Continental Community?: Independence and Integration in North America 9780773595811

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CONTINENTAL COMMUNITY?

CONTINENTAL COMMUNITY? Independence and Integration in North America

edited by: W. Andrew Axline, James E. Hyndrnan, Peyton V. L yon, and Maureen A. Molot with Naorni Black, H. Edward English, John J. Kirton, Claude Masson, John N. McDougall, Charles Pentland, A. E. Safarian, Garth Stevenson, Gilbert R. Winharn, and Gerald Wright.

Copyright O 1974 by McClelland & Stewart

The Canadian Publishers McClelland and Stewart Limited 25 Hollinger Road, Toronto

PRINTED AND BOUND IN CANADA

Carleton Contemporaries

A series of books designed to stimulate informed discussion of current and controversial issues in Canada, and to improve the two-way flow of ideas between people and g o v e r n m e n t .

ISSUED UNDER THE EDITORIAL SUPERVISION OF THE INSTITUTE OF CANADIAN STUDIES. CARLETON UNIVERSITY, OTTAWA. DIRECTOR OF THE INSTITUTE, DAVIDSON DUNTON

TABLE OF CONTENTS

Preface, viii Peyton Lyon - Introduction

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Section I: Economic and Political Interaction in North America: Theoretical Foundations Andrew Axline - Introduction 15 1. H. Edward English -The Political Economy of International Economic Integration: A Brief Synthesis 19 2. Charles Penflond - Political Integration: A Multidimensional Perspective 42 3. W. Andrew Axline - Integration and Inequality: Notes on the Study of Integration Hegemony 67 4. Naomi Block -Absorptive Systems are Impossible: The Canadian-American Relationship as a Disparate Dyad 92

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perspectives which might serve as the organizing concept for the study of North American contemporary political and economic interaction. Other obvious contenders are systems analysis, imperialism and "penetration." We are not asserting that the perspective of integration offers the only way of looking at CanadianAmerican relations, but we do believe that it offers a useful way of conceptualizing and organizing the study of these relations in order to enhance understanding. The United States and Canada share many cultural attributes and values originally inherited from a common English motherland, and developed through mutual cohabitation within the confines of an isolated continent for a period of several hundred years. This similarity, proximity, and mutual isolation have encouraged a relatively high degree of interaction in trade, movement of persons (both immigrants and tourists) and communication. Some of the common problems and goals have been dealt with through the establishment of formal institutions. At times the possible elimination of economic barriers, or the suppression of political frontiers (perhaps even by force). have been mooted on one or both sides of the border.

ECONOMIC AND POLITICAL INTERACTION IN NORTH AMERICA

These characteristics of the Canadian-American experience are important factors in the study of international integration and the suggestion that integration is a concept which aptly describes the contemporary situation is neither new nor original. Indeed. the fear that a high degree of interaction in the economic sphere will lead to political integration has often been expressed and appears to have been the dominant issue in at least one general election. This fear is an implicit acceptance of the Functionalist thesis that economic cooperation will inevitably lead to political fusion. A recent scholarly article has considered the broad spectrum of Canadian-American relations as an integrative situation, and a recent Canadian external affairs paper on policy toward the United States reasserted the credibility of the Functionalist thesis. Both Canada and the United States are countries whose federal forms of government are the result of an integrative process which remains dynamic. Their history has served as a foundation for some of the most important theorizing on political integration. This book is also concerned with the internal integrative processes within Canada, and the relationship between these processes and the larger process of continental integration. We have tried to formulate this theoretical section broadly enough to provide a basis for the analyris of the two levels of integration. The theory of political integration has developed as a separate body of knowledge from that of economic integration, but the two have always been closely tied, sometimes quite explicitly. The clearest link between economic and political integration is found in the Functionalist tradition, mentioned above, which led the founders of the European Community to pursue their goals of political integration through the means of economic integration. But in all approaches to political integration, economic interactions are seen as one of the most important among social and cultural transactions which underlie political integration. In this section on the theoretical aspects of integration applicable to the North American experience, we have tried to draw on both the economic and the political bases of integration theory. English's paper deals exclusively with principles of economic integration, while Pentland's and Axline's papers both build upon the economic element as one of the most important among the factors relevant to political integration. But, as these two essays indicate. ~oliticalinteeration involves cultural. social and institu-

INTRODUCTION

Theoretical considerations, by their very nature, must remain valid beyond the specific cases out of which they are developed, and be applicable to classes of phenomena rather than merely to the particular case under study. In this section we try to develop some general theoretical observations which are applicable to a particular class of phenomena into which the Canada-United States relationship falls. This can roughly be described as closely linked pairs of countries which are greatly unequal. i.e. disparate dyads. The inequality is usually expressed in terms of such characteristics as G.N.P., population, territory or military capability, which are traditionally known as the elements of national power. The theoretical considerations are developed through a modification of the basic principles of political integration to permit their application to a situation dinerent from that of groups of states joining to form a customs union or confederation, the situation in which the principles were originally developed. This modification involves two fundamental elements, the reduction of the number of wuntries involved in the integrative process to two, and the existence of a gross inequality of national power. The gross inequality factor does not give us much cause for theoretical concern, because it has been taken into account in much of the theory of both ewnomic and political integration. The other modification, however, is of greater moment. There is certainly no assurance that the process of integration among a number of roughly equal countries is likely to parallel the process among a pair of countries of which one overwhelmingly dominates. That the process in these two different contexts is similar is a working assumption in this theoretical section, and indeed in the whole book, but the degree to which it is borne out can only be determined through attempts at application. The proof of the postulate is in the testing. The theory found in the following four chapters is derivative and synthetic. It tries to derive some major principles from the scholarly literature on international integration and to synthesize from it a set of questions, or organizing concepts, for the study of Canadian-American relations as an integrative experience. The chapter by English examines the fundamental thrust of economic integration theory, particularly the aspects that are relevant to situations such as those in North America. Upon close examination, it appears that some of the popular conceptions of costs and benefits of economic union are likely to be inaccurate, perhaps the very opposite of what they really are. For example, English suggests that in a free trade area the 1' 7

