The Canadian economy and its relationship to the United States

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The Canadian economy and its relationship to the United States
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Wilson, Arlene
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Table of Contents
    Front Cover
        Page i
        Page ii
    Letter of transmittal
        Page iii
        Page iv
    Table of Contents
        Page v
        Page vi
    Foreword
        Page vii
        Page viii
    Introduction and summary
        Page 1
        Page 2
        Page 3
        Page 4
    Political and cultural influences on the Canadian-United States relationship
        Page 5
        Page 6
    Regionalism
        Page 7
        Page 8
        Page 9
        Page 10
    Economic growth of Canada, 1775-1970
        Page 11
        Page 12
        Page 13
        Page 14
    The Canadian economy in the 1970's
        Page 15
        Page 16
        Page 17
        Page 18
    United States-Canadian cooperation and conflicts in the 1970's
        Page 19
        Page 20
        Page 21
        Page 22
        Page 23
        Page 24
    Bibliography
        Page 25
        Page 26
    Appendix. The June 1978 fisheries dispute between the United States and Canada: A resume
        Page 27
        Page 28
        Page 29
        Page 30
    Back Cover
        Page 31
        Page 32
Full Text
4,1


01 */ itc


THE CANADIAN ECONOMY AND ITS
RELATIONSHIP TO THE


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C Nil
MR AIR .,


UNITED STATES


COMMITTEE ON


BA1kING, FINANCE AND URBAN A]
A 'HOUSE OF REPRESENTATIVE
95th Congress, Second SessJ aL


?FAIRS


AUGUST 1978


Printed for the use of the
Committee on Banking, Finance and Urban Affairs

fB report has not been officially adopted by the Committee on
JUnkg, Finance and Urban Affairs and may not therefore necessarily
reflect the views of its members.

U.S. GOVERNMENT PRINTING OFFICE
0 WASHINGTON : 1978


II
I,.


[4COXXEh PRINTI]






















HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS

HENRY S. REUSS, Wisconsin, Chairman


THOMAS L. ASHLEY, Ohio
WILLIAM S. MOO RHEAD, Pennsylvania
FERNAND 3. ST GERMAIN, Rhode Island
HENRY B. GONZALEZ, Texas
JOSEPH G. MIN1SH, New Jersey
FRANK ANN UNZIO, Illinois
JAMES M. HANLEY, New York
PARREN 3. MITCHELL, Maryland
WALTER E. FAUNTROY,
District of Columbia
STEPHEN L. NEAL, North Carolina
JERRY M. PATTERSON, California
JAMES J. BLANCHARD, Michigan
CARROLL HUBBARD, JR., Kentucky
JOHN J. LAFALCE, New York
GLADYS NOON SPELLMAN, Maryland
LES AUCOIN, Oregon
PAUL E. TSONGAS, Massachusetts
BUTLER DERRICK, South Carolina
MARK W. HANNAFORD, California
DAVID W. EVANS, Indiana
NORMAN E. D'AMOURS, New Hampshire
STANLEY N. LUNDINE, New York
EDWARD W. PATTISON, New York
JOHN J. CAVANAUGH, Nebraska
MARY ROSE OAKAR, Ohio
JIM MATTOX, Texas
BRUCE F. VENTO, Minnesota
DOUG BARNARD, Georgia
WES WATKINS, Oklahoma
ROBERT GARCIA, New York


J. WILLIAM STANTON, Ohio
GARRY BROWN, Michigan
CHALMERS P. WYLIE, Ohio
JOHN H. ROUSSELOT, California
STEWART B. McKINNEY, Connecticut
GEORGE HANSEN, Idaho
HENRY 3. HYDE, Illinois
,RICHARD KELLY, Florida
CHARLES E. GRASSLEY, Iowa
MILLICENT FENW1CK, New Jersey
JIM LEACH, Iowa
NEWTON L STEERS, JR., Maryland
THOMAS B. EVANS, JR., Delaware
BRUCE F. CAPUTO, New York
HAROLD C. HOLLENBECK, New Jersey
S. WILLIAM GREEN, New York


PAUL NELSON, Clerk and Staff Director
MICHAEL P. FLAHERTY, CoUnel
GRASTY CREWS II, Counsel
MERCER L. JACXsON, Minority Staff Director
GRAHAM T. NORTHOP, Deputy Mifnority Staff Director
(0)
















LETTER OF TRANSMITTAL


To the Committee on Banking, Finance, and Urban Affairs:
Transmitted herewith for the use of the Committee on Banking,
Finance and Urban Affairs is a committee print I have prepared.
Sincerely, HENRY S. Euss,
HENRY S. E EUSS,
Chairman, Subcommittee on the City.
(MI)

















CONTENTS

Page
Foreword---------------- -----------------------------v------vi
Introduction and summary------------------------- -------------- 1
Introduction--------------- ------------------------------- 1
Summary ------------------------------------------------- I
Political and cultural influences on the United States-Canadian
relationship.------------------------------------------ 1
Regionalism-------------------------------------------- 2
Economic growth of Canada2----_-- -------___-_-------- 2
United States-Canadian cooperation and conflicts in the 1970's- 3
Political and cultural influences on the Canadian-United States relation-
ship ----------------------------------------------- -------- 5
Regionalism--------------------------------- ----------------- 7
Economic growth of Canada, 1775-1970 ----------------------------- 11
The Canadian economy in the 1970's------ ---- -- --- 15
Business cycles and unemployment -----------------------------15
Wage and price increases ------------------------------------ 16
Government policy----------------------- ------------------ 16
International trade and payments----------------- ---- 17
The Canadian dollar---------------------- ------------------18
United States-Canadian cooperation and conflicts in the 1970's------- 19
Energy------- -------------------- 19
Environmental relations_-------- -- ----------- 20
Foreign direct investment in Canada --------------------------- 21
Canadian-American automotive agreement----------------------- 23
The St. Lawrence Seaway------------------- --------------- 24
Other--------------------------------------------------- 24
Bibliography_ ------------------------------ 25
APPENDIX
The June 1978 Fisheries Dispute Between the United States and Canada:
A Resum ------------------------------------------------- 27
Background- ------------------------ -- 27
The Interim Reciprocal Fisheries Agreement for 1978---------- 27
The Dispute. --- ----------------------------------------27
Legislation Concerning the Interim Reciprocal Fisheries Agreement
for 1978---------------------- --------------------------28
Other Factors Affecting Dispute----------- -------- 28
Economic Impact---------------- -------------------------- 29
Other--------------------------------------------------- 29
(V)













ii.
FOREWORD
;A a, native of a Great Lakes State, I have always had a friendly
"tses t in this country's northern neighbor, Canada. Like many in the
ted;6d States, I found part of the charm of Canada in the notion that
t)at country was somehow a more pleasant, less crowded, less polluted
ygsion of the United States; speaking the same language, more or
0lss; enjoying the same coast-to-coast diversity of a country as big as
a contihdent. Also, like many of my countrymen, eventually I found
that nothing so irritates Canadians as precisely that case of mistaken
identity* te. delusion that Canada is a smaller, even a "nicer" edition
of the United States. Canada, they insist, is Canada.
So it is, and the pages that follow are designed to help members of
the Committee on Banking, Finance and Urban Affairs sharpen their
understanding of the Canadian qualities of the northern American
continental economy as compared to our own southern American
continental economy.
The origin of these pages is a visit to Washington by members of the
Canadian House of Commons' Standing Committee on Finance,
Trade and Economic Affairs last January. The Members of Parliament
met with Government economists, academic economists, and, in the
bipartisan spirit, economists of both the Brookings Institution and the
American Enterprise Institute. One afternoon of their stay here, it
was my privilege to preside at a luncheon meeting between the
visitors and members of our own Committee on Banking, Finance and
Urban Affairs. The discussion was lively, often highly pointed and
always extremely instructive to the elected representatives of both
nations. The chairman of the Canadian committee, Mr. Robert
Kaplan, M.P., agreed with me that the exchange of views was profit-
able to both sides, and that the occasion should be repeated from time to
time in the hope of furthering economic understanding among legislators
whose committee work includes economic relations between the two
nations.
This committee print has been researched and written toward the
same end for the benefit, in the first place, of members of the House
Banking, Finance and Urban Affairs Committee, of other Members of
Congress and of the academic and general public interested in the ques-
tion. Ms. Arlene Wilson of the Library of Congress Congressional
Research Service, is the principal author. I commend her text to
members for its lucid and concise exposition of a long, sometimes
complicated history. A special feature is the appendix, in which are
presented the details of the June 1978 breakdown of mutual fishing
arrangements between the two countries.
In spite of that current concern, the history of economic relations
between us is good. Our relations began, after all, with repeated
efforts of the young United States to annex Canada by force. Certainly
no sensible American has contemplated such adventures in well over
a century.
(vIn)





VIII


Readers will perhaps be surprised, though they shouldn't be, that
our two countries are each others' prime investors and prime cus-
tomers; that for all intents and purposes there is a de facto common
market in financial paper between New York, Toronto, and Montreal;
that business, professional and trade associations are likewise held in
common.
Obviously, it is premature even to think about a true and full com-
mon market between the two countries: the sheer size of the U.S.
economy could not but seriously harm the Canadian in completely
uncontrolled commerce. Nevertheless, we can and should look forward
to increasing cooperation and to future action based on the recogni-
tion that our relationship is unique for both nations, is based on
common ancestry and the common continental experience, and of
its nature is mutually beneficial.
HENRY S. REUSS,
Chairman








