5(e) = 1(S)i : Canadian-American Economic Relations
During the 1960s or Setting the Stage for the New Economic Policy
Bruce Muirhead
Professor of History
University of Waterloo
On one important level, the Liberal years of the 1960s were among the best that Canada ever
experienced. First, the two minority governments led by Lester Pearson enacted more progressive
and far-reaching legislation than had any other government in the history of the country. The pace
of change was staggering – health care, additional social services, a new flag, alterations to the
Immigration Act, the launch of a royal commission on bilingualism and biculturalism, and a
national pension plan changed the fabric of Canada. When Pierre Trudeau took over as Liberal
leader and prime minister in April 1968, with a government of his own following the election in
June, more of the same followed. The country’s defence policy was dated – change it. Its foreign
policy was too tightly connected with an old world that had disappeared in the “modernity” of the
post-war period; it, too, would be scrutinized and altered to reflect the new reality. International
development would be regularized and systematized with the establishment of the Canadian
International Development Agency in September, while a new organization, the International
Development Research Centre, a Crown corporation based in Ottawa, would soon establish itself
among the very best in the world in supporting research for development. The nation, or so it
seemed, was unbeatable and at the top of its game.
A large part of that strength came from an economy that was very closely linked to that of the
United States. It was Canadian forest products, resources, and especially automobiles that poured
across the border that helped to make Canada as prosperous as it was. The relationship also
continued to grow through the decade. While that had come at a cost that was increasingly being
debated on the country’s university campuses and in the parliamentary offices of the Progressive
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Conservatives and the New Democratic Party, it hardly seemed to matter. And if the odd public
opinion poll showed that Canadians as a group were becoming more wary of being so tightly bound
to the US, then the Pearson or Trudeau governments would respond in ways that did not jeopardize
the relationship, but would publicly “stand up” for Canadian integrity. When questioned closely,
however, very few in the country could conceive of a prosperous Canada without those ties that
bound them to the United States.
Still, the economic relationship that provided Canadians with so much was very odd,
especially given the US reputation as an unrepentant hegemon willing to use its power to get its
own way. As Canadians knew, it was not above invading smaller neighbours when the mood
struck, like the Dominican Republic in April 1965, or waging war in Viet Nam to stop the
communist hordes before they landed in Seattle, or adopting harsh positions in certain
international organizations when its interests were being threatened. The peculiar part was that
Washington, in the years since the Second World War, had developed a relatively benign
policy when it came to Canada, even despite Canadian provocation at times. It was almost the
case, as the characterizations of the day had it, of little brother pushing big brother around with
the latter doing little, usually, to stop the former. That is, until the inauguration of the Nixon
administration on 20 January 1969. From that point, the relationship cooled; the new president
would be on record a few years later as having called Trudeau “that asshole.” The prime
minister’s response was equally dismissive: "I've been called worse things by better people."ii
It was not only Nixon’s personality that caused a fundamental recalculation of the equation.
This paper will argue that Canadian success in negotiations with Americans on contentious issues
like the country’s response to the 1962 currency crisis, the 1963 partial exemption from the interest
equalization tax, a full exemption from the 1965 voluntary Johnson guidelines and the 1968
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mandatory controls, or the 1964-65 exemption from the imposition of US countervailing duties
which led to the negotiation of the Auto Pact, sowed the seeds of future discord by creating an
impression of Canadian “entitlement” to American exemptionalism. That sense built up over time,
coming to a head on 15 August 1971 with the announcement of the New Economic Policy, or
“Nixon Shock,” when Canada was identified as being a significant source of US financial and
economic troubles whatever the reality actually was. That it was actually a net contributor to
American financial well-being during the 1960s, meant nothing. Perception is reality, and so it was
in this case – the Nixon administration viewed Canada was as a complaining, whining, demanding
neighbour which had treated the US shabbily. As the secretary of the treasury, the hard-headed John
Connally, was to note when referring to Canada, he wanted to use “a baseball bat to get the mule’s
attention.”iii It certainly worked.
The relationship did deteriorate quickly. Then-president Lyndon Johnson, lifting Pearson off
the floor at Camp David following Pearson’s Temple University speech of early April 1965
demanding a pause in the US bombing of North Viet Nam and shouting “Don’t you come in here
and piss on my rug,”iv would seem mild by comparison as the new Republican administration set its
teeth into the issue of Canadian-American relations after 1969. As the United States experienced
more than its share of economic and financial troubles, as its cities exploded in race riots, as its
soldiers were dying overseas, its northern neighbour was constantly on the lookout for its own
advantage, or so the new president felt. That was probably true, and it would have been odd had it
been otherwise. By the time Nixon, a California-based Republican with few happy thoughts about
Canada took office, the match was close to the fuse. The fact that Nixon and Trudeau came to detest
each other did not help in terms of avoiding a showdown. The exemptions, adumbrated above, led
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the way, in part, to the Nixon Shock when Ottawa, with apologies to Carol King, “[felt] the earth
move under [its] feet/[It] felt the sky come tumblin’ down, tumbling down.”