smaller partner will gain more in relation to the larger, that a stable equilibrium is possible, that controls on flows of investment and resources are consistent with the free trade area, and that it can successfully function without need for policy harmonization or supranational institutions. But the key questions are left to be answered through empirical investigation. The second chapter, by Charles Pentland, distills the vast and complex theoretical literature on integration into a series of organizing concepts. or dimensions, which represent the principal areas of activity in which integrative activity is manifested. These dimensions, along with the particular variables included in each dimension, provide an important guide to the areas in which integration can be observed and measured. These dimensions serve as a common conceptual framework for the subsequent substantive chapters. The third chapter, by Andrew Axline, suggests a number of different levels at which integration may have an impact and at which research could fruitfully be undertaken. Drawing upon the same literature as English and Pentland. he provides a synthetic point of view from which the theory of economic and political integration can be used to suggest general hypotheses about integration in Canada and the United States. A particularly important aspect that is suggested for study, and examined in later chapters, is the relationship between integration within Canada and between the United States and Canada. The fourth chapter, by Naomi Black, suggests that the dynamics of closely integrated pairs of countries operate in such a way as to prevent total absorption of the smaller. Thus there are built in constraints which establish an upper limit to the level of integration possible between unequal pairs of countries. The chapters in the theoretical section make an explicit attempt to leave open the central empirical and normative questions implied by this study. It is assumed that integration is a process that could move in two directions: disintegration, in other words, is an equally possible prospect in North America. And the desirability of integration is likewise left open. Clearly most observers of the present Canadian-American situation have opinions, often strongly held, on both of these issues. Indeed, these commitments are apparent in the following sections of this book. But it is precisely the distortions that can arise from premature conclusions that we wish to overcome in providing an objective, theoretical framework for the evaluation of Canadian-American relations. 18

CHAPTER 1

THE POLITICAL ECONOMY O F INTERNATIONAL ECONOMIC INTEGRATION: A BRIEF SYNTHESIS H. Edward English

The chief contribution of economics to the understanding of the interrelationships between countries is to identify the character of those interrelationships that affect the economic well-being of the individual countries involved and to attempt to measure the extent of such benefits. Economics as such has little or nothing to say about the social desirability of the interrelationships or the directness of their contribution to international harmony. The framework for all analysis of the contribution of economics to international affairs lies in the question: will the economic benefits be suflicient to warrant bearing whatever social cost is involved in the increased closeness or changed character of the international relationship under study? From this question it is possible to devise a definition of internarionol social equilibrium as the state from which no nation is tempted to depart because reduction in independence of action or any other of the benefits of nationhood exceed the benefits of policies leading to increased interdependence or new forms of interdependence. It is worth adding that this may be either because the former "losses" are great or because the added "benefits" of interdependence are small. The term "integration" was not used in the preceding paragraph because the intent of the paragraph was to define the international role of economics in the most general terms. What part of international relations is covered by the term "international integration?' If one is to include economic transactions, I think the answer must be a very high proportion. A common practice is to distinguish between cooperation and integration where the former term is used to identify rather looser forms of association, while integration is reserved for more formal 19

ECONOMIC AND POLITICAL INTERACTION IN NORTH AMERICA

arrangements. For example, it seemed easy to distinguish between the Organization for Economic Cooperation and Development and the European Economic Community on this basis. But what about GATT-does it represent a scheme for woperation or integration? It is an agreement suggesting a sort of cooperation, but it is an agreement about the instruments for control of trade flows and it quite explicitly rejects absolute barriers to trade and is strongly biased toward the reciprocal and non-discriminatory reduction of the most important relative barrier-the tariff. The treaty itself, and each round of negotiations, leads to clear commitments permitting greater interdependence of the national economies affected. There is also a strong bias against reversing the moves toward interdependence, except under conditions very clearly defined as temporary.' In what way are such commitments different from those undertaken in the formation of a customs union? There is no doubt a question of degree, but is the degree significant enough to warrant the terminological distinction? I think not. In searching for a limit to the scope of integration that is satisfactory on economic grounds, one is driven to a concept limited only by the regularity or relative permanence of the arrangement. Cooperation becomes a single act or short series of economic transactions. eg.. a wheat sale by Canada to China, a specific aid project; integration is any system providing the basis for systematic and recurrent transactions enlarging the scope for economic interdependence. Thus the GATT system has involved substantial commitments to economic integration, and it differs only in degree from more explicit and institutionalized economic unions. The importance of this discussion of definitions is that it provides support for the contention that integration. at least of an economic kind, can begin long before supranational institutions are introduced, and that if one approaches international integration on an interdisciplinary basis, it is quite inappropriate analytically to require elements of formal supranationality. Indeed, mere commitments to national self-discipline restricting the use of trade and investment obstacles in line with the principles of c A n and similar arrangements can open the door to a very substantial degree of economic integration. Thus if we are to talk meaningfully of integration, we must be aware that many of the benefits of economic interdependence are likely to be achieved before any of the more elaborate types of international political institutions

A POLITICAL ECONOMY OF INTERNATIONAL ECONOMIC INTEGRATION

are brought into play. (In this respect, social integration and economic integration are probably parallel. Commonality of elite groups and of scoial attitudes emerge in a permissive atmosphere, especially that which exists between wealthy and politically liberal states, without explicit governmental effort to promote it.) The Ingredients of Economic Integralion

Integration is economical if it pays to move productive factors and consumer goods and services. This means that the benefits from economic integration will be a function of the mobility of money capital, labour, and final products. By definition, natural resources are immobile, and national differences in patterns of natural resources are the only immutable basis for specialization and trade among nations. It is at least theoretically possible for all other factors and goods to move and, if they move, to reduce or eliminate international differences between prices of factors or goods and services. In fact, the mobility of resources is limited by factors other than the absence of differences between prices. The complete immobility of natural resources is the most importanL2 The mobility of all other factors or goods is affected by the cost of moving them. These costs must in all cases be related to the size of the benefits. The cost of moving fixed structures is almost prohibitive, and thus these will not normally be traded internationally. The of unskilled labour is related less to transvort -~~~ cost ~-~ moving ~~~cost than to the costs of adjustment - finding employment, housing, etc., and overcoming cultural obstacles such as language differences. For skilled labour, some of these costs may be lower or less serious relative to income, though in trades or professions of unique cultural characteristics (e.g., law) the costs of moving may be very high. For the other factors, money capital and technology (disembodied skills), the cost of moving is almost nil. These factors have an almost identical price everywhere. However, technology is not completely mobile because it is not equally adaptable in all settings, and the price of money capital between markets in which there are no artificial barriers differs at least by the average difference in riskiness of investment between national economies. The mobility of final products is also affected by moving costs, largely transport costs. For the most part, goods are more

