OCTOBER 30, 1980
Canada and the United States: Casual Neighbours, Critical Partners
AN ADDRESS BY David Rockefeller, CHAIRMAN,
THE CHASE MANHATTAN BANK
JOINT MEETING of The Canadian Club of Toronto The Empire Club of Canada
CHAIRMAN Reginald Stackhouse, President The Empire Club of Canada
Ladies and gentlemen: To speak of our world as a global village is a commonplace, but not all of us appreciate that one reason this planet has become a community is the constant flow of information, negotiation, and conciliation through the corporate network that spans the globe.
Every four years the competition for the White House becomes such an all-consuming passion, for not only Americans but Canadians too, that we might assume there could be no greater honour conceivable than to become President of the United States. But according to one biographer, for David Rockefeller to be elected President would be a demotion!
That extraordinary claim was based not only on his having headed, for many years, one of the largest banks in the world, but because of the national and international significance of his bank's operations, and also the style with which he has conducted its affairs. On behalf of the Chase Manhattan Bank, he has travelled tirelessly throughout the United States and has made repeated visits to most of the world's capitals and business centres, establishing and maintaining connections with leaders of government and finance on a scale enjoyed by few heads of state. His bank is said to have so many representatives in so many countries that its chief has what amounts to his own diplomatic corps.
To many, it seems almost to be expected that someone with the name Rockefeller should be head of a bank, but the fact is he is the only member of his large family to make banking his career. After studies at Harvard, London and Chicago, where he took a PH.D. in economics, our distinguished visitor entered the bank where, apart from years spent in World War II service, he has worked ever since. But there has been much more to him.
Although the name, David Rockefeller, connotes high finance the world over, our guest of honour has not been confined to banking for his interests. He is, for example, an expert entomologist (a beetle is named after him). He is a renowned collector and judge of art.
Convinced of the social responsibility of the capitalist system, he has devoted himself also to so many projects of civic betterment that he has twice been asked to run for mayor of New York. He has also been twice sought for the position of Secretary of the Treasury, and also for that of Secretary of Defense. He has been a leading member of the Council on Foreign Relations, an organization for the study of world affairs so prestigious and influential it has included every Secretary of State since World War I with only two exceptions.
Five hundred years ago the Renaissance ideal was the universal man, the person whose interests and talents transcended the narrow restrictions of the twentieth century specialist--the person who learns more and more about less and less, until he knows all about nothing, and then gets his PH.D.! Our speaker does have a PH.D., but he is a universal man, and it is my privilege now to present Mr. David Rockefeller.
Good afternoon. It's truly a pleasure for me to be here today. Toronto is one of my favourite cities, and I haven't had the chance to see it as often as I'd like.
I'm also very honoured to be here. Both the Empire Club and the Canadian Club have long provided a valuable public forum to air issues of considerable political and economic importance. The tradition is a venerable one, and I'm delighted to be a part of it.
Still, I have to confess I'm surprised to see all of you meeting under the same roof. I always thought the only time both your organizations might get together would be to hear Anne Murray sing!
Some of what I have to say today, I'm afraid, is not a cheerful song. We face, throughout the world, a frightening degree of political instability--from the invasion of Afghanistan to the turmoil in Southeast Asia, from the war in Iran and Iraq to the violent political antagonisms in Central America. These are, indeed, unsettled times.
By comparison, the differences between Canada and the United States are clearly minor irritants. To be sure, a major treaty on fisheries lies unratified. And squabbles continue about advertising on U. S. television stations that broadcast into Canada.
Even so, our two nations manage a border five thousand miles long more casually than neighbouring countries anywhere else in the world. Though we in America feel close and warmly toward our Canadian neighbours, we have learned not to take Canada for granted. We also have come to recognize the validity of your desire to do things your own way. We should be able, on both sides of the border, to acknowledge the differences that exist while remembering the vast interests we have in common. Certainly it was in this spirit that your government rescued several Americans from Tehran last winter, an act which touched the hearts of all of us in the United States.
Besides, if there is one constant in our otherwise troubled world, it is the inexorable momentum with which our two economies, as well as the global economy, have become increasingly integrated and interdependent. Since the end of World War II, global trade has grown by a startling degree. Canadian-U. S. trade is a prime example. Last year alone it amounted to ninety billion dollars.
So, what I'd like to do today is explore some of these Canadian-U. S. trade links in the context of the current world trade situation and the problems that bear on it. These problems include:
- world-wide instability and the global economic slowdown;
- the resulting pressures on global trade;
- the international imbalance of payments; and
- the growing sentiment toward protectionism in the U.S. and elsewhere.
The chief problem right now, of course, is the recession that's beleaguering most of the economies of the world--including Canada's. As I'm sure you know all too well, Canada has had its first real recession since 1954. Gross domestic product declined by more than 1.5 per cent here in the first half of the year, although Alberta and British Columbia have been largely unaffected.