American and Canadian Contexts
The 1960s were, mostly, unkind to the US in terms of its balance of payments position.v
Aside from a few decent years as the decade drew to a close, its condition was not robust which
caused some soul-searching in Washington. The deterioration in the economic and financial context
was almost as worrying to the Kennedy and Johnson administrations as the course of war in Viet
Nam was to be. Still, what was happening was not unexpected. As Western Europe and Japan
recovered from the effects of the Second World War the US share of world trade declined. Further,
US firms were investing heavily in Western Europe and other regions which placed a strain on the
balance of payments. Similarly, the Cold War had led to increasing military expenditures abroad as
the services built bases, airfields, naval facilities and supported thousands of troops in far-off
places, all of which took much American coin. By the time of Kennedy’s assassination, the numbers
were frightening; there had been an unprecedented drain on US monetary reserves. The gross
reserves of the United States had fallen from US$26 billion in 1949 to roughly US$17 billion by the
end of 1964, “while its indebtedness to the IMF and to foreign central banks climbed daringly – but
precariously under the gold exchange standard – from $3 billion to $16.4 billion.”vi Many in the
administration viewed this situation as untenable; in that, they were correct.
Canada had its own problems in the early 1960s, primarily that it was the world’s largest
debtor, holding international liabilities of about CAN$20 billion, with most of that originating in the
US. Its annual current account deficit with its southern neighbour was approximately CAN$1.2
billion, a very high number for the times. This was partly met by borrowing in the United States,
partly by using the surpluses generated from other geographical areas and applying them to the
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deficit with the US, and partly by using newly-mined Canadian gold. The painful fact remained,
however, that Ottawa relied very heavily on access to American financial institutions to balance its
books – it borrowed what it could not amass on its own. In short, Canada was dependent for its
financial stability on being able to borrow in the United States on reasonable terms to bring its
current account deficit into balance. If anything interfered with that ability, the country would be
disadvantaged as it would be forced to cast about for other ways to ease its deficit. One of those
methods might be to reduce imports from the US, which would also not help that country.
In a sense, it was like a ponzi scheme, moving markers around the board without having hope
of being able to cover the principal, all the while juggling income with payments, only a step ahead
of the regulator. The result had been difficult for Canada, despite the fact that it has prospered
mightily with the inflow of American investment. Eventually, however, it had to pay that off and in
doing so had been a net contributor to the US balance of payments over the decade since 1952 to the
tune of about CAN$6 billion. That was a partial explanation for the so-called special relationship,
although it did go deeper into sentiment. Still, it was the envy of some others; on a 1962 visit to
Washington, Earl Cromer, the governor of the Bank of England, had enquired about this US
willingness to let Canadians do what the less blessed could not. That, he was told, had simply “been
accepted by the US.”vii The fact that the odd relationship helped to balance increasingly out of whack
American books just made it easier.
Further, Canada was still feeling its way following the recession that had lasted the several
years following 1959. By 1960, unemployment had risen to a post-war high, as had the bank rate,
making the downturn worse. As was permitted by the General Agreement on Tariffs and Trade, rates
of duty were raised on certain items to provide additional protection to Canadian manufacturers that
would, it was hoped, stimulate employment. However, the primary response to the recession came in
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December 1960, when the Conservative government of John Diefenbaker introduced a
supplementary budget to support demand, in part through the redirection of spending to public works,
thereby increasing the federal deficit.viii As that was working its way through the system, the situation
was further muddied by the June 1962 federal election when the Conservatives dropped from 203 to
116 members of parliament, the Liberals increased to 99, Social Credit won 30, and the New
Democratic Party, 19. A minority government was a relative unknown in those days – the last had
been in 1925. How stable and capable, people wondered, would it be? Additionally, during the
campaign, the government had pegged the Canadian dollar to its US counterpart at the rate of
CAN$0.925 to US$1, which represented a significant devaluation of the now-pegged currency,
following a 12-year float. And no one knew how that would play out.
Canadian Policy and the Currency Crisis of 1962
Keynesian economics dictates that government prime the pump when the economy is in a
downturn. The Conservatives did that with a vengeance in 1961, as government expenditures rose
by seven percent over the same period in 1960.ix By 1962, however, as the economy recovered, that
stimulus seemed counter-productive. With electioneering the order of the day following an 18 April
call, it was unlikely that the Conservatives would turn off the taps, anticipating perhaps-disastrous
results for their re-election possibilities if they did. Indeed, the party promised voters more of the
same – new programs and massive outlays. Those commitments were made even as Canada’s
holdings of gold and US dollars were tumbling – from more than US$2 billion in January 1962, to
about US$1 billion by June. That, in turn, spooked the international investment community which
knew that Ottawa was running a current account deficit of about CAN$1 billion per year which
would have to be made up through recourse to foreign money. With Canada already an very large
debtor, foreign investors believed that the electioneering Conservatives were making a bad situation
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worse. Rasminsky put it best noting: “If we run a large deficit in a period of high economic activity,
investors and the public in general would be bound to ask how huge the Government’s borrowing
requirements will be when the economy undergoes a cyclical set-back … some time within the next
two years. New public expenditures will then be undertaken in an effort to alleviate the situation,
existing expenditures with a built-in growth factor will go on increasing, while revenues will fall
off. The deficit would assume truly staggering proportions.”x R.B. Bryce, the secretary to the
cabinet, told the prime minister the same thing, namely that international investors felt his
government was not paying sufficient attention to “sound” financial policies: “Whether they are
right or wrong is no longer the point – they are the ones whose opinion is important now.”xi Thus
began the sordid tale of the 1962 exchange crisis as confidence in the Canadian dollar evaporated.