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ECONOMIC AND POLITICAL INTERACTION IN NORTH AMERICA

mobile than any of the factors except technology and money capital, though the lower mobility of labour is governed by the complex and ill-defined cultural factors rather than transport cost. In any case, the artificial factors-immigration laws, etc. have historically reinforced the deterrents to mobility of labour more effectively than tariffs and other trade barriers have restricted the trade in goods. The fact that the obstructions to international labour mobility are closely related to national cultural preferences may justify an assumption that a difference in kind exists between such restrictions and those imposed on trade in goods. Allowing for at least some validity in this argument, one may, I think, conclude that the main scope for benefits from integration lies in systems permitting transfer of technology, money capital, and a wide range of goods including industrial raw materials, capital equipment, and consumer goods. The consequence of meaningful integration that emerges from any institutional system is largely measured by the extent to which the benefit from the transfer of these three ingredients is exploited. Any assessment of the non-economic effects of close economic integration should be related primarily to the implications of the transfer of these three ingredients. Among the interesting questions that immediately arise is the extent to which the movement of goods is a substitute for the movement of technology and money capital and to what extent they are complementary, a question that attains considerable importance to the extent that the political consequences of factor transfer are regarded as less acceptable. The Stages of Economic Integration A practical definition of the stages of integration based upon the foregoing discussion might thus be as follows: 1. Zero integration represents a state in which there is no systematic economic interdependency. This can be because there is very little economic or social motive for transactions, as between Canada and Albania, or it can be because formidable political barriers are erected, as between China and Taiwan or Tanzania and Mozambique. 2. Conventional treaty integration, conveniently defined, is the state achieved under permissive agreements covering one or more of the fields of merchandise, capital, and migrant transao

A POLITICAL ECONOMY OF INTERNATIONAL ECONOMIC INTEGRATION

tions. Every country experiences a degree of economic integration (of systematic transactions under treaty limits) with some other countries, and most have extensive patterns of such transactions. 3. Free trade association. The pure free trade association represents the limiting case of 2 -wherein each member removes formal trade barriers with all its partners. But such an association can be conveniently defined to exclude any form of supranational institution and to require only minimal common services statistical collection on a common (or readily reconcilable) basis and perhaps some kind of cornplaints bureau covering the actions of the partner states that might tend to contravene the intent of the treaty. This is the basic character of the European Free Trade Association, though like most free trade gorups, the commodity coverage in EFTA is incomplete. 4. Customs union. The customs union is distinct from the free trade association in that in the latter no common set of trade barriers is required. Each member retains its own trade policy vis-a-vis nonmembers. The customs union, on the other hand, requires a range of policy consultation and agreement. Whether this really requires supranational institutions is not self-evident. Coordination of customs administration is necessary, as well as common negotiating teams in dealing with non-members, but these needs can be met by joint councils containing representatives of national governments. The European Economic Community has established a substantial bureaucracy in Brussels, but in spite of this, national customs administrations collect the joint tariff at their own ports. And in the Kennedy round, although the Community had its negotiating team, this team had to consult frequently with member governments in order to avoid going beyond its authority. Of course, much of the European Community's bureaucratic superstructure exists to serve the functions of the Community that go beyond a pure customs union. 5 . Common Market. This term is usually less clearly defined than those described already. A full common market implicitly requires not only the free flow of goods among members, as in a free trade area, and common conditions of competition vis-a-vis the outside world, as in a customs union; it also implies wmmon labour 'and capital markets. There can be no doubt that the introduction of this element of commonality greatly complicates the arrangements and the extent of coordination required. The

ECONOMIC AND POLITICAL INTERACTION IN NORTH AMERICA

factors affecting the labour market include such things as conditions of work, educational qualifications, and social security systems. Those affecting the capital market include basic laws governing private property and financial institutions. These matters come much closer to the fundamental social preferences of society, and national governments are likely to be more interested in preserving their particular educational and social security systems and their private property institutions. The implications of these considerations both for the possibility of establishing a full common market and for the measurement of the net gains of such a market may be of crucial political importance. 6. Economic union. This expression is reserved for higher levels of integration. It implies the more or less complete coordination or harmonization of public policies and recognizes the many ways that government policies may affect the transfer of goods and factors of production in response to the basic resource structure and price differences among nations. Some of these may be so closely tied to the establishment of a customs union or common market that the act of establishing such arrangements will point to the desirability of some harmonization of policies. But with the contemplation of economic union, even the more general policies, what are called the macro-economic policies, become a subject of harmonization efforts. Central to the concept of full economic union is the harmonization of monetary and fiscal policies and the aaeptance of a fixed relationship between currency units (or a common currency). This means that the partner states are prepared to adopt similar views on such national objectives as full employment and inflation. With common monetary policy and a fvted exchange rate (or common currency), it will become impossible to pursue different employment objectives. If the growth potentials of the economic regions occupied by the individual states differ under these circumstances. the consequence of these differences in terms of different levels of employment and economic welfare in the various states will have to be dealt with by policies of redistributing income from the stronger to the weaker partners. There is little doubt that economic union is easier if there is a high degree of commonality of social preference patterns, at least in respect to the range of most widely used economic goods, and that it is much easier to contemplate when partners have similar growth potentials.

A POLITICAL ECONOMY OF INTERNATIONAL ECONOMIC INTEGRATION

The Process of Integration - Elements of a "Social" Equilibrium The lengthy definitional discussion up to this point is intended as framework for a discussion of integration as a process. The first necessity in scientific examination of the process is to get rid of two very common notions about the integration process; that it is inevitable, and that it is desirable. It would not be necessary to stress these rather obvious points except that we have been "brainwashed" by the literature on European integration - l suppose if the literature had been born out of North American experience, we might have to contend with a theory implying the inherent undesirability of integration. However, inevitability is harder to put in perspective. In the literature on European and even Atlantic integration, inevitability was a direct function of desirability.' The whole weight of political ambition in the early postwar years was to make the most of spillover, of expanding loyalties, and the theory was therefore biased, often quite deliberately, in the direction of arguments for a continuing process. History has demonstrated how remarkably biased was this theorizing. Oddly enough, although economic theory has no such doctrine of inevitability imbedded in it, it is very probably the root source of the conviction of many social theorists. This is because it is so widely accepted that the maximization of economic benefits from international relations is probably to be found in removal of all avoidable obstacles to such relationships. The only partial exception to this lies in the infant industry case, although this too can be treated as a problem of imperfection of capital markets. In a world in which the market system is subject to such a wide variety of modifications, based upon a shifting mix of economic and non-economic arguments, it seems very strange that social scientists should have fallen victim to such a simplistic inevitability doctrine. To understand why this has happened, it is necessary to more fully examine the integration process itself. The basic hypothesis that will be tested is an application of the international social equilibrium concept cited at the outset of this paper: that there is a level (or range of levels) of integration that maximizes the social benefits to the participating partners. The equilibrium position may not be unique. The factors requiring measurement are numerous and in some cases not readily quanitified, so that positions near equilibrium can not be readily ranked. Among the problems of definitions, there is one that is particularly funda-