, .. .

h. CANADIAN ECONOMY AND ITS RELATIONSHIP
S ..... TO THE UNITED STATES
.I ..: : Introduction and Summary
,* I..1 '4j
.,r"^ ..INTRODUCTION
I, ."- ..
The purpose of this report is to provide a broad understanding of
th currant Canadian economy and how it has developed historically.
No attApt is made to be all-inclusive; instead, only the most impor-
tant influences are mentioned. Special emphasis is placed on the
rlath&mnhip between Canada and the United States.
Thia study begins with a brief discussion of the political and cul-
turainlences in order to give a sense of perspective to the economic
factors. Since Canada's economic development has been heavily
i uflaed by the relationship among the provinces, a section on
rgiamul differences is included. The economic growth of Canada
frm44V75: to 1970 is outlined, followed by an analysis of the Canadian
economy in the 1970's. Finally, the most important recent issues
btwea the United States and Canada are discussed; these include
probm and conflicts as well s areas in which considerable coopera-
tion haseriated.
Si SUMMARY
f.ii and cultural influences on tke United States-Cbnadian re-
lattiouekip
Political conflicts between Canada and the United States were
cniderable in the first 80 years after the American Revolution.
The tited States invaded Canada twice and made inflammatory
ttnixts about annexing Canada from time to time. Although
Mrtios gradually improved, these U.S. actions probably still inm-
ice Canadians' feelings toward the United States. In the 20th
t (Canadian-United States relations have been generally
i di although, many disagreements have emerged at times.
M m of population and GNP, Canada is roughly one-tenth
spi e of the UTnited States. This diversity of size has meant that
B.p&. y decisions have had a large effect on the Canadian economy,
Ikt te reverse is not true, at least not until the energy crises of the
&Wf. anda's relatively small size, along with its geographical prox-
ieto the United States, have contributed to her fear of political,
q W]~`, and economic domination by the United States. Many attempts
i a i made to develop a unique cultural identity through national
i TV programs, films, and magazines, but the high cost of
g has deterred some of these efforts. In addition, the lack of
ending and knowledge of Canadians by the U.S. Govern-
.d i irrifate the CaWa1diao,.
A ., '. ( 1
- ..*".*i'.:!- !jU: l b : i: .., :: *.. : . . .. (I ]j .


049"8,--S-






Regionalism
Canada is composed of 10 Provinces-the original 4-Ontario,
Quebec, New Brunswick, and Nova Scotia-which were united by
confederation in 1867 and the other 6-Manitoba, British Columbia,
Prince Edward Island, Saskatchewan, Alberta, and Newfoundluad-
which joined the Federation at a later date--plus the Yukon and
Northwest Territories. At the time of the confederation, the Provinces
were given subsidies based on need, and in tuarn, transferred their
taxing powers to the Federal GCvernment. These subsidies and tax
powers have been a source of conflict ever since, and have been rene-
gotiated many times, with the result that the provinces have greater
tax powers today than they did earlier.
Income levels and rates of unemployment differ considerably among
the Provinces; in recent years, Quebec and the Atlantic Provinces
have grown more slowly than the other Provinces. Closeness to the
large, buoyant Midwestern U.S. market has stimulated the economies
of Ontario and the Prairie Provinces, while the increasing importance
of scarce oil, natural gas, and other natural resources has benefited
the Prairie Provinces.
Canada's geographically dispersed population has also added to
conflicts over the customs tariff (favored by industrial Provinces
such as Ontario but opposed by the Prairie Provinces), and the rail-
road rate structure, which favors industrial areas.
The separatist movement in Quebec has created considerable
political and economic uncertainty. Reports abound of businesses
and capital leaving Quebec for other Provinces or the United States
because of the 1974 law making French the official language. Rene
Levesque was elected Premier of Quebec in November 1976 on a
platform of political separation from Canada, which, if it occurs,
would cut off the Atlantic Provinces from the rest of Canada.
Economic growth of Canada
Canada's economic development has been heavily influenced by
waves of immigration, railroad construction, the movement westward,
and the growing demand for Canada's exports. After the U.S. Revolu-
tionary War ended, the United States-Canadian boundary lines were
mostly established and the first wave of immigration-40,000 British
loyalists-took place, followed by another wave from the British Isles
in the early 1800's. At this time, lumber, shipping, fishing, and agri-
culture were Canada's most important industries and the United
Kingdom was her most important customer. In the middle of the
18th century, the old colonial system was replaced by free trade, and
Canada's interest turned to the US. market. A 12-year reciprocal
trade treaty between Canada and the United States was signed in
1854. This treaty lapsed in 1866 despite attempts to renegotiate it,
and trade among the Canadian Provinces became more important.
This potential trade, the necessity for a railroad linking the Provinces.
and the political fear of a takeover by the United States after th9
Civil War made a union among the Provinces desirable. After con-
federation, which was achieved in 1867, a railway linking the east to
the west was initiated (and completed in 1886), a high tariff was
established to promote industrial development of the east, and agri-
cultural development of the west was encouraged.






The Canadian economy was highly vigorous from 1896 to 1911, as
more immigrants came from Europe and the United States and high
world demand for wheat stimulated Canadian prosperity in other
aseaas well. After World War I, Canada's economy became primarily
industrialized, with the pulp and paper, hydroelectric power and
mining industries rowing enormously, although agriculture was still
very i ortant, with wheat the leading crop.
Canada was especially hard hit by the depression of the 1930's;
exports fell drastically, and a drop in wheat prices along with a drought
m id the Prairie Provinces the hardest hit of all.
A close military partnership between the United States and Canada
developed during World War II and Canadian resources, and industrial
capacity contributed heavily to the war effort. After the war, Canada
was a major industrial power, and the discovery of oil, uranium, and
iron further stimulated the Canadian economy, which entered a very
pFrlpewfus phase.
fhe Cnadizn economy in the 1970's
The Canadian economy appears to have many problems in the late
1970's: Inflation and unemployment are both high, Canada's balance
of payments has weakened and the Canadian dollar has depreciated
sibstantially against the United States dollar in 1977 and 1978.
.Although the 1974-75 worldwide recession was less severe in Canada
thmn in the United States, Canada's economy since then has not ex-
lubited sustained vigor as has that of the United States, despite a
short-lived upturn in Canadian economic activity in late 1975 and early
1976. The rate of unemployment in Canada increased from 6.9 to 8.1
percent between 1975 and 1977, while in the United States it fell from
to .7.,1 percent over the same period. From 1970 to 1975, monetary
and fiscal policies were employed to mitigate the business cycle. Since
then, however, Government policy has been directed at controlling
inflation, considered to be the most important problem. Canada's
inflation rate of 8 percent in 1977, high by historical standards,
represents a decline from even higher rates in 1974 and 1975. This may
be partially due to wage and price controls which were established by
the Canadian Government in 1975 and removed in April 1978.
In the international sector, export growth has been small, partially
on account of increased Canadian costs. Canadian tourism abroad and
interest and dividend payments going abroad have increased. Direct
investment by foreigners in Canada has declined, possibly because of
lower expected profits and/or the Canadian Foreign Investment
Review Act. In 1977, as a result of smaller borrowing requirement of
the Provinces and the narrowing of the spread between Canadian and
United States interest rates, new foreign borrowing declined.
For the above reasons, the Canadian dollar declined to a 45-year low
of US $0.868 in April 1978. Also, it is possible that the Quebec un-
certainties have stimulated adverse capital flows which contributed to
the Canadian dollar depreciation.
United States-Canadian cooperation and conflicts in the 1970's
The energy crisis and environmental concerns have stimulated most
of the disagreements that have occurred between Canada and the
United States in recent years. Forecasts of Canadian energy resources
have become increasingly pessimistic, which led to the Canadian





Government's cutting back on exports of oil and natural gas to the
United States. In addition, an export tax was imposed on oil shipments
to the United States, which was a source of irritation in the relation-
ship between the two countries. Pipeline construction has also been
part of the energy issue-in 1977, the United States and Canada rati-
fied the transit pipeline agreement and, more importantly, an Alaska
pipeline agreement was announced by President Carter and Prime
Minister Trudeau in September 1977.
Environmental problems, such as water pollution and flooding-of
waters-caused by dams, have usually been settled amicably, although
sometimes after long discussion. Examples are the Great Lakes water
quality agreement and the Garrison diversion project-currently under
negotiation-which arose because the diversion of the Missouri River
might increase the salinity of Canadian rivers.
The Canadian-American automotive agreement, signed in 1965, in-
creased trade in automotive parts between the two countries from
US$0.71 billion in 1964 to US$17 billion in 1976. Although some
problems remain, the agreement has been beneficial to both Canada
and the United States.
Direct investment by U.S. firms in Canada was welcomed by Cana-
dians in the early postwar period, but by the later 1960's, many
Canadians resented U.S. domination of their economy. The Foreign
Investment Review Act, passed in 1973, restricts foreign investment
to those that result in a "significant benefit" to Canada. However,
most foreign investment applications have been approved since then,
although the act may have deterred some foreign firms from applying.
The St. Lawrence Seaway, jointly constructed and operated by the
United States and Canada, has been an enormous success. Occasion-
ally, minor disagreements occur over the operation of the seaway, but
they are amicably settled.