Despite the hand-wringing and dire scenarios, Canada survived the tremor, at least in part
because of American beneficence. It also helped that Louis Rasminsky and Robert Bryce were wellrespected in the international community, and that the governor and the deputy minister of finance,
Kenneth Taylor, put together a package that helped to still those rumblings beneath their feet. It
included, among other things, a temporary graduated surcharge on certain classes of imports,
ranging from 15 percent for those deemed less essential, to five percent, affecting in total about
US$2.5 billion worth of imports. The package also reduced the exemptions for a set period in
customs duties accorded to Canadian tourists on goods they brought back that, naturally, affected
the United States disproportionately. Much to Canadians’ relief the reaction of the outside world
was satisfactory, and the currency crisis passed into history.
However, it need not have been so and was, partly, because the United States did more than
its fair share to help resurrect confidence in the Canadian dollar. They did not publicly complain
when surcharges were applied to goods imported by Canadians from the US, or to the fact that
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Canada’s dollar had been devalued vis-à-vis their currency. On both counts it probably meant that
the United States’ export surplus to Canada would be reduced at a time when it was beginning to
feel the odd vibration beneath its feet. As well, Canadian interest rates had risen over the months
since the election had been called and they were now considerably higher than those in the US. The
Federal Reserve Board had noted in one of its analyses that “In the past, a spread between the US
and Canadian market rates has produced a flow of US funds into Canadian securities; with a
substantial gap, Canadian borrowings in this country have also tended to become substantial. Thus,
some increase in the flow of US funds … to Canada is to be expected.”xii That did not serve them
well given their plunging trade balances and the resultant slide into balance of payments difficulty.
Further, the administration was irritated by the import surcharges, privately protesting their
imposition. Douglas Dillon, the secretary of the treasury, told the president that they could have a
corrosive effect on North American economic relations, and that it would be incumbent upon
Ottawa to remove them as soon as possible. They remained in place for nine months, but this was
not the last time Americans referred to them – John Connally did so in 1971, on NBC’s Today
show, when responding to Canadian criticism of the US imposition of import surcharges, a part of
the New Economic Policy: “[The Canadians] are going to come down here and complain and ask
that they be exempt from the imposition of the surcharge. We’re going to be cooperative … but I’m
going to point out that when they imposed a surcharge in 1962, we went up there to ask for relief
for American products, and they said no … I must say, I don’t think their bargaining position is as
strong as it might be.”xiii Still, as noted above, the 1962 package did appropriately address concerns,
restoring the equilibrium that had characterized the relationship in the past. At least until the next
crisis in continental relations, which made its presence felt in short order.
The Exemption Waltz – the Interest Equalization Tax
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Parliament Hill gossip-mongers had a field day with the IET in their speculations over
whether or not it represented retaliation. [check G and M here – maybe Winn FP] It also
provoked indignation in official Ottawa that the United States could even think of applying the
interest equalization tax, announced in July 1963, to Canada – an exemption should have been
automatically decreed given past practice, common history, and the nature of the North American
relationship. Designed to begin to reverse the surging outflow of US dollars as foreigners borrowed
increasing amounts in American money markets the tax, while raising the cost of loans, would
thereby reduce their willingness to borrow.xiv Canadians were perplexed that they were lumped in
with the British, the French, the Germans and sundry others; did the US not know that Canada was
not a problem but rather a significant part of the solution?
Ottawa officials did have a point in that there would be no appreciable American advantage
with the IET’s application to Canada; indeed, it could be the opposite, given the two countries’ very
close economic and financial relationship and the particular form that it took. Canadians needed
access to that relatively cheap source of finance, given the large current account deficit that
demanded attention and which was caused, in part, by massive outflows to the United States. If not
the US because of cost, then where? Even worse, if the US priced itself out of the market, the bank
rate would have to rise to attract foreign investment, which could only adversely impact Canadian
economic policy. Following the dismal recession that had begun in 1959, the economy was growing
again and officials worried that the IET or an increase in the bank rate could do that harm.
However, it could also have an adverse effect on the volume of dollars that flowed south across the
border in the form of profits from US subsidiaries, interest payments, licensing fees, and a host of
other charges. It was almost too much to contemplate for the new Liberal government of Lester
Pearson, elected in April 1963.
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There was, however, a context to the IET’s application to Canada of which Ottawa could only
have been willfully blind. Walter Gordon, the newly-appointed minister of finance, (and Canadian
nationalist), had presented a budget to parliament in June 1963 that had proposed, among other
things, a tax on the sale of shares of Canadian companies to non-Canadians.xv The minister was
primarily interested in repatriating Canadian companies from their American owners through this
device that was immediately denounced as unfair, damaging, discriminatory and arbitrary by
Americans, but also by certain Canadians as well. In the event, it was such a resounding failure and
received such bad press that it was withdrawn a mere six days later. The takeover tax was seen as an
attack on foreign investment on which Canada was dependent – about 30 percent of new private
business investment in Canada was made by foreign companies. If that declined, it could have an
adverse effect on growth and employment. Americans did not comprehend the June 1963 budget
with some suggesting that whoever was responsible was ready for “the psychoanalyst’s couch.”xvi
So why would the IET be applied to Canada even though it was clearly detrimental to the
interests of both countries? Perhaps it lay in what parents might call a “teachable moment.” The US
did allow Canadians privileges granted to no others in their market, partly because it suited their
interests but also partly because they did see Canada differently than, say, France. While generally
the aphorism “superpowers do not have friends – they have interests” is true, it was not in this case.