ECONOMIC AND POLITICAL INTERACTION IN NORTH AMERICA

mental -to what extent will the degree of integration that maximizes the benefits for one partner be the same that achieves the same goal for the other partners. Clearly. if it is not, it will be possible for the disadvantaged partner to be compensated by those who are able to approach their equilibrium position most closely. Clearly also, all partners will incline toward capturing any major unexploited gains from closer integration, as this will help either to avoid the compensation process or lo make it easier. The equilibrium level (or range) can be further specified as that level from which there is no sustained tendency to depart because the benefits of such departure will not compensate the losses. Both benefits and losses will incorporate both economic and non-economic elements. On the basis of the foregoing discussion, economic factors will bias toward more integration, while non-economic forces may operate in either direction. For example, political forces may be strongly biased toward closer integration if security arguments require such interaction, as they were believed to in early postwar Europe. On the other hand, they will probably more often act as a constraint upon closer integration, since the existence of the nation state as a custodian of traditional cultures and institutions implies that there will eventually be substantial non-economic cost in pursuing integration further. Rather than go further with these political and social aspects, the rest of the discussion will be devoted to an assessment of the size of economic benefits likely to be involved. If such benefits are after a point limited, the non-economic costs of acquiring such benefits may not need to be at all substantial for a nation to willingly forego the gains of integration. The key question may well be at what level of integration is it possible to obtain the major benefits of international transactions associated with economic integration, thus making the sacrifice of further economic gains relatively easy. The relationship of the flow of economic benefits to the stages of integration defined earlier provides a context for assessing the level of integration that suffices for capture of such gains. There is a considerable literature on the gains from international trade. and from the movement of factors of ~roduction including t&hnology, capital, and labour.' The gains 'from trade arise out of three facton: (i) Specialization, by which each nation or region stresses those activities in which it enjoys a comparative advantage, subject to

A POLITICAL ECONOMY OF INTERNATIONAL ECONOMIC INTEGRATION

transport cost constraints, departures from constant cost supply conditions, etc. (ii) Achievement of economies of scale not possible in supplying only the national economy. There are industries in which the efficient unit or production and marketing and the rate of technological change make very large markets necessary. Too often, however, exaggerated generalizations are based on the requirements of such industries. Economies the size of Britain, France, or Germany are sufficient to provide a home market base for plants or firms of optimum scale in most indu~tries.~ This means that new economies of scale are mainly enjoyed by smaller members of an integration group. (iii) Gains from the greater competitiveness of national industries exposed to the industries of partner states. This can be important to the vigour of oligopolistic rivalry (including dynamic elements) even in relatively larger member states of an integration group.6 All these benefits are directly tied to trade liberalization. The act of forming a free trade association leads to all the advantages to be derived from the three forces listed. The size of these benefits will be greater the larger the initial barriers to trade, the closer the partners are physically to one another, the better their relative supply potentials relative to non-members, and so forth. Certain policy questions at once arise if the trade benefits of the integration group are all to be achieved. These include some attention to transport policies, commodity tax structure, and national subsidy policies. A11 these will directly bear on the realization of the benefits of integration. The potential partners a n agree to accept all the differences among partner practices as given at the outset of the integration agreement. But even if they do this, they are likely to agree also that no individual state can further accentuate differences among the partners without group approval. In fact, the types of policy listed will he likely to concern partners in differing degree. Inefiicient and protected national transport systems and tax patterns that work against the state imposing them contain a built-in incentive to reform. Of course. national pride may warrant protection of a transport system that has become a "national symbol," but this will bias trade against the partner that uniquely practises such protection. The same may be said for the commodity tax structure that has the same effect. On the other hand, subsidies are likely to raise the objection of partner states as giving rise to unfair competi27

ECONOMIC AND POLITICAL INTERACTION IN NORTH AMERICA

tion for their exports. None of these factors is likely to have very serious economic or political implications for the social equilibrium level.s As one moves on to consider a customs union, there is almost nothing to add so far as economic benefits are concerned. The main difference between a customs union and a free trade association is that the former requires the group to have a common tariff and a common commercial policy. This requires a coordinating mechanism including a method of distributing customs revenues. Supranational political institutions of modest scale may thus be introduced. But the requirement is modest, and so are the benefits. Unless there are deemed to be positive political implications from the greater coordination required, it may simply be concluded that the customs union has no real advantage over the free trade area.9 The move to a common market implies free movement of factors of production -capital and labour. This phase brings up more significant issues. But it must be noted generally at the outset that the movement of goods is a partial substitute for factor movements. The flow of trade that will occur in the absence of labour and capital flows will reflect the relative shortage of these factors in the country that would otherwise experience the factor inflow. To the extent that the flow of factors is permitted, and thereby brings an equalization of factor prices. the pattern of trade flows and probably also the volume would be altered. The effect of liberalizing capital movements and human migration should be estimated net of the effect of any reduction of trade that would result from changes in factor price ratios. (By the same token, if one is talking about liberalizing trade, the net effect on integration should allow for the possible reduction in factor flows that might accompany it.) How important are the benefits from labour and capital flows under circumstances in which trade already flows freely? Obviously, the main advantages to labour flows are those that accrue to the individuals. Their effect on labour markets, if any, is to depress wages in the recipienl country and to increase them i n the country of emigration. But the same effect can be partly derived from trade flows if these are based on relative labour cost advantages in the exporting country. Once the commitment to free trade is in effect. the liberalization of migration will alter , *. the form of integration but not necessarily the degree. Since the ,.!-., social and political costs associated with migration are apparently

