455. Memorandum From Secretary of State Rusk to President Johnson0

SUBJECT

  • U.S.-Canadian Problems

In accordance with my promise at the Cabinet meeting yesterday, I am attaching a memorandum briefly describing the principal current problems between the United States and Canada.

[Page 1217]

Over the past few years, our relations with Canada have grown increasingly sticky. The Canadians have maneuvered themselves into an impossible dilemma. Their economic prosperity depends on the continual inflow of U.S. capital. This necessarily brings with it control of their enterprises by U.S. management. They could undoubtedly improve their standard of living if they accepted the full consequences of this situation and permitted a gradual integration of the Canadian market with our own. But because they are so conscious of the overwhelming size and power of the United States, they tend to pursue highly nationalistic policies—fearing that otherwise Canada would become, if not the 51st State, at least a neighbor heavily dependent on the U.S. Colossus.

The result is that, no matter which party may be in power, every Canadian Government feels compelled to try to reduce the economic control that necessarily accompanies reliance on U.S. capital. The Diefenbaker Government pushed such measures too far and precipitated a balance-of-payments crisis that required us to mount a costly rescue operation. When Diefenbaker later attempted to renege on his defense commitments to the United States, his Government was voted out of office.

The Pearson Government is, in spirit, friendly to us and, in principle, much more sympathetic with U.S. objectives. But it, too, has felt compelled to take a series of measures that have kept our relations on the edge of tension—measures that can, if carried too far, result in serious economic and political problems between our two countries.

In late October, President Kennedy established a Subcommittee of the National Security Council, under the Chairmanship of George Ball, to try to bring together the problems each of our Departments was having with the Canadian Government, and to explore broad lines of policy that could result in improved relations. Up to this point, the Subcommittee has gathered information from each of the Departments. Its proposals should be ready in time to be considered when you meet with Prime Minister Pearson in January.

Dean Rusk1
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[Attachment]

ROUND-UP OF U.S.-CANADIAN PROBLEMS

Petroleum

Imports of petroleum and products from Canada are excluded from the U.S. licensed import quota program. Since 1962, imports from Canada are calculated within the total permissible imports into the United States, and any increase in imports from Canada would therefore be at the expense of imports from some other source. The Canadian Government has voluntarily limited expansion of exports during 1963 but has indicated that they will be unable to do so in 1964 without formal controls. Imposition of formal controls would be regarded in Canada as making a mockery of the national security rationale for the program under which the overland exemption has been justified.

Canadian Softwood Lumber Exports

Increasing imports of softwood lumber from Canada since the end of 1961 have brought considerable pressure from Pacific Northwest lumber communities for some restriction of imports. The Tariff Commission reviewed the problem under the terms of the Trade Expansion Act of 1962 and in its report in February this year ruled that increasing imports due to tariff concessions were not the cause of injury to the domestic industry. After failing to achieve quotas or increased tariffs under the existing legislation, the industry has sought to have Congress pass various bills which would require that imports of lumber and logs be marked as to origin or otherwise impose restrictive measures. The Administration is on record as opposing these bills which are inconsistent with U.S. trade policy. A House-Senate conference committee approved the measure December 11 and the Canadian Ambassador has requested an appointment with Mr. Ball to register his government’s concern.

Passamaquoddy Tidal Project

Secretary Udall reported to the President July 1 on the results of a re-study of the proposed Passamaquoddy Tidal Project and development of the Upper Saint John River, which found the project economically feasible. The Department is proceeding with necessary discussions at an early date with the Canadians so that legislation may be introduced into Congress early next year. Thus far, there has been no indication of strong interest in the project from the Canadian Government although the Provincial Government of New Brunswick has been more enthusiastic. Technical discussions were held with the Canadian Government December 4–5, 1963, but no negotiations have been scheduled.

