Where are Canada and the U.S. Going?

The effort of U.S. manufacturers (and they account for most of the investment) to "get close to the market", to establish behind the tariff wall, seems largely complete. The new firms, once established, have grown by plowing back much of their earnings.

In many industries, the United States has become a more attractive place to locate. Over the past ten years, unit wage costs in manufacturing increased almost twice as much here as there. Canadian costs in many sectors now exceed U.S. costs. The trend continues.

Other countries have proved more attractive. In the early 1960's one U.S. direct investment dollar out of three came to Canada. Now it's one dollar out of six.

Finally, uncertainty inhibited some investors as Canada debated attitudes toward foreign investment and acted to control it.

The other side of these developments is growing Canadian direct investment in the States. Ten years ago such flows were insignificant, but in the 1970's they have greatly increased. Now Canadians are investing almost as much in the U.S. as Americans are in Canada. Like U.S. firms before them, large Canadian enterprises are trying to get close to the market. And they often bring advanced technology with them.

Are these trends likely to continue over the next several years? The answer is probably yes. For one thing, it will take some time for Canada to correct the shift in its competitive position.

Moreover, the climate for direct investment remains uncertain. American investors are sensitive f6 the special concern of Canadians to foster viable Canada-based enterprises. That is in both our interests. But U.S. investors have begun to wonder whether the deck isn't gradually being stacked against them. They wonder how far the controls will go, now that they have begun.

I leave to you whether this drying up of direct investment from the States is good or bad. It is costing you some entrepreneurship, advanced technology and capital you would otherwise receive. On the other hand, it responds to the desire of those who would wish to see the role of U.S. enterprise in the Canadian economy diminish.

From a U.S. point of view, there are three things to be said about the new trend.

First, we have no need to export capital. We don't have enough ourselves to meet our needs for expansion, energy invulnerability and the environment.

Second, we would be concerned, as I know you would be, if our investment relationship were marked by disputes and misunderstandings.

Third, investment is of such importance to the future well-being of the United States and Canada that a cooperative approach would seem to be in both our interests.

Now, let me turn to resources. One of the great myths of Canadian-American relations is that you produce raw material and trade them against our processed goods. You are, so the saying goes, "hewers of wood, drawers of water", while we do supposedly more noble work.

Not in agriculture. We sell you $1 billion a year more than you sell us.

Not, and this is important, in crude material other than energy. In this sector our trade is balanced.

Nor will the energy sector any longer show a lopsided Canadian surplus. When you phase out oil exports, your coal purchases from us will be half as big as your gas sales to us. And they are growing.

In goods processed from non-renewable crude materials, like chemicals, iron and steel, non-ferrous metals and manufactures, we have a big two-way trade that gives you a surplus of $1 billion.

You do have a big surplus, about $3 billion, in goods processed from renewable forest products, such things as lumber, pulp, newsprint and paper. But whether it will remain that big in the face of the challenge now coming from the forest products industry in the southern U.S. remains to be seen. Already we export to other countries nearly as much in forestry products as we import from you. It seems that we are in competition with you as "hewers of wood". Nor, I should add, do U.S. enterprises in Canada confine you to the role of raw material producers. Exports of oil, gas, ores and wood account for less than a tenth of their sales.

They mean that if you have a lot of "commodity power" in trade with us, we have just about as much in trade with you.

They mean that if you have both advantages and disadvantages in trading commodities, so have we.

They mean that the two of us should be able to discuss the future of commodity development from about the same point of departure.

As you know, there are few subjects more controversial than the future of raw-material supplies, particularly non-renewable ones. There are those who insist that the world is approaching the limits of growth; that scarcity will dominate; that raw materials will get progressively more expensive relative to everything else. There is also the view that capital and technology will make development of less rich lands and ores possible in the future as they have in the past and do now. Frankly, nobody knows the answer, and Vs easy to go broke betting too heavily on one approach or the other. But some things can be said.

One is that new commodity development in your country and mine will be enormously capital intensive. Even in well-established industries like nickel and iron, new capacity requires several times as much investment for each unit of output as ten years ago. For new industries, like deep sea-bed mining, oil shale and tarsands, the multiples are bigger. The question is: how is capital on this scale going to be raised?

Secondly, going it alone is an option for both our countries. It is not an attractive one for us. At the present time, the U.S. is, on balance, self-sufficient in commodities. We import a lot of energy; export a lot of foodstuffs, and balance out in all other commodities taken together. If commodity prices are to double, we would move towards a net surplus position. We would eventually substitute our vast aluminum-bearing clays for imported bauxite; produce most of our own non-ferrous metals and fertilizers rather than import them, and so forth. But going it alone would be enormously expensive for us, just as it would be for you or any other country.

Third, the present world tariff structure impedes efficient location of raw materials processing.

This is a point Canada has often made. All the main trading countries--the U.S., Japan, the Europeans, you too--charge higher tariffs on processed than on crude material, a practice known as "tariff escalation". A more rational structure of world trade could emerge if escalation were reduced. At the same time I should caution that it is not always possible to predict whether a country will benefit economically from higher processing. It can help create managerial and technical capabilities that otherwise would not exist. It is often energy-consuming, and may not be a high-profit operation, unless undertaken on a large scale.