" s ''


Political and Cultural Influences on the Canadian-United States
Relationship
T1 economic relationship between Canada and the United States
is only one part of a much larger relationship. Although the following
duiscussion of the political and cultural aspects of the relationship is
very brief, 'not [only is an awareness of these factors essential for an
understanding of the economic relationship between the two countries,
but also these aspects are extremely important in their own right.
Political relations between the United States and Canada were
quite hostile at the time of the U.S. Revolutionary War, but have
gradually progressed to the generally friendly relations today. The
occupation of Montreal and the attempted capture of Quebec in 1775
1TA the: Canadians bewildered and angry at the United States. After
the war, Benjamin Franklin suggested that "on the minds of the
peepI: in general, would it not have an excellent effect if Britain
should voluntarily give up this province," I the first of several pro-
ptals for annexation of Canada by the United States made over the
next century. After the War of 1812, during which the United States
again invaded Canada, relations began to improve. Conflicts over
the Oregon boundary and the Maine-New Brunswick boundary were
settled in the 1840's. After the Canadian confederation in 1867, which
Was stimulated partly by fear of a political takeover by the United
States, both countries were busy industrializing and moving westward,
mad problems were solved by mutual agreement.
From the 1930's through the 1960's, a close military and political
partjership evolved-Canada not only actively participated in World
War II, but also played a major role in the creation of NATO. In
the mid-1970's Canadian politicians spoke of taking the so-called
third option,2 which referred to promoting ties with countries other
tha the United States and lessening Canada's dependence on the
United States. At present, however, there is some evidence that the
Canadian-United States relationship is improving, partially because,
according to one observer, Canadians see the United States as "the
ultimate security blanket if Canada starts to disintegrate." 8
Although Canada is the seventh largest non-Communist country
in the world in terms of GNP and second only to the U.S.S.R. in
terms of geographic size, it is small relative to the United States in
.trms of population-23 million in 1977 compared with 217 million
ii the United States-GNP-U.S.$195 billion in 1977 compared with
U.&$3,890 billion in the United States-and military strength. This
diversity of size is often assumed to be a large factor in the.'iQaadin
SZapper, Stanley R., and Douglas L3 Bailey. 'Vanada and the United States-the Second
ears," Now York, Hawthorn Books, Inc. (116T), p. i6
'The first option was continuation of the status quo, and the second option was Incueased
tie. With the United States.
SS "A Wind of Change; Canadians Look South Again After a Period of Aati-Aara ."
Wall Street Journal. Mar. 17, 1978, pp. 1, 27.







fear of domination by the United States. Until the energy crisis of
the 1970's, Canada's actions have had relatively little effect on the
United States. On the other hand, United States decisions often affect
Canada to a considerable extent. The potential impact of United
States actions on Canada, as well as the memory of the annexation
attempts by the United States, has had an effect on Canada's feelings
toward the United States.
While few Canadians seriously fear a political takeover by the United
States, the threat of economic domination-and its consequent in-
direct political control-is felt by many people. Canadians sometimes
feel, and there appears to be some justification, that the United States
wants to dominate its economy, deplete its natural resources, and use
it as a military buffer between the United States and the Soviet
Union.
The Canadian desire to achieve its own cultural identity has been
frustrated in part by U.S. dominance in Canada's communications
industry. The fact that most of Canada's population lives within 100
miles of the U.S. border, combined with the economies of mass pro-
duction in communications has exposed Canadians to U.S. radio and
TV, films, and magazines to a considerable degree. The Canadian
Broadcasting Corporation was established in the 1920's, partially to
encourage production of Canadian programs, but high costs have
resulted in the importation of more programs than was originally
intended. In 1967, the Film Development Corp.-a Canadian firm-
which provides financing for the private production of feature films,
was established, but less than 2 percent of films shown on Canadian
screens are of Canadian origin.4 Also, in 1969, four out of five magazines
read by Canadians originated in the United States.5 In order to provide
needed advertising revenues to Canadian-owned enterprises, the
Canadian Government has made tax deductions available only for
those advertising expenses paid to Canadian-owned TV stations and
magazines. In retaliation, the U.S. Congress refused to exempt Canada
from its 1976 law prohibiting tax deductions for more than two foreign
conventions a year, which has hurt the Canadian convention business
considerably.
Last but not least is the awareness or lack of awareness that Cana-
dians and U.S. citizens have of each other. Canadian schoolchildren
probably know more about the history and culture of the United
States than adults in the United States know about Canada. U.S.
citizens tend to regard Canada as an extension of the United States,
partially because of the similarities in culture, history, religion,
language, politics, literature, food, dress, and sports. Many U.S.
citizens are largely uninformed about the Canadian identity; however,
Canadians themsel-ves are still in the process of defining that identity.
EnglUsh, H. Edward, ed. "Canada-United States Relations." New York Academy of
Political Science, 1976. (Proceedings, v. 32, No. 2) p. 67.
SIbId., p. 68.








t I,
I T" ", *, ..
., ; i'
Regionalism

Mach 'has been written about Quebec's religious, cultural, and
li itb iniqueness, as well as about the separatist movement. Less
wef Imown are the differences among all of the other Provinces which
have effected the Canadian economy as well as its relationship to the
Uitbed States. These diversities relate to different income levels among
the Provinces, geographic isolation, a long history of conflict in
federl-provincial tax and expenditure relationships and conflict over
r trKansportation costs and customs tariff structures.
'TFur Canadian colonies-Ontario, Quebec, New Brunswick, and
Nova Scotia-were united in 1867 when the British Parliament passed
the British North America Act. The remaining six Provinces came into
ftie Union at a later date-Manitoba in 1870, British Columbia in
1871, Prince Edward Island in 1873, Saskatchewan in 1905, Alberta
in 1907, and Newfoundland in 1949. Nova Scotia, New Brunswick,
Pdce Edward Island, and Newfoundland are often referred to as the
"MAIk time" or "Atlantic" Provinces, while Alberta, Saskatchewan,
and Manitoba are called the "Prairie" Provinces.
Other th n the political fear of U.S. domination, the main motives
behind confederationn were economic. Increased trade among the
colonies and with the United States, a stimulus to manufacturing
aetvity- consolidation of debt-and better ability to borrow and
finance. railways and canals-were foremost among the objectives.
ti te process of reaching these objectives, the Provinces transferred
their customs and excise tax collecting powers to the Federal Govern-
ment, and in return received Federal subsidies, based on formulas
which: gave more money to the needy Provinces-subsidies were also
given to those colonies and areas that joined the Dominion after
codfideration.
Miaty adjustments were made over the years in the subsidy
fonmulas-later called equalization payments-in response to changing
Heeds'of the Provinces and claims of unfair treatment by the Provinces.
Federal and Provincial taxing powers were also revised many times.
Most of the changes in the past 30 years have shifted tax and expendi-
ture powers to the Provinces and away from the Federal Government.
%e' main reason for subsidies and equalization payments is that the
province differ greatly in terms of economic vigor, income levels, rate
bf nempo-oyment, and so forth. In recent years, the economies of the
A0l1ttiet Provinces and Quebec have lagged behind those of the
PWM6e Provinces, Ontario and British Columbia, although in the
10S9w the Atlantic Provinces were quite prosperous. Factors such as
dAlpeas to markets, resource base, industrial diversification and
cr te tend to cause this diversity. Ontario's closeness to the large,
iar market' of the Midwestern United States as well as the
di.e din dustrial structure of southern Ontario stimulates growth
litt. nTis compares with the Maritime Provinces, which are some-
what isoj ated. from the main growtmrnkets and whose .co.part.ive
: .1 : 'fbt1, : *:'.. .. ..* "* "**i ** " ' ;. *
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advantage is concentrated in fish and coal. The Prairie Provinces have
been most buoyant economically in the 1970's. Not only are Western
U.S. markets large and growing but the increased importance of oil,
gas, and other resources as well as higher resource prices, and the
production of some staple goods which has moved west, have given
the Prairies vastly increased prosperity and economic power.
In addition to equalization payments which even out income differ-
ences among the Provinces, in recent years an attempt has been made
to stimulate employment in the weaker regions. In 1969 the Depart-
ment of Regional Economic Expansion was created, which has been
attempting to stimulate investment in new industry and expand basic
investment, needs such as roads and energy.
The geographic dispersion of the Canadian population over a wide
area also tends to heighten regional conflicts. First, since the industrial,
financial, government, and academic centers are mostly located in the
region between Toronto and Montreal, people in the outlying areas of
both the east and the west feel isolated. Second, the dependence of the
Prairie Provinces on the railway has led to considerable conflict over
transportation rates. Historically, rates have been based on a value-
of-service principle whereby higher rates were charged those who
needed the railroad most, instead of a cost-of-service principle. Inevi-
tably, the Prairie Provinces, which depend on the rails to ship staples
to markets and import consumption items, are hurt most by this policy.
Another source of contention is the high tariffs on Canadian indus-
trial imports. This policy tends to discriminate against those Provinces
that produce staples and import manufactured goods, which cost more
than otherwise, while it favors those Provinces heavily engaged in
manufacturing.
A recent Federal-Provincial conflict concerned the Federal export
tax imposed on crude oil in 1973, which was later combined with a
domestic price ceiling on the wellhead price of oil. This meant that the
Provinces, which hold land or mineral leases on most of the land in
which oil was extracted, lost a considerable amount of revenue.
In Quebec, regional differences are heightened by the fact that there
are two cultures and languages represented in Canada. Although there
are French-speaking people in all the Provinces, only in Quebec are the
French concentrated and able to wield political power. Adding to the
historical conflict of cultures is the fact that in the past 15 years,
Quebec's relative economic position has deteriorated substantially.
Although some analysts attribute this deterioration partly to language
differences, economic factors such as the lack of investment-caused
by fears of separation-are probably more important.
Some of Quebec's recent policy measures have alienated business
firms and caused some firms to move or consider moving out of Quebec.
In 1964, the Official Language Act, which makes French the official
language of Quebec and requires business firms to undertake "franciza-
tion" programs and make jobs available to French-speaking persons,
was passed.1 In January 1978, Sun Life Assurance Co. announced that
it would move its head office to Toronto due to Quebec's Official
Language Act. It is estimated that this proposed move would cost
Quebec 1,800 jobs and $40 million annually.2 In addition, recent per-
SEnglish, H. Edward, ed. "Canada-United States Relations." New York Academy of
Political Science, 1976. (Proceedings, v. 32, No. 2) p. 34.
a "Sun Life Assurance Company's Planned Move to Toronto." Canadian Press Comment
Jan. 25, 1978, No. 4 (Washington, D.C., Canadian Embassy), p. 1.





