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The Canadian Economy and Its Competitors

FROM its beginnings the Canadian economy has developed as world markets needed Canadian products and as improved techniques of exploration, production and transportation made possible the conquest of various stubborn obstacles. It has developed at very uneven rates. There have been short periods of rapid progress, succeeded by frustration and painful readjustment. There have been periods of waiting for scientific knowledge to progress and for markets to expand or open as transportation costs were cut or competitive sources dried up. Other conditioning factors were the exacting climate of northern latitudes and the high cost of rearing an economic and social structure on the basis of a sparse population unevenly spread over great land masses.

Political forces also helped shape the Canadian economy. Under a different political history the regions of Canada might have been simply the extended northern frontiers of the United States. But the presence of the French-speaking population and the United Empire Loyalists, the intermittent encouragement of British imperialist policy and the lack of interest shown by the United States all but forced Canada into developing an independent economy. Not until the beginning of the twentieth century, however, did it begin to show promise of vigorous survival.

Up to the time of World War II, the Canadian economy was to a peculiar degree dominated by bulk exports of food and lightly processed materials--pulp and paper, wheat, nonferrous metals. Lumber, fish and some other exports were less important nationally but had great regional importance. A significant export of manufactures in automobiles, electrical equipment, rubber and other products went primarily to Commonwealth countries where they enjoyed the advantage of preferential tariffs. A number of United States firms found it profitable to concentrate their manufacture of exports to the Commonwealth in Canadian branches or affiliates. There also was a considerable production of manufactures for the home market, protected by tariff and other devices but subject to competition over the tariff with products of the United States, the United Kingdom and other countries. During the great depression, faced with practices of discrimination and bilateralism, high protection and oversupplies of food and raw materials, the Canadian economy fell far short of the full use of its resources. Moreover, when the recovery came in the second half of the thirties the persistent oversupply of wheat, pulp and paper gave Canada less than her proportionate share of its benefits.

Counterbalancing the mass exports were certain mass imports to make up national and regional deficiencies, conspicuously in coal, petroleum and iron ore. There were also varied imports of consumer goods, particularly from the United States, which provided Canadians with a range of choice and gave Canadian producers a degree of competition vastly greater than that encountered in such a country as, for example, Australia. Characteristically, also, the Canadian economy received substantial imports of capital in periods of active investment and paid back a portion of the investment in periods of slack business.

Thus the Canadian economy, closely integrated with the economies of the United States and Europe, was peculiarly sensitive to world fluctuations. It was the economy of a sparsely settled country whose main cities lay close to the United States border and under the shadow of the metropolitan centers to the south.

II

With a history like this it was to be expected that after the recent war the Canadian Government would help willingly and substantially with international plans for reconstituting a world based on multilateral trade.

While prepared to be flexible about the improvisations required for the transition period following the war, Canadians had some firm views as to what they hoped for afterwards. They were quite clear that they wanted a framework of multilateral trade in which quotas, exchange restrictions and all the devices of bilateralism were eliminated. They wished increased freedom of trade and sharply reduced protection. They believed that the ultimate aim was convertibility of currencies, without which multilateral trade is necessarily limited. They also wished to generate again the flow of international investment, if possible from private sources, for without this many countries could not progress and thus would be restricted in their trading.

At the end of the war, Canadians, in so far as they had clear forward views, expected on the whole that their major mass exports would continue and grow substantially. An exception was wheat, where the hope was for recovery rather than expansion. They probably also expected a considerable industrial extension, with the processing of Canadian materials carried forward to fabrication and with ancillary industries developed. They expected that the home market would be larger and manufacturing more economical in scale. In this there was some reasoning by analogy from the history of the United States, where the development of the home market has played so decisive a part. There was some tendency to disregard the degree to which the consumer market in Canada is narrowly pressed along the United States border. On the other hand, Canadian operators during the war had manufactured standardized products in large volume with man-hour requirements not more than those of the United Kingdom or the United States--and in some cases distinctly less. With a larger-scale production after the war, based on a bigger home market, some manufacture for export and some share of the United States market, they hoped that competitive costs would become possible.

These circumstances predisposed the more alert and venturesome businessmen to favor a policy of multilateralism and reduction of tariffs. Looking for markets in many countries, they also favored policies which would lead to convertibility of currencies and to the freer flow of international investment.

What has actually happened in Canada in the decade since the war has far outrun the most optimistic expectations. The high level of economic activity in the Western World, whether induced by the needs for rehabilitation, by aid under the Marshall Plan, by Korean war expenditures, by continuing defense expenditures or by the vigorous reconstruction efforts of a number of Western countries, has been reflected in increases in the prices and volumes of Canadian exports. Meanwhile, population both from births and immigration has grown by more than 25 percent since the war, and a country which entered the war with barely 11,000,000 people now thinks 20,000,000 a conservative planning figure for 1970. Physical production is nearly two and a half times the prewar level. From 20 to 24 percent of the gross national product is being invested.

