The State and Foreign Trade

MR. GEORGE S. MATHIESON: As this is Foreign Trade week in Toronto, it was suggested to me that this would provide a subject about which I might address a few thoughts to you.

I think you will all agree that Foreign Trade is one of the most vital elements in Canadian economy.

On all sides, both at home and abroad, we hear talk of the wonderful natural resources of this land of ours, resources which, in volume, are far beyond what we need at home, and we are told how necessary some of them are to the peoples of the world, especially in Europe and Asia.

Twelve millions of people cannot possibly absorb the abundance of wealth that Canada can, and does produce, in richer profusion year after year, both industrially and agriculturally.

It is of prime importance, therefore, that the channels of trade, through which our surplus resources flow to other markets throughout the world, should be kept as free as possible of obstacles which tend to interrupt or impede that flow.

On the other hand there are commodities and goods that are necessary, or desirable, for our higher standard of living, that cannot be produced, or at least as efficiently produced, in Canada as in other countries. We consumers therefore should aim at easy access to other markets, where these commodities and goods are purchasable by the money received in the sale of our surplus commodities and goods.

Foreign Trade therefore is a two-way street, and every exporter, be he producer, processor or manufacturer, who sees his products passing along this thoroughfare, should welcome a stream of traffic coming the the other way and give it plenty of room, in the knowledge that the heavier the passing traffic is, the greater will be the power, vehicular and financial, able, and willing, to take back with it, the surplus of his products still remaining to be moved.

At the risk of making you feel that chilly draft, which the use of figures seems to create-at least to me--I am indebted to one of my authoritative banking friends for the following analysis.

In the fifty years 1895-1944, taking into consideration exports and imports of goods and commodities, nonmonetary gold, travel, interest and dividends, freight, shipping, insurance, and other services, the deficit against Canada in favour of the United States was 163 millions per annum. On the other hand in the same period Canada's trade with countries, other than the United States, showed a surplus in favour of Canada of 307 millions per annum, which left an overall surplus in Canada's favour of 144 millions.

In 1939 the figures were 116 millions deficit with the United States, a surplus with other countries of 242 millions, or a net surplus of 126 millions in Canada's favour.

Before the war the surplus of sterling and other currencies was turned into U. S. dollars, through its sale in the open exchange markets-principally New York.

The funds so converted were mostly invested at home or abroad, or used in industrial and other expansion in Canada.

All this is of course mere platitudinism, and has been said many times more forcibly and effectively by others, but the danger of all platitudes is that their force is dulled by repetition, and their admitted truth allowed to lie dormant. Do not therefore let us be lulled into an atmosphere of drift. Rather let us try to clarify the problems of Foreign Trade in our own minds.

You have heard it said again and again that at the end of this war to end wars, things would not be the same as they were before the war. Statements made by responsible statesmen in the leading nations, indicated that the days of isolation were gone, that no nation can live unto itself, and that international trade would be developed as a great instrument, for the preservation of prolonged peace, and for fostering the brotherhood of man. No man busy in trade has time for thoughts of war.

It is now fifteen months since the last of the Axis powers was defeated, but peace is not yet with us. Violence still holds up its ugly head in China, and Palestine, and in less degree in India. The Paris Conference is over after a troublous series of sessions, and we now await the reactions of the Big Four this month.

In the United States industrial unrest is impairing production, and efforts to curb inflation are encountering difficulty after difficulty. In Canada the situation is better, but nobody can say it is satisfactory.

In Great Britain export trade has been stepped up to over pre-war figures, and doubtless her sterling indebtedness is being reduced. But her people there are still on rationed food and clothing, and the housing situation is bad.

The obstacles to a broader international trade still exist. Reduction in tariffs, removal of embargoes and quotas, are not yet accomplished facts. Cartels and Imperial Preference still hold sway. No nation seems ready to move in the international economic field until the political skies are cleared, and these are still cloudy and overcast, although the forecast is for clearing and more settled weather.