US officials were as equally perplexed about the budget tabled in parliament as Canadians were
about the IET. But if Canada went ahead with its declared policy, then surely the new American tax
would merely facilitate that; the Gordon budget clearly sought to make Canada less dependent on
the US – so, too, would the interest equalization tax by forcing some of the former’s borrowing
elsewhere. As Livingston Merchant later made plain, Ottawa’s interests had been taken into
consideration with the IET: “The Canadians shouldn’t object to this since it merely served to
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implement announced Canadian policy.”xvii The expression “hoisted on one’s own petard” comes to
mind in this case.
Through several twists and turns, Canada eventually received a partial exemption. According
to its terms, the country would keep its reserves to within a prescribed range while being allowed its
old privileges with respect to access to American financial markets – the idea was that Canada not
accumulate vast amounts of US dollars. In the aftermath of the budget fiasco, Pearson told the US
ambassador to Canada, Walton Butterworth, that Gordon would have to take the opinions of others
in cabinet into consideration as he constructed the 1964 budget or he would have to go.xviii The
minister had also learned a salutary lesson from the experience, having gone to Washington to plead
for the IET exemption in July 1963 as well as traveling there in 1964 for consultations with US
officials as he formulated his next budget. For their part, the Americans learned not to trust
Canadians who came bearing gifts, like the repeal of the takeover tax.
That was just as well as by late 1964, Canada’s reserves were going up with a bullet; the US
thought they had been “fixed” with the IET negotiation to a level of less than CAN$2.55 billion,
which would not unfairly deplete American reserves. However, that was not the case as Canadian
governments and the private sector were borrowing heavily in the US market, well beyond the
amounts considered reasonable in the dark days of July 1963. When Dillon met with Rasminsky to
complain, he also let the governor know that should Canada not respect the spirit of the agreement
in its accumulation of reserves, Congress, capable of “irrational action,” would become involved.
“Congress,” Rasminsky emphasized, “was not the only body capable of irrational action and if it
did act irrationally it was inevitable that that would provoke reactions in Canada which would be
injurious to US as well as Canadian interests.”xix So much for gratitude and so much for the
negotiation as Canada refused to agree to reduce its drawings in the US. “Canada-US bilateral
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relations,” undersecretary of state George Ball had earlier suggested, “far from being the most easy
in the world, were in fact amongst the most difficult.”xx Richard Nixon and John Connally could not
have put it better.
Guidelines and Mandatory Controls
American problems did not disappear with the implementation of the IET; in fact, the US
continued the financial slide that the tax had been designed to address. War in Viet Nam in
particular, but also the beginnings of the Great Society program, placed tremendous demands on the
economic and financial capacity of the United States. Partly as a result, its balance of payments
situation continued to be adverse, calling for further government intervention. That came in
February 1965 with guidelines laid down by the administration of Lyndon Johnson, who had
succeeded to the presidency following Kennedy’s assassination in November 1963. This instrument
limited purchases of long-term foreign securities by any American non-bank financial institution to
five percent of the amount of its holdings on 30 September 1965, and permitted each corporation an
average rate of direct investment abroad in 1965-66 up to 135 percent of its 1962-64 average, which
was problematic, at least for Canadians.xxi Its purpose was to encourage the repatriation of USowned short-term financial assets held in Canada and elsewhere by American corporations. They
could increase their credits via exports, repatriate capital, or reduce new overseas investment.
Ottawa was worried as the economy was expanding, which meant rising imports. It was expected
that the country’s current account deficit with the US would be more than the record CAN$1.8
billion that it had been in 1964.
The guidelines did not have the positive effect on the US balance of payments that was
anticipated. Indeed, the fourth quarter of 1965 was shaping up to be a wild one for the United States
with an adverse impact on the US dollar, or so some in Washington worried. The US Treasury
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believed that to be the result of transactions with Canada whose reserves had improved to the tune
of about US$200 million in the third quarter. In the fourth, some speculated that the amount would
rise by a whopping CAN$800 million. Canada, it was thought, would have to be reined it. As
Douglas Dillon had earlier remarked, that country “ha[d] become a special problem of the United
States balance of payments position.”xxii That meant, under the guidelines, a re-examination of the
IET partial exemption that had given Canada the special deal in the first place.
Again, Ottawa expressed disbelief at perfidious America and vowed to stop that in its tracks.
Various meetings were held with US policy makers at various levels. In one, Walter Gordon met
with Henry Fowler, the recently-appointed secretary of the treasury, demanding that nothing be
done to compromise the partial exemption. Canadian reserves, Gordon managed to convince him,
would fall after 1 January 1966. Further, it might be possible for Canadian borrowers to delay their
loans until after that date if, the implied suggestion ran, it would help the US. Amazing. On the
other hand, if the US went ahead with its plan a number of Ottawa officials forecast unhappiness for
both sides as the country would be unable to reasonably import the capital necessary to pay its bills.
And that would result in an exchange crisis that could make the summer of 1962 look like child’s
play and which would have a significant impact on the United States. Moreover, the argument made
in 1963 remained valid – Canada was not a part of the problem, but to some extent that was beside
the point. Robert Bryce, the deputy minister of finance, emphasized that noting “We are sure that
the US does not want to have us interfere with our current payments to the United States, reducing
imports, for example, simply to reduce the capital flow necessary to finance them.”xxiii
The argument made sense although Canadian attitudes and perceived self-interest did not, and
the Americans ultimately agreed, both to the continuation of the IET and to an exemption from the
guidelines. Ottawa had hung tough with the US and had secured, at least for now, what it wanted.
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That would be put to the test again in January 1968, as the guidelines became mandatory controls.
