Expanding Trade—The Positive Approach to Economic Growth

MR. KENT: Among our guests today may I welcome a group representing the Canadian Export Association. They have joined us to hear our guest speaker Mr. Elliott M. Little who is the President of that Association. In electing Mr. Little to that office, the Association has selected an executive who has had long and valuable experience in selling Canadian products in foreign markets.

On November 24th, 1960, this Club was addressed by Mr. R. D. L. Kinsman, who was then President of the Canadian Export Association. He delivered an interesting and most valuable address on Canada's International Trade. He urged the sale of more Canadian products abroad as a remedy for our lagging prosperity and serious unemployment problem.

As our export trade is of such great importance to business in this country, I was delighted to hear that Mr. Little could accept our invitation to have him appear here today.

From 1946 to 1958 he was president of Anglo-Newfoundland Development Company Limited of Grand Falls, Newfoundland and since then the Chairman of its Board. He was president and general manager also of Anglo Canadian Pulp and Paper Mills, Limited and of Gaspesia Sulphate Company Limited of Quebec and was Chairman of the Executive Board of the Canadian Pulp and Paper Association for 1952. He is also a director of the Montreal Trust Co., the Bathurst Power and Paper Co. Ltd. and of the Executive Fund of Canada Limited. Born at Beachburg in Ontario, Mr. Little graduated from the University of Toronto in 1925 in electrical engineering. Since then his efforts have been principally devoted to the Pulp and Paper Industry with Abitibi and the corporations already mentioned. In the first war, he served in the Royal Flying Corps and during the last war he became Director of National Selective Service.

Mr. Little has many capacities and duties-Life Governor of a Quebec Hospital; Governor, Superior School of Commerce in Laval University, married and the father of five children, member of several golf clubs, but it is in his capacity as President of the Canadian Export Association that he speaks to us today on the subject: "Expanding Trade -The Positive Approach to Economic Growth".

MR. LITTLE: It will be news to no one in this room if I state that in the past five or six years economic conditions in Canada have changed for the worse. Our buoyant rate of growth has slowed down to the extent that, since 1956, there has been virtually no gain in real output per capita. We enjoy the doubtful distinction of having the highest average rate of unemployment of any major Western nation.

Over-capacity in many industries has kept business capital investment, the main driving force of our expansion in the post-war period, well below the levels we became accustomed to in those earlier years. Indeed, we now find ourselves gazing enviously at the Western Europeans, whose pace of economic advance has recently so greatly exceeded our own. Who, in 1948, say, or even 1955, would ever have foreseen such a situation as this?

Moreover, there is another aspect of our contemporary affairs that is particularly distressing, and that is the sense of malaise-the loss of confidence and purpose-that afflicts the Canadian people at the present time. This phenomenon has been referred to in two outstanding speeches by prominent Canadian within the last three weeks. Dr. A. Davidson Dunton, President of Carleton University, addressing the Canadian Club of Montreal on January 21, commented on the "sagging spirit in Canada; some lack of drive and sense of purpose and direction; a vague sogginess in our national life." And Mr. R. M. Fowler, President of the Canadian Pulp and Paper Association, at the annual luncheon of that Association on January 24, noted that "wherever you look in Canada there is a feeling of uncertainty and anxiety", continuing "I think our first task is to restore our own confidence in this nation and determine where we want to go in the rapidly changing world."

Mr. Fowler went on to say that, if he were asked to put his finger on the single major cause of this lack of confidence that characterizes the Canadian scene, he would point to our failure to define a satisfactory trade policy. With this I agree, for I feel that trade policy (in which I include tariff or "commercial" policy) is of greater significance to us just now than any other field of our economic affairs. Let me, therefore, expand on this theme a little.

For the best part of a century Canadian trading policy has had two separate features, each of which has tended to be, to some extent, in conflict with the other. These features have been, on the one hand, the desire to maintain the most open possible foreign markets for our primary goods exports, while, on the other hand, endeavouring to develop a complex of manufacturing industries behind a protective tariff at home.