In the United States, our recovery appears very mixed. Despite a surprisingly strong showing for business activity in the third quarter, there are still elements of heavy drag in the economy. Maybe the election next week will help clear the air, although I must say the campaign thus far hasn't helped to clarify much.
What's evident now is that the U. S. recession appears less severe than many feared a few months ago. The downturn in Europe, by contrast, may be sharper than most people expected. Europe's slide into recession didn't actually start until the second quarter, so there may not be any positive growth across the Atlantic before the first quarter of next year. Even Japan is facing some problems. Although it should technically avoid a recession, domestic demand is now weak in Japan and it may well be next spring before there's significant recovery.
The recession, in short, is taking its toll. Output among oEcD countries--and the newly industrialized countries as well--is down; unemployment is up.
The good news in all this, if one can find good news in it, is evidence that this recession won't be nearly as severe as what occurred in 1974-75. At that time the world had been jolted by the initial leap in petroleum prices. The recent oil price hike, of course, is a major factor behind the current recession. But unlike last time, both North American and European economies are in a better position to withstand the initial effects of the price increases. As a result, the recession has not been as deep.
The bad news, however, is that the recession has not purged our economies of inflation. Here in Canada you have a special problem with inflation right now as you work to bring domestic oil prices more in line with international levels.
In most industrialized countries, inflation has, if not stopped, at least slowed down. In fact, there's now some hope that consumer price inflation may have peaked last spring. If the conflict between Iran and Iraq doesn't disrupt Middle Eastern oil production too long, there's even a possibility that inflation may abate noticeably in the major industrialized nations next spring. We can all take some consolation in that, although the assumption on which it is based may not prove to be justified.
On the other hand, what the recession did do was to disrupt and curtail long-standing trade patterns. This tends to make for a very ragged recovery worldwide. As you would expect, world trade volume also is down. Based on recent growth rates, trade volume should have expanded by six per cent or more. Yet this year we'll be lucky to see any increase at all over last year. And in 1981, volume is unlikely to climb more than three or three-and-a-half per cent.
For Canada and the United States the problem has a special cast to it. Because we are each other's biggest and closest trading partners, both countries suffered when the bottom fell out of the North American automobile industry this year. One reason your export volume declined earlier this year was the drastic reduction in demand for automotive products. Ultimately I have confidence that our automobile industry's decision to build a product competitive on a world scale will pay off--even if it was a belated and painful decision. Until the payoff begins, though, it will continue to strain our two economies.
This also has put some strain on the automotive product agreement between our two nations. I am hopeful those strains will ease as the large investment in the Canadian auto industry this year comes on stream, and as the product line allocated to Canada shifts away from larger, less economical autos. The agreement, of course, is a major underpinning for U. S.-Canadian trade. It's considered a model for how two nations can merge their respective economic goals to mutual advantage. While it may be necessary to make adjustments from time to time, I think the agreement fundamentally is sound. In fact, I would urge that we explore the possibility of working as closely in other sectors of our economies.
Meanwhile, there is another problem whose potential impact on world trade financing could be enormous. This is the dramatic increase in the imbalance in international payments which began last year with the latest round of oil price hikes.
It is estimated that the combined current account surplus of the opEc states will be around $120 billion by the end of this year, and it would still run close to $94 billion next year. The composition of that surplus may change as a result of the war between Iran and Iraq. But it's unlikely that the size of the surplus will shrink much.
The source of all this surplus money piling up in OPEC hands is the large deficit being assumed primarily by the industrialized countries, but also, to a significant degree, by less developed countries.
The last time opEc accumulated such a huge surplus there was considerable concern over how to recycle the so-called petro-dollars, how to put the money to work in industrialized and emerging nations who needed it. In fact, it turned out to be less difficult than most people expected. This was due to the fact that the international private banking system--including, importantly, the Canadian banks--accomplished the job through the Euro-currency market more effectively than anyone thought possible.
Now the whole problem is back in our laps again. It has particular ramifications for the less developed countries and their trade efforts. In view of the debt load they carry as a result of the first oil price upheaval, there has been considerable pessimism about trying to refinance them once more. Put another way, the question is: Can the global financial system do it again?
My answer is a qualified yes--qualified by the measures that international organizations and the opEc nations are willing to take, as well as those of the banks. The private banking system simply cannot assume as much of the risk as it did last time. So I would look to official lending agencies, such as the IMF and the World Bank, to increase both their loan volume and their capacity to make loans. Also, the opEc nations with a significant surplus should play a larger role, either through direct lending or through the international agencies.