The world was gripped by speculative frenzy following a pound sterling crisis (again) in late
1967,xxiv and it now looked as if the US dollar would also be a target, given doubts about the
country’s economic and financial condition.
The situation was caused, Time magazine pointed out, by the steep decline in the US trade
surplus “which has been the cornerstone of U.S. global economic power since World War II.”xxv It
went on to describe a situation that had deteriorated year after year during the 1960s: “From a peak
of $7 billion in 1964, that surplus shrank 41% to $4.1 billion last year. So far this year, the record
has been even worse. The first-quarter surplus fell to an annual rate of only $731 million, the lowest
in 31 years; during March, the U.S. trade balance actually ran $158 million in the red.” Unless the
US could offset this shortfall, it could well lead to a rise in an overall balance of payments deficit
that would be bad for the United States and the global monetary system. As events transpired, it
could not. While New Year’s eve revelers slept off hangovers and other ills, Washington addressed
its own – a balance of payments program was announced on 1 January 1968.
That announcement left Canada very vulnerable. Indeed, the country was as much in
speculator’s sights as were the UK and the US. They believed, rightly, that Canadian price and cost
performances were weak, the balance of payments would deteriorate following the end of the very
successful Expo ’67 as tourists went home, and there was a general suspicion that Ottawa was not
taking seriously the upheavals in the financial world around it. Even an increase in the prime rate,
from six to seven percent, did little to dissuade speculation, nor had an anti-inflationary budget,
passed in November 1967. And when it was announced that Canada was in a group that could not
receive more than 60 percent of the amount of American foreign direct investment placed there in
1966, a run on its dollar resulted. The bullseye was clearly visible to all.
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That January, Canada lost 15 percent of its reserves, more than CAN$350 million while in
February, CAN$400 million disappeared in supporting the Canadian dollar in exchange markets.
Further, Washington was considering the imposition of an import tax, which would apply to about
US$2 billion worth of Canadian exports. That would devastate trade. Confidence in its dollar had
crashed as the earth seemed to open beneath Canadian’s feet. This was more than a tremor,
especially as many believed it to be impossible that Canada would be able to import enough capital
at reasonable enough rates to cover its current account deficit. There was some talk of Canadian
devaluation. To avoid all that messiness, the tried and true solution to this problem was to ask the
United States for an exemption from the controls.
Which Ottawa received. Negotiations on 3 March went on in Fowler’s office until 3 am –
exhaustion might have contributed to Canadian success. Certainly the agreement was not praised by
all US officials; a few thought that “Fowler was going too far.”xxvi However, the exemption would
cost little in terms of balance of payments “as most of the capital flows to Canada come back to us
in one form or another.” Further, an exemption was a lesser evil than possible Canadian
devaluation, or so some senior Americans believed. However, even despite Canada’s wobbling
economy, it was not prepared to cast its lot wholly in with the US. For example, the country would
not “harness [its] wheel to the American chariot. Nor would it duplicate the US program.” The
Americans agreed, and on 7 March the two month’s of hell ended with the Canadian secretary of
state for external affairs, Mitchell Sharp, announcing the deal in the House of Commons. The bank
rate was hiked to 7.5 percent and the government appointed a Prices and Incomes Commission,
desperate to be seen to be doing something. Shakespeare had written about all’s well that end’s
well, and so it seemed here – at least for now.
“You Screwed Us on the Auto Pact”xxvii – Its Implementation and Effects
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If it all ended well for Canada, it was largely because of the Auto Pact which single-handedly
solved Canada’s perpetual balance of payments deficit with the United States. If, however, it did
this for Canada, it must have had an opposite effect on the United States – hence the earthy
language from the president noted in the subtitle. It would also have a lingering effect on CanadaUS relations, from Johnson’s comment to Nixon’s intention to either renegotiate or unilaterally
abrogate it with the launch of the New Economic Policy. The Auto Pact was certainly an irritant as
its terms and conditions became better known to US policy makers, although they had approved it.
The agreement also contributed to the sense in Washington that Canadians had always been, and
would always be, prepared to take advantage of American goodwill (and good nature!) to benefit
themselves without much thought of real reciprocity or evenhandedness.
The Auto Pact was one of those defining agreements that totally changed the status quo for
both sides. It also got official Washington out of a tight spot in that it did not have to apply
countervailing duties to Canadian imports, providing an exemption of sorts from that necessity.
Indeed, various secretaries in the Johnson administration had been in a flutter about the necessity of
doing so. With respect to the agreement itself, there had been some ploughing of this furrow in
Canada since 1961 with that year’s Report of the Royal Commission on the Automotive Industry,
followed by a program in 1962 that covered automatic transmissions and a stated number of
stripped engines. This program “provided for a refund on duties paid on automobiles and parts
imported into Canada by any firm that by itself or through independent parts manufacturers
increased the exports of cars and parts.”xxviii One dollar of exported Canadian content would earn
the remission of duties on one dollar of dutiable imports. The object, of course, was to increase the
country’s share in the production and trade of automobiles. The Liberals liked what they saw when
they took office in April 1963, and built upon it.
