Canada: Coping with a Twitchy Elephant

While Americans focused on Phase II of Nixon's economic program last week, other nations remained deeply distressed by the continuing aspects of Phase I--particularly the surcharge of up to 10% on their exports to the U.S. They fear that a trade war could erupt should Treasury Secretary John Connally overplay his bargaining hand and prolong the surcharge at their expense. No country has been as dismayed by Washington's measures or stands to lose as much as Canada, far and away the U.S.'s best customer and most important supplier. Prime Minister Pierre Elliott Trudeau two years ago memorably summed up the two countries' relationship: "Living next to you is in some ways like sleeping with an elephant. No matter how friendly or even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt." Now Canadians have discovered what happens to a bedmate -when the elephant starts tossing and turning.

CANADA is acutely vulnerable to Washington's economic twitches. Fully 13% of Canada's nearly $90 billion gross national product depends on exports to the U.S. Ottawa estimates that the 10% surcharge, if it is maintained for a year, will cost the country $900 million in exports and 90,000 jobs--the equivalent of 900,000 in the U.S. Yet unemployment was already running at 6.5% or 455,000 jobs, a higher rate than in the U.S. In Trudeau's words, Canada stands to be "more hurt than any other country" by Washington's trade moves. As a result, U.S.-Canadian relations have sunk to what may be their lowest point since Ottawa's Tories won a 1911 election on the slogan "No truck nor trade with the Yankees."

Trudeau summed up the prevailing mood: "They don't seem to realize what they are doing to Canadians. If they do realize what they are doing and if it becomes apparent that they just want us to be sellers of natural resources to them and buyers of their manufactured products, we will have to reassess fundamentally our relations with them, trading, political and otherwise."

Washington of course denies any such intent, although U.S. officials do concede that Canada was hit by a truck that was heading elsewhere--namely to Japan and Western Europe. For his part, Trudeau has turned aside suggestions from the opposition New Democratic Party that Ottawa slap a retaliatory export tax on natural gas, oil and minerals needed in the U.S., or restrict dividend payments to U.S. parent companies. He has settled on a milder response: a bill, passed by Parliament two weeks ago, setting up an $80 million kitty to aid hard-hit firms in maintaining their employment rolls. The danger is that if Canadian companies use that money to cut their export prices, Washington must by law retaliate with countervailing duties--which in turn would further exacerbate relations between the two countries.

When the surcharge is finally lifted, Canada stands to benefit from both a pickup in the U.S. economy and the revaluation of other currencies, especially the Japanese yen. Of far greater concern to Ottawa at the moment are two Nixon Administration bills that passed the House of Representatives last week: an investment tax credit of 7% for companies buying equipment made in the U.S. and a bill setting up a Domestic International Sales Corp. DISC, as it is called, would give U.S. companies generous tax benefits to produce items for export inside the U.S., thus eliminating any incentive to expand their foreign subsidiaries. Since roughly half of Canadian manufacturing is U.S.-owned, Ottawa fears that the bill, if it passes the Senate, could calamitously slow down Canada's economic growth.

Ottawa is also disturbed by Washington's increasingly hard line on the 1965 auto pact between the two countries, which was designed to integrate car manufacturing and let Canadians build as many autos as they buy. It has worked more to Canada's advantage than anyone expected, helping to turn Canada's longstanding trade deficits with the U.S. into a $1 billion surplus last year (though such items as interest payments and dividends to U.S. corporations tipped the overall balance the other way, to a deficit for Canada of $60 million). The pact contains so-called "transitional" safeguards for Canada that Washington is now anxious to abolish. Ottawa is willing to negotiate but not under duress.

The result has been a growing irritation on both sides. Trudeau may face a general election next year, and any party might find it tempting to ride to power on anti-Americanism--directed largely at U.S. corporations' $17 billion of direct investment in Canada. Perhaps some of that feeling will dissipate when the surcharge is removed, if it does not remain in effect too long. In addition, Nixon plans to visit Ottawa next spring; the trip could serve, as did his meeting with Emperor Hirohito in Anchorage, as a symbolic reaffirmation of U.S. good will. But such is the disrepair of the once easy relationship between Ottawa and Washington that it will take more than symbols to convince Canadians that the U.S. is not out to improve its trade at the direct expense of its closest economic partner.

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