9-

pp;. s revisions .in Quebec have resulted in higher taxes on senior
..... which may increase the pressures for relocating elsewhere.1
....l november 197% the separatist movement led by Rene Levesque
: eltion on the promise to seek political independence for Quebec
. Iatsining .some sort of economic ties with the federation.
*:i;J^^ ^ the separatist movement has a long history in Quebec, the
V.i.... now is that it has gained political control. If separation does
|h:l41ihe Atlantic Provinces would be cut off geographically from the
0q*tfJ tl Canada, which would inevitably have some adverse effects on
ib(i2a dian economy and is the cause of considerable concern. Even
....p.. ubity of separation has probably led to adverse effect. on
I economy. Press reports have emphasized the moving some
residents and businesses to New York State and New England,
Sr:as elsewhere in the United States, and people are reported to
. .w:tuisfering out of Quebec.
*L f:: impossible that the separatist movement in Quebec has contributed
*i!o mased contacts and perhaps closer relations between Canada
-d the United States.' Both factions ar trying to obtain support in
:'6United States; Prime Minister Trudeau and Quebec Premier
Levesque make frequent speeches in the United States.
Iu addition to the 10 Provinces discussed above, Canada includes
the Yukon and Northwest Territories, which account for more than
40 rcent of Canada's land. Mining is the principal industry of the
ation of Eskimos, Indians, and whites, while the fish and
r inustries also provide some income to the population.
r
tv.lieFPenoal Tax Revtloam Boost Premare for Reloeatlon of Head OEma" Wanl
....:.. Vlad C .hae" pp. 1, 32.
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*t Economic Growth of Canada, 1775-1970
X thalt of the United States, Canada's economic development waS
spured on by waves of immigration, the conquering of the frontier,
nd construction, and the process of industrialization. However,
bamd's. economy is more "open" in the sense that foreign trade and
iwe .nsn have played a far larger role in Canada than in thq
tsj~sdtates,
:hI A U.S. Revolutionary War provided the first impetus to economic.
awhi: Qanada. Not only were boundary lines between the United
8q pad Qanada established for the most part, but about 40,000
jtbloraate moved to Canada, most of whom settled in what later
bqpafe Now Brunswick and on the shores of the St. Lawrence River,
a4L es m .Ontario and Erie. Another wave of mmigration took place
it .4hfisttI of the 1800's; by, 1850 Canada's population was over
2 miliou, compared with 500,000 in 1815. The immigrants, who were
l froqv the British Isles, settled in Nova Scotia to work in the
s'Ahipping, or fishing industries or New Brunswick's lumber
jbstay, or went to what is now Ontario to farm or become tradesmen.
o1n -early 1800's, Canada's economy was more closely tied to that
44: ted Kingdom than the United States. The United Kingdom
wilka-s ada's largest customer because of tradition, the advantages
S*seplouial system with its preferential markets-colonial goods
.we tmited to Britain almost duty free, while other countries' goods
IA&* tiff, British tariff--financial aid, and high U.S. tariffs. At this
tjEp lumber in its various forms was Canada's chief export group,
i s wheat, furs, ad fish were also very important. ,
hM'we o'd colonialsystem was replaced by free trade in the middle
of the 19th century, Can interest in the U.S. market increased.
'tPte r to negotiate some form of reciprocal trade resulted i" tihe
i oW a 12-year treaty with the United States in 1854. This treaty
%pvided (or reciprocal free trade in coal and fish, farm and forest
4uo&,Als. tho United States gained access to inshore fisheries mi
*porV px prpvidmgifor U.S. access to the St. Lawrence and Canada's
canals in exchange for Canadian access to Lake Michigan. Iii .1866
IM:tJrfl w# .allowed to lapse and although it was renegotiated
nmrtyt times inie'e net 50 years it was never approved by both the
%tjxMwStwa and OManadian governments. .
-y lfatpqing o| ierecip.roca trade treaty which made trade among
4 RovM mora desirable was one of several factors Jleading up to
de inr C.'j anads. The U.S. Civil War had generated con-
.tensOns with Capada and the U.S. policy of "manifest
c 7&Ls. .. nsionists talkd of ruling the continent
i jto Cnads. Perhaps more important was the Canadia
realization that raros were.orucial to (0ada's economic develop-
ment. Although by 1860 there were 2,065 miles of track in Canada,
owyu "a A& 'adf e bakk t, and the lines were not linked to each
other due to the lack of financial resources and political uuity among
the Provinces. '
(11)






Confederation was realized in 1867 with the passage of the British
North American Act joining together the four Provinces of Ontario,
Quebec, New Brunswick, and Nova Scotia. Canada did not achieve
complete independence from Great Britain in this act; for example,
Canada could not negotiate with other countries and Canadian par-
liamentary procedures could be overruled by the British. However,
the. significance of this act was the opportunity it gave Canada to
solve some of her problems, such as political, religious, and regional
conflicts, economic isolation and stagnation.
After confederation, Prime Minister MacDonald's policy was
threeTd: A transcontinental railway to link the East and the West-
whhi was completed in 1886-the agricultural development of the
West4rnd the industrial development of the East. The latter objective
wasatrtbe reached partially by the establishment of a high tariff wall,
another of MacDonald's policies. From this time on, the tariff stmzo
tare, although modified from time to time, has remained high, and
often has been a controversial issue among the provinces. In general.
the Maritime and Prairie Provinces opposed the tariff because it forced
them to pay higher prices for consumer goods, while Ontario nad
Quebec, the industrial centers, were in favor of the tariff because it
protected their own manufacturing industries.
From 1896 to 1911, Canada's economy entered a new, highly vigor
ous phase. Once again a flood of immigrants, this time from Europe
as well as the United States, spurred on by the availability of Canadian
lnd, was a stimulus to economic development. As world demand for
Wheat increased, wheat prices rose, and the Canadian prairies grew
eiiormously, accompanied by prosperity in the rest of the country.
For example, processed steel was produced in the Maritimes, whi
in Ontario and Quebec the thriving pulp and paper industry was
joined by copper and silver extraction, along with production of a
large variety of manufactured goods. British Columbia's lumber,
mining and fishing industries prospered?.1 At the same time, a new rail-
way boom was underway, which created thousands of new jobs and
was an additional powerful stimulus to the economy.
World War I accelerated the growth of the economy as profits of
both farmers and the producers of war supplies increased, as did the
the demand for Canadian minerals. Canada, which along with the
other dominions, signed the Treaty of Versailles herself and was given
a seat in the League of Nations, had also entered into a period of
greater political autonomy.
From the 1920's on, Canada was no longer primarily an agricultural
country. In 1921, industrial production of $2.7 billion was almiOBt
double that of agricultural production, and the urban population of
4.4 million was about the same as the rural population. several in-
dustries in particular grew enormously-pp and paper, hydroa-
electric power and mining. Agriculture was still verY important, with
wheat the leading crop, which stimulated a new railway boom. Eoo-
nomic development in the 1920's tended to proceed along regional
lines with the Maritime Provinces, which concentrated on fishing
and luimbering, lagging behind the others.