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However, not without some American angst. While President Kennedy had not been opposed
to the program in pursuit of better Canada-US relations, there were some legislative irritants. In
fact, a law dating from 1897, and updated in the 1930 Tariff Act, the infamous Smoot-Hawley
legislation, had provided for mandatory countervailing duties on imports that enjoyed a grant or
bounty from the government of the exporting country. The Canadian auto program clearly did,
although senior Americans like Dean Rusk, the secretary of state, were prepared to skate close to
the line in ignoring it. US businessmen, on the other hand were not – they demanded that the
administration observe both the spirit and the letter of the law. That was one of the reasons why, as
Rusk told a new president, Lyndon Johnson, in December 1963, “Our relations [with Canada] have
grown rather sticky.”xxix
Meetings and negotiations went on for the better part of a year, with some Americans
becoming increasingly concerned. Senator Vance Hartke of Illinois, for example, wrote to Johnson
linking Canadian programs to the lay-off of 700 workers at an auto parts maker. Similarly, Stewart
Symington, the senior senator from Missouri, raised his concerns about unfair Canadian
competition with a firm from his state which made parts. Finally, and this was the clincher, the
Modine Manufacturing Company of Racine, Wisconsin, tabled a formal complaint instructing that
countervailing duties be placed against Canadian auto and parts imports as its business was
adversely affected by Canadian policy. That demand really set the cat among the pigeons. Ottawa’s
response could not have given the administration much solace: These measures were of
fundamental importance to the Canadian economy and if frustrated by Washington, it “would have
the most serious implications for Canadian-United States relations.”xxx Douglas Dillon later
informed the president that the Canadians “showed no give whatsoever on the substance and
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originally refused to even consider joint working level talks looking to a possible solution” to the
countervail issue.xxxi
On 15 April 1964, Modine’s complaint was filed, which kicked the whole US trade
investigation apparatus into gear, Canadian policy squarely in its sights as it lumbered forward.
Through support from a few unlikely sources, Walton Butterworth, (whom Walter Gordon had once
said should never have been let out of the US), and Henry Ford, the President of the Ford Motor
Company, as well as an American intent not to do anything that could do serious harm to
continental relations, the countervail was avoided through the negotiation of a more far-reaching
agreement which came to called the Auto Pact. That suited senior Americans, like George Ball, the
undersecretary of state, who had noted that if an agreement was not reached on the issue between
the two, “we will be hit by something harmful to the economic interests of this country.”xxxii The
solution was to opt for managed trade in autos and parts. The president was told what the agreement
entailed:
Both Canada and the United States would eliminate tariffs on automobiles and most
automobile parts originating in the other country.
The Canadian government would make a side deal with the major automobile producers who
operated on both sides of the border; the producers would commit themselves to increase
somewhat the fraction of their output originating in Canada. The shift is to take place over
four years and would be made easy by the rising market for automobiles both here and there;
it should cause us very little trouble.xxxiii
That’s what the memorandum writer, McGeorge Bundy, thought, and he could not have been more
wrong. Indeed, right from the negotiation of this agreement, Canadians wondered why Congress
19
would approve it, given its bias in their direction. They immediately saw the minimum percentage
of production guarantee as a massive commitment, and they were correct.
The agreement was signed on 16 January 1965 by the prime minister and the president.
Ottawa then amended its order in council to provide that duty remissions should not be paid as a
result of any exportation of auto parts after 17 January. This brought an end to the countervailing
duty investigation, satisfying both sides but not, of course, Modine – for the company it merely
entrenched an untenable situation. However, the big news for Canadians was the immediate relief
the Auto Pact brought to the country’s balance of payments situation: Canadian vehicle production
was up by 35 percent in 1966 over 1964; employment was up by 27 percent; and, Canada’s car
exports to the US rose from US$75 million to US$900 million. Ottawa was ecstatic and President
Johnson had every right to tell Charles Ritchie that he had been “screwed” on the deal. That was the
case as the results of the deal became more obvious in the fullness of time – while US producers
had a surplus in the automotive-related current annual balance of payments with Canada from 1965
to 1967, from 1968 to 1973, the balance was in deficit by an annual average amount of almost
US$300 million. In 1969, the United States had its first overall trade deficit with Canada during the
20th century and cars were a significant contributing factor. The safeguard provisions, guaranteeing
the country a certain percentage of production, were partly to blame for that. When Americans
wanted to address that issue in 1967, Canadians did not; the timetable for doing so which had been
discussed but had not been included as a part of the agreement – again, there was something about
the letter and spirit of agreements involved here.
Eight Years of Tremors Leads to One Big Earthquake
The Nixon Shock of 15 August 1971, Tom Zeiler’s contribution to this workshop, was one
attempt by Americans to reverse the past decade of American economic and financial decline, and
20
do likewise to North American economic and financial history. Contrary to the usual interpretation
of the period, that Ottawa was a patsy for US interests, it is clear that it was not.xxxiv Canada proved
to be a demanding and assertive neighbour, (perhaps too demanding and assertive), very conscious
of its influence in the face of American power and willing to play brinksmanship when it suited. As
Brian Tomlin and Peyton Lyon have correctly observed, not all the aces lie with the stronger power
in international affairs. In certain areas Canada was able to exert its influence to bring the United
States to its point of view: “[T]he Canadian policy community is smaller and better able to
concentrate its main attention on relations with Canada’s giant neighbour.”xxxv
The incidents portrayed in this paper served to sensitize Americans to the perils and pitfalls of
dealing with Canada as George Ball’s comment, noted above, suggests. The Auto Pact was a game
changer to be sure. That, taken in conjunction with the various Canadian exemptions, and Canadian
attitudes, contributed toward a perception of an aggressive and demanding Canada that was out only
for its own benefit. In the Ottawa mindset it seemed that to give was never better than to receive, or
so senior Americans came to believe. That sense grew stronger in Washington as the decade ground
on despite the fact that the objective reality, viz. that Canada contributed more finance to the US
than it borrowed, did not change.
