The following is a chapter from the 1979 IRPP-Harvard University book, The Future of North America: Canada, the United States, and Quebec Nationalism. Edited by Elliot J. Feldman and Neil Nevitte. Walter Gordon (1906-1987) was an influential Canadian accountant, businessman, philanthropist and politician who served as Minister of Finance under Lester B. Pearson.
Two central issues concern Canada today, one domestic and one foreign. The domestic issue is the “Quebec problem”; the foreign issue is economic, especially foreign ownership of Canadian companies and resources.
Let me begin with the foreign problem. The annual merchandise trade between our two countries is the highest of any two countries in the world. Adding imports and exports together, it amounted to over $50 billion last year. However, Canada’s exports to the United States (more than two-thirds of Canada’s total exports) are to a large extent made up of industrial raw materials, whereas U.S. exports to Canada (close to one-quarter of total U.S. exports) are largely in the form of manufactured goods. In other words, the United States has a considerable advantage in the labor content of exports.
When we take into account such invisible items as interest and dividend payments on U.S. investments in Canada, freight and travel charges, etc., Canada has incurred a deficit in its current account transactions with the United States in every year over a very long period. These deficits have been reduced to some extent by surpluses with some other countries and, much more importantly, by the capital that has come to Canada, largely from the United States.
The Canadian economy is extremely sluggish at the present time; Canada is, in fact, on the verge of a recession:
It is true that all the oil-importing countries, including the United States, have had balance of payments problems since the oilproducing countries (OPEC) raised their prices so dramatically in 1973, but that does not make the Canadian problem any easier. It is not much wonder that the Canadian dollar, which in 1976 was at a premium in terms of the U.S. dollar, was in July 1978 down to about 88 cents U.S.
There is no doubt that foreign capital (mostly American) helped to develop the Canadian economy much more rapidly than would otherwise have been the case. (By foreign capital, I mean a package that apart from money, included management, scientific and technological know-how, and in many cases an assurance of markets for the raw materials or goods to be produced.) The economy of the United States was developed in much the same way with the aid of foreign capital in the nineteenth century (mostly from Britain). But in those days, the capital came in the form of bonds and other fixed-term securities which the United States was able to pay back out of profits.
In Canada’s case, the capital came in the form of equity which ensured continuing control in the future to those who put up the funds (mostly enterprising American corporations). It is this continuing foreign control of the most dynamic industries that concerns Canadians, especially as these industries continue to expand. Many Canadians believe that non-residents control too much of their resources and their business enterprises. Foreign control accounts for approximately 60% of all manufacturing companies, 70% of all mining enterprises, 99% of petroleum refining, 80% of the oil and gas industry (including exploration and development), 95% of the automobile industry, 90% of the rubber industry, 80% of the chemical industry, three-quarters of electrical apparatus, and so on.
In an article in the August 1977 issue of Fortune, entitled “Why the Multinational Tide is Ebbing,” it is asserted that “some kinds of American corporations are still powerhouses abroad, but the basic attractions of overseas investment have vanished.” The article suggests that the urge for U.S. corporations to make direct investment abroad is declining.
In a reference to Canada, the article states:
Ironically, Canada, which among advanced nations is perhaps the most rabidly opposed to American investment, may have the most to lose from discouraging this investment. It can be argued that the more foreign investment a country has, the more it is likely to benefit from additional investment. The inflow of foreign capital raises the productivity of domestic labor by increasing the amount of capital per worker. Hence real wages rise. At the same time, the new foreign investment should increase domestic competition, driving down prices and thereby lowering the returns to capital. If the capitalists are mostly Americans, which is overwhelmingly the case in Canada, then additional U.S. foreign investment would logically transfer income from American business to Canadian labor and consumers-a circumstance that most Canadians should applaud.
I have three comments to make about these assertions:
The article reads like an apologia for U.S. multinational corporations. It is unconvincing to a Canadian like myself. There are many reasons why I believe excessive foreign control of the Canadian economy is not in Canada’s best interests. But here I will concentrate on only two of them.
As I have said, some 60 % of all Canadian manufacturing is controlled abroad. A typical Canadian subsidiary may be encouraged or directed by its parent corporation to import parts or materials from its parent or the latter’s associates instead of developing alternative sources of supply in Canada. Moreover, a typical Canadian subsidiary frequently is not permitted to develop export markets for its products, including markets in the United States, in competition with its parent. While this prohibition is quite understandable, it tends in both cases to reduce job opportunities in Canada and to increase the deficit in the balance of payments.