11..
*IMJLJ. Canadian Eisory at a Oiance." New Yfl, Dane.a &t Web, hnc.. i-t






The worldwide depression of the 1920's hit Canada particularly
hard. Canadian exports fell drastically-export income fell by 67 per-
cent between 1929 and 1933 '-as nations reverted to high tariffs and
import quotas to protect their own industries. Regional inequalities
in t severity of the depression were apparent. A severe decline in
wheat prices along with a drought made the Prairie Provinces the
hardest hit of all. Those provinces which were heavily dependent on
the sport of primary products, such as British Columbia, the northern
parts of Ontario and Quebec, also suffered sharp declines in income.
Thornse areas engaged in manufacturing for the home market, such as
the industrial regions of Ontario and Quebec, were the least hard hit.
Daring World War II, Canada's resources and industrial capacity
wre utilized to provide supplies for the Allies. Canada's transition to
a major industrial nation was completed during this period. Trade
between the United States and Canada was greatly stimulated by
World War II, so that after the war the United States replaced Great
Britain as Canada's chief customer.
After World War II ended, the discovery of oil in Alberta, of ura-
am in Saskatchewan and northern Ontario, and of iron ore in Quebec,
provided the impetus for new industrial development as well as stim-
ulating old industries. Population grew from 12 million in 1945 to 18
mflinin 1961, and 67 percent of the people lived in cities in 1956,
pp from 57 percent only 5 years earlier, due partially to the 2 million
immigrants who came to Canada between 1945 and 1965.'

lm" 3:Ut




























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*r 'ia: *-
P.7 91 ..^ .
*' cr' .1L The Canadian Economy in the 197(18

-r' amda'S economy appears to have many problems in the late
f0's'--unemployment is high, inflation has hurt the Canadian
osisy, 'Catada's international trade position has weakened, and
wiftCadin dollar has depreciated against the U.S. dollar, reaching
W4P7Sio low in April 1978.
m mm i e an munemmployment
From 1971 to early 1974, Canada's economy was in a strong ex-
pansonary phase. Buoyant domestic demand, especially personal
tedsMptlea expenditures, helped real GNP-dollar GNP adjusted
bhu -beiohangei-to grow by 6.6 percent in 1971,5.6 percent in 1972,
ndY 1. percent in 1973-see table 1. The worldwide recession of
1974-75 was less severe in Canada than in the United States-real
tNP gew 3.2 percent in 1974 and 1.1 percent in 1975 in Canada
S6pftzdwitd a decline of 1.6 and 1.3 percent in 1974 and 1975 in
-I"AUl States. Domestic demand and especially residential con-
S.aft if mid-1975 was stronger in Canada than in the United
avflB and the 1973-74 oil embargo affected Canada less severely
*1k bher countries. Also, vigorous fiscal and monetary policies were
tMis more quickly in Canada than in the United States. The inter-
national trade sector was the principal area of weakness in Canada
@*Tts period.
k'!'- "' tm" I < TABLE 1.-SELECTED ECONOMIC STATISTICS

~ -m)' m Aminand IpwU rate in real GHP -Annual porcataplchan UnemplaymoMt rb
li United laStet CeadI United StUts Canada UniedStaes Canda

"-1 2.6 5.9 L 9
S -- 2.9 5.6 4.3 2.9 5L9 6.4
,- ,5..4 5.6 3.3 4.1 5.6 6.3
7 5.4 7.2 6.2 7.6 4.9 5.6
1571 -1.6 13.2 11.0 10.9 5.6 5.5
-13 11 9.1 10. .5 6.9LI
L. I .1 4.9 5.8 7.5 7.7 7.1
5.0 L.6 6.5 to 7.1 LI
EM a nin c Indicaturs. Much 1983 OECO MaiM tnaumle lldcatas. Histuuicad Statlnttcu, 19G65-5;
P, !, OuMiilkp^ik Decemober 1977; Bank of Canada niew. March 1978.,
mm m m min economic activity which bega n m mid-1975 lost momen-
ia e economy. in 1976 was somewhat weak. GNP rose about
^l-*cjt in 1976-of that, residential construction rose by 18 percent.
fl.str Igh of the housing sector was partially due to Federal and
,U h o lsOi.ppli In 1977, the Canadian
policiesl,.such'as ho sinbgis SS&S W
1ygrew by 2.6 percent, comPdretd with the 5 e cent aroth f

'W' xOii tm employment rate, which decline& to: 5.5 percent
+ l b"' been ..sing ev .ery year since, reachid percent: m 1977,
:'"..teU r e.S. .e .7 -percte. in thatt r.. labor force
IUW5UditaS^ grflw rapidly, tw ch, combined with sluggish economic
,fl sisedt the unemployment picture o 't en.. ..
) S
(15)







Wage and price increases
The rate of increase in consumer prices in Canada; asseen in table 1,
has been high since 1973, both by historical standards and in compari-
son with the U.S. rate of inflation. It appears that the initial impetus
to the inflation in 1973-74 came from exogenous factors, such as the
rapid increases in world oil and food prices; the recent high rate of
inflation, on the other hand, is probably due most to cost-ptmsh pres-
sures, although food price increases were an important factor in 1977.
The high rate of inflation has stimulated unusually large wage anad
salary increases, particularly when measured against productivity in-
creases. This has meant that unit labor costs have increased faster in
Canada than in the United States from 1974 to 1976, which adversely
affected Canada's competitive position.
GovernmenC policy
The Canadian Government has used monetary and fiscal policy
actively in the 1970's to stimulate demand and to moderate the rate of
inflation. In addition, wage and price controls were established in
October 1975, in an attempt to mitigate inflation.
The annual budgets of the Federal Government have been the
major fiscal policy tool. When restriction of demand is the aim, the
budget is tightened, and when expansionary policy is desired to stimu-
late demand, taxes are reduced and expenditures increased. Timely
countercyclical fiscal policy was applied in order to stimulate the
economy in the early 1970's, to moderate demand in 1973, and stim-
ulate demand in the recession of 1974-75. Since mid-1975, the main
policy goal has been the reduction of inflation.
Monetary policy was also used in the early 1970's to stimulate the
economy and since mid-1975 to reduce inflation. In the early 1970's the
emphasis was on both the money supply and interest rates. In the past
few years, however, monetary policy has been aimed mainly at control-
ling the growth of the money supply. This has led to relatively high
short-term Canadian interest rates in 1975, for example, causing
capital to flow to Canada. Consequently, the Canadian dollar appre-
ciated in early 1976 even though the Canadian current account was in
deficit.
The main goal of price and wage controls, which were established in
October 1975, was to reduce the rate of increase in consumer prices
gradually to 8 percent in the first year after controls, to 6 percent the
second year, and 4 percent the third year. The controls were compre-
hensive, applying to prices, profits, wages, salaries, rents, dividends,
and professional fees, and were quite detailed as well as flexible. Over
the period of the controls, wages and price increases were lower than
previously; however, it is unclear how much of the moderation is due
to the controls. For example, from October 1975 to October 1976,
import prices-which are an important factor in Canada's economy-
rose only 1) percent in Canadian dollar terms, and wage settlements
were decelerating before the controls took effect. On the other hand,
the controls may have contributed to a deceleration in price increases
through their effect on expectations, and there is some evidence that
wage compensation in the noncontrolled sector rose faster than in the
regulated sector, indicating that controls had some influence. In any
event, controls were very unpopular with the business community,
and were removed in April 1978.








Ininationad &rade and payments
, An examination of table 2 belowreveals the substantial deterioration
%WCanada's current account-net merchandise exports plus net service
receipts plus net transfer receipts-in the 1970's from a small surplus
in the early 1970's to a relatively large deficit in the latter part of the
decade. This deterioration is due both to a narrowing of the mer-
aundise trade surplus and an increase of the deficit in the services
k-1Unt.,
There are two main factors in Canada's deteriorating merchandise
tde position. First, business cycle swings in Canada and abroad-
especially in the United States-have a large effect on Canada's
ejorts and imports in the aggregate. Canadian exports are highly
eorreltted with the level of economic activity abroad, while her imports
depend on the level of domestic business activity. For example, in
1975, in the trough of a recession that was less severe in Canada than
in the rest of the world, Canada's merchandise imports exceeded
merchandise exports because her exports were hurt by the recession in
oter countries while her imports continued to increase substantially.
, Second, the composition of Canada's trade has changed in the 1970's.
Canada's trade balance in manufactured goods has deteriroated-
both when automotive trade is included and when it is excluded
from the data-which is probably caused by the increase in domestic
costs. The oil and natural gas balance deteriorated because Canada
is restricting exports as part of her energy program, and oil imports
have been growing.
TABLE 2.-CURRENT ACCOUNT IN CANADA'S BALANCE OF PAYMENTS, 1970-77
[in billions of Canadian dollars]
Merchandise Merchandise Net Net Net Current
exports imports exports services transfers account
L- ----- 16.9 13.9 3.0 -2.1 0.2 1.1L
"_L....----.-- 17.9 15.3 2.6 -2.4 .2 .4
WB.L_---- .-...---2.1 1&.3 1.8 -2.5 .3 -.4
2 2.5 22.7 2.8 -3.0 .3 .1
32. .......6 30.9 1.7 -3.8 .6 -1.5
B...--.--. 33.4 34.0 -.6 -4.6 .4 -4.8
S76------------------ 38.0 36.9 L1. -5.8 .5 -4.2
-!--..-.. % .---. 44.6 41.7 2.9 -7.5 .4 -4.2
umas: Bank of Canada Review, March 197. tables 68 and 69.
Two main factors have contributed to the worsening services ac-
count. First, Canadian tourist expenditures in the United States have
increased considerably. Over most of the current decade, real dis-
posable income in Canada has increased and consumer prices have
grown faster in Canada than in the United States. Even after adjusting
for changes in the exchange rate, it has been cheaper for Canadians to
travel in the United States than at home. Second, the Canadian deficit
on interest and dividend payments has increased substantially due to
the increase in long-term interest rates and the high volume of borrow-
ing abroad in recent years, most of which was by local and provincial
Governments.
SDirect investment in Canada by foreigners has been in a declining
trend over the decade of the 1970's. This may be partially due to the