The decade was also an economically and financially tough one for both countries as they
struggled with such developments as the evolution of the European Economic Community and its
impact on trade patterns and relationships or the results of the Kennedy round from 1963-68, the
most significant General Agreement on Tariffs and Trade negotiation undertaken to that point
undertaken. As well, inflation became a bigger problem in the ‘60s than it had been earlier, most
notably during the later years of the decade. That exacted a cost in terms of higher interest rates and
carrying charges. Similarly, the once-believed-impossible phenomenon of a US dollar surplus
21
became a reality as Washington printed the money it did not have to fight a war and to provide for
the Great Society. As that process gathered pace others, who had kept some of their reserves in US
dollars now asked for the gold that backed the currency. The British and the French were
particularly adept at this, despite American requests that countries not ask. That, also, proved to be
unsustainable and was one of the factors driving Washington to reconsider the link established in
1944 at Bretton Woods. In short, a dollar overhang existed where American gold could not possibly
cover the dollars now pouring out around the world; by 1971, US gold assets totaled roughly US$10
billion while liabilities to foreigners were about five times that.xxxvi Speculators also rushed into
what seemed like a potentially lucrative market, putting further pressure on the currency. The link
was severed on 15 August 1971 because, Paul Volcker, the undersecretary of the treasury for
monetary affairs, was to say, the US “had come to the end of the line.”xxxvii Little did he know how
true those words were: from 1971 to 2009, there has only been one year, 1973, where the US has
had a balance of payments surplus, and then of only US$1.9 billion. In every other year,
astoundingly, deficits have been the norm.xxxviii
In one sense US policy makers were helpless in the face of developments they did not really
understand. How could the turnaround have happened so quickly, from global economic colossus
to, while still important, an economic and financial power of lesser stature. A big part of the reason,
of course, was of their own doing with war and an ambitious domestic program, but they were
reluctant to blame themselves – Canada and Japan fit that role nicely. The 1999 song, “Blame
Canada,” is not inappropriate in these circumstances:
Times have changed/Our kids are getting worse/They won't obey their parents/They just
want to fart and curse!/Should we blame the government?/Or blame society?/Or should
we blame the images on TV?/No, blame Canada, Blame Canada/With all their beady
22
little eyes/And flapping heads so full of lies/Blame Canada, Blame Canada … Blame
Canada, Shame on Canada/For...the smut we must stop/The trash we must bash/The
laughter and fun/Must all be undone/We must blame them and cause a fuss/Before
somebody thinks of blaming uuuuuuuuuuuuuuuuuuuus!!!!
Conclusion
US perceptions of Canadian-American economic and financial relations during the 1960s
were cumulative, and potentially damaging for the smaller partner. They also led in a fairly straight
line to the Nixon Shock when Canada, along with Japan, was seen as a significant part of the
problem. Americans might have had a point. As Tomlin and Lyon have suggested above, Canada
was blessed with a surfeit of excellent officials, as well as some politicians. They knew their files
and pursued an ambitious Canadian interest in all negotiations. The fact that they were often
successful speaks to their ability to focus discussions in a way that Americans, given their global
responsibilities, could not. Those same officials and politician have been castigated for “selling out”
Canada to the US for the security it promised; when 1960s and 1970s left-nationalists like Melville
Watkins, Abraham Rotstein or James Laxer berated Canadian leaders, they might have been correct.
However, when they claim it was done by a compromised and effete Canadian continental elite,
they could not have been more incorrect. Walter Gordon? Louis Raminsky? Simon Reisman?
Mitchell Sharp? Whether one agrees or not with how they focused Canada’s development in the
‘60s, none of those men could be described as weak or accommodating. They knew the Canadian
interest and they hewed to it as closely as circumstances allowed. That, eventually, brought them to
August 1971.
23
Appendix I
U.S. Balance of Payments
Value in $ millions
1960 through 1971
Year
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
Balance of Payments Total
3,508
4,195
3,370
4,210
6,022
4,664
2,939
2,604
250
91
2,254
-1,302
US Balance of Merchandise Payments
Value in $ millions
1960 through 1971
US Balance of Invisible Payments
Value in $ millions
1960 through 1971
Year
Total Merchandise Trade Balance
Year
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
4,892
5,571
4,521
5,224
6,801
4,951
3,817
3,800
635
607
2,603
-2,260
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
Total Invisible Trade Balance
Source: http://www.census.gov/foreign-trade/statistics/historical/gands.txt
-1,384
-1,376
-1,151
-1,014
-779
-287
-878
-1,196
-385
-516
-349
958
24
i
Where e = exemption and S = Shock.
ii
The language has become very public. See, for example, Lee Anne Goodman, “Trudeau
Lectures Rambling Nixon in Long-Lost Recording,” 7 December 2008. Accessed at
http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20081207/trudeau_nixon_08120
7/20081207?hub=TopStories
iii
Theodore H. Cohn, Global Political Economy: Theory and Practice, (Toronto:
Longman, 2000) 149.
iv
Charles Ritchie, Storm Signals: More Undiplomatic Diaries, 1962-1971, (Toronto:
Macmillan, 1983)
v
See, for example, an article written soon after the end of the decade attempting to
explain the process. Frank S. Wert, “A Product Cycle Model of the Balance of Payments
Impact of U. S. Based Multinationalism” Journal of International Business Studies, Vol.
