Foreign Relations of the United States, 1969–1976, Volume III, Foreign Economic Policy; International Monetary Policy, 1969–1972

85. Memorandum for the Record¹

Washington, December 6, 1971, 4 p.m.

SUBJECT

• U.S.-Canadian Ministerial Meeting

PARTICIPANTS

• Canada
  • Edgar J. Benson, Minister of France
  • Jean Luc Pepin, Minister of Industry, Trade and Commerce
  • Sol Simon Riesman, Deputy Minister, Department of Finance
  • James F. Grandy, Deputy Minister, Industry, Trade and Commerce
  • Albert Edgar Ritchie, Under Secretary of State for International Affairs
  • Marcel Cadieux, Canadian Ambassador to the United States
  • Peter M. Towe, DCM, Canadian Embassy
• United States
  • Secretary John B. Connally
  • Secretary Maurice Stans
  • Under Secretary Paul Volcker
  • Assistant Secretary of Treasury, John Petty
  • Assistant Secretary of Commerce, Harold Scott
  • Acting Assistant Secretary of State, Julius Katz
  • Deputy Assistant Secretary of State, George Springsteen
  • William Johnson, Canadian Country Director
  • Ambassador Adolph William Schmidt
  • Helmut Sonnenfeldt, NSC
  • Robert Hormats, NSC
  • Denis Clift, NSC

Minister Pepin indicated Canada’s desire to keep trade discussions outside of the surcharge context and to discuss “trade irritants” of interest to both the U.S. and Canada. Trade irritants for the U.S. were the Canadian-American Automotive Agreement, tourist allowances for Canadian tourists returning to Canada, and the Defense Production Sharing Arrangement.

Canada was concerned with such matters as uranium, petro-chemicals and U.S. anti-dumping regulations. Canada believes it must have a balanced trade package in which it also receives something from the U.S. and does not believe the U.S. has helped in developing this package. Mr. Petty discussed Canada’s request of changes in U.S. trade programs and indicated what was being done on these matters.

Secretary Connally indicated a need for Canada to help the U.S. eliminate its balance of payments deficit. Minister Benson insisted that Canada had a deficit on current account (trade and invisibles) with the U.S. Secretary Connally indicated that the reverse is true and that last year Canada had had a trade surplus with the U.S. of $1.7 billion. (These terms and our figures are illustrated below) Mr. Volcker pointed out that Canada continues to be a strong exporter of goods and a strong importer of capital. Minister Benson maintained that last year Canada’s overall surplus on current account was less than one-half of what it was in 1970 and that capital inflows have fallen off steadily. Canada also pointed out that it has engaged in a clean float in which its dollar has floated upwards and that forces currently at play will decrease or eliminate Canada’s surplus with the U.S.

U.S. Bilateral Balance of Payments with Canada 1970 (in U.S. $)

U.S. Exports	9,044
U.S. Imports	-10,720
Trade Balance	-1,676
Invisibles (shipping, tourism, etc.)	1,080
a) Current Account Balance	-596
U.S. Direct Investment in Canada	-915
U.S. Purchase of Canadian Securities	-475
Other	-19
Canadian Investment and Security Purchases in U.S.	+367
b) Capital Account Balance	-1,042
Basic Balance (a & b)	-1,638

Secretary Connally pointed out that we will have a deficit of $10-11 billion in 1972, and that we would expect some help from Canada in improving our position. He indicated that the Canadian dollar was undervalued. Minister Benson replied that it was not, and that Canada was allowing its dollar to float freely and would re-peg it when it arrives at a sustainable market rate. It had moved upward recently and was now nearly at par. Canada’s pulp and paper industry, to cite one example, had been hurt by the exchange rate adjustments, and is now realizing no profits. He indicated that Canada had a deficit of $220 million on current account with U.S. last year. It had had a $2 billion overall current account deficit in 1965 and had steadily progressed to the point where it has a much smaller deficit.

Secretary Connally repeated that the U.S. had a $1.7 billion trade deficit with Canada and a current account deficit of $600 million. Canada stated that the U.S. had a current account surplus with Canada, but that its basic balance with Canada was indeed in deficit.