Foreign Investment Review Act, which may have led foreigners to feel
unwelcome in Canadian industry, and/or partially to the high wage
rates that must be paid in Canada and to the reduced profit potential.
In contrast, direct investment abroad-especially m the United
States-by Canadians appears to be an increasing trend, which again
may be due to higher expected profit rates in the United States.
Most of the long-term Canadian borrowing abroad is done by
provinces and corporations. Provincial Governments tend to borrow m.
the New York capital market because of their need for large bond
issues which can only be absorbed by the large capital market of the
United States. All new issues in 1977 are estimated to amount to C$6.2
billion, down from C$9 billion in 1976.1 Two factors probably account
for most of the decline-the smaller borrowing requirement of the
provinces and the narrowing of the spread between Canadian and
United States long-term interest rates.
The Canadian dollar
From 1971 through 1976, the Canadian dollar fluctuated around
C$1 = US$1. In early 1977, however, the Canadian dollar began de-
preciating substantially against the United States dollar, reaching a
45-year low of C$1=U.S.$0.868 in April 1978.
Most of the reasons for the depreciating Canadian dollar have al-
ready been discussed in earlier sections of this study. The large Cana-
dian current account deficit of recent years-and the bleak outlook for
an improvement in the current account in the near future-is one
reason. Canada's weakened competitive position, as evidenced by
relatively high wage and price increases, is another factor. Changes in
capital flows-the lower direct investment by foreigners in Canada and
decreased amounts of new bonds issued abroad discussed earlier-were
also probably responsible for some of the depreciation. Not mentioned
earlier was the narrowing of differentials between United States and
Canadian short-term interest rates, which caused less short-term
investment in Canada and more in the United States. Although diffi-
cult to substantiate, it is also possible that the uncertainties regarding
the future of Quebec in the federation has contributed to the increased
outflow of Canadian funds and the reduced inflow of United States
funds, which may have put pressure on the Canadian dollar. In the
spring of 1978, the Canadian Government announced that it was
borrowing C$750 million in foreign markets, one of several measures
aimed at supporting the Canadian dollar.
I Bank of. Canada Review, March 1978, table 71.












United States-Canadian Cooperation and Conflicts in the 1970's
Since United States-Canadian differences tend to be solved by
mutual agreement and conflicts sometimes arise in cooperative ven-
turqs, it is impossible to separate the two areas; therefore, cooperation
mad conflicts are discussed together.
ERrgy
In the field of energy, Canadian relationships with the United States
are influenced by changing supply and demand conditions, regional
considerations within Canada itself, the Canadian desire for increased
economic independence and environmental concerns.
In the early 1970's, the outlook for Canadian energy supplies was
bright. In 1971, the Minister of Energy, Mines and Resources stated
that '"Canadian soil contained sufficient reserves to supply gas for
some 932 years and oil for about 390 years." 1 The supposed plentiful
supply of oil and gas, as well as the fact that the price of exported oil
was higher than that of imported oil encouraged exports in that period.
The 1973-74 energy crisis and increased price of imported oil stimu-
lated new forecasts for future Canadian supplies, which were just the
reverse of the earlier forecasts-quite pessimistic. For example, in
October 1974, the Canadian National Energy Board announced that
4'Canadian oil supplies would not be adequate to serve traditional
Canadian markets as well as part of the Montreal area beyond 1983." 2
As a result, export restrictions were imposed by the Canadian Govern-
ment in which oil exports were to be gradually reduced to zero by 1983.
In addition, an export tax on oil shipments to the United States was
imposed, which created a two-price system and received a condemna-
tory resolution from the U.S. Senate. Not only did it raise oil prices to
"U.S. consumers-which probably would have happened anyway due
to the rise in world prices-but it diverted oil company profits to the
Canadian Government, which may have prevented some exploration
and development by the oil companies. The receipts from this tax
were used to subsidize oil imports into eastern Canada, which had the
effect of not stimulating cutbacks in consumption.
Oil production is concentrated in the western part of Canada-the
Province of Alberta accounts for 80 percent of Canada's oil produc-
tion-while the eastern Provinces rely on imported oil. Due to the
lakk of a pipeline, oil is exported from the western Provinces and im-
ported by the eastern Provinces, mostly from OPEC countries, es-
pecially from Venezuela. In an effort to become somewhat more self-
AC hstre. GhistlIne. "etro-Canada: A National Oil Company In the Canadian Context"
atshln'tbn, U.S. Government Printing f0ce, 1977, p. 5.
* X. AM.u. ortf Congress Foregn Ants diair n. The Current Canadian Situation"
(prepared by Edward T. Lampson) Washington, 197TS, p. 10.
'.7- :9)







sufficient, it was decided to extend the Ontario pipeline to Montreal-
the extension was completed in 1976-and the 250,000 barrels per
day that flow through this pipeline are at the expense of exports to
the United States. This decision, and the decision to reduce oil exports
to the United States, caused some hard feelings in the United States
because the latter was not consulted first.
Canadian natural gas exports are based on long-term contracts,
unlike oil exports, which are based on 30-day permits, a circumstance
which makes it more difficult in the short term to reduce Canadian
exports of natural gas than of oil. However, in 1975, it was decided
to reduce Canadian gas exports due to a forecast that present gas
production is inadequate to meet domestic requirements. However,
the amount and timing of the decrease was to be decided after consul-
tation with the U.S. authorities. Natural gas cutbacks are potentially
more serious to the United States than oil cutbacks because gas trans-
portation depends on the availability of pipelines. Also, the Canadian
Government announced increases in the price of natural gas exports,
a policy which is recognized by both Governments as being necessary,
but the United States feels strongly that price increases should be
gradual.
At the May 1977 meeting of the Canada-United States Interparlia-
mentary Group, drilling in the Beaufort Sea was one of many energy
issues discussed. It was decided that representatives of the drilling
industry in Canada and the United States discuss technological
problems further to insure environmental safety before permits were
issued for drilling in the Beaufort Sea.
Considerable progress was made in 1977 on gas pipeline agreements.
The United States-Canada Transit Pipeline Agreement, which pro-
vides protection against interference with the flow of natural gas in
transit and against discriminatory tax policies of either country, was
ratified by the United States and Canada. More important, perhaps,
is the Alaska pipeline agreement announced by President Carter and
Prime Minister Trudeau In September 1977. After considerable study
of the costs and environmental impacts of various routes for transport-
ing Alaska natural gas to the United States, the ALCAN route was
selected. Some issues to be resolved in the ALCAN gas pipeline agree-
ment include the pricing of gas, the pipe specifications, Provincial
holdups, financing, the meaning of the "Canadian content" provision,
and the possibility of delay through litigation.3
In early 1978, Vice President Mondale, on his trip to Canada, pro-
posed a swap of Canadian-United States natural gas in which Canada
would sell some of its current supplies to the United States in return
for Canadian access to Alaskan gas later. Also, a United States-
Canadian study is underway regarding the feasibility of a joint oil-
storage facility in the Atlantic Provinces.
Environmental relations
Environmental concerns such as water. pollution, air pollution,
flooding of waters caused by dams and possible oil spills are inevitable
3 Canada-United States Interparliamentary Group. Delegation from the United Statme
House Delegation. Nineteenth meeting of the Canada-United States Interparliamentary
Group, Feb. 9-13, 1978; Report pursuant to Public Law 42, 86th Congress. Washington,
U.S. Government Printing Office, 1978, p. 21.






in countries which share a long common border. In most of the contro-
versial issues, the United States, which is more heavily industrialized
and populated, receives both benefits and costs, while Canada may
receive only social costs, such as increased pollution. Since the United
States and Canada agree generally on the environmental standards to
be met, conflicts have usually been settled amicably, although some-
times only after a considerable length of time. The existence of the
national Joint Commission-established in 1909-with its im-
partiality and highly respected data gathering procedures, facilitated
the settlement of many disagreements. The structure of Canadian
Federal-Provincial relations, in which the Provinces have power in
many areas, such as water and property rights that the United States
daot have, tends to complicate settlement of some issues. The follow-
ing paragraphs include a few of the recent and most important en-
vuaomental concerns between the two countries.
The Great Lakes water quality agreement, which was signed in
April 1972, provided for construction of municipal and industrial
tuWwment plants within the Great Lakes system by both the United
States and Canada. Some controversy arose over the speed of U.S.
aemstruction, but this is now settled. At the second round of negotia-
tieas in March 1978, substantial agreement was reached on a number of
Wrdas concerning the agreement.
The Garrison diversion issue refers to a project in which about 2
percent of the upper Missouri River would be diverted to eastern and
central North Dakota for purposes of irrigation, flood control, water
supply, recreation, and wildlife improvement.4 Canadian objections
arose because most of the drain-off of the irrigated lands with its high
saline content will flow into Canada's Souris and Red Rivers. The
International Joint Commission's report, which is currently being
studied by agencies of the U.S. Government, recommended significant
modifications of the Garrison diversion to prevent adverse effects in
Canada.
SAn example of a coastal pollution issue is a U.S. company's 1972
proposal to build an oil refinery in Eastport, Maine, which would bene-
it New England. However, oil would have to be transported through
Head Harbor passage-entirely in Canadian waters-which has serious
navigation problems, such as fog and very strong currents. The possi-
bility of an oil spill with its resulting damage to nearby fishing rounds
and recreation areas caused Caadian, objections to the project. At
present the company is attempting to get U.S. approval to the pro-
posal, and, if granted, will then consider Canadian concerns.
foreignn direct investment in Canada
'A s shown in table 3 below, foreign capital-most of which is U.S.
'Wtal-is a large share of all capital in Canadian industry, especially
Sthe petroleum and natural gas industries. Foreign direct investment
assumed a large role in the post-World War IT period, and was wel-
comed by Canadians who perceived considerable advantages to the
CiaadiaU economy. In the past 10 to 15 yearSj however, many ques-
ti hlrave"einerged concerning the benefits to Canada.
Hu. a ,atwud, SL. "Cnlada-United Stata felationa," pp. 153-1B4.....






