Some Problems of Canadian Trade

MR. STARK: The name of Robert MacLaren Fowler appears very frequently in our Canadian newspapers for a variety of reasons. For the past fifteen years he has occupied, and continues to occupy, the Presidency of the important Canadian Pulp and Paper Association and the Newsprint Association of Canada. There is no need to remind this audience of the vital part that newsprint plays in our Canadian trade, and in the building up and maintenance of that trade, our guest has rendered a very important service.

It is a great personal pleasure to me to welcome Mr. Fowler here today, for we attended law school only one year apart. Our guest was an honour graduate in law from Osgoode Hall in 1931. For the next six years--in the very heart of the depression as we soon found out--Mr. Fowler practised law in Toronto with McMaster, Montgomery, Fleury and Company. Then, for two years he took on an interesting assignment as legal secretary to the Chairman, the late Chief Justice N.W. Rowell, of the Royal Commission on Dominion-Provincial Relations. Then came another term of law practice in Toronto until 1942 when our guest was appointed Secretary and General Counsel of Wartime Prices and Trade Board, Ottawa. This service continued until 1945 when he assumed the high post he presently occupies as the official representative of the newsprint industry, with his offices in Montreal.

But Mr. Fowler's activities have extended far beyond the newsprint industry. To mention only a few of these activities: he is presently Co-chairman of the Canada-United States Committee of the National Planning Association; and also is Chairman of the Royal Commission on Broadcasting (1956-7); Governor of the Royal Victoria Hospital, Montreal; Chairman for 1953-4 of the Executive Council, Canadian Chamber of Commerce; and President of the Canadian Institute of International Affairs, 1945-50.

Mr. Fowler has a busy home life. In 1934 he married Sheila Gordon Ramsay of Toronto and they have five children, two girls and three boys. I now present to you Mr. R. M. Fowler whose subject will be "Some Problems of Canadian Trade".

MR. FOWLER: I am very glad indeed to have this opportunity to come back to Toronto, where I spent about half of my adult life before moving to Montreal. While the decade of the thirties and the early war years did not seem at the time to be a particularly easy or encouraging period, they seemed, at least through the eyes of a then-young lawyer, to have been relatively simpler, and we seemed to be able to be more certain of the answers to our problems than we are today. Perhaps this is saying no more than that a lawyer's life before the war was more definite and specific in its problems and their answers than the life of a businessman is today. In any case, I am glad to be back in Toronto; to see a number of old friends in this audience; and particularly to address you today under the chairmanship of Alex Stark, who is a former legal colleague and an old friend.

I am billed today to talk to you about some of the trading problems we are now facing in Canada. I must say that I did not find any lack of problems or that it was possible to deal with them in any light-hearted or entertaining manner. The problems are many, and they are serious.

I do not mean to suggest that the Canadian economy is today in a state of collapse or that our long-term future cannot be as bright as our more enthusiastic optimists have said it will be. But I think our future will only be a good and satisfactory one if we make it so. I believe the time has come when we cannot postpone for much longer decisions as to the courses we will follow and action to implement those decisions. We must soon, I suggest, be clear as to the causes of our present plight and devise appropriate action to deal with the problems we are facing. This, if you like, is a call for leadership in our economic affairs-a plea that we get away from emotional generalities and get down to specifics and to action. We need people to tell us what we can do not what we cannot do. And I had better, in a modest and minor way, try to take my own advice.

What do we find today? What is the state of the nation in the closing months of a year that was supposed to be a booming start on a brilliant decade? Our production is holding up fairly well; export trade has increased a little; inflation no longer seems to be a danger; consumer demand has been reasonably steady. But in almost every industry there is a substantial amount of productive capacity standing idle. There is widespread uneasiness and concern about the state of the economy, as the performance of the stock market clearly demonstrates. There is a distressing tendency to look around for scapegoats, and the easy and popular escape-hatch of the moment is to blame everything on the Americans. I can think of no easier way for a Canadian speaker to hit the headlines than to view with alarm our "dependence" on American trade, or to suggest that American investment in Canada is stealing our birthright. But above and beyond everything else, there is the fact that we had, even under the revised statistics, 327,000 people without work last September. Think what this means in terms of human values, particularly at the season when employment should be high, and we are facing an inevitable seasonal decline in the winter months. Multiply this figure by the dependents of those who are unemployed; whether you take three to one or four to one, it comes to a figure of a million or more Canadians who face uncertainty and dissillusion. The idle machines may not matter very much; the idle people matter a great deal.

The plain fact is that growth in the Canadian economy has almost disappeared during the last four years. The average Canadian in real terms, after allowing for price changes, is worse off in 1960 than he was in 1956. Our problem is not that we have been trying to do too much too fast, but that we have not been doing enough. The statistical evidence to support these rather positive conclusions seems to be convincing.