As they did last time, I expect Canadian banks will once more play a sizable role in assisting the recycling process. And, as happened before, not all the recycled funds will find their way back to the less developed countries. In its broadest sense, recycling also includes the movement of surplus capital through private investment channels back to the fully industrialized nations to help stimulate industrial expansion and underwrite trade.
Here in Canada, for example, it has been estimated that the expansion of your domestic gas and petroleum industry over the next ten years will require at the very least investment capital in the $250 billion range. A substantial amount of this, as your government acknowledged in its new budget earlier this week, simply will have to be raised abroad. What's more, in view of the Canadian-ownership objectives spelled out in the new budget, most of that foreign capital would have to take the form of debt financing. One thing that this suggests, it seems to me, is the need for a bigger role for international banks in helping underwrite your twin national goals of increased production and broader Canadian ownership. How acceptable this will be to the various parties involved remains to be seen.
Today's world no longer permits even the most isolated of economies the luxury of being totally self-supporting. We all rely on trade. We have to. And despite all the political upheavals and turmoil in recent years, I believe we have made good progress on setting rules and guidelines for world trade.
One example is the recently concluded Tokyo round of GATT negotiations. For the first time there has been some substantive agreement on reducing nontariff barriers to trade. These barriers include everything from special government subsidies for specific industries to the practice of unloading or "dumping" goods in a foreign market at prices below what is charged in the domestic market. They have been a particular sore point with American industry for a long time. I call them the "guerrilla warfare" of international trade. Unrestricted until now by formal trade agreements such as GATT, they have often struck at the heart of our industry, sometimes targeting certain industries in what amounts to sabotage of formal trade arrangements.
The agreement coming out of Tokyo dealt not only with government trade subsidies and anti-dumping, but also with customs valuation practices and industry standards. The standards issue is especially interesting. What the GATT countries have agreed to is that governments should not be allowed to set domestic product standards which amount, in effect, to a protective device to keep out imports. And under the new agreement, it will officially be permitted for any country which finds itself hurt by such standards to retaliate with its own standards. This is a necessary step in the right direction.
Despite all the progress made through GATT to open up trade and equalize trade opportunities, there remain some significant inequities in areas where foreign and domestic competition meet. Ironically, these inequities are occasionally self-inflicted by the host nation. To take an example I am very familiar with, foreign banks have far more latitude in the United States than American banks. They are not restricted by the same rules, especially the same anti-trust rules, that apply to American institutions. Some can bank across state lines and buy up other banks--privileges generally not permitted American banks. Their reserve requirements are less onerous too. The most important point, however, is that the U.S. has welcomed foreign banks, and they, in turn, have made constructive contributions to our overall banking system.
So we view with much interest the Federal Bank Act revisions anticipated here in Canada later this year. Allowing foreign banking companies to establish fullscale banks in Canada--not just the "near banks" they now have--is a welcome move. Despite the restrictions imposed on capitalization, we feel the Bank Act is a significant first step. But it still leaves a disparity between the broad freedoms allowed Canadian banks in the United States and the restrictions on American banks in Canada. Our hope is that, in the not too distant future, Canada will remove some of these lingering restrictions. Clearly, it is unlikely foreign banks will suddenly dominate Canada. I must say it's hard enough to compete with Canadian banks in New York, much less on their own turf!
I raise this point because a feeling of protectionist sentiment has recently begun to emerge in my own country. And it concerns me. In the last few months we in America have heard more than a few calls to batten down the hatches against imports, to protect our workers from foreign competition and our industries from foreign innovation. Feeding this protectionist sentiment is the public's perception, correct or not, that some of our trading partners are unwilling to open up their markets. I suspect this sentiment echoes the public outcry that occasionally surfaces here against the U. S. business presence in Canada.
Let me make clear that Canada has not been the target of the protectionist outburst in the United States. This sentiment is generally directed elsewhere, a fact which again illustrates how closely our two economies are tied and how readily we have been able to manage our trade relations. However, as we move ahead in the coming years--as I think we must--to broaden our trade relations even more, this sentiment in America will not make negotiations any easier. At the same time, national attention here necessarily is being focused on the constitutional questions now facing Canada. I simply hope that the whole question of closer trading ties doesn't get overwhelmed by the press of other issues, or put off into the distant future.
In the end, it seems to me, sharing as we do a common democratic heritage and having many interests in common, we will avoid the mistake of letting petty irritations override our mutual goals. Minor problems of one kind or another between our two countries will probably never be entirely eliminated. But I am confident that as nations we can be mature enough to rise above these small differences and co-operate on all matters of mutual importance. Canada and the United States have been such strong partners for so many years now that it is certainly essential to us--and to the world--to continue that partnership without interruption. It is in this spirit, I believe, that we must approach the months and years ahead.
The thanks of the clubs were expressed to Mr. Rockefeller by Mrs. Margaret Scrivener, First Vice-President of the Canadian Club of Toronto.