111. Letter From Secretary of the Treasury Connally to Secretary of Defense Laird 1

Dear Mel:

I appreciate your early reply to my memorandum of February 16,2 concerning our trade arrangements with Canada in the defense area.

There is a need for us to come to grips promptly with the trade problems we have with the Canadians for several major reasons. A large part of our overall trade and payments deficit results from our large payments deficit with Canada. Economic forces are at work which will continue the deterioration in our bilateral position with that country in the years ahead. The trends we anticipate are highlighted in the enclosed analysis3 prepared by my staff.

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A significant part of our deficit arises from identifiable U.S. military expenditures in Canada exceeding $200 million annually. The various U.S. agencies have agreed that the outlook for an increased level of Canadian procurement in the U.S. is bleak. As you point out in your letter, Canadian defense expenditures have fallen. At 2.6 percent of GNP, their defense expenditures are the lowest of all NATO members except Luxembourg. Their policy towards NATO and our common defense appears to be one of retraction rather than acceptance of an equitable sharing of the burden. This situation cannot be ignored as we seek ways of correcting our trade problems.

There are several aspects of the Defense Production Sharing Arrangement (DPSA) which concern me.

The Canadians seem to view the Arrangement not as a security arrangement at all, but as another commercial venture. Indeed, the primary responsibility for the Arrangement in Canada has been transferred from the Defense Ministry to the Ministry of Industry, Trade and Commerce.

The arrangement itself is clearly one-sided. It confers on Canada privileged access to our market which we extend to no other NATO ally. At the same time, it acknowledges that Canada need not even consider procurement in the United States, if Canadian sourcing is “justifiable.” Under the circumstances, withdrawal of the Buy America exemption is hardly likely to lead to further reductions in Canadian purchase here, as presumably they now only buy in the United States what they cannot get in Canada or cannot buy elsewhere at a better price. If Canada must be treated as part of the defense production base of this country, we must at least ensure that U.S. participation in this base we have created is on terms at least as favorable as those enjoyed by Canada.

There is no question in my mind concerning the importance of Canada’s strategic role in the joint defense of the North American continent. Both governments have expressed their agreement on this matter. It seems to me, however, that Canada has equally as much interest in the maintenance of this relationship as we do. The Canadian Defense White Paper published last year4 emphasizes unequivocally the priority Canada places on its defense relations with the United States.

“The Government concluded in its defense review that cooperation with the U.S. in North American defense will remain essential so long as our joint security depends on stability in the strategic military [Page 430] balance. . . . Cooperation between Canada and the U.S. is vital for sovereignty and security.”

The Canadians fully appreciate the important advantages they derive from our special arrangements with them. These include not only the security provided by a powerful allied defense force, but also access to our defense market and technology, plus the economic benefits arising from our large supporting expenditures associated with U.S. defense personnel stationed in Canada.

Our defense arrangements, with Canada and others around the world, should be based on mutually agreed acceptance of the security issues involved. If the neutralization of an outmoded, inequitable trade arrangement can call into question fundamental defense ties, how sound is the foundation of that defense relationship?

We can no longer afford the luxury of subordinating our economic interests to the political and military aspects of our international relations. Our defense agreements should bear clearly identifiable, direct budgetary costs to each party. Efforts to “sweeten” these arrangements through corollary agreements conferring economic or commercial concessions can lead to disputes with the foreign government concerned, create difficulties with Congress, and exact an economic cost to the U.S. not supportable by our present international payments position.

I welcome your offer to explore means of eliminating imbalances with Canada in the defense area. I have asked Deputy Assistant Secretary William Cates of my staff to work with the appropriate officials of your Department to expand our knowledge and appreciation of the basic data pertaining to the Defense Production Sharing Arrangement in order to facilitate efforts towards this end.


John Connally
  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 472, President’s Trip Files, Canada. Confidential. The original is a copy that Connally sent to the White House on April 7. In a covering note to Haldeman, he wrote: “I think the President ought to see this before he goes to Canada.” An April 11 memorandum from Lawrence Higby of the White House Staff to Haldeman, also attached, reads: “This should go to Kissinger first. 9:00 A.M.—4/11/72.” Haldeman annotated: “Right—but it must go to P.[resident] by tomorrow.” Additional annotation on Higby’s memorandum reads: “Sonnenfeldt/Hormats have action (HAK has c[op]y).” Higby’s memorandum was initialed by Haig. A memorandum from Connally to the President, suggesting strategy for his meeting with Trudeau, is ibid.
  2. A copy is ibid. Laird replied in a March 3 letter. (Ibid.)
  3. Not printed.
  4. Canada, Department of National Defence, Defence in the Seventies: White Paper on Defence.