A POLITICAL ECONOMY OF INTERNATIONAL ECONOMlC INTEGRATION

greater than those associated with commodity trade, it seems likely that governments will be less inclined toward complete liberalization of migration. Only if the shortage of labour is serious or if particular humanitarian motives apply will there be a strong case for more immigration, and these motives tend to apply to particular occupation groups and particular times and would not at all warrant a common market in labour. The absence of such a market would only prove more troublesome in circumstances in which a larger country with rubsranrially lower wage rates were to try to form a common market with one or two small, high-wage countries. Either the trade or labour flows of such an association (whether a free trade area or partial common market) might force a degree of adjustment in the smaller partner that would not be required if more or larger high-wage members were participating. Many of the most important differences in social policy would be affected by the principle of commonality in labour market conditions. In a country with a liberal social security system, supply costs will be raised relative to those in another country with a more limited system. In a country with a more egalitarian tax system, higher income groups will have less take-home pay, a factor that might also indirectly affect commodity prices, if such taxes are passed on to consumers, or productivity if they affect incentives. The effects of such differences will usually be accepted as part of the basic social preference pattern. But it wiU be more diflicult to square them with any explicitly declared "common labour market." Of course, in so far as there are general effects on the competitive position of any economy consequent upon its social security or tax system, such a factor should eventually be reflected in the foreign exchange relationship between countries. If partners in a common market wish to move toward full economic or polltical integration, the creation of a common market in labour will be an important step, precisely for the same reasons that it will he resisted if countries wish to retain distinctive social systems while getting the major advantages of economic integration. But in view of all the above argument, there is little reason to believe that the retention of distinctive living styles will mean substantial loss of benefits to the national economies that are already trading freely. The question of a common capital market on the whole raises fewer problems, but one or two of these prove particularly

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troublesome. The decision to permit inflow of foreign capital is a decision basically not to forgo current consumption or to postpone growth-generating investment. If the motive for the capital flow is soundly based economically, it helps to equalize the rate of growth in two economies. The resistance to such flows is usually based either on the fear of debt or on the implications of equity and control. Fear of debt is usually not troublesome so long as the investment is productive and the economy is experiencing steady growth. The equity problem is more complex. On the positive side is the advantage of the package of production technology and managerial and marketing skills that often goes with equity control. On the negative side, foreign control of equity may often mean that there may be some delay in the development of managerial skills in the host country. Some participation of nationals in the private or government enterprises of the host country is often considered desirable in order to ensure that they will eventually be able to compete with the foreign business elites. A more direct approach would include improvement of professional educational facilities. These points serve to indicate the national aims that are likely to Limit the interest of a nation state in a completely free movement of capital. But again, it should be stressed that the problem is affected by the existence or absence of trade barriers. If there is free trade, both foreign-owned and domestic-owned enterprise must compete with firms in partner states on equal terms. Problems of inefficiency cannot arise so easily, and because the extent of foreign investment is reduced in those sectors where its only rationale would be to acquire a share of a protected national market. On the other hand, where new enterprises could become established because there is access to a wider free trading area, there may be some justification for limiting the extent to which such opportunities are exploited only by firms based outside the nation. The probability of this happening will be limited by the availability of comparable and relevant managerial and technical skills in each partner state. The main conclusion would appear to be that freedom of trade encourages a more efficient capital contribution to national development. There is no reason why the aggregate contribution of foreign capital need be greater under free trade than under protected market conditions. Thus the existence of a free trade arrangement does not seem inherently to open up the opportunity for new benefits requiring completely free flow of capital.

A POLITICAL ECONOMY OF INTERNATIONAL ECONOMIC INTEGRATION

On balance, the opposite may be more likely, because of the capital-saving effects of free trade efficiency and the fact, mentioned at the outset, that imports in some lines preclude capital flows that would occur under protection. A complete common market in capital is not essential so long as foreign investment in debt and equity forms is available to enable a rate of economic growth reasonably in line with that of trading partners without constraining consumption below politically acceptable levels. Criteria such as availability of the best international technology to leading industry sectors should also be ,applied in determining the optimum level of foreign investment. allowing fully for channels of access to technology other than as part of a foreign investment package. The final set of issues relates to the difference between a full common market and an economic union. The latter assumes common macro-economic policies - a common monetary policy and either a common currency or fixed exchange rates between national curren~ies.'~ It also assumes a high degree of coordination of fiscal policies to ensure that their aggregative implications will not be in conflict. Fundamental to the success of an economic union is the absence of marked conflict over the stability goal-full employment without excessive inflation. Recent years have witnessed serious difficulties in achieving an acceptable tradeoff here, but the problem has been universal, and there have not been marked differences among national attitudes toward the goal. Thus differing definitions of the goal do not appear to be a major deterrent to emnomic union. But the real issue is in the opposite direction -to what extent is economic union conducive to a better prospect for achieving stability and perhaps even arriving at a more acceptable tradeoff function (a leftward shifting Phillips curve)? A wmmon monetary policy and futed exchange relationship will mean that while the aggregate money supply and average level of prices can be set in accordance with some estimate of the best tradeoff (given the function), there is little possibility of using monetary adjustments to encourage national regions within the community in which employment is depressed and constraining inflation in other areas. The preservation of some independence in stabilization policy on the part of nation states, including occasional adjustment of exchange values or even flexible exchanges, should make possible a higher average level of employment and lower rate of price increase through monetary 31

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policy action alone. Of course, a similar result might be obtained by redistribution policies among partner states, but the political difficulties of explicit redistributional policies (even if described as regional development policies) would seem likely to be more formidable than those associated with the maintenance of a measure of decentralization in monetary policy. This is an oblique way of putting a more positive argument, that there appears little gain in capacity to achieve effective stabilization through replacing national monetary authority by a community authority. In either case, a very similar attitude to stabilization goals is required, and in either case some policy is required to deal with differences in national or regional capacities to achieve adequate employment levels. There is at very least no strong presumption that stabilization benefits will be maximized under monetary or full economic union. There is, on the other hand, ample evidence that an effective monetary system requires understandings that go weU beyond countries that comprise convenient and workable free trade groupings. Further to the above mentioned interest in improving the tradeoff function relating employment and price levels, it can be said that at least one of the most important factors that will reduce the price pressures related to declining unemployment is the strengthening of competitive forces. It has already been stated that the liberalization of trade itself contributes more to this objective than any subsequent stage of integration. Thus it seems probable that the stabilizing benefits of integration are largely captured at the free trade association stage. Much more can be said about macro-economic policies, but the main principles involved and the relevance of integration to these principles have been introduced. The consideration of economic union, like that of the earlier stages, points to one major conclusion about the economic benefits of integration -that they are much more obviously positive and substantial in the earlier stages up to the free trade association level. Beyond that they are more marginal and even may be negative, unless non-economic factors are present to reinforce the case for higher forms of Only one further point seems particularly necessary to the aims of the present interdisciplinary discussion. The main purpose of a free trade association, as against more traditional measures for liberalizing trade, is probably that it introduces much more certainty of purpose into the economic policy plan-