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Wheat Pricing Policies

Disagreement between Agriculture and the Canadian Wheat Board over pricing policies has been aired in the press in recent months in both countries. The Department of Agriculture has argued that market conditions are good for an increase in the international price which would benefit the U.S. balance of payments and reduce the cost of the wheat subsidy program. As the two largest sellers of wheat in the world market, Canada and the United States have an important effect on prices. The Canadians believe that a large increase in price would be undesirable since it would not only encourage future uneconomic production but would also antagonize regular customers who might be lost in future years. Compounding Agriculture’s unhappiness is a belief that the Canadians had failed to keep a commitment to consult closely on price policies. The matter has subsided somewhat but close consultation has not been resumed.

Differences regarding wheat policies are a continuing item in U.S.-Canadian relations which can continue to be controlled by use of the consultative mechanism.

U.S. Interest Equalization Tax

This proposed legislation would raise by 1% the effective rate of interest paid on borrowings by foreigners in United States markets and is designed to reduce but not eliminate such borrowing in order to alleviate the U.S. balance of payments problem. There was an immediate and severe reaction in Canadian stock and money markets reflecting a fear that Canadian borrowing in the U.S. would dry up and result in serious balance of payments and internal economic problems for Canada. The Administration subsequently proposed an exemption from the tax for new Canadian issues, announcement of which relieved the situation. While the measure is pending in Congress, foreign borrowing in the U.S. has come to virtually a standstill. Canadian officials have indicated a belief that a total exemption for Canada would be needed if it were to avoid another balance of payments crisis.

Gordon Budget Measures on Taxation of Foreign Investment

The 1963 Canadian budget proposed discriminatory tax treatment on firms which are more than 75% owned by a foreign owner (person or corporation). Considerable opposition was expressed in Canada on the grounds of practicability which resulted in later administrative modifications. Some criticism has also been made of the effect which the measures might have on investor confidence and, in turn, on the economy of Canada. The discriminatory taxation of dividends paid to non-residents would raise taxation from 15% to 20% for non-qualifying firms, effective January 1, 1965.

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The U.S. rate would automatically go to 30% unless the double tax treaty between the U.S. and Canada were renegotiated. The Canadian measure became law December 5, 1963.

Automobile Export Incentive Scheme

The Canadian Government introduced effective November 1 new measures which would provide for a refund on duties paid on automobiles and parts imported into Canada to any firm which by itself or through independent parts manufacturers increased the exports of automobiles and parts. A potential $200 million of dutiable imports into Canada annually are involved.

The Canadian measure aims at increasing Canada’s share in production of and trade in automobiles, particularly vis-à-vis the United States where the products are similar and parts are virtually interchangeable for similar models. The scheme is somewhat objectionable because of the artificiality of the measures and their interference in normal business decisions. However, they aim at more economic production and an intended effective removal of Canadian tariffs which average 20% and contribute to the high cost of cars in Canada. The Canadian Government hopes that this will lead to lower costs, lower prices, expanding markets and benefit therefore to industry on both sides of the border. The applicability of U.S. countervailing duties has been considered by Treasury. The recent decision of Studebaker to close its U.S. plant but continue production in Canada appears to be a result of other economic factors. However, the Canadian scheme has been mentioned as a contributing factor.

Great Lakes Labor Dispute

The Seafarers International Union of North America (SIU) was expelled from the Canadian Labour Congress in 1960 for corrupt and antidemocratic practice. The CLC organized the Canadian Maritime Union (CMU) and SIU, which controlled by far the largest number of Canadian seamen, reacted by instituting harassment, picketing and boycotting within Canada of ships manned by CMU. The Canadian Government successfully enjoined this SIU action in Canada. Harassment of CMU ships then took place in 1962 and 1963 in U.S. ports—where injunction was only partially successful.

The report of a Royal Commission (Justice Norris) sustained the charges leveled by CLC against Banks and recommended a Canadian Government trusteeship over the five Canadian maritime unions with power to remove any union officials it deemed necessary.