This delay, however, in cleaning up the political mess of aftermath of war, only cultivates the ground from which rises the poisonous growth of socialism, with its stultifying effects on human endeavour.

In Great Britain a socialist government is in power, returned at the last election with an unexpectedly strong majority, on the wave of a welter of promises of reforms but so far they have only been able to put a few into effect.

The nationalization of the Bank of England was largely a matter of form because in effect it was really under government influence although financed by private capital.

The nationalization of the coal mines was not unexpected, both miners and mine owners being largely to blame for conditions in the industry. The nationalization however has not stepped up production, coal still being in short supply.

The steel industry has not been taken over, the Government confining its actions to the appointment of a supervisor.

Conditions in the cotton industry are not satisfactory, no substitute having been found for the Cotton Futures market which was closed by the Government.

The Rubber Industry, which the Government tried to control, proved uncontrollable, and latest reports indicate that the Rubber Futures Market may soon be reopened.

In Canada our own Government has not escaped this infection, as has been evidenced by the recent bilateral agreements with the British Government in wheat and beef, and it is to this development of state trading that I propose to direct your attention for a little.

This Anglo-Canadian agreement is the latest convulsion which has attacked the Agricultural Economy of Western Canada. Whether or not it will be the culminating phase of thirty years of pestilence lies with people like you. It rests with public opinion, which alone can decide, how far it will let the state interfere with the individual.

I realize how difficult it is to make the generality of people, not actually in the grain business, realize the threat to all business, that underlies this latest action by their Government.

The Grain Trade, from the farmer to the miller and exporter, has developed throughout the past sixty years into a highly specialized organism, which, despite the Government interference of the past two decades, has worked like a well-oiled machine. Its very efficiency and smoothness of operation have created in the minds of many people, especially among farmers, a feeling of mystery, and suspicion of too much oil or grease.

The Trade embraces Country Elevator Companies, Terminal Elevator Companies, Transit Elevator Companies, Exporters, Millers, Feed Dealers, Vessel Owners, Brokers, and Commission Merchants, all of which are units of trade within themselves, in active competition with each other, and yet, as a whole, providing the greatest example of co-operation in the Dominion, possibly in the world today.

Yet there are very few members of that Trade which understand its operation from A to Z. They are experts in their own branch of the trade, but a Country Elevator Owner's knowledge of the export or milling business is on a par with the knowledge of an exporter or miller's, of the Country Elevator business.

And that is the business which the socialists and some politicians, and other agitators, think the bureaucrats can handle efficiently in a highly competitive world market.

As has already been pointed out modern political thought claims, that no nation can live unto itself; the problems of today are international, and the idea of national isolation must be discarded.

What is true internationally is also true federally of the nine provinces of Canada, and important issues in one or more of these provinces have repercussions in the other provinces, and affect the Dominion economy as a whole.

Therefore I claim that it is your privilege, nay your duty, as Canadian citizens, to have opinions, and state them, on matters affecting the West, just as it is the privilege, and duty, of the West to have opinions, and express them, on events say in Hamilton, Sault-ste Marie or Sydney.

Let me tell you therefore, in some detail, how this socialistic encroachment on a great business has come about--not like a fairy tale but the very reverse of such more like the growth of an ugly cancer which is eating into the very vitals of Canada's economic being.

After the first world war, the Farmers' organizations in Western Canada, hearing of some alleged successes achieved by fruit farmers in California, in the pooling system of handling their products, invited a gentleman, called Aaron Sapiro, to explain to Western Farmers how this system could apply to grain. He addressed meetings from Winnipeg to the Rockies, and the final result was the formation of provincial pools in Alberta, Saskatchewan and Manitoba.

The pool principle is that the farmers should deliver their grain to a central organization, and receive an initial payment, and a participation certificate showing the amount of grain delivered.

Thereafter the pool would handle the grain in the markets of the world at cost, cutting out the services of all intermediaries, and from the profits return to the farmer a final payment, computed on the basis of the amount of grain he delivered, as shown on his participation certificates.