4, No. 2 (Autumn, 1973) 51-64. Wert writes that “There has been considerable interest in
the past decade in assessing the real effect of direct foreign investment … on the balance
of payments of the lending country. This interest has been particularly intense in the
United States, as various national policy measures have been implemented to correct the
severe US balance of payments deficit.” (51)
vi
Robert Triffin, The Balance of Payments and the Foreign Investment Position of the
United States, (Princeton, NJ: International Finance Section, 1966) 2.
vii
National Archives of the United Kingdom, T299, vol. 182, M.H. Parson to Sir Denis
Rickett, 11 December 1962.
viii
James Powell, 99.
ix
Bank of Canada Archives, Ottawa, ON., LR76-552-7, Louis Rasminsky,
“Memorandum,” 2 January 1962.
x
Rasminsky, “Memorandum,” 2 January 1962.
xi
LR76-523, Bryce to Diefenbaker, 18 June 1962.
xii
Federal Reserve Board Records, Paul Gekker to Board of Governors, 27 June 1962.
xiii
LR76 -373-12, Treasury Secretary Connally on the Today show.
xiv
For an account of how the IET works, see Bruce Muirhead, Against the Odds: The
Public Life and Times of Louis Rasminsky, (Toronto: University of Toronto Press, 1999)
251.
25
xv
For an account of this, see Stephen Azzi, Walter Gordon and the Rise of Canadian
Nationalism, (Montreal and Kingston: McGill-Queen’s University Press, 1999)
xvi
Ritchie, Storm Signals, 52.
xvii
United States National Archives (USNA), Department of State Records (DSR), 19641966, Econ Finance Box 841, file 12, Balance of Payments Can-US, 1/1/64, Livingston
Merchant, “Memorandum for this File,” 9 October 1964.
xviii
USNA, NSF: Box 19, file: Canada, General, 11/9/63-12/2/63, Ottawa to SecState, 15
November 1963.
xix
LR76-365-31, “Conversation with Secretary Dillon,” 10 December 1964.
xx
Library and Archives Canada, Department of External Affairs Records, Vol. 6057, file
50316-8-40, “Discussions between Walter Gordon and George Ball,” 2 August 1963.
xxi
See Muirhead, Against the Odds, 265.
xxii
Lyndon Baines Johnson Presidential Library (LBJL), Austin, TX, B/P – Canada,
Dillon to the President, 8 February 1965.
xxiii
LR76-367-63, “Notes for Discussion with the US,” 22 November 1965.
xxiv
Indicate
sterling
crises
here.
xxv
“Trade: Can the US Still Compete? Time, 10 May 1968. Accessed at
http://www.time.com/time/magazine/article/0,9171,902220-3,00.html
xxvi
LR76-525-52, “Meeting of March 3rd.”
xxvii
Michael Hart, “The Auto Pact: Forerunner of Free Trade,” Policy Options, December
2002-January 2003, 84. Charles Ritchie, then Canada’s ambassador to the United States,
attributes this to Lyndon Johnson.
xxviii
Bruce Muirhead, Dancing Around the Elephant: Creating a Prosperous Canada in
an Era of American Dominance, 1957-1973, (Toronto: University of Toronto Press,
2007) 70. See also USNA, NSF, Box 19, file: Canada, General, 11/9/63-12/2/63,
Butterworth to Secretary of State, 15 November 1963. Later, when speaking with Pearson
about the Canadian balance of payments issue and the trade in autos and parts more
generally, the Canadian prime minister asked the US ambassador why his country had not
reacted when the Diefenbaker government had passed measures designed to stimulate the
export of cars and parts. Butterworth responded, noting: “that this was a significant
illustration of one aspect of how Canadian-American relations are conducted and should
not be conducted: that if the Canadian action … had been taken by a friendly European
country, we would have immediately reacted adversely, but since we were instinctively
26
predisposed to treat Canada in a very special category, we did not. By the same token,
Canada, having taken an inch and not having been called, then was prepared to take a
mile.”
xxix
Memorandum from Secretary of State Rusk to President Johnson, 12 December 1963,
in Foreign Relations of the United States, 1961-1963, Vol. 13, 1217.
xxx
See Greg Donaghy, “A Continental Philosophy: Canada, the United States and the
Negotiation of the Auto Pact, 1963-65,” International Journal 53 (Summer 1998), 453.
xxxi
LBJL, Box 165, Country File – Canada Memos, Memorandum for the President,
“Report on meeting of Joint US-Canadian Committee on Trade and Economic Affairs,” 1
May 1964.
xxxii
LBJL, George Ball Papers, Box 1, file: Canada 1, Telcon Ball to Katzenbach, 9
December 1964.
xxxiii
LBJL, NSF, Box 165, Country file – Canada Memos, vol. 2, McGeorge Bundy to the
President, 27 November 1964.
xxxiv
See, for example, Kari Levitt, James Laxer, Abraham Rotstein, Melville Watkins.
xxxv
Peyton Lyon and Brian Tomlin, Canada as an International Actor (Toronto: Macmillan
1979), 108.
xxxvi
F. Boyer de la Giroday, “Myths and Reality in the Development of International
Monetary Affairs,” Essays in International Finance, No. 105, (Princeton, NJ:
International Finance Section, 1974.)
xxxvii
xxxviii
LR76-373-14, Washington D.C. to Ottawa, 26 August 1971.
See “U.S. Trade in Goods and Services - Balance of Payments Basis, Value in
millions of dollars, 1960 through 2009,” 11 March 2010. Accessed at
http://www.census.gov/foreign-trade/statistics/historical/gands.txt