TABLE 3.-UNITED STATES AND OTHER FOREIGN CAPITAL AS PERCENT OF TOTAL CAPITAL IN CANADIAN INDUS-
TRY, 1974 a
Industry United States Other foreign
Petroleum and natural gas...---- ---------------------------------------- 58 17
Other mining and smelting -------------------------------------------- 43 1Z
Manufacturing------------------------------------------------------------------........................ 44 14
1 Capital in which there is voting control.
Source: English, H. Edward, ed., Canada-United States Relations, p. 76.

There are two main issues which apply to foreign direct investment
in the petroleum, natural gas, mining and smelting industries. First,
how should revenues be divided between foreign firms and Provincial
governments-who own or have leases on most of the resource-
producing land. Since the resource is on Canadian land, should not
Canadian citizens benefit from some or all of the net gains involved in
depleting the resource? Second, to what extent should prices, pro-
duction, and investment in these industries be determined by Cana-
dian governmental bodies in order to meet the national goal of
conservation? The oil export tax and domestic subsidy on oil as well
as the reductions in exports of oil and natural gas to the United
States mentioned earlier in this study are examples of Canadian
policies in this area which strained United States-Canadian relations.
The growth of foreign investment in the manufacturing sector was
partially a free-market response to the high Canadian tariff structure-
the only feasible way of gaining access to Canadian markets was to
produce there. Many of the issues raised by foreign investment in
this sector concern the power of multinational firms. One issue is the
potential lack of competition among oligopolist multinationals and
its effect on the Canadian economy. Another Canadian concern is the
lack of an adequate flow of information between foreign firms and
the Canadian Government.
Many multinational manufacturing firms are in industries where
products are differentiated, such as soft drinks and soaps. This may
have led Canadians to feel that they were being "sold" the American
culture, which probably contributed to the mid-1970's feeling that
the advantages of foreign direct investment may have been exceeded
by its disadvantages.
The Foreign Investment Review Agency, which was established in
1973, was a reaction to Canadian dissatisfaction with foreign direct
investment. This Agency has the power to review foreign-controlled
firms' investment or takeovers of new businesses, while the Canadian
Cabinet can accept or reject the Agency's recommendations. Only
those takeovers that result in a "significant benefit" to Canada-based
on a list of somewhat vague criteria, such as, for example, "com-
patability with industrial and economic policies" 5-are to be
approved. Since this policy has gone into effect, a large majority of
the takeover applications have been approved. However, it is not
known how many takeovers have been avoided by firms not even
applying due to their expectation of being rejected.

A Ibid., p. 96.






Canadian-American automotive agreement
:sBefore 1965, Canada's automotive industry, which was relatively
kowffiwent in that output was too diversified for the limited size of
ttie home market, was protected by high tariffs. Canadian measures
4w*e tieg proposed to increase home production by & duty-remission
planwhiih might have invited retaliatory action by the United
Stata. To prevent a potential conflict, bilateral negotiations with the
Vuited States were undertaken. These resulted in the Automotive
Products Trade Agreement of 1965, which had the following three
objectives:
1. The creation of a broader market for automotive products within
which the full benefits of specialization and large-scale production
en be attieved;
t': The liberalization of United States and Canadian automotive
made im respect to tariff barriers and other factors tending to impede
it, with a view to enabling the industries of both countries to par-
ticipate on a fair and equitable basis in the expanding total market
944e two countries; and
....Thie development of conditions in which market forces may
operate effectively to attain the most economic pattern of investment,
ORduction, and trade.'
It was'provided that the agreement may be terminated by either
overhInment with 12 months' notice.
Th implementation of the agreement centered on elimination of
dutis on trade in certain motor vehicles and original equipment
arts i order to achieve a more integrated North American market.
However, certain safeguards were imposed by each country. The
C dan safeguards, which were included to give industry time to
adjpst, were, ia the view of the United States, intended to be tem-
pory, and gave rise to U.S. dissatisfaction with the agreement
at tines.e .
Ai hough some problems remain, the agreement has been beneficial
to the United States and to Canada, but especially to Canada where
it stimulated a large growth in output. Trade between the two
9oUntries increased from U.S.$0.7 billion in 1964 to U.S.$17 billion
u 1976.7 Canadian automotive production became more efficient
&4attve to that of the United States resulting in considerable wage
gam in mCanada. Also, the differential in consumer prices paid by
aiadian and United States consumers has narrowed in most years.
Prior to 1973, bilateral automotive trade resulted in a surplus for
Canada-and a deficit for the United States-while since then a
Canadian deficit (U.S. surplus) has existed. The U.S. surplus rose
from $0.4 billion in 1973 to a high of $1.8 billion in 1975 and fell to
$1 billion in 1976.8 The 1975 surplus was partially caused by the
1974-75 recession, which was less severe min Canada than in the
United States, resulting in higher Canadian imports from the United
States and lower U.S. imports from Canada. However, Canadians are
currently concerned that if present trends continue, the Canadian
deficit could reach $2.5 billion by 1985.9
U.SL. ongress Senate. Committee on Fnuance. Canadian Automobile Agreement "'ev-
eath Annual Report of the President to the Congmeai on the Operation of the Automotive
Producta Trade Act of 1965." December 1977. Washington, U.S. Government Printing Offce,
1971, pp.
*Ibid.
kmCanada-UnIted States Interparliamentary Group. Delegation from the United Btates.
oune Delegation. Nineteenth Meeting of the Canada-United States Interparliamentary
Group, eb. 9-18, 1978, p. 12.






The St. Lawrence Seaway
Discussion of a seaway by the United States and Canada had been
underway since the 1930's, but had been opposed by U.S. rail and
shipping interests and coastal ports who feared the competition. By
1951, when Canada began planning the seaway alone, the United
States agreed to participate. The seaway was completed in 1959 and
has been enormously successful in meeting transportation needs as
well as stimulating economic growth in the midwestern parts of both
-countries.
The United States and Canada have differed on how to finance the
-operating deficit of the seaway. Since most of the locks are on the
Canadian side, Canada was most concerned about the deficit, while the
United States feared an increase in the tolls would divert traffic away
from the seaway. However, both sides agreed that toll increases were
necessary, and a new toll structure has been established beginning
with the 1978 season.
Other
Private sector cooperation between Canada and the United States
is the greatest of any two countries in the world. The large trade
-and investment flows-each country is the other's largest customer and
largest direct investor-and the existence of a near common market in
securities, loans, capital stock, and commercial paper between New
York, Toronto, and Montreal attest to this cooperation. Also, business,
professional, and technical associations are commonly operated
jointly.
Recently, relations between the two countries seem to have im-
proved. Vice President Mondale, who was given a warm welcome on
his trip to Canada in January 1978, announced that the United States
planned to ease the tax laws that have tended to keep U.S. convention
business out of Canada. He also announced that the extraterritorial
-application of U.S. antitrust laws, another issue that had irritated
Canadians, would be changed so that information would be sought
voluntarily from subsidiaries of U.S. corporations and the Canadian
Government would be consulted before court proceedings were
utilized. In April 1978 a new interim agreement was reached on the
fisheries dispute which arose from United States and Canadian 1976
laws extending sovereign jurisdiction 200 miles offshore. Currently
new bilateral arrangements in energy resources, meat, and tourism
are being negotiated.