This policy has necessitated a delicate balancing act between the two elements. An increased tariff to assist a manufacturer might invite retaliation from foreign countries against Canadian exports of primary products, and so on. But this difficulty, which is faced to some degree by most nations with mixed economies, has been especially critical for us owing to the "cost of the tariff"-that is, the effect of import duties on domestic prices-and the vital necessity of avoiding too great a discrepancy between Canadian and United States living standards. As it is, this difference is variously estimated at between 25% and 30%, undoubtedly in part as a consequence of the tariff. At this rate it is known to contribute to a continual loss of manpower-often the most talented and enterprising manpower-across the border-a wastage we can ill afford. Clearly the gap must not become any wider.

Today, I suggest, the balancing act is no longer viable. It is beginning to wobble, and if we do not do something drastic pretty soon it will topple to the ground. My reasons for believing this are as follows:

First, the potential market of our primary goods has undergone a sharp decline from the expectations of the early post-war period. This development derives from a number of factors. There has been an enormous build-up in capacity for the production of minerals, for example, all over the world in recent years, some of it involving concentrations of far greater wealth or economic suitability than the corresponding resources in Canada. (A decade ago these advantages might have been offset by the more stable political outlook here than in other mineral-rich areas, but this feature seems to be considered of less importance nowadays.) Typical of the results of such circumstances is the relatively disappointing prospect for Northern Quebec iron ore, compared to a few years ago, following the exploitation of ore bodies in Venezuela and the fabulous new discoveries in West Africa.

Then, too, synthetic materials are taking over from many of the metals and other minerals we export. And finally, we see the emergence of a new kind of economic isolationism in the apparent desire of the European Common Market to achieve self-sufficiency in agricultural commodities and, to a lesser extent, industrial raw materials.

These trends suggest that we may suffer a deterioration in our exports, with a resultant loss of living standards, unless we are prepared to pay for improved access to markets, such as the European trading bloc, with reductions in our tariffs on manufactures. Either way the balancing act is endangered.

Second, in respect to manufactured products, the tendency in the world seems to be towards bigness. One aspect of the movement towards bigness is the development we have just noted, the growth of regional trading groups, at present mainly in Western Europe but being emulated in Latin America, the Middle East and elsewhere. One of the avowed advantages of regional groupings is the opportunity for "economies of scale", as the economists call it, the lowering of unit costs through mass production and distribution for a continental market. Add to the European super-market the 100-million strong industrial giant of Japan; then contemplate the emergence within the next few decades of similar massive economic units in other parts of Asia and in Latin America; and consider the increasing competition of such monolithic states as Russia and China.

At the end of this process you may well wonder where small fellows like Canada fit into the picture. We would fit very well, of course, into the maw of the economic giant of this continent, the United States, but we seem to want avoid that destiny. Again, how do we maintain the balancing act?

There is another aspect of this trend towards bigness too, and that is the growth of the industrial complex or corporate empire. Whether reluctantly or enthusiastically, Canada is very much a part of this process as our small firms are continually absorbed by larger companies. Unfortunately, however, the advantages of this process are often small in Canada, simply because the corporations that acquire control in such cases are, for reasons we all know about, usually foreign, and the existence of the tariff tends to prevent the integration of the Canadian company into the international enterprise in an efficient way. On the other hand, similar corporate amalgamations occurring within the United States (or Britain, or elsewhere) do produce a reorganization of the enterprise, bringing about specialization of production with consequent "economies of scale". Thus once more, the gap between Canadian and foreign costs and, as a result, living standards tends to grow; the balancing act becomes increasingly precarious.

These, then, are the factors that I believe are undermining our traditional trading policy, upon which so much of our total economic policy has been built. Indeed it is perhaps not too much to say that a great deal of our political policy too has been built upon this basic structure. And it is therefore not surprising that the growing realization that this policy is falling apart is creating a widespread feeling of confusion and despondency. Moreover, adding still further to this decline in the public morale has been the response of Canada to the challenging events in the trading field.

Let me remind you of a few of them, starting with the proposed diversion of 15% of Canadian imports from the United States to the United Kingdom back in 1957. The British called our bluff on that one, you may recall, by suggesting an Anglo-Canadian free trade area, an idea apparently so shocking to the Canadian authorities that it was hurriedly swept under the carpet and forgotten. Equally negative were the so-called "voluntary" quotas on Japanese exports to Canada, despite the continuing heavy export surplus we run in our trade with Japan. Then came our unenthusiastic response to the British application to join the European Common Market, and our lukewarm initial attitude to the U.S. Trade Expansion bill.