The largest manufacturers in Canada, as in the United States, are the automobile companies whose operations come under the U.S.Canada auto pact. According to a recent review of the financial statements of General Motors Corporation (worldwide) and General Motors Canada, the Canadian subsidiary assembled 8.3% of all the vehicles produced by the corporation. However, it does considerably less actual manufacturing than is done in the United States. Consequently, it accounts for only 4.2% of worldwide employment and 4.5% of worldwide payrolls. The Canadian company’s payroll represents only 12.5% of the manufactured cost of a car in Canada compared to 33.9% worldwide. It follows that while General Motors is assembling a large number of vehicles in Canada, it is not doing a satisfactory job in terms of employment opportunities.
Consider also the influence of the principal oil companies in Canada, most of them subsidiaries of large U.S. corporations. Prior to 1970, Canadians were informed that they had conventional reserves of crude oil and natural gas that would last 900 and 400 years, respectively. Then, some four years later, new estimates warned of shortages. While both sets of estimates were announced by the Canadian government authorities, inevitably they were based on data supplied by the oil companies. The earlier estimates presumably were based on optimistic expectations of the amount of oil that would prove available in the Alberta basin. They came at a time when the oil companies were urging the Canadian government to persuade the United States to accept more imports from Canada. However, the hopes about the quantities of oil available in Alberta were not substantiated by drilling results. By the time the much lower estimates were announced, and with the new information available, the objectives of the oil companies had changed. By that time, they were urging the Canadian government to approve very substantial price increases, ostensibly to provide them with additional funds with which to step up their exploration activities in Canada.
Perhaps Canadian officials were naive in accepting data supplied to them by the oil companies; they at least might have told the public of the assumptions on which the estimates were based and the uncertainties surrounding such assumptions. Such caution regarding the accuracy of the estimates was of particular importance, as in both cases the reserve estimates supported the objectives of the oil companies at the time; in the first place, to justify increased exports to the United States, and in the second, to justify substantial increases in prices in order to stimulate exploration in the light of serious shortages. This may have been only a matter of coincidence. If so, it was a remarkably favorable coincidence for the oil companies.
There are several alternatives for dealing with the foreign control problem. The one I have suggested from time to time is that members of the Canadian Parliament should express by resolution the view that the foreign owners of the larger Canadian subsidiary companies should gradually over a period of years sell out to Canadians. By “larger” I mean foreign-controlled companies with assets in excess of $250 million. At the end of 1973, there were only 32 of them, which would make the problem manageable. The seven or eight thousand other foreign-controlled Canadian companies would be left alone unless and until their total assets reached the $250 million mark.
I have suggested that the transfer of ownership should take place in stages over a period of years, beginning with companies in the oil and gas and other resource fields. An estimate of the total cost of the 32 companies in question would come to perhaps as much as $15 billion to be paid by Canadian investors (not the Canadian government) over a period of 10 years. This amount would be well within Canada’s financial capabilities.
It would be up to the owners to decide how the changes in control should be accomplished. In many cases, it would simply be a matter of selling the shares of their Canadian subsidiaries for cash through underwriters. In some cases, the Canada Development Corporation or some new federal or provincial agencies established for the purpose might buy control. In still others, it might be necessary to sell control not for cash but for some form of debentures redeemable over a period of years.
The advantages of this proposal would be that:
I should make it quite clear that the Canadian government has shown no disposition to do anything along the lines suggested. Nevertheless, the American Ambassador to Canada, Thomas Enders, has explained United States policy regarding such possible changes as follows:
The United States believes the free flow of private investment capital between countries can make a major contribution to the prosperity of each country, and should be interfered with as little as possible.
However, should a foreign country nationalize or buy into U.S. enterprise for an authentic public purpose, the United States would not oppose the transaction provided full, effective and prompt compensation is made.
Let us consider some other specific matters that are now, or could in the future become, the cause of tension between our two countries.
There are no very serious or basic differences between Canada and the United States in the fields of defense and foreign policy at the present time. The U.S. government would have liked Canada to take an active part in the war in Vietnam and no doubt would like Canada to spend more money on defense. But from a Canadian point of view, this would not make sense.
Occasionally, Canada has taken initiatives in its foreign policy, which at the time may have appeared to be contrary to the then current posture of the United States. For example, after long negotiations, Canada established diplomatic relations with the People’s Republic of China in 1971. As things turned out, this was a useful prelude to the wholly identical relations that now prevail between the United States and China. However, in this world of superpowers, there are decided limits to what a country like Canada can do. Moreover, as your closest friends and neighbors, we think it fair to say that, as a rule, Canadian and American views and objectives are much the same. I do not expect serious tensions to arise in this general field.
There is the question of a common energy policy for North America which, from time to time, your government authorities have suggested. Canada has not thought this would be desirable from its standpoint. The amount of our conventional reserves of oil and gas is limited, and, even if Canada were to increase exports to the U.S., it would have only a marginal effect on U.S. requirements. Canadians who have any knowledge of the subject will expect their government authorities to safeguard Canada’s reserves for domestic use.