Bibliography
BOOKS, PAMPHLTS, DOCUMENTS, ETC.
Baznk of Canada Review. March 1978. 199 p.
Barntt, Charles A. Canada's international trade: trends and prospects. Ottawa,
Conference Board, c1976. 55p. (Conference Board in Canada. Canadian studies,
No. 39)
Canada. Department of External Affairs. Information Division. Facts on Canada.
Ottawa, Queen's Printer, 1965. 43 p.
Canada-United States Interparliamentary Group. Delegation from the United
States. House Delegation. Eighteenth meeting of the Canada-United States
Interparliamentary Group, May 27-31, 1977; report by Dante B. Fascell,
Chairman of the House of Representatives Delegation, pursuant to Public Law
42, 86th Cong. Washington, U.S. Government Printing Office, 1977. 19 p.
Canada-United States Interparliamentary Group. Delegation from the United
States. House Delegation. Nineteenth meeting of the Canada-United States
Interparliamentary Group, February 9-13, 1978; report pursuant to Public
Law 42, 86th Cong. Washington, U.S. Government Printing Office 1978. 26 p.
Canadian-American Committee. A time of difficult transitions: Canada-U.S.
relations in 1976; a staff report. Washington, 1976. 58 p.
Cestre Ghislaine. Petro-Canada: a national oil company in the Canadian context.
(95th Congress, 1st sess., Senate Committee on Energy and Natural Resources
print) Washington, U.S. Government Printing Office, 1977. 65 p.
English, H. Edward, ed. Canada-United States relations. New York, Academy
of Political Science, 1976. 180 p. (Proceedings, b. 32, No. 2)
Lower, J.A. Canadian history at a glance. New York, Barnes & Noble, 1967
(cl1966) 248 p.
Maxwell, Judith, ed. Policy review and outlook, 1978: A time for realism. Quebec,
D. C. Howe Research Institute, 1978. 157 p.
McNaught, Kenneth. The history of Canada. London, Heinemann Educational
Books Ltd. (1970) 336 p.
Murphy Lawrence J., et al. Perspectives on the Canadian economy: an analysis
of cyclical instability and structural change. Ottawa, Conference Board, 1977.
100 p. (The Conference Board in Canada. Canadian technical paper No. 2).
OECD Economic outlook (No. 22) Paris, Organization for Economic Cooperation
and Development, December 1977. 140 p.
OECD Main economic indicators. Historical statistics, 1960-75. Paris, Organiza-
tion for Economic Cooperation and Development, 1976.589 p.
OECD Main economic indicators. Paris, Organization for Economic Cooperation
and Development, March 1978. 160 p.
ayweA, John. Canada past and present. Toronto, Clarke, Irwin & Co., Ltd. (1969)
U.S. Congress. Senate. Committee on Finance. Canadian Automobile Agreement.
Eleventh Annual Report of the President to the Congress on the operation of
the Automotive Products Trade Act of 1965. December 1977. Washington, U.S.
Government Printing Office, 1977. 80 p.
U.S. Library of Congress. Congressional Research Service. Alaskan natural gas:
when and how (continuously updated) Issue Brief IB75083.
U.S. Library of Congress. Foreign Affairs Division. The current Canadian situa-
tion (Prepared by Edward T. Lampson). Washington, 1975. 13 p.

ARnaQZS
Analysts see Canada foreign borrowing as just short-term aid to payments gap.
Wall Street Journal, February 27, 1978, p. 7.
A wind of change; Canadians look south again after a period of anti-Americanism.
Wall Street Journal, March 17, 1978, pp. 1, 17.
Canada section of gas pipeline faces high political hurdles. Journal of Commerce,
February 6, 1978, p 4.
A(N)







Canada, U.S. map bilateral trade pact. Journal of Commerce. January 20, 1978,
pp. 1, 15.
Hutchinson, Bruce. Canada's time of troubles. Foreign Affairs, v. 56. Oct., 1977,
pp. 175-189.
Political problems draw Canada closer to U.S. Washington Post, January 23,
1978, p. A18.
Quebec's personal tax revisions boost pressure for relocation of head offices. Wall
Street Journal, May 8, 1978, p. 23.
Quebec's separatist posture is a godsend to nearby States seeking firms and jobs.
Wall Street Journal, March 14,1978, p. 13.
Sun Life Assurance Company's planned move to Toronto. Canadian Press Com-
ment. January 25, 1978, No. 4 (Washington, D.C., Canadian Embassy) 3 p.
United States-Canadian oil, fishing pact seen. Journal of Commerce. February 6,
1978, p. 32.

































*


r "' *


I









APENDIX


ThIe June 1978 Fisheries Dispute Between the United States
and Canada: A Resum4
Beckground
SFisheries disputes between the United States and Canada have erupted
throughout the history of the two countries. The current dispute is the
result of the extension by both countries of the fisheries jurisdiction
from 12 miles to 200 miles in early 1977. This meant that some tradi-
tional fishing patterns of each country were disrupted because what
were formerly international waters came under the jurisdiction of
Canada or the United States. In 1977, a long-term agreement con-
cerning maritime boundaries, salmon interception, and the manage-
ment of east and west coast fisheries was being negotiated. But due
to the complexity of the issues, a long-term agreement was not con-
cluded and in order to allow traditional fishing patterns to continue,
an interim agreement was reached in 1977. The most important pro-
vision of this agreement was that each country's commercial fishing
could continue in accordance with existing patterns.
The Interim Reciprocal Fisheries Agreement for 1978
Since the long-term agreement was still pending when the 1977
interim agreement expired in December 1977, a new interim agree-
ment was negotiated and subsequently completed on April 11, 1978.
Besides retaining the provisions of the 1977 interim agreement, the
1978 agreement contained the following main additions:
1. Since the United States and Canada differ as to the length of
chinook salmon that can be caught (the minimum U.S. size is 28
inches, while that of Canada is 26 inches), the United States agrees
to allow Canadian salmon trolling vessels to carry chinook between
26 and 28 inches through the U.S. zone as long as the chinook were
caught in the Canadian zone and the Canadian vessels report the
number of such chinook to the U.S. authorities.
2. The area in which Canadian salmon troll fishing is allowed in
the U.S. zone is larger than that permitted in 1977, subject to several
conditions.
3. The United States has the right to request Canada to close the
Swiftsure Bank area of British Columbia from April 15 through June
14, 1978, for conservation reasons (due to the number of immature
salmon originating in rivers of the United States found in the Swift-
Sure Bank area). If Canada does not agree with the conservation need
to osle the Swiftsure Bank for this period, the United States is not
*igsad to.. permit Canadian salmon troll fishing in the agreed-upon
expanded area nr to allow the carrying of 26- to 28-inch Canadian
cbiwook through U.S. waters.

D Disre 6ients oter west coast salmon 'and ekst coast fish stocks led
to the ctlisg of Uniited States and Canadian waters to reciprocal
fishing on June 4. First, the United States requested that the Swiftsure
(27)






Bank be closed on April 14. Canada, not agreeing with the conserva-
tion need to close the bank, did not close it until May 15. Consequently,
the United States did not grant Canada access to as large an extended
area for salmon trolling in the U.S. zone as had been originally in-
tended. In the meantime, the Washington State Trollers Association
and the Quileute Indian Tribe obtained a temporary injunction on
May 5 (which was stayed a few days later) barring all Canadian boats
from trolling in U.S. waters, on the grounds that the Canadians didn't
close the Swiftsure Bank when requested. In this court decision, the
1978 interim agreement was declared invalid because it lacked con-
gressional approval.
The east coast fish stocks disagreement originated when Canada
objected to efforts by U.S. fishermen to increase their catch of some
fish stocks in the U.S. zone. The Canadians wanted these efforts to
cease within a given time span, while the U.S. position was that under
the 1978 interim agreement, the United States had no obligation to
comply, and the legal steps necessary for compliance were impossible
within the time limits set by the Canadians.
The inability to settle these two issues led to the June 2 note by the
Government of Canada ceasing implementation of the 1978 interim
agreement, with the resulting prohibition on U.S. fishing in Canadian
waters effective noon, June 4. The United States took similar action,
also closing U.S. waters to Canadian fishermen on June 4 (since a grace
period was given by both countries to allow boats to leave the pro-
hibited areas, reciprocal fishing actually ceased on June 6). In ad-
dition, the U.S. closed the Great Lakes to fishing by Canadians,
although the Canadians did not extend their ban to the Great Lakes.
Legislation Concerning the Interim Reciprocal Fisheries Agreement for
1978
Due to the May 5 court decision mentioned above, congressional
approval was required for the 1978 interim agreement. Consequently,
legislation to approve the Interim Reciprocal Fisheries Agreement for
1978 was introduced in the House (H.R. 12571) and Senate (S. 3098).
The House passed H.R. 12571 on May 25, 1978 and hearings on S. 3098
were held by the Senate Foreign Relations Committee on June 13,
1978, at which Mr. Lloyd Cutler, the chief U.S. negotiator of the 1978
interim agreement, recommended that the Senate complete the legisla-
tive approval of the 1978 interim agreement so that the executive
branch would have the legal powers to resume negotiations concerning
reciprocal fishing. During these hearings it was mentioned that the
U.S. ban on Great Lakes fishing by Canadians was an "unintended
complication" which had now been cleared up.
Other Factors Affecting Dispute
It is possible that'the current fishing dispute has been complicated
by feelings caused by previous as yet unresolved Canadian-United
States disagreements. For example, at the June 13, hearing mentioned
above, Mr. Jacob Dykstra, president of the Eastern Region of the
National Federation of Fishermen, mentioned that Canadian subsidies
to Canadian fishermen have adversely affected the U.S. scallop fishing
on the Georges Bank. He also stated that U.S. fishermen felt that the
United States is the side that usually grants most of the concessions in
reciprocal fishery agreements.







Economic Impact
It is estimated that in 1977 the value of the U.S. fishery in Canadian
waters and disputed boundary areas was $7.1 million and $15.7 million,
respectively. Although the amounts involved are very small in relation
to the size of the U.S. economy, the loss of these fisheries probably has a
considerable adverse effect on some local economies as well as on the
livelihood of the fishermen involved.
Other
Although at this writing reciprocal fishing remains prohibited,
negotiations on the long-term reciprocal fisheries agreement between
Mr. Lloyd Cutler, of the United States, and Mr. Marcel Cadieux, of
Canada, are scheduled to resume June 19.
More detailed information on this topic can be obtained from the
President's message to Congress on the Reciprocal Fisheries Agree-
ment with Canada (H. Doc. 95-329), the report on the Fishery Con-
servation Zone Transition Act amendment (H.R. 12571) by the House
Committee on Merchant Marine and Fisheries (H. Rept. 95-1215),
and recent notes exchanged between the United States and Canada.


















3 1262 04827 8740


*4..
* Ed. ~ *jhrL..
tEd:.....


















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