If the period between 1950 and 1959 is broken down into three equal three-year periods, 1950-53, 1953-56, and 1956-59, the declining rate of growth becomes evident. It so happens that each of the years 1950, 1953, 1956, and 1959 fall at about the same point in the business cycles and thus comparisons between them will largely wash out cyclical influences. We find that gross national product in constant dollars in 1953 was about 20 per cent above 1950; in 1956 it was about 15 per cent above 1953; but in 1959 it was less than 5 per cent above 1956. Industrial production rose by about 20 per cent in each of the first two three-year periods but was only about 7 per cent higher in 1959 than in 1956. The comparisons for real labour income, personal consumption expenditures, volume of business investment, and physical volume of exports show a similar trend.

Many of the causes for this slow-down in the Canadian rate of growth were beyond our control and the result was largely inevitable. From 1945 to 1956 Canadian industry expanded rapidly to meet rising demands; these demands seemed insatiable and competition was relatively light. There was over-expansion of capacity with the result that today we have idle capacity in almost every industry. Meanwhile, other nations in Western Europe, and Japan, were reconstructed and came back as active and efficient competitors in world markets. During the long period when production was our only objective, Canadian costs rose and they are a serious disability in the face of renewed competition both within Canada and in the markets of the world.

This story is not told for the purpose of assessing blame for the past, but only to try to define the nature of our economic problems as a guide for the future. If Canadian growth has slowed down, every policy should be directed towards getting growth started again as rapidly as possible and in as large volume as possible. This, I suggest, is the only real solution of the present serious unemployment in Canada.

You are entitled to ask any one who talks in this way to give at least some concrete examples of what might be done. I will give you three or four suggestions of policies that might be tried, and two examples of policies that seem to me to be dangerous and undesirable.

First, I think we should all recognize that our present rate of economic growth is unsatisfactory and must be stimulated. Any one who ventures to point out the facts of life in Canada today should not be regarded as some kind of anti-social animal and accused of being a prophet of gloom and doom. No one is suggesting that Canada is in a state of collapse or that we are facing an old-fashioned depression. People in other countries can read the statistics as well as we can, and we fool no one by the dangerous game of refusing to face unpleasant facts. Instead we will inspire much more confidence abroad if we are clear-eyed about our difficulties and show that we are trying to do something about them.

Then, I think, on a more specific point, we could do with a moderate and gradual expansion of the money supply which has been held rigidly for some time. I do not pretend to be an expert on this complex subject, but such an expansion would ease interest rates and provide a little more financial elbow-room for our industry to grow and develop.

Thirdly, I suggest it should be made a specific and urgent objective of Canadian policy to bring the Canadian dollar down at least to par with the American. In this, you can accuse me, if you like, of special pleading, as this would obviously benefit the exporting branches of the pulp and paper industry. Admittedly, a dollar at par would have benefitted the Canadian exporters of pulp and newsprint to the tune of some fifty million dollars m 1959, or would have enabled them to compete more effectively in export markets. But the disadvantages to our domestic industries of the dollar premium are probably even more important and serious causes of their present difficulties. This is one subject on which both "primary" and "secondary" industries -both world traders and domestic suppliers-should be able to agree. Whatever distressing conflicts there may be between them, however great differences there may be as to the wisdom of higher tariffs or lower tariffs, we must surely agree that it is undesirable to have changes made in this way in both our own tariffs and in the tariffs of other countries to which we export. This is an element in our economic life which inhibits production in both domestic and exporting industries in a way that no other major industrial nation permits today.

Now I know that the Minister of Finance and his advisers argue that to eliminate the premium on the Canadian dollar will require them to enter the money markets to make massive purchases of American dollars and possibly require the re-imposition of wartime exchange controls. I do not agree with this view. This is a sensitive market and it can be influenced by less extreme measures. As with other problems, it can be broken down into smaller components. A reduction in interest rates by an expansion of the money supply would tend to discourage the inflow of undesirable "hot money" to Canada. A narrowing of the present differential between Canadian and U.S. longer-term interest rates would reduce the incentive for Canadian borrowings in the U.S. capital market. We might also consider setting up facilities in Canada which would provide a source for municipalities and provinces to borrow for their needs in Canada, without compulsion, and thus reduce the risks of excessive reliance on this potentially dangerous form of capital inflow. Possibly, too, some system of pre-registration of corporate investment intentions could be established in order to allow some influence over the flow of foreign investment to Canada without formal control.

Such steps as these are fully within the constitutional powers of the Federal Government. They would all tend towards a reduction of the premium on the Canadian dollar. If they did not fully succeed they would not involve serious burdens or irrevocable actions. It would be encouraging to find that active steps were being taken to deal with this dollar problem and we could consider later if more vigorous and perhaps more controversial action was required.

Finally, to stimulate Canadian economic growth, I suggest that a revision of our tax system is overdue. The present tax structure grew up in very different economic conditions than exist today and taxes at present high rates have a powerful influence on growth. I think, for example, we could make a much more imaginative use of accelerated depreciation on a selective basis to assist domestic industries which are in competitive difficulties and to locate industries in areas that are chronically in trouble. I think we could also take a look at revisions of the income tax laws with a view to stimulating demand which should be our major objective.

