Tilt Between Neighbors

The U.S. balance of payments deficit swelled to an alarming floodtide of nearly $30 billion in 1971. When the Administration announced that staggering shortfall last week, it became doubly clear why Treasury Secretary John Connally has attached such importance to forcing trade concessions from the nation's foreign customers. The Japanese and Europeans have recently agreed to relax some of their restrictions against U.S. imports. But bargaining with the U.S.'s biggest and closest trading partner, Canada, has so far produced little but misunderstanding and bitterness. Negotiations broke down this month, and no date has been made for resuming them, leaving trade relations between the two usually good neighbors at their lowest point in years.

Connally and his aides demand a reversal in the balance of merchandise trade with Canada, which has swung from a consistent U.S. surplus for a quarter-century to a deficit in each of the last four years; for 1971, the imbalance was $1.2 billion. U.S. negotiators have three complaints. First, Canadian tourists can bring back only $25 worth of duty-free goods from the U.S. every three months; Washington wants that limit increased, to something closer to the $100-per-trip limit put on Americans who shop in Canada. Second, under a 1959 agreement, Canada's defense purchases in the U.S. were supposed to remain in a roughly fixed ratio to U.S. defense expenditures in Canada; lately Canadian spending has lagged, and the U.S. wants it boosted. Third and most important, the U.S. wants a change in a 1965 auto agreement that allows Canadian-made cars to enter the U.S. duty-free but heavily taxes non-dealer traffic in new cars moving in the other direction.

The Canadians are bitter about having been asked to help out the U.S. with its deficit problem. They point out that even though the U.S. runs a deficit in merchandise trade, it came out about equal in overall balance of payments with Canada during the first nine months of last year. Reason: the money that Canada sent across the border in the form of dividends to U.S. investors and interest payments to U.S. lenders more than made up for the Canadian trade surplus.

Heavy Mail. Further, the Canadians argue that the U.S. indulges in some blatantly unfair trade practices of its own, including an embargo on the sale of Canadian uranium in the U.S. and inequitable tariffs on Canadian-made aircraft and engines, and should match any concessions granted by Ottawa. Said one top Canadian trade official: "The U.S. trade policy is not as white as driven snow." Nevertheless, the Canadians are probably willing to make a few adjustments--but nothing near what the U.S. wants.

Trouble is, the issue is tangled in the election-year rhetoric of both countries. Prime Minister Trudeau has received so much mail on the auto pact that his political advisers are convinced that any major concessions could cost him a half dozen parliamentary seats from car-producing Ontario in this year's election. U.S. officials have taken to playing on Canadian fears of congressional retaliation, possibly by a reimposition of the 7% excise tax on Canadian-made cars--although things are not likely to come to that for some time. "There are elements in this country which are protectionist by nature," Treasury Under Secretary Paul Volcker warned a group of Canadian and American businessmen last week in Washington. Canadian Trade Minister Jean-Luc Pepin complains that the U.S. is a hard nation to bargain with. As he told TIME'S Lansing Lamont: "We speak with one voice, but not the U.S. The American negotiators say,

'Between us, we would like to go along with you on this issue, but Congress won't stand for it.' "

A new element in the controversy will be the appearance in the next several weeks of a Canadian government report, which will propose legislation for regulating foreign-owned businesses--most of them U.S.-controlled--in Canada. Though the new rules probably will not be as strict as Canadian nationalists would like, the report is expected to urge closer screening of foreign investments and possibly even compulsory Canadian shareholding of 51% or more in some local subsidiaries of non-Canadian corporations. That is hardly the sign of friendly capitulation that U.S. negotiators are impatiently awaiting from Canada. Trudeau said last week that his government planned to persist in scheduling new trade talks. Even so, the chances are unfortunately strong that U.S.-Canadian trade relations will grow still worse before they get better.

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