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ning of the national governments concerned and of investing enterprises. Of course. this would not be important if the prospective partners have little in common. have markedly different national -economic and social goals, and so forth. B U ~once the degree of commonality of stages of development and of economic priorities is present to such a degree that substantial trade liberalization is regarded as desirable, then there would seem to be added advantages in setting a clear-cut goal and embodying it in the kind of treaty that offers a maximization of gain, a low probability of backsliding, and a system of consultation and coordination whenever national policy threatens to conflict with the spirit and intent of the free trade arrangement. Such a treaty can substantially reduce the uncertainty costs of international transactions and of national policy measures. This is particularly important for groupings that include partner states of widely different size. Smaller states invariably gain the most (proportionately) from international trade. They are therefore vulnerable to any system of rules or institutions that govern trade and other related transactions, and abhor sudden, substantial, and especially avoidable changes in the operation of the system. The General Agreement on Tariffs and Trade has done much to regularize trade patterns, but it has fallen short of the sort of comprehensive commitment to free access to the markets of its members. and to the kind of certainty that would particularly assist investment planning and industrial rationalization in the less self-sufficient nations. In dealing with larger countries, the smaller trading nations cannot hope to eliminate vulnerability, except at a cost that none is prepared to bear once having embarked on the exploitation of opportunities for specialization and trade. The only option appears to be a search for firm and clear-cut schemes for guaranteeing the major economic benefits of integration on a continuing basis, while preserving those elements of independent policy action, including policies relating to non-partners, that need not be sacrificed. The free trade association may need to be given a new political glamour coat, if on further examination it is confirmed as having particular merit as a pragmatic route to equilibrium levels of international economic and social relationships. An Applico~ionto Canada-United State\ Relation5 The main object of the foregoing discussion has been to identify the relationship between political and economic aspects of 33

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.

schemes for international economic integration and to suggest from what elements or stages of integration the major economic benefits may be expected. To apply this to any real-world grouping of countries requires an elaborate empirical study. It is perhaps indicative of the importance of political faith in international agreements that the world's largest economic community, the EEC, never really conducted such a study, certainly not before the members signed the Rome Treaty. On the other hand, the various aspects of Canada-United States relations have been examined by Canadians in considerable, though varying. depth. There is much evidence available on the economic and noneconomic impact of various elements of economic integration, both actual and proposed. What points from the foregoing theoretical discussion are particularly relevant to Canada-United States economic integration and how well are the expectations of theory supported by the empirical evidence now available? In the first place, the definition of integration suggested herein should serve to sidetrack some of the most facile debate about Canada-United States relations. For example, one favourite declaration is that Canadian-American cooperation is good, but that closer integration is to be feared. Definitions of cooperation and integration do not normally accompany such rhetoric, but if one uses the definitions suggested at the outset, the issue becomes a much more rational one: i.e.. how elaborate a system of agreements is required to achieve the major advantages of interdependence or interactions without major disadvantages? The system in operation consists of adherence of both countries to GATT and the IMF and to a set of rather ad hoc bilateral arrangements. A few of these are quite specific, e.g.. the agreement on automotive products, but for the most part bilateral arrangements consist of consultative machinery, such as the Joint Cabinet Committee on Economic Affairs, or even less formal contacts between counterpart ministers. There are even fewer bilateral arrangements governing factor movements, the most important being in the form of exemptions from national policies having general application, e.g., the United States exemption of Canada from laws governing capital export or immigration. In fact, historically Canadian-American economic relations may be characterized as a combination of restricted flow of goods and an almost free flow of factors. This combination seems peculiar in several important respects. Given the theoretical argument that factor flows are more likely to encroach on the

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political and social distinctiveness of the smaller and hence more identity-conscious member of an economic partnership, how can one explain why Canada has opted for so much interchange of people and of ownership rights? The historic emigration of Canadians to the United States is the least difficult to understand, since it contributed an important safety valve in situations in which greater economic costs might have been experienced by the native Canadians who emigrated or by the immigrants from Europe who "replaced" them. In any case, neither the economic nor the non-economic costs to Canada of an outflow of population was likelj to induce Canadian governments to oppose that emigration, and the easy assimilation of Canadians by the United States made it unlikely that the United States would want to limit immigration from Canada. It is possibly significant that the flow of Americans to Canada in recent years has resulted in more controversy, reflecting a perception by some Canadians that to assimilate Americans into Canadian society may involve less acceptable social costs. Capital flows across the Canada-United States border have raised more problems for Canadians, presumably because they have for a long time constituted a substantial net inflow. However, the questioning of non-economic "'costs" of capital inflow has only become a significant issue since the late 1950's. Before the Second World War, United States investment in Canada was secondary to that from Britain. Furthermore, over most of Canadian history, British investment involved much more debt capital and portfolio equities, having less "control" implications. The worries most often expressed concerned the inadequacy of the capital inflow. Since the late 1950's. Canadians have expressed more doubts about foreign investment. At first these doubts focused on the flow of capital at a time when Canada was experiencing considerable unemployment and when one of the effects of capital inflow was to raise the value of the Canadian dollar and thus to encourage imports and discourage exports. However. it was eventually realized that the real culprit in this case was the restrictive Canadian monetary policy of the time, which was encouraging provincial governments and other borrowers to turn to New York. However, it also appears that during and since this period, many Canadians began to feel that heavy reliance on foreign capital was not necessary for Canada. In retrospect, this can be interpreted as a consequence of the high standard of

