATT session that ends in October. We can, of course, make it clear that we will be prepared to discuss the Canadian Government’s legislative plans at that time, and, if it needs two or three more months to pass internal tax legislation [Page 1186]as a substitute for the import surcharges, we might be willing to agree to an extension of the waiver until the end of the year.

But if we were to agree to a waiver until next July, as the Canadians are asking, we would almost certainly have to demand compensation or be prepared to take retaliatory measures. Otherwise we could never justify our position before the Congress during the trade bill discussions.

I understand that the Canadians are asserting that we will shake confidence in the Government if we do not agree to a waiver beyond October. If they were sincere in their representations as to the temporary character of the import surcharges, I cannot believe that there should any impairment of confidence.

I am seeing the Canadian Ambassador at 6:00 p.m. on Friday2 and plan to take this line with him unless you feel it essential to have further discussions.

Proposed Canadian Loan in the New York Market

Bill Armstrong’s telegram from Ottawa on June 283 mentioned that the Canadians plan to float a loan of $250 million in the New York market in order to refinance obligations for which the Export-Import Bank line of credit is designed to provide only interim assistance. We do not have the details on this in the State Department, but I have the impression that certain of these obligations are to European creditors. If this is correct wouldn’t it be appropriate for our two Departments to suggest to the Canadians that they seek funds in Europe to cover the European part of their refinancing problem?

You made a brilliant argument in Rome4 that we should try to discourage flotations in the New York market by foreign governments and public authorities. In view of the magnitude of the help we gave the Canadian Government to meet their financial crisis, I think we are in a strong position to insist that they tap the European capital market for this money.

Our General Attitude Toward the Canadian Program

In approaching the present Canadian request for a year’s waiver of GATT requirements I feel we must bear in mind what the Economist this week refers to as the “beggar-my-neighbor” character of the Canadian program. Granted that we had to run a fast rescue operation in view of the urgency of the crisis, I think it would be a great mistake for us to let the Canadians get away, for any length of time, with such a cheap and [Page 1187]easy solution as increased import restrictions. This is a very dangerous precedent. It is in direct violation of GATT. In my judgment it is unworthy of an economically advanced country. Obviously Prime Minister Diefenbaker finds it agreeable to provide increased protection for Canadian industry, but I see no reason why we should let him do this at our expense.

I’d like to talk with you about all these matters after you have had a chance to read this.

Yours ever,

George W. Ball5
  1. Source: Department of State, Central Files, 611.42/7–562. Official Use Only. Drafted by Ball. Copies were sent to Kaysen, E, and EUR.
  2. No other record of these meetings has been found.
  3. July 6; no record of this meeting has been found.
  4. Document 437.
  5. For text of Dillon’s speech to the Conference of the American Bankers’ Association at Rome, May 18, see RIIA, Documents on International Affairs, 1962, pp. 536–545.
  6. Printed from a copy that bears this typed signature.