Fourth, it should be possible to make more efficient .use of raw-material capacity in our two countries than at present. Commodity markets tend to be highly cyclical, with periods of over-capacity succeeded by supply crunches. Co-ordinated efforts to build national economic stockpiles and use them counter-cyclically could keep capacity at work during the slumps and obviate the need for extra capacity at the peaks. Economic stockpiles, however, would themselves require major capital investment.

My conclusion is this. Both Canada and the United States would like to have it both ways. Where we are consumers, we want low prices and secure supplies. Where we are producers, we want market control and high processing.

But do we not need each other in so many ways: to mobilize capital; to rationalize markets for processing industries; to provide a two-way flow of crude materials; to stabilize commodity markets, that we could both benefit by a broad co-operative approach here too?

One of the most difficult problems in organizing the relationship between Canada and the United States is the difference in size. Canadians often point out that U.S. economic influence in Canada through investment and trade is incomparably greater than Canadian influence in the U.S. This is true. Yet your actions, as our greatest trading partner and, as one of our principle foreign investors, impact with great force on the livelihood of millions of Americans.

You sometimes say that it is like being in bed with an elephant. Americans, too, wonder how to cope with Canada, because we may be confronted with the choice of not reacting, or of taking an action that could have a disproportionate effect on you.

Clearly, we cannot establish unequal rules for our relationship. You don't want it. We don't want it.

But we both must exercise a particular forebearance. Americans must be sensitive to the special constraints imposed by the pervasive character of our economic presence in Canada. Canadians should not be indifferent to the impact of their actions on the United States, and should be aware of our efforts not to over-react.

And we can look to multilateral negotiations, bargaining designed to respond to the interest of many countries of various economic sizes, to establish disciplines within which we both can live.

How could this approach apply to investment and resources?

First, we could try to improve the investment climate by creating agreed international standards for the obligations and rights of foreign enterprise in each of our countries. We often say that U.S. enterprises in Canada must be good citizens. I think they are. But you have your standards and so have we. Should we not articulate by international consensus what we mean by good citizenship?

At the same time that we ask foreign enterprise to be good citizens, should they not also be assured that they will be treated the same way as national firms? Clearly there would have to be some exceptions, such as national security. Such an assurance would also leave open the possibility of refusing initial establishment to any foreign enterprise. But it would give stability to enterprises that are admitted and thus provide a firmer basis for investment decisions.

Negotiations on guidelines of this kind, not legally binding but a moral commitment, are now almost completed in the OECD (Organization for Economic Cooperation and Development). We hope that Canada will be able to join in the consensus, which would help prevent investment disputes that could otherwise arise between us.

Second, we could use the developing pattern of consultation between our countries to provide early warning and help identify solutions in the investment field, as well as others, so that disputes do not unduly affect the over-all investment climate. No matter what institutional arrangements we make, investment disputes will inevitably occur from time to time. We understand that your authorities will wish to review investment at first entry against standards of benefit to Canada. Provided you give us the same treatment as other countries, this is not an issue between us. But we would be concerned if you use your review powers to disadvantage U.S.-owned firms already established here in favour of their Canadian-owned competitors.

Third, we can use the current multilateral trade negotiations to move toward a more rational structure of raw material processing. This is a high-priority Canadian objective, and we agree with it.

In these negotiations the United States has just tabled a proposed rule for across-the-board tariff cuts which would, among other things, decrease tariffs on most processed goods by 60%. We hope Canada will give serious attention to our proposal, which meets many of your objectives. Similarly, we are prepared to consider how the Canadian proposal of sector negotiation can be used as a complementary technique.

Fourth, we can also use the multilateral trade negotiations to define and exchange for the first time undertakings on security of supply. This would involve, in return for comparable concessions, commitments to refrain from imposing quantitative restrictions or taxes on exports.

Fifth, should we not join together in multilateral action to stabilize commodity markets? The United States put forward a series of proposals to this end at the UN Special Session last September. The UNCTAD meeting that starts next week in Nairobi will be an important forum to consider such questions as how to finance buffer stocks, how to negotiate commodity arrangements, and how to provide new funds for commodity production in developing countries.

Finally, should we not use our consultative processes to anticipate and plan for shortages or other supply shocks. Gas is an area in which shortages on both sides of the border are possible this decade. We should plan for them in advance.

Since I've been in Canada I've heard about something called "Continentalism". I haven't actually met a "Continentalist" on either side of the border, so there can't be very many of them. For it simply is not true that what's good for the United States is necessarily good for Canada and vice versa. We have much in common, but our interests are not always the same.

I have also heard a good deal about "Canadian economic nationalism". Canadians tell me they want to assert a specifically Canadian economic identity, even if that means foregoing some advantages or accepting some costs.

O.K., Americans understand and accept that. We can and indeed have adjusted to it. After all, it's not as if nationalism were unknown on the other side of the border. We can do it too, and sometimes do.

But just because we have separate identities doesn't mean that we can't work together. Just because our interests are different doesn't mean that co-operation won't be of benefit to both of us.

Both our societies will have major requirements for the efficient use of scarce capital and resources in the future. Yet in these areas we are in danger of letting our differences dominate the relationship, and block out our opportunities.

What I would like to ask today is whether we haven't reached a symmetry in your interest and ours investment and resource flows roughly balanced on each side--from which we can set a new direction?

If we have, the United States is ready to co-operate with you, in both a bilateral and multilateral framework, in finding new expansionary solutions.

Our distinguished guest and speaker was thanked on behalf of the audience by Mr. Arthur J. Langley, a Past President of The Empire Club of Canada.