Now it may be that the official Canadian reactions to Britain's application to join the Common Market, and again to the United States presentation of its new trade bill, were tactical diplomatic manoeuvres rather than reflections of opposition to these moves. But it cannot be denied, I think, that this attitude has given the impression that we are afraid of change and progress, an impression which, added to the reverse in our economic fortunes in recent years, leaves Canada with a tarnished image in the eyes of the world and adds to our loss of self-esteem here at home.

And here let me pause to refer briefly to another type of negative response to the trade challenge-the "Buy Canadian" approach, which I regret to say seems to have found its way into the otherwise admirable Ontario Trade Crusade. I can understand a "Sell Canadian" approach. That makes sense. But we are not going to expand our trade by offending our customers. I know how I would feel as an exporter of Canadian products if in one of my markets the government were to urge its citizens to buy local products in preference to my own. And I know that a "Buy Canadian" campaign doesn't help me or any of my fellow exporters in selling abroad and creating jobs for Canadians.

In saying all this, I do not wish to belittle the excellent work of the Canadian government and others, including the Ontario government, in promoting exports. The Hon. George Hees, and his department, in particular, is doing an excellent selling job. Nor do I overlook the possibility of substantial trade gains as a result of the devaluation of the Canadian dollar. What I am talking about is trade policy, in which respect I think our attitude has been essentially negative and unimaginative.

What we need is a positive approach to trade policy. The old concepts and ideas are outdated. We have to become as revolutionary in our thinking as the Europeans and the British and the Americans. If we do not, we shall experience all the difficulty, and too few of the benefits, arising from the changes that are taking place around us. At worst we may, as Dr. Dunton suggested in the speech I mentioned earlier, "slip into a dull", secondary category among developed nations.

We cannot afford to sit back and wait to see how we are going to be affected by the U.S. Trade Expansion Act or by Britain's entry or nonentry into the Common Market. We cannot go on extending voluntary export quotas to one industrializing country after another, as these, like Japan, move into the modern world, perhaps as a result of the help that we and other developed nations are giving them. We should be actively engaged now in re-thinking our position and our policies. To be specific, I think we should be prepared to bargain away some of our tariff protection in order to obtain access to foreign markets. We should switch the emphasis from making as few changes as possible to securing as many new markets as we can. Let the bargaining be tough but let it be aimed at expanding, not restricting, trade. We have so much to gain from such an approach.

What do we have to gain? Well, I would like to suggest a line of thought to you on this subject. I referred a few moments ago to "specialization of production" and "economies of scale" as contributing to lower unit costs. But I want to make one point very clear. When I speak of the "small market" available to Canadian companies I do not wish to suggest that this country is essentially too small to support competitive manufacturing enterprises. This is a widespread conception, but studies into the economics of industrial concentration would seem to indicate that a home market of 18 million people, 10 million of whom live within the industrialized regions of Southern Ontario and Quebec, is ample to permit economic production in the great majority of enterprises, provided they are appropriately organized.

That interesting nation Sweden, with a population of only 8 million, has succeeded in building a manufacturing industry which performs most effectively against international competition, despite high wages and other costs, and in doing so has achieved a standard of living which some authorities have calculated as superior to our own. Many other of the smaller European countries have had similar successes, suggesting that a small home market need not be the insuperable obstacle it may appear to be.

The secret of these countries, if it can be called that, is specialization of production in a relatively few industries, few companies, few product lines. Thus instead of the market being fragmented into many segments, none of which is adequate to support an efficient manufacturing operation, a situation all too common in Canada, a smaller number of enterprises and activities can each supply a share of the market that does permit economic production. There is, moreover, a second advantage to this type of specialization. It enables the country concerned to trade tariff reductions on the things it does not produce for concessions by other nations on those it does, thereby obtaining low-tariff entry to markets abroad. These export opportunities make possible a further increase in the scale of production, leading to further reductions in costs.