Canada strongly asserted its intention to let the market rate determine the value of its dollar and to re-peg when it is sure it has a sustainable rate. It hopes to do this as soon as possible. Canada pointed out that its currency is extremely vulnerable to market crises primarily because big American firms can move huge sums of money across the border almost instantly.

Secretary Connally wanted to know whether, because it was so intent upon floating, Canada would help him at the next Group of Ten meeting to get others to float as well. He said that U.S. would be happy to keep its dollar floating if others agreed to float. Canada indicated that its policy was to float because it would be difficult to re-peg while monetary conditions were uncertain. However, other countries may assess their interests differently. Secretary Connally indicated that Canada should be able to find a viable parity for its currency; and, that, because it has floated longer than anyone else, it should know at what rate the Canadian dollar could be sustained. Minister Benson indicated that Canada did not know, during this period of uncertainty, at what rate its dollar could be sustained and could not afford to re-peg at a rate which would necessitate large-scale Canadian intervention in the exchange market. It would float until it did have enough information to re-peg.

With regard to trade questions,² Minister Pepin indicated that Canada was prepared to remove the first two (the requirement that auto manufacturers in Canada produce in Canada approximately 75% of all products sold there, and that their companies maintain specific minimums of absolute values of their production in Canada) of the three “transitional safeguards” of the Canadian-American Automotive Agreement, but is still sticking on the third-no duty-free import of automobiles by individuals, (i.e. Americans are free to import cars from Canada, but Canadian individuals must still pay a 15% duty on cars imported from the U.S.). Minister Pepin indicated that a committee should be set up to look at this tariff, and examine measures to broaden the agreement. Secretary Connally indicated that “symmetry” would dictate imports of American cars into Canada be treated the same way as Canadian cars into the U.S.

On tourist allowances, Canada indicated that it was willing to raise the exemption on duty from $25.00 to $50.00, and would be willing for the U.S. to drop its duty-free allowances from $100 to $50.00. With regard to granting special tariff exemption for Micheline to build a factory in Canada, Minister Pepin indicated that Canada would make no tariff change without first consulting with the U.S. Minister Pepin indicated a desire to develop a package on “irritants” and was willing to continue negotiations to this end. Pepin indicated, however, that it would be politically very difficult to drop the third “safeguard” in the Canadian Automotive Agreement at this time. In fact, he said, the Canadian Government was way out on a limb for having agreed to remove two of three.

Mr. Volcker indicated that the U.S. wanted a solution conducive to expanded trade. Canada had imposed certain trade restrictions when it was in deficit. He proposed that we negotiate to make these arrangements reciprocal, and that we take the necessary political steps to bring this about. Canada indicated, however, that it would have to get a GATT waiver to remove the 15% duty on cars imported by individual Canadians from the U.S.

Secretary Connally indicated that it would be important to reaching a solution to the monetary problem in the near future if Canada could move on these trade issues. He felt that we should try for reciprocity in our trade arrangements. Minister Pepin indicated that this might be possible. Secretary Connally again repeated the importance which this country attaches to resolving our balance of payments and trade problems and indicated that Canada would have to do its share.

The meeting concluded with the understanding that the bilateral committee being established to find solutions to trade irritants would submit its recommendations by December 17.³

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 356, Monetary Matters. Secret. The meeting was held in the Roosevelt Room. Prime Minister Trudeau also met with President Nixon the same day.
2. Sub-Cabinet level meetings on “trade irritants” had been held in Ottawa on November 4 and November 15. Reports on those discussions were sent in telegram 1816 from Ottawa, November 6, and telegram 1871 from Ottawa, November 17. (Department of State, S/S Files: Lot 73 D 153, Box 124, Morning Summaries August 25-December 31, 1971)
3. According to an April 12, 1972, memorandum from Assistant Secretary of Commerce Scott to Kissinger, Assistant Secretary-level consultations with the Canadians were held in Washington December 16-17. (National Archives, Nixon Presidential Materials, NSC Files, Country Files—Europe, Box 671, Canada Volume III 9/71-12/72) No record of recommendations was found.