So much for an indication of the policies we might consider to produce a renewal of Canadian economic growth. The two policies which I would like to caution against will have to be dealt with briefly as I must not go on too long.

The first is that the time may have come when someone should say that it is both childish and churlish, and dangerous too, to blame the Americans for our present economic difficulties. I think we have serious problems of maintaining our national identity against American influences, but I suggest our attention will be diverted from our real problems if we continue to over-emphasize our so-called dependence on trade with the United States or the heavy investment by Americans in Canadian industry. I suggest to you that the non-economic influences are important: the television and radio programmes, the movies, and books and magazines. These cultural encroachments-valid enough in themselves -are serious and pervasive and we must, at considerable cost, seek to build a Canadian off-set against them. But trade and constructive investment are valid and desirable assets which strengthen us and do not threaten our independence as a nation.

The reason for this view is a simple one which, however, is easily forgotten. We do not, except for a few aeroplanes and military stores, trade with the United States. We buy and sell with individual Americans. Similarly, so far as I know, we do not borrow capital from the United States, but from individual Americans: banks or investment houses, or corporations, or investors. It is not state trading and it is not American foreign aid that we are getting.

I can see no virtue or defect in the fact that we sell a carload of newsprint to a Canadian or an American publisher. I do not think it adds one jot to our independence if the buyer happens to be a Canadian nor does it detract from national identity one scrap if he is an American. There is simply no dependence effect--in national terms--from trade, either exports or imports. In fact, the greater our trade, the greater will be our ability to maintain and develop our national character and culture.

Similarly, whatever future difficulties it may create for debt service or balance of payments, I can see no threat to Canadian independence from private American investment in this country. If we opened the door to receive their money, and it is now safely in Canada in the form of bricks and mortar and machinery, we can easily see that it performs satisfactorily according to Canadian standards-by persuasion preferably, by legislation if necessary. The fact is that we needed this investment in the early post-war years and it contributed greatly to our then rapid growth. The fact also is that we will continue to need foreign investment in Canada. We simply do not generate enough capital of the right kinds to meet our needs for the growth we want. I hear many questions asked today about the Canadian climate for investment. If we are not careful, we may find that foreign investment will turn to other more agreeable and enticing places, of which there are many in the world. If this happens, we will wake up to find that our growth has been sharply and shockingly arrested.

The other word of caution is about domestic trading policy. We hear much today about our large volume of imports. It is suggested that it would be nice if we made these things ourselves and gave more employment to our local industries. Some more protection--higher Canadian tariffs--would do the trick. This is dangerous and unrealistic talk.

Our present trading system is the result of a long series of post-war international agreements, and we can today make no extensive tariff increases without breaking our Canadian word. We gained trading concessions from other countries as the price of our present tariff levels, and if we raise them we go back on our bargains. Nor can we impose quotas; there is no legislation in Canada which allows the government to impose quotas, and it would be an odd step for a nation that has preached loudly and long against quotas by other countries to create this power now. These are powerful, practical reasons against a resort to increased protection. But there are even more basic reasons against such a course.

The essential fact is that you cannot improve a high cost economy by making costs still higher. You cannot insulate an entire economy against the influence of world competition. An increase in tariffs means inevitably that Canadian consumers will be compelled to pay substantially more for the things they need and want. And if Canada raises tariffs, we are bound to get retaliation from other countries. The fact is that we already have a favourable balance of trade with almost every major industrial country except the United States. We now sell more to each of them than we buy from them-the United Kingdom, and France, and Holland, and Japan. If we shut off their goods, they will shut off ours.

I suspect, however, that the problem is much more fundamental than this. I suspect it is not really a question of how we sell our wheat to Japan, but how Japan buys wheat from us. In a word, it is how the Japanese eat and what happens in the world if they don't eat. This example and its implications can be extended around the globe.

More generally, a retreat to protectionism would be a political disaster in world affairs. The protectionist sentiment is growing. It is here in Canada. It is clearly evident in the United States, and it is said to be showing itself in Europe. At the same time, the less-developed nations of Asia, Africa, and Latin America are seeking foreign investment to raise their industrial and living standards. For a variety of reasons, the more developed nations are pouring vast amounts of capital into these countries to speed their industrialization. If this is successful, they will want and need not only capital and technical assistance, but markets for their products too. It is a basic contradiction of policy for the major industrial nations to put money into Asia, Africa, and Latin America, and at the same time to be regarding increased protection as a possibility.

You know, we have been through much of this before. If you cast your minds back thirty years you will remember the Smoot-Hawley tariffs in the United States. They were only part of the breakdown of world trade which made the emergence of Hitler easier and the Second World War inevitable. The one difference is that that time we managed to mess things up among ourselves. Today there is an outside powerful nation waiting off-stage, ready and eager to pick up the pieces.

THANKS OF THE MEETING were expressed by Mr. Arthur E. M. Inwood.