I believe that the key to the solution of many of Canada's economic problems lies in this kind of specialization. If we could specialize our production more, we could lower our unit costs, find export markets, reduce unemployment, raise our living standards, and slow down our loss of valuable manpower to the United States. The effects of these improvements could help to break the sense of stagnation that is besetting so many Canadians today as they ponder their country's future, producing a new dynamic in our national affairs. These are bold claims indeed, but I do not think they are excessive.

Well, then, you may say, if the advantages of specialization are so obvious why have such changes not been made already? Are our business leaders so dull that they cannot see for themselves the things you are saying? No, of course, they are not. Some moves in this direction have in fact been made; the reason that more have not occurred is primarily, in my view, the nature of our tariff structure, which has helped both to create and to perpetuate a high cost, fragmented industrial system in Canada. It has helped to create it in the way I mentioned earlier, by preventing the efficient integration of Canadian branch plants into the large, international corporate organization of the parent company. Moreover, it has encouraged the building of Canadian plants by virtually all the U.S. companies in many industries, plus a few more from Britain, France, Germany, etcetera. Obviously, this leads to overcrowding of our relatively small market, with the result that most Canadian plants in this category operate below capacity and at high cost.

Similarly, tariffs can help to perpetuate this problem by removing the stimulus, provided by foreign competition, to do something about it. For if a regime of this kind makes for high costs in Canada, these costs do not become a real burden to industry so long as the Canadian market is insulated from lower costs elsewhere. In recent years, as we know, foreign competition has upset this picture in many cases, despite the import tariffs in force, and the result has been a cry for increased tariffs, quotas and so on. If we provide such protection, the difficulty recedes and things go on as before, with none of the needed reforms taking place. (The same result, or lack of result, will be encouraged by "Buy Canadian" campaigns.) The only way in which we will bring about the necessary rationalization, I submit, is by embarking on a policy of planned tariff reduction.

I hope I have made a sufficiently convincing case for a new trade policy, involving substantial cuts in import tariffs, with a view to producing a more specialized, low-cost industrial structure in this country. The question now is how this objective should be pursued.

We should begin, in my belief, by endorsing enthusiastically the United States initiative in seeking a broad liberalization of world trade. This initiative is represented by the new U.S. Trade Expansion Act, the future of which has, of course, been placed in some jeopardy by President de Gaulle's veto of Britain's application to join the Common Market. However, the legislation is far from being dead, and there is little doubt that the U.S. Administration, faced with the changed position, will employ every means at its disposal to maintain this avenue towards the goal of freer international trade, or will seek a satisfactory alternative. Meanwhile, although we must regret the reason for the delay, Canada can in fact use this breathing space to advantage in formulating an appropriate policy of its own. As a guide to the development of this policy, let me examine with you briefly the principal provisions of the U.S. Trade Expansion Act as it now stands.

The Act, for those of you who are not familiar with it, empowers the President to amend tariffs in four broad areas. First, in bargaining with any country or group of countries, he may reduce any existing U.S. Tariff by up to 50% of its present level. Second, he may eliminate, in similar negotiations, any tariff that is at present 5% or less. Third, he may eliminate, in bargaining with the European Common Market, the tariff on any product in which the United States and the Common Market countries together account for 80% or more of Free World exports. (This provision has assumed British membership in the Common Market and will now probably be reworded to include Britain and other European nations even if they are not members.) And fourth, of little interest to Canada, he may eliminate tariffs on certain tropical agricultural commodities.

Nor need we think only of the United States in regard to his Act, for it is one of the fundamental features of the legislation that any tariff reduction realized, whether the bargaining took place with the Common Market countries, Canada, Brazil, India or any other country or group, will be applicable to other nations under the system formulated by the General Agreement on Tariffs and Trade.

However, considering for the present the possible impact of the three main provisions on our exports to the United States alone, we find the following situation. About twothirds of our exports to the United States that are now dutiable fall into the category on which the U.S. tariff is currently 5% or less and thus is eligible for elimination under the new Act. Of the remaining one-third about $150 million worth, or 10% of all dutiable exports, appear likely to be covered by the amended United States-Common Market provision under which tariffs can also be eliminated. This leaves only about $350 million worth of Canada's present exports to the U.S. that are not eligible, under the Act, for tariff elimination. And even they stand to have their tariffs cut by 50%.