A recent issue of The Canadian Forum was devoted to a discussion of a gas pipeline from Alaska to the “lower 48,” i.e., to the central United States, through Canada. All the contributors opposed the construction of the pipeline at the present time. The reasons included the fact that, as far as Canada is concerned, only a disappointing amount of natural gas has been discovered so far in the Canadian Arctic; the prospects seem to be for greater discoveries in the south, in Alberta itself, than in the Mackenzie Delta. Other reasons for not proceeding with the project now are the desirability of settling the land claims of the native peoples before, not after, the construction of a pipeline, and the supposed damage the construction would do, both to the ecology of the region and the social mores of the natives. I have not agreed with these conclusions and, in a newspaper article published in June 1977, expressed my own views in the following terms:
An early decision on the pipeline issue is both necessary and desirable because the United States desperately needs the natural gas that has been discovered in large quantities in Prudhoe Bay, Alaska. From the point of view of the Americans, the best way of transporting this gas to the markets is by a pipeline through Canada.
Only limited quantities of Canadian gas have been discovered in the Beaufort Sea area (of Canada) so far, and the potential for further discoveries in the high Arctic may be less than in Alberta itself. It follows that Canadian requirements for natural gas can be taken care of from existing and potential reserves in the south for a good many years during which time the native land claims could be settled.
But the Americans are our friends and neighbors and surely it would be unthinkable for Canada to refuse them access to their gas in Alaska even if approval for a pipeline at an early date may complicate the settlement of native Canadian land claims. While it would be quite wrong for Canada to refuse permission for a gas pipeline to be built, we would be foolish not to point out to the U.S. the disadvantages to us in proceeding immediately rather than later and to make certain conditions to giving the necessary approvals.
In the first place, it should be agreed that any Canadian gas exported to the United States from now on under existing contracts should be repaid by equal quantities of Alaskan gas, at the same prices, as soon as the pipeline is completed.
Secondly, we should point out the effect a huge inflow of capital needed to finance the line would have on Canada’s balance of payments and the exchange rate for the Canadian dollar. This would be an ideal time to offset this inflow of capital by an equivalent outflow represented by the cost of acquiring control of some of the large foreign-owned companies in this country.
And thirdly, in the light of our present unemployment problem, we should insist that priority be given to Canadians and Canadian manufacturers in connection with all phases of the pipeline construction. There is no doubt that under present conditions, the construction of a pipeline from Alaska could do much to relieve the unemployment problem.
Finally, we should insist on measures to protect and safeguard the lives and social habits of the native peoples near the areas to be traversed by the pipeline.
Recently, President Carter and Prime Minister Trudeau announced that they had agreed upon the construction of a natural gas pipeline from Alaska through Alberta along the route of the Alaskan Highway. In doing so, they did not spell out the conditions as specifically as I for one might have thought desirable. However, it is now decided the pipeline will be constructed if it is approved by Congress and the Canadian Parliament. This removes what might have caused serious tensions between our countries.
Canada will be exporting large amounts of electric power to the United States when the huge development in James Bay is completed. Canadians do not seem to object any longer to the export of water power in the form of electricity. But any suggestion that Canada should consider the export of fresh water itself, even if at present it is being wasted in rivers or glaciers emptying into the Arctic or Pacific Oceans, would have Canadians up in arms. This may not seem logical to Americans. But then the United States’ tremendous arms exports to the Middle East and, formerly, Iran may seem to others to lack a certain common sense. In other words, the human animal is not always very rational in its thoughts or actions.
I suppose there will always be issues that affect particular industries in particular sections of the country and, therefore, provoke individual Senators or Congressmen to speech, if not to action. The recent row over Canada’s decision to disallow as deductions for income tax purposes payments to U.S. television stations for advertising beamed at Canadian audiences is a case in point. Two others that come to mind are disagreements over fishing rights and the question of pollution in the Great Lakes. But such issues are not of very serious proportions.
In conclusion, I always ask my American friends to keep in mind that, by and large, Canadians are your friends, your neighbors, and your allies. We are probably the best friends you have in this dangerous and troubled world.
But please remember that Canada is a separate, sovereign nation and wants to remain that way. We do not like it when American businessmen—sometimes with the best will in the world-treat Canada as if it were just another state of the Union.
I am not exaggerating when I say that we have great admiration for the United States and for all that Americans have accomplished. We acknowledge that we rely on the United States for our defense. We have no alternative, of course, in this age of superpowers.
But this does not mean we would like to become the fifty-first state of the Union. And it does not mean that the United States would have us, even if we did.
The best solution, I submit, is for each of us, Canadians and Americans, to respect one another’s independence—to try to understand each other’s problems—but whatever happens, to remain good friends.
NOTES
1 Personal conversation between the Hon. Thomas Enders and the author.