More specifically, increased urbanization and improved communications have greatly enlarged the demands for paper and have encouraged a great expansion and modernization of the Canadian paper industry. The increased use of nonferrous metals both for defense and civilian purposes and the decline of sources of cheaper supplies have stimulated Canadian expansion and have encouraged widespread exploration with the best scientific equipment for the discovery of new resources. Intensive and systematic prospecting has reaped rich rewards. The extension of electrometallurgical processes and increased demands from a score of industries have accelerated the development of hydroelectric resources, making profitable the use of water powers hitherto too remote for economic development. Until within the last year, even wheat had a buoyant market; shipments to Asia compensated for some decline in European sales. During much of the period, special needs and special shortages here and there provided scattered markets for a great variety of Canadian manufactures which had not normally enjoyed a large export sale.

Not only has the period been favorable to exports but the development of the prairie oil fields proceeded to the point of providing for about two-thirds of our greatly increased domestic requirements, thereby relieving us of foreign payment for much of one of our largest imports. Similarly, for the first time in half a century, iron ore is being uncovered to replace imports and provide new exports.

These great changes have not come about without very heavy investments of capital. They have been supplied in large part (80 to 90 percent) by a high rate of domestic savings but in significant volume also by a persistent flow of capital from abroad, chiefly from the United States. Under these circumstances, the rate of economic growth in the country has been unusually high.

While the realities have exceeded the expectations, there have been some unexpected features in the pattern of postwar economic expansion. There has been not less but more concentration on a few mass exports. There has been a great increase in the share of our exports (about 65 percent) going to the United States. The multiplication of United States, British, Belgian, Dutch and other branch plants and affiliates has been unexpectedly large. Though not just as expected, all this has been very acceptable to Canadians, who were inclined to think for a while that their only worry was the question of how long this prosperous era would last.

When the recession of 1953-54 developed in the United States and spread to Canada, creating worrisome unemployment problems during the past winter when business normally encounters seasonal slackness, Canadians became aware that the postwar transition period was over. They were still convinced that they had ahead of them an extended period of rapid growth. They began to realize, however, that the Canadian economy as a whole and Canadian industries in particular must adapt themselves to the facts of a postwar world in which Western Germany had reëmerged vigorously, Japan was making desperate efforts to reëstablish her trade, Marshall Plan expenditures had disappeared, and United States and Canadian expenditures for defense were likely to be less. They realized that they had to readjust themselves to a situation in which efficiency of production had provided plenty of competitive supplies and that both external and home markets had become highly competitive.

III

These circumstances have brought to the surface and sharpened a number of disturbing problems bearing on Canada's foreign economic relations, especially with the United States.

There has been growing concern over the extent and results of United States investment in Canada. The persistent buying of the rather limited range of Canadian common stocks by American investors and investment trusts has lifted Canadian stock prices to levels which seem to forecast a very distant if prosperous future. In some measure the action is encouraged by United States tax laws. This movement of capital, together with other investment in Canada, has until recently been the major factor in keeping our currency at a premium in New York, putting some damper on our exports and making it easier for importers to compete with domestic producers.

In addition, there has been some concern over the extent of the direct investment by which large American corporations, through their wholly-owned subsidiaries, have become fairly dominant in certain industrial fields. Recently there have been some murmurs of complaint that certain areas of Canadian industry and finance are powerfully affected by United States subsidiaries in which there is no Canadian investment, in some of which there is no Canadian share in management, no more than branch-plant discretion, and no full reporting on the results of the Canadian sector of the enterprise. In contrast, of course, there are a considerable number of partly-owned United States subsidiary or affiliated companies which have welcomed Canadian investment in their Canadian operations and which have developed a marked degree of independence of management.

Now that labor organizations are uniting there also is concern over the developing assumption that union contracts in, say, the steel industry should be uniform for North America. It may seem eminently plausible that there should be no difference between working conditions and union standards in Windsor and Detroit or in Hamilton and Buffalo, but in fact market and other conditions are fundamentally different.

Canadian industry has been rudely disturbed by the great increase in foreign competition as a whole, both in export markets and at home. Some Canadian industries have experienced a series of shocks. The first was the elimination of some of the sterling-area markets on the ground of exchange shortage and the necessity to concentrate on sterling purchases. The second was the disappearance of a number of export markets which were based on postwar shortages and which some inexperienced traders did not recognize as being short-lived. The third was the revival of imports in substantial volume from countries which had rehabilitated themselves and were again competing in world markets. Finally, there was the intense competition, coincident with the United States recession, signalized by the resurgence of Western Germany and Japan in particular. Recently the competitive advantages created by devaluation in the United Kingdom have become painfully conspicuous. Many industries have felt the heightened impact of competition, but it was particularly sharp in textiles and in the electrical equipment industries.