These Pools induced thousands of farmers to contract to deliver their grain to the pools for a five-year period, under penalty of action at law, and the game began.

It was of course presumed that the wisdom of the Pool managers would ensure, that the initial payment would be such, that there would always be a profit, and no provision was made for a possible loss.

Alas for the frailty of man's judgment, the initial price finally got too high, and the three Pools all went broke.

The Three Provincial Governments had finally to come to their rescue by putting up millions of dollars, and the Federal Government aided their operations by appointing a Stabilizer to their Central Selling Agency.

Eventually the Government, by act of parliament, established the Canadian Wheat Board which took over the functions for which this Central Selling Agency had been supposedly created.

Now you may well wonder how this came about. Well, in the first few years of their existence the three pools delivered their wheat to the Central Selling Agency who had applied for and had been elected to membership in the Winnipeg Grain Exchange. In these early days this Agency used the facilities of the Exchange in disposing of pool grain.

Later, however, their ambition soared and they engaged extensively in direct export business, carrying heavy stocks and shipping wheat unsold without using the hedging facilities of the Exchange. The result was disaster.

In 1929 European crops were poor, the Argentine crop was close to a failure, and this central selling agency, working in consultation with the Farm Board of the United States, came to the conclusion, that Europe would have to come to the North American continent for wheat, and that the North American continent could dictate the price, which they set at not less than $2.00 per bushel. I must admit that considerable public opinion encouraged that view and at least one prominent Canadian financier endorsed it publicly.

At that time, and in the early thirties, there were stirring those elements that finally resulted in war, and it has never ceased to be my personal opinion that this attempt, in 1929-30, to hold up Europe on the price of wheat, awakened the nations of Europe to the precarious position in which they would find themselves, if, in the event of war, they had to depend on foodstuffs from the outside world.

For, from that time on, there sprang up in importing countries, a system of protective tariffs, quotas, and even total embargoes, against imported wheat. Simultaneously, subsidies and high prices, were guaranteed and paid, to encourage farmers in these importing countries to grow wheat domestically.

The final result is soon told. In 1927-28 Canada exported 333 millions of bushels of wheat, at an average price of 146% for One Northern in store Fort William-Port Arthur, and in 1928-29 she exported 407 millions of bushels, at an average price of 124%, and this in competition with heavy exports from the other big three, United States, Australia, and Argentina, who, in the same periods, exported a combined total of 457 and 493 millions of bushels.

In 1938-39 Canada's exports had dropped to 160 millions, and those of the others to 329 millions.

In these earlier years Canada's exports to Europe, excluding the United Kingdom, were 205 and 235 millions respectively. In 1938-39 they were only 51 millions.

Now, I suggest to you, that any business man, on realizing a drop in his turn-over, would investigate the reasons thereof, and noticing how he was losing many of his customers, would immediately get down to root causes for this loss of business, and take such steps, as lay within his powers, to regain his lost markets.

But what happens in Canada? Instead of trying to break down the barriers against the importation of Canadian wheat to Europe, higher traffs on the imposition of goods from these same countries were imposed, and Imperial preference was set up.

At the risk of suggesting something that may not be palatable to members of the Empire Club, do you not think that there is something to the thought, that Imperial preference, within the British Commonwealth, is simply national self-sufficiency on a limited international scale?

I am not arguing in favour of abandoning Imperial preference at the present time. I was informed two years ago by a prominent British M.P., that the British Government, in consultation with the Dominions and Colonies, would hold on to Imperial preference and cartels, until they got something better, which at that time meant the lowering or abolition of U.S. tariffs. A despatch from London about three weeks ago, reporting a press conference given by Sir Stafford Cripps, President of the Board of Trade, confirms this attitude.

"It is also recognized that the reduction or elimination of preferences could be considered only in relation to, and in return for, reductions of tariffs and other barriers to world trade. There would be no unilateral surrender of preference."