Now this looks like quite an interesting prospect, and in many ways it is. But it has a number of shortcomings from our point of view. The big category of goods dutiable at 5 % or less, on which tariffs stand to be eliminated, consists mainly of primary commodities, and the demand for such goods tends to be relatively "inelastic"-that is, unresponsive to small price changes such as would result from the removal of a 5 % or lower import tariff. I am not saying the change would be anything but welcome; only that we should not exaggerate its effects. Similarly, the reduction by half of the U.S. duties on the $350 million worth of products, principally manufactures, I have mentioned would doubtless help us, but might not be so much of a boon simply because our costs in manufacturing tend to be higher than the Americans'; on the other hand, a 50% cut in our tariffs would unquestionably give a very great advantage to American manufacturers in the Canadian market.

It is the third provision, which permits the elimination of tariffs on items mainly of a manufactured nature, that provides, or would have provided, the most exciting possibilities for Canada. Why do I find this provision exciting? If satisfactorily negotiated it would cover Canadian exports valued at only about $150 million, or one-twentieth of our annual sales to the United States. Surely it is ridiculous to get excited over the prospect of even a substantial increase in such a small proportion of our trade?

But this is only half the story, for the complete removal of tariffs on manufactured goods, if matched by similar action on the Canadian side, could open the door to the very kind of rationalization of Canadian industry that I have suggested is so necessary. Some of this would occur in the form of the integration of Canadian branch plants, now that tariffs were no longer a significant barrier, into the international corporate organizations of the parent concerns, permitting specialization in certain product lines in Canada for export all over the world, or at least over all or part of the North American continent. Some would result from the ability of a number of foreign companies, currently forced by the tariff to maintain uneconomic manufacturing facilities here, to close down their plants, leaving the remainder far better placed to achieve competitive production. More, again, would derive simply from the pressure put on firms to rationalize their activities in order to beat the new import competition. The consequence could be not just a helpful increase in the present rather modest exports of these industries, but a transformation in the entire cost pattern of this sector of manufacturing, leading to an enormously strengthened competitive position at home and a chance to raise exports two, five or conceivably ten-fold in some cases. Indeed it might well prove possible to export in large quantities some products that are not at present exported at all. This is what I mean by exciting possibilities: the opportunity for a reshaping of our industrial complex on utterly new and more progressive lines.

If you are with me so far you will conclude, I think, that we should aim not only for the reinstatement of this provision in any amended legislation to cover Britain's failure to gain entry to the Common Market, but should go further and seek to have it broadened to cover more categories in which we are interested. As the Act stood prior to the de Gaulle veto, we might have pressed to have Canada included in the "80% of Free World exports" formula. With the new need to reappraise, and perhaps revamp this element of the legislation, and maybe even the entire Act, we have an opportunity to try for a far better deal. This is the sort of fresh, imaginative trade policy we need.

In closing, let me make it plain that I do not believe these measures represent the entire solution to our economic dilemmas. They need to be backed up with all kinds of other devices designed to further these objectives. Just to take a couple at random, I would hope that we might be able to assist certain kinds of structural reorganization of the type fostered by these tariff changes through a more liberal and imaginative attitude towards the regulation of combinations and mergers; and I think we should put our minds to the formulating of methods of helping companies, including both management and labour, to cope with amendments in trade patterns through the sort of "adjustment assistance" that is provided for in the U.S. Act.

But the trade measures are the essential first step. They are what can set in motion these really fundamental alterations in our industrial structure that we need. They represent the breakthrough, the positive approach to some of the basic problems that are sapping the vitality of our economy. I therefore urge you all to give them your earnest consideration.

It is high time we started to work on these questions. Let us take a bolder approach to our economic problems. Let us shake off this negative attitude, this conviction that we are doomed if we do not continue to protect our industries in a high-cost little island. Protection has not been helping us; it has been smothering us, preventing a dynamic economy from graduating from adolescence to the lusty maturity it is ready to accept. Let us have the courage and the perseverance to set it free.

THANKS OF THE MEETING were expressed by Mr. W. M. Karn.