In a highly competitive world, Canadian manufacturing occupies a peculiar position. On the one hand, it is subject to the competition of United States mass production. Even after the reduction in United States tariffs resulting from the GATT agreement, the fact is that the access of Canadian manufactures to the United States market is much more restricted than is the United States access to the Canadian market. On the other hand, the Canadian manufacturer is confronted by lower-wage competitors in Europe and Asia, whose position has been enhanced in a number of cases by the devaluation of currency. Competition from these sources is, of course, particularly severe in all products that have a relatively high labor content.

In these circumstances, many Canadian industrialists are beginning to ask themselves: "Have we gone too far in tariff reduction? Can we really develop an independent rather than a satellite economy on the northern boundary of the United States without higher tariff protection? Does an economy which produces food and materials for the larger countries of the world and whose fate is determined by the policy decisions of Washington and London satisfy Canadian ambitions?"

External trade policies in both the United States and Canada are bound by the General Agreement on Tariffs and Trade, through which the subscribing countries have substantially limited their freedom of action in order that they might obtain concessions in other markets and achieve the general object of wider and more varied opportunities for world trade. GATT has always been subject to criticism because of the number of exceptions and qualifications necessarily introduced in order to achieve minimum agreement and provide realistically for those countries which are still passing through severe postwar adjustments.

There have always been escape clauses in GATT. But it was the stiff requirement put forward by the United States at Geneva last year for a complete waiver validating United States quantitative restrictions, plus Congressional insistence on more liberal interpretations of the President's obligation to prevent any damage to United States industry or to modify any arrangement which might affect continental security, which greatly increased the uncertainty surrounding the trade agreements and reduced the value which other nations attach to them.

Since the war other countries have repeatedly been urged by American spokesmen to make concessions which would enable the President to persuade Congress from time to time to maintain or extend the Trade Agreements Act. There are signs that we are entering a period when other countries may press American representatives to produce evidence that the United States is able to make a dependable agreement. To say this is not to discount the ingenious and sincere efforts which have been made by two Administrations in Washington to further the aim of larger and more competitive trade in the Western World. In future, however, if agreements are to be subject to the heavy discount of escape clauses and modifying legislation, a much greater consideration may be required.

Different in character but similar in effect is the still vexing question of customs procedures and valuation. The President has been unable to get Congress to pass new legislation which would conform to international standards and provide unequivocal and prompt customs and valuation procedures. This also has greatly reduced the attractiveness of trade agreements with the United States. Trade in some volume can accommodate itself to almost any tariff structure which is dependable and certain, but tariff schedules which are uncertain and subject to unilateral interpretation and modification simply destroy trade.

As has been noted above, a few Canadian manufacturers after the war hoped that by adding the nearby United States market to their Canadian market they might obtain a sufficient volume of production to make their operations fully competitive with those of United States companies. Often the required market consisted merely of a few bordering counties in the United States. However, even where trade agreements have seemed to make this possible, customs procedures, amended interpretations, valuations and delays have intervened to prevent it. The widespread support among Canadian manufacturers for a liberal trade policy at the end of the war has in the intervening years been very seriously reduced.[i]

United States agricultural policies, while devised to serve internal interests, have important and disturbing external effects, brought about mainly by two practices. The first is the imposition of import quotas to protect the operation of support prices and prevent foreign supplies from flowing in to take advantage of government purchases. The Canadian farmer from time to time finds markets disturbed by the imposition of quotas on products such as potatoes, oats, barley, etc. In fact, the quotas which are presently imposed are not particularly severe since Canada at the moment has no great supply of coarse grains. They do, however, introduce a very important element of uncertainty into the normal continental trade by which Canadian coarse grains have been exported into the cattle-fattening and dairy regions of the United States. Again, the effect of bigness is important since a comparatively moderate restriction in terms of United States consumption may be of decisive proportions in terms of expected Canadian exports.

The support prices themselves and the devices employed in the United States to dispose of surpluses also have serious repercussions. It has been increasingly difficult for Canadians to comprehend how a country which prides itself so much on innovation and up-to-dateness in its industry can seriously base a support-price policy on the purchasing power of a bushel of wheat in the period before the First World War, when wheat was sown and harvested by horse-drawn machinery and transported to the rail line in horse-drawn wagons. This system of support prices in the postwar period has caused a very large increase in United States wheat acreage, more than the whole Canadian acreage of wheat. As a result, United States postwar exports of wheat have been nearly five times the exports of the prewar years. In contrast, Canadian postwar exports of wheat have increased less than 40 percent and the Canadian acreage sown in wheat has on the average been no larger than before the war. There are, of course, influences affecting wheat acreage other than the support-price policy; but Canadians find it hard to believe that the production of wheat is not being differentially subsidized by the system and that the United States has not itself created the problem of surpluses which haunts its farmers and the Administration.