That would seem to be a perfectly logical position to take, world conditions being what they are at the present time.

That however is somewhat of a digression.' The point I would like to make is that Canada's national policy, since the decade of the twenties, has tended to antagonize her customers rather than to keep, or regain, their goodwill.

The effect of this decline in export sales was, that the annual carry-over of wheat irk Canada rose, despite short crops in 1933-4-5-6-7- from the normal figure of 20 to 30 millions of bushels to 103 millions in 1939, and prices touched an all-time low of 38c in December 1932.

That the depression of the thirties, would have undoubtedly brought about a lower level of wheat prices, than that ruling during the previous decade, can not be disputed. However it is my personal opinion, that the serious decline in the annual volume in sales of such a seasonal product as wheat, and the consequent piling up of a surplus each year, created a buyers market, especially when a large part of the holding was in one hand, the Central Selling Agency, of the Canadian pools. With farmers growing and delivering more wheat than our narrowed list of customers could absorb, the decline was, in my opinion, aggravated. It seems to me to establish a clear demonstration of the adverse effects of concentrated holding, and the corollary of bulk selling.

However, as sometimes happens, luck does turn, but it was no thanks to the pooling idea in practice, or the Government support or policy, that in 1939 Canada had a large surplus carry-over and a good crop. In fact in the seven years 1939-45, Western Canada grew nearly 2800 millions of bushels of wheat, and the carry-over of 103 millions, in August 1939, was down to 69 millions in August 1946. This represents a total disappearance, domestically and for export to our Allies, and a few neutrals, in these six years, of over 2800 millions of bushels of wheat.

But if the United Nations have their way, there are going to be no more wars, and we have to get down to the fundamental peace policy of keeping markets for the exportable surpluses of our natural resources, and of regaining and keeping other markets, which we have lost, largely through our own stupidity.

But what happens?

The Liberal Government, which did a better job during the war than many people expected, had, at the last election, been returned by a narrow over-all majority. Some of the members of the party seemed to be leaning towards th left, and someone, I refrain from mentioning or suggesting names, conceived the idea of making a bulk sale of wheat to the United Kingdom, at prices, over a term of years, that would enable the Government to guarantee the Western farmer a floor price for five years, thereby weakening the forces of the political opposition in the West, and ensuring solidarity in the party itself.

The outcome was the much discussed Anglo-Canadian long term wheat contract, and in order that you can get some idea of what terms Government bulk selling can get, I am going to quote from the Contract itself.

1. (a) The United Kingdom Government undertakes to purchase and the Canadian Government undertakes to sell the following quantities of Canadian wheat, which quantities include wheat to be processed into flour for sale to the United Kingdom Government:

(i) within the crop year 1946-47, 160,000,000 bushels;

(ii) within the crop year 1947-48, 160,000,000 bushels;

(iii) within the crop year 1948-49, 140,000,000 bushels;

(iv) within the crop year 1949-50, 140,000,000 bushels;

A bushel shall be of the weight of 60 pounds avoirdupois.

(b) In the event of the United Kingdom requiring from Canada any additional quantities of wheat that the Canadian Government is prepared to make available, such additional quantities which the Canadian Government offers and the United Kingdom accepts shall in all respects be subject to the provisions of this Agreement.

2. (a) The price per bushel to be paid by the United Kingdom Government to the Canadian Government, on the basis Number One Manitoba Northern, in store Fort William-Port Arthur, Vancouver or Churchill, shall be as follows:-

(i) In respect of wheat bought and sold in the crop year 1946-47, $1.55.

(ii) In respect of wheat bought and sold in the crop year 1947-48, $1.55.

(iii) In respect of wheat bought and sold in the crop year 1948-49, not les's than $1.25.

(iv) In respect of wheat bought and sold in the crop year 1949-50, not less than $1.00.