35

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living achieved by Canadians by the 1960's. of the related increased capacity to finance a satisfactory rate of growth in Canada, even if this rate might not achieve the levels possible with foreign investment. In other words, the advantages of increasing the rate of growth by turning to foreign finance did not represent as important a benefit as it had when Canadians had been less weU off in earlier decades. It should be stressed that this view is by no means universally shared, and during the 1970's the opposing view that foreign capital is still essential has been given additional support by those concerned about the problem of employing a Canadian labour force that is growing more rapidly than that in any other industrially advanced nation." However, the main focus of concern about foreign capital in the 1960's has shifted to the stock of such capital in Canada. and not the flow of new capital. It is the operation of foreign enterprises that now attracts greater attention from Canadian critics. This issue has been extensively discussed.l2 The outcome of these enquiries has demonstrated that foreign-owned enterprises have been concentrated in certain industrial sectors in which pools of capital are required, especially for mineral exploration, technological improvement R and D-intensive activities), and larger-scale marketing and distribution systems. However, within these industries, Canadian and foreign owned enterprises operate in similar ways. The main shortcomings and inefficiencies that have arisen relate to the nature of some of these activities and the apparent willingness of firms under protected market conditions to operate small scale and excessively diversified and therefore high cost production activities, and to rely upon selling activities other than price cutting to maintain market shares. But as this implies, it is the protection that makes it possible to sustain such inefficient oligopolistic structures and to avoid rationalization and specialization of the production units. The contribution of foreign capital to this inefficiency arises mainly in those cases where there are a number of foreign, especially American, rival enterprises and each has attempted to extend its market power to Canada in miniature replica of market conditions in the United States. thus making industrial production units that are smaller and more diversified than purely indigenous enterprises would probably be. This not uncommon type of circumstance was dramatically illustrated when the Canadian automotive industry was examined. The

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Canada-United States Automotive Agreement of 1965 represents one way to bring about rationalization, and significantly includes both substantial modification of tariff barriers and direct controls over the Canadian operations of international companies. Apart from the scope for improving economic efficiency gains to Canada, the other "problems" revealed in recent enquiries focus on possible extraterritorial effects of foreign laws on Canada, and the possibility of more direct political and social constraints on Canadian autonomy through foreign decision making in such fields as banking, communications, the media, etc. There is considerable disagreement about the practical importance of extraterritoriality effects, but fairly general agreement in Canada that the service sectors listed should be retained under Canadian control. However, the important point for the present discussion is that the form of integration does matter, and that the burden of criticism and concern falls on the foreign-owned enterprises and thus on the effects of capital movements rather than the movement of goods. Furthermore, the main instances of economic inefficiency associated with foreign capital relate to circumstances where foreign-owned branches have been operating behind substantial Canadian tariffs and other trade barriers and have thus been a substitute for trade. In these circumstances, it is the form of international integration adopted and not the degree that is questionable. It seems to me very useful to approach the Canada-United States case employing the equilibrium level of integration concept described earlier. If we do this, we are compelled to focus on orders of magnitude, and even where these cannot be accurately estimated at least to raise questions about the relative value of economic benefits of successive "stages" of integration and their relative importance when compared with any concomittant political and social "sacrifice." In the Canadian case, the only important estimates of the benefits of integration relate to the effects of the tariff and the consequences of its elimination." These estimates indicate that the gain in real income from the elimination of Canada-United States tariffs might range as high as 10 percent after the transitional period, a once-and-for-all jump in the material wellbeing of Canadians that could probably not be matched by any other net gain consequent on public policy changes.14 Even if the gains were only 5 percent, the same claim could probably be substantiated.'* -4i

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The important points about these estimates are two: 1. They undoubtedly greatly exceed any economic gains that could be derived from any further step, indeed all further steps, toward economic integration between Canada and the United States. This is partly because Canada has already gained most of the advantages that are available from factor flows between the countries (as well as the costs) and from harmonization of national economic policies.16 2. They greatly exceed the gains available from trade liberalization to large nations such as the United States, which are not as dependent on the external sector. This is particularly significant for Canada in North America." as it is for Quebec or any other province in Canada. Smaller units will gain much more from the achievement of free trade and lose much more from the erection of new trade barriers. Politically, it is unrealistic for the governments of small political units to neglect such economic benefits. It is only possible for them to make a case for foregoing such gains if substantial and relared social and political "sacrifices" can be identified. As already hinted, it is not easy to identify such costs in relationship to trade liberalization alone. The main political costs of freeing trade are those associated with the transitional period, and as the European Communities showed, these are manageable. The task of the national governments of small nations is not to reject the economic interdependence that benefits its electorate so substantially, but rather to minimize the non-economic costs of interdependence. As suggested above, this is likely to require much more attention to factor flows and their implications. With all the advantages of hindsight, it seems regrettable that Canada has so long neglected to seek out an equilibrium level of integration with the United States (and indeed with its other major overseas economic partners) that would optimize the net benefits of these relations. Whereas there has been much inventiveness in public policy making in Canada, this has not, with some notable exceptions,ls applied to international economic relations. One of the reasons has been the deep commitment of some substantial economic interests and of the Central Canadian political power bloc to a National Policy now sadly outdated. Another reason lies in the commitment of Canada to multilateral institutions and approaches. This is not in itself undesirable, but it should not be permitted to stand in the way of bilateral

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arrangements that serve Canada's economic and political interests, especially where bilateral approaches can be made compatible with the aims of the multi-lateral institutions to which Canada is committed. Probably Canada's most regrettable missed opportunity was the failure to negotiate a free trade arrangement with the United States in 1948. At that juncture, when industry was faced with the need for postwar reorganization in any case, and when the massive inflows of foreign capital of the early 1950's had not yet occurred, a policy program of free trade with our major trading partner and of clearly stated priorities backed by whatever controls might have been necessary to control foreign investment might have resulted in the capture of many economic gains from interdependence that Canadians subsequently measured as the costs of protection. Since foreign accumulated investment under these circumstances would probably have been substantially less, some of the costs to Canada that accompany capital flows might also have been avoided. There is little doubt that the transition problems of that period would have been much more manageable at that time, both economically and politically. Finally, it seems probable that Canada would have been better prepared to meet the competitive challenges subsequently posed by the emerging European Economic Community and the recovered Japan. Footnotes

I. Notably Article xu permitting imposition of quotas in periods of temporary balance of payments difiiculties. 2. See the Hecksher-Ohlin formulation of the relationship between goods and factor movements summarized in most texts. for example. Ronald Findlay. Trade and Speciolizarion (Penguin Modem Economia, 1970), pp. 92-106. 3. See the earlier writings of L. N. Lindberg. E. B. Haas, and Karl Deutsch. 4. Jacob Viner, Studies in rhe Theory of International Trade (Harper. 1937). Chapters 8 and 9: Charles P. Kindleberger, Inrernarional economic.^ (Richard Irwin, 1968). especially Chapter 5. 5. Rather qual~tativesupport for this statement appears in Economic Consequences of the Sire of Nations (Macmillan. 1960). More specific evidence may be found in writings on economies of scale and other barriers to entry into specific industries: e.g., J. S . Bain, Barriers ro New Comperirion in Canadian Manufacturing (Economic Council of Canada, 1968). Also see H. E. English, Indur-