They have, of course, no complaint that the farmer in the United States is drawing larger profits than is the farmer in Canada, nor are they concerned with the internal policy of the United States. They necessarily become seriously concerned, however, when the United States uses special devices--giveaway programs, grants of foreign aid with requirements that the money be spent on United States food products, or even straight sales of wheat at depressed prices. They are worried when they find that Canadian exports of wheat have lagged and that the Canadian carry-over this summer is likely to be in the neighborhood of 500,000,000 bushels, a modest amount for the United States but a threateningly large carry-over for Canada. The Canadian wheat farmer is prepared to compete with the United States wheat producer but he feels that the competition is unequal if not unfair when he must compete both with his United States counterpart and the Government of the United States. He has in the past year found this competition particularly costly in terms of sales to Germany and Japan, two of his better customers.

There are a number of other questions, too complex and diverse to discuss in detail here, which influence the Canadian climate of opinion. They concern especially the preservation for Canadian use of Canadian sources of energy and the maintenance of the historic pattern of Canadian transportation.

Many Canadians feel that the United States obtained a half interest in the St. Lawrence development (vastly more important to Canada than to the United States) very cheaply. They feel that Canada's declared intention to go ahead alone on the project had the salutary effect of forcing Congress to pass the Wiley Bill. Many point out that for little more than $100,000,000 for the construction of a relatively short canal the United States obtained an equal voice in a transportation system which includes the Welland Canal and will include the new Lachine Canal, both built entirely at Canadian expense. Most Canadians would probably have been happier to carry out the whole project without United States partnership, but it was judged that this scheme would be thwarted by the withholding of United States consent to the joint power project. The St. Lawrence Seaway is going ahead and will be pushed through to satisfactory completion, but there is no question that the United States lost good will in Canada by its hard bargaining.

Regarding the use of the waters of the Yukon rivers and the Columbia, the Canadian Government has indicated the strength of its determination not to allow external use of water power or export of electric energy. Since Canada is a country without centrally located coal deposits, she has historically been sensitive to the importance of power and its use to develop her resources.

A somewhat similar Canadian attitude on the project for a natural gas pipe from the prairie gas fields to Ontario is a reflection of the historic decision which located Canadian transcontinental railways north of Lakes Superior and Huron and assumed for the Canadian nation some of the financial burden of all-Canadian transportation routes.

IV

These are problems for which, no doubt, reasonable and satisfactory solutions will be reached. Some are of small importance in themselves. The attitudes expressed in the discussion of them, however, reveal various trends and apprehensions and highlight certain historic positions which have significance.

Canadians are now conscious that the short-term economic effects of the war have worked themselves out, that the transition period is over. They are aware that their country has within it forces of growth which are affected by, but do not spring from, the cold war or defense programs or shifts of policy abroad. After having been immersed in the processes of material advance they are now beginning to redefine and redetermine their directions. They have applauded the action of the Government in appointing a Royal Commission on Canada's Economic Prospects. They think it well to scrutinize carefully the implications of growth and the policies which foster and control it. In the field of trade policy there is bound to be a reëxamination, for the drive for multilateral trade and convertible currencies has had repercussions both favorable and disturbing. The weight of opinion will still support liberal trade policies, but proponents of this view are handicapped by the gap between the principles and practice of trade policy in the United States. With the utmost admiration for the persistence and ingenuity of President Eisenhower and Secretary Benson in finding compromises and blocking extreme action, Canadians are wondering if their liberal trade policy has not become too one-sided to be advantageous to a small country with a big neighbor.

Canadians have been prone to look to the United States for models. Innumerable problems have been encountered and dealt with there before they became acute in Canada. Now there is a growing awareness that, though Canada is and always will be influenced by her huge neighbor, she has a different sort of destiny. She will never equal the United States in mass and density. Her frontier will not reach the Pacific and disappear; it will always stretch across the North--a perpetual frontier to be driven back at intervals in deep thrusts as world needs and technical knowledge develop. This frontier will not be overrun by population but will yield only to scientific knowledge and the great apparatus of modern industry. These prospects will pose different economic problems and different social and political problems. Borrowed solutions will not be adequate.

At the end of the Second World War, Canadians struck out on an economic path which they have followed closely to this day with considerable confidence that they were on the right road. Now they are in the mood to take another view ahead. They do so with the consciousness that although their historic associations still stand they have also their own peculiar destiny.

[i] However, the process has been checked somewhat by the President's effective resistance to the bill in Congress reclassifying "hardboard" imports under much higher tariff rates.

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