(b) The actual prices to be paid for wheat to be bought and sold within the crop year 1948-49 shall be negotiated and settled between the United Kingdom Government and the Canadian Government not later than the 31st December, 1947, and prices for wheat to be bought and sold within the crop year 1949-50 shall be negotiated and settled not later than the 31st December 1948. In determining the prices for these two crop years, 194849 and 1949-50, the United Kingdom Government will have regard to any difference between the prices paid under this Agreement in the 1946-47 and 1947-48 crop years and the world prices for wheat in the 1946-47 and 1947-48 crop years.

3. It is agreed that the United Kingdom Government may sell or dispose of the wheat and flour purchased under this Agreement in whatsoever manner the United Kingdom Government may deem expedient both in regard to destination and price.

6. It is mutually understood that matters arising from, or incidental to, the operation of this Agreement may at the instance of either party become subjects of discussion between the parties to this Agreement. .

I ask you if you can imagine any group of business men getting together, and entering into a contract so loose in its terms.

In the first place it is a bilateral agreement, despite the avowed aims of the United Nations in the direction of International trade, to which both Canada and the United Kingdom have subscribed.

Do you not think that when the Economic and Security Council gets down to discussing tariffs, embargoes, quotas, preferences, cartels etc., the other nations are likely to regard Canada, and the United Kingdom, with prejudiced, not to say hostile, eyes and to question the sincerity of any proposals either may submit?

It is true that politicians have assured other nations, that this was not a bilateral agreement, and that these nations would be given an opportunity to a contract on the same terms. The agreement with the United Kingdom was not made in competition with proposals from other exporting countries, and the execution of similar agreements with other importing countries would not remove the stigma of bilateralism. But as a matter of fact, no such new contracts have been announced. On the other hand, sales have been made to Belgium, and the Netherlands, at 60c per bushel higher, than the sale price in the contract with the British Government, and several millions of bushels have been sold to other countries, in the form of flour, based on wheat prices 50c to 60c above the price to the United Kingdom.

Canada has at least sixty customer nations, other than the United Kingdom. Can you believe that this kind of dealing makes for regaining the goodwill of the customers that were lost in the thirties, because of a parallel hold-up policy?

Take again the provision which permits the United Kingdom to resell part of the wheat and flour so purchased. Recent London despatches say that the United Kingdom has no intention of reselling any wheat, but shipment has been made to South Africa., and paid for by the United Kingdom at $1.55, the contract price. The sale price to South Africa is not known. Is it not logical to assume that other countries are being supplied by the United Kingdom, and it may be, at prices higher than the price in the Anglo-Canadian contract?

The normal import of Canadian wheat and flour into the United Kingdom was, prior to the war, around, 90 to 100 millions of bushels. It is claimed that all the 600 millions of wheat specified in the contract will be used in the United Kingdom. What then becomes of the relations of the United Kingdom with the United States, Argentine, and Australia, all of whom are large exporters of wheat? And yet under the contract, the United Kingdom may, like Oliver Twist, "ask for more."

If this contract had been made at the request of the United Kingdom, to tide them over a difficult time, a statement to that effect would have disarmed criticism.

But the terms appear so favourable to the United Kingdom, that, obviously, it was Canada that desired the contract, as being advantageous to her as seller, and the apologists for the contract plead this advantage in extenuation.

Take the matter of price alone. It is one thing to supply the United Kingdom with wheat, during war time, at prices well below world values, even although it was done in the form of Mutual Aid, which of course the taxpayer paid. The only objection there could be was that, at such prices, the farmer, as a taxpayer and a producer, was paying an undue share. Some case might be made out for continuing to supply wheat at such a relatively low price, for a year or so, until the international situation was more settled, but, to extend the contract to the end of the 1949-50 crop-year, implies a confidence in price levels, on the part of the United Kingdom, which should have made the Canadian Government pause. Or do the bureaucrats at Ottawa think they are wiser than the experts in the City of London, with centuries of experience behind them.

Personally I have no opinion on wheat price levels for the next four years. I have been too long in the trade to know anything about the future trend of prices. It is only theorists, bureaucrats, academic wiseacres, and junior clerks, who can tell you all about future wheat prices. But I can suggest physical difficulties some of which have shown up already.