Secretary Wirtz with the support of the State Department and Minister of Labor MacEachen attempted unsuccessfully this year to arrange a joint trusteeship by the AFL–CIO and CLC. The Canadian Government [Page 1221] passed a bill providing for a government trusteeship. At the urging of the trustees, the SIU of Canada, continued to work the ships, but sporadic picketing and boycotting of Canadian vessels has occurred in U.S. ports. Thus far, however, this harassment has been limited to half a dozen vessels, but the situation remains potentially dangerous.

Defense Matters

Essentially, U.S.-Canadian defense problems are susceptible of orderly resolution through existing channels. A major problem in U.S.-Canada defense relations was resolved by the recent nuclear weapons agreements.2

The Canadian Government has underway a complete reappraisal of defense policy. The goal is to attain a more “coherent” defense posture and reduce defense costs. We can live with the present level of Canadian defense spending as long as Canada’s defense policies are symmetrical with our own. We have reason to believe that this requirement will be met. However, it is important that Canadian leaders and public continue to be made aware of the vital need for nuclear weapons in the defense of North America and in NATO.

Canada is greatly interested in the Defense Production Sharing Program. Secretary McNamara and Canadian Minister of Defence Production Drury last June reaffirmed the Program at the highest practical level in balance (thus removing it from the balance of payments). The program essentially is in balance. The present problem relates to the Caribou airplane, which has been the principal Canadian produced item and the visible symbol of the Program in Canadian eyes. The U.S. is ending its purchases of the present model, but hopes to continue participating in research and development of a promising second model. The latter, however, depends on Congressional approval for reprogramming funds.

Law of the Sea

Canada has announced its intention to proclaim in May 1964 a 12-mile exclusive fisheries zone measured from straight baselines which would close off from the high seas certain important areas of its coastal waters. In an effort to deter any action which would create undesirable precedential repercussions affecting our defense and commercial interests, we have offered to recognize the 12-mile zone provided it is [Page 1222] measured from valid baselines and our traditional fishing rights are undisturbed. Further, we have agreed to acquiesce in the Canadian claim to Hudson Bay. Baselines acceptable to us being not too different from those drawn by Canada, we now propose to offer a joint examination of the fisheries problem before the third negotiating meeting in January in the hope of reaching further accommodation without jeopardy to our vital worldwide interests. Deputy Under Secretary Johnson is in charge of these negotiations.

Columbia River Treaty

The treaty providing for development of the Columbia River was signed in January 1961 and ratified by the Senate shortly thereafter. Canadian ratification has been held up by a change in policy of the British Columbia Government which now wishes to sell to U.S. consumers the power benefits it would receive under the treaty rather than use the power itself as originally envisaged. Negotiators reached agreement ad referendum December 11, 1963 on a draft Exchange of Notes which would clarify the terms of the treaty.3 If the U.S. Government approves the negotiators’ recommendations vis-à-vis the sale of the power, it is highly probable the notes can be exchanged before the end of the year and ratifications exchanged by late spring. U.S. negotiators will be meeting next week with Secretary Udall and White House staff to formulate a U.S. Government position.

Civil Aviation

Canada has long wished to renegotiate its bilateral air agreement with the U.S. to obtain deeper penetration routes into the U.S. instead of essentially transborder operations now permitted. Ambassador Galbraith did a study for the White House in the early fall of 1963 and negotiations have been proposed on the basis of the report. The Canadian Government has agreed and negotiations are expected to begin in early 1964.

  1. Source: Department of State, Central Files, Pol Can-US. Secret. Drafted by Ball.
  2. Printed from a copy that bears this stamped signature.
  3. The first agreement, on warheads for U.S. forces in Canada, was executed by an exchange of notes on August 16; the second agreement, on warheads for Canadian forces in Canada and in Europe, was executed by an exchange of notes on September 28 and 30. Both agreements were terminated on March 9, 1987. Documentation on the negotiation of the agreements is in Department of State, Central Files, Def 12–2 Can.
  4. For text of the Columbia River Treaty, signed January 17, 1961, with attached exchange of notes, which entered into effect on September 19, 1964, see 15 UST 1555.