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110. Memorandum From Helmut Sonnenfeldt and Robert Hormats of the National Security Council Staff to the President’s Assistant for National Security Affairs (Kissinger)1

SUBJECT

  • Tough Treasury Position on Canada—A Pointless Crisis

Treasury has rejected the latest Canadian offer on trade.2 It feels that the “trade package” is inadequate and has threatened to take a public hard line against Canada when we submit the “gold bill” to the Congress in the middle of next week. And, Treasury has raised the possibility of suspending the U.S.-Canadian Auto Agreement and the Defense Production Sharing Arrangement with Canada. Canada, however, believes that it has gone as far as it can go and that to give any more would lead the Government to fall in the next election. The Canadians feel that they are being asked to commit political suicide by Treasury for the sake of concessions that could scarcely make that much difference to the U.S. This memo is to alert you to the problem and to the urgent need to moderate Connally before an unnecessary foreign policy crisis with adverse domestic implications arises.

The major issues are:

—Canada wants to declare “inoperative” the first two safeguards of the Canadian-American Auto Agreement by legally eliminating them through an order-in-council (which the Ministers feel would involve unacceptable domestic political consequences). Treasury wants formal elimination. The issue here is more political than economic, since these two safeguards have not actually been adhered to or affected our trade in the last several years.

—With regard to the third safeguard, which limits the duty free import of autos into Canada to manufacturers alone, i.e., no private Canadian citizens can import duty free automobiles from the U.S. Canada has indicated that for both political and economic reasons it cannot give any concessions on this, although it has proposed the establishment of [Page 427]a committee to examine this problem. Treasury’s position is that individual Canadians should be able to import automobiles duty free since Americans can now import automobiles duty free from Canada (although because Canadian prices are higher no Americans have done so).

—In addition, Canada will remove the ten percent (“buy Canadian”) differential on defense purchases under the Defense Production Sharing Arrangement, and will allow duty free entry for prime contracts valued at $150,000 or more as opposed to the current $250,000. Treasury’s position is that because most contracts are not “prime,” but “subcontracts,” this is of little help to us. (Treasury is probably right.)

—Canada has also offered to increase tourist allowances, which is calculated to increase U.S. earnings by about $40 million per year. And Canada has indicated that it would eliminate its present five percent duty on citrus juices, although it admits this is unlikely to affect the level of U.S. exports to Canada.

—Canada also points out that the U.S. has done nothing which has the appearance of a reciprocal concession.

Although admittedly Canada has made limited concessions to the U.S., it would serve little good at this time to publicly denounce Canada or to threaten to revoke the Auto Agreement or the Defense Production Sharing Arrangement. Indeed, it might encourage members of the Congress to tack on punitive amendments to the gold bill, and strengthen protectionist pressures.

The foreign policy consequences would be that anti-Americanism will become the major Canadian election issue with the parties outbidding each other. In addition, the Canadians are not incapable of economic retaliation with adverse effects on interests and communities in this country which should be of some concern to the President. Needless to say, any notion of a Presidential trip in these circumstances would be absurd and, as has been previously pointed out to you, the cancellation of the trip will merely add to the momentum of deteriorating relations. (Incidentally, there is evidence that Treasury, either on its own or with White House blessing, has already threatened the Canadians with cancellation of the trip as part of the economic bargaining.) Instead, the trip ought to be used as a means to keep the negotiations open until the Canadian election,3 after which Trudeau will be able to make concessions which now would kill him politically.

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Recommendation:

It is essential that you talk to Secretary Connally on this matter before Treasury freezes the position and goes public.4

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 671, Country Files—Europe, Canada, Vol. III. No classification marking. Sent for urgent action. Initialed by Kissinger.
  2. The negotiations began in November 1971; see footnote 5, Document 108. The negotiations deadlocked on February 9.
  3. October 30, 1972.
  4. There is no indication of action by Kissinger. Kissinger and Connally met for lunch at the Treasury Department on March 7. (Library of Congress, Manuscript Division, Kissinger Papers, Box 438, Miscellany, 1968–76, Record of Schedule) No record of their meeting has been found. A March 16 briefing paper by the NSC Staff for Kissinger suggested that he tell Connally that mutual retaliatory actions during the President’s April 13–15 visit to Canada would not be helpful. The paper recommended that Kissinger ask Connally to develop a negotiating scenario for after the Canadian elections. (National Archives, Nixon Presidential Materials, NSC Files, Box 290, Agency Files, Treasury, Vol. III)