Recently there were over 60 boats at one time in the St. Lawrence waiting for wheat which is not there, for the reason that the Western farmer is not excited about the Government filling its contract with the United Kingdom. He is not rushing his wheat to market. He is guaranteed a floor price of $1.35 anytime during the next four years. He does not need the money; he never was better fixed financially; he sees $2.23 as the price at which wheat is selling to countries other than the United Kingdom, and he can never tell, but what the day may come, when he will be allowed to sell as he pleases; he has work on the farm to do before the winter comes in; he learned the trick of storing his wheat on the farm during the war years, when he was restrained from marketing his wheat on account of lack of elevator storage space. This year's western crop is estimated at 50% of last year's crop.

It would appear that stocks in Eastern positions during the winter are likely to be the lowest in years, and the United Kingdom will probably be calling for wheat which the Government cannot ship, because it is back in the West. Will the United Kingdom, in that event, be forced to go for supplies to the United States, or Argentine, at prices well above the Canadian contract price? Already the United Kingdom are reported to have paid $1.95 f.o.b. Argentine for corn.

The contract also envisages the advisability of holding back stocks, next summer, equal to 50% of the contracted quantity, deliverable in the following crop year.

It also suggests control of acreage, and of deliveries, should surpluses later pile up.

There are current contracts for bacon, and a new contract has recently been made for beef, as well as milk, cheese, eggs and other farm products.

It suggests the danger of similar government interjection into other commodities, such as lumber, pulp, fisheries, fruits, metals, etc. Bulk selling in general however tends to create a buyer's market in times of normal or abnormal supplies of exportable commodities. There is only one seller; buyers know this, and that the exportable surplus of seasonal commodities must be sold within the crop year. They can therefore be more patient, and conservative in their bids, buying for immediate needs, in the full knowledge that they can get their requirements at any time. This slows up demand, the surplus is slow in being reduced, and is more likely to be increased, and the seller tries to stimulate demand by lowering prices. Acceptance of lower bids suggests an anxiety to sell at lower prices still, and the merry game goes on.

Bulk trading such as this wheat deal, tends, over a period, to sour relations between buyer and seller, as futures price action must suit one or the other, it cannot suit both. One British economic expert concludes his analysis of the deal thus

"All told it will be remarkable if this Anglo-Canadian wheat agreement retains its present popularity throughout its four years' life. In my humble opinion somebody has been sold a pup. What very much remains to be seen is who?"

That is one question which only time can answer, but the vital question to which the people of Canada have to give an unqualified reply is, "Are freeborn Canadian citizens to have their everyday lives ordered about by the Government of a socialist state, or are they to be allowed to work out their individual destiny, as they desire, and as their abilities for service to their fellow men can find a place in the community in which they live."

This is no fancied problem, it is a very real one. We in the Grain Trade during the past three years have been autocratically told what grain shall be moved, and to what destination, who shall offer it abroad, to whom it shall be offered, and at what price. Our lake vessel owners have been told what to load, and to what port, and at specified freight rates. The Railway companies have been directed in the supply of box cars. The farmer himself is beginning to squirm under interference with his inalienable rights in the soil, as recent events in the West, economic and political, have demonstrated. These are facts, and the same kind of thing is going on in the Packing industry, and in dairy products. All this has happened at the hands of a Government avowedly opposed to socialism. Had it come about with the socialist party in power, the electorate alone would be to blame, but having elected a non-socialist party to govern us, it is our own fault if the government is to be allowed, without public protest, to undertake such dangerous policies.

The Grain Trade, never dreaming that they should be so betrayed, have been and are making the strongest possible public protests against such unwarrantable encroachments on their liberties, and I suggest to you that business throughout the Dominion must awake to the danger that threatens it before it is too late. It is a national and not a sectional problem. I ask you to face it squarely; on any one of you the axe may fall.