39

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trial S t m u r e in Canada's International Competitive Position

(Canadian Trade Committee, 1964). 6. See the argument about the benefits of British entry into the EEC. James Meade and others put the main emphasis on this wmpetitive effect. The work of the Wonnacotts (Ronald and Paul) on the effect of a Canada-United States free trade arrangement places maior emohasis on the effects of restructurine: sec United Slates~aiadian kree Trade: n e Potential Impact oi'the Canadian Economv (Canadian-American Committee. 1968). 7. S& jawb Viner, op. cit., etc. 8. See J. E. Meade. H. H. Liesner. and S. J. Wells. Case Studies in European Economic Union (Oxford University Ress, 1962); also H. Shibata, Fiscal Harmonization under Freer Trade. Canada in

9.

10. I I.

12.

13.

the Atlantic Economy Series (University of Toronto Press, 1969); and J. Munro. Trade Liberalization and Transoortation in International Trade. same series (1969). For a more iheoretical and wmprebensive treatment of these points, see H. G. Johnson, "The Implications of Free or Freer Trade for Harmonization of Other Policies," in Harmonization of Narional Economic Policies Under Free Trade, same series (1968). All discussion of the trade diversion implications is assumed to be irrelevant to the purpose of this particular paper. Actually, the net world trade creating effect of free trade association is likely to be more favourable than an averaging of customs tariffs. It affords an opportunity for FTA members with low-tariff preferences to create trade by unilateral cuts or bilateral arrangements with nonmembers. See Johnson, op. cit., p. 33 ff. An alternative way of viewing this problem is to regard it as a problem in optimizing the distribution of work and leisure. This would not require a bias toward growth based on employment requirements. The most comprehensive private study undertaken on foreign owned firms is A. E. Safarian's Foreign Ownership of Canadian Indurtry, McGraw Hill, 1966. Government sponsored reports based on Safarian's and other work include the Report of the Task Force on Canadian Industrial Structure (Ottawa, 1968) and the so-called Gray Report, Foreign Direct Inve.~tment in Canada (Ottawa, 1972). The earlier studies that treated foreign ownership in relation to the tariff and other factors influencing industrial structure include H. E. English, Industrial Structure in Canada'r Inrernational Competitive Position, Canadian Trade Committee, Montreal, 1964; D. J. Daly and B. A. Keys and E. J. Spente, Scale and Specialization in Canadian Manufacturing, Economic Council of Canada, Ottawa, 1965 John H. Young, Canadian Commercial Policy, study for the Royal

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Commission on Canada's Economic Rospects (Ottawa, 1957), and R. J. and Paul Wonnacott, Free trnde Between the United States and Canada: The Potential Economic Effects (Cambridee: Har> . vard Ress, 1967). 14. Multilateral free trade would of course eo even further. but as a practical matter, Canada-United States f;ee trade would probably lead to the achievement of most of the gains of multilateral free trade, if only because it would enable Canada to participate fully in multilateral liberalization initiatives subsequent to the removal of Canada-United States barriers or to take other bilateral initiatives. 15. In a situation of large-scale unemployment, mino policies could be expected to achieve similar gains. 16. See the following Studies in the series, Canada in the Atlantic Economy. University of Toronto Press: Hany G. Johnson et a/.

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Harmonization of National Economic Policies Under Free Trade;

John Munro, Trade Liberalization and Transportation in Internarional Trade; Hirofumi Shibata, Harmonization of Fiscal Polrcy under Freer Trade, H . E. English. Bruce W. Wilkinson, and H. C. Eastman, Canada in a Wider Economic Community. 17. Estimates of the real income gain to the United States from the elimination of trade barriers seldom exceed 'h of 1 percent of GNP.

18. The Canada-United States automotive pact being the best example. However, its shortcomings (its sectoral character and ambiguities) have recently bemme more apparent as well.

POLITICAL INTEGRATION: A M U L T I D I M E N S I O N A L PERSPECTIVE* Charles Pentland

The study of international political integration has always had a strongly normative flavour. In constructing their analytic models and weighing their explanatory variables, integration theorists, like students of economic and political development, have generally worked in anticipation and often advocacy of some future state of affairs expected to be an improvement on the present. In classic integration theory - dominated by federalist ideas -it was usually held that this future would be represented in a new supranational state constructed from, or superimposed on, the existing states. Until quite recently, the dominant analytic approach to European integration among political scientists that of the neofunctionaliststended to accept somewhat uncritically this federal or supranational model as the goal of political integration.' If there was any difference between the federalist and the neofunctionalist goals, it was one of emphasis: federalism was primarily an attempt to recognize continuing diversity and to distribute power and jurisdiction rationally among two or more levels of government, while neofunctionalism resembled much more a theory of political development in which the centralization of power was both an overriding first objective and the prerequisite of further change. It would he wrong, however, to see this form of supranationality as the goal of all integration theorists. One of the earliest systematic studies of integration in the post-war period posited supranationality (the "amalgamated security community") as the * For their comments on an earlier draft of this paper I am partncularly indebted to Andrew Axline, Peyton Lyon, Graham Murray. Joseph Nye. Nils Orvik and Garth Stevenson.

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less likely (and arguably the less desirable) of two possible outcomes, the other being a "pluralistic security community" which consisted of independent states whose mutual communications and interactions were so intense and enduring as to make war inconceivable as a means of resolving conflicts."n communications theory, peace research and many more policy-oriented writings on European integration, this latter "pluralist" model is strongly evident.) In the writings of the functionalists, finally, yet another model of the integrated community is to be found-one which is experiencing something of a revival in the literature on transnational relation^.^ The functionalist vision is not a supranational state but a network of institutions each of which has emerged to meet a specific economic, social or technical need. Such institutions might initially be set up by governments cooperating to solve common problems, or they might emerge as transnational, non-governmental organizations. These institutions are expected gradually to overlay the nation-state system, and to eliminate warfare both by eroding national sovereignties and by solving peoples' economic and social problems so efficiently that the underlying sources of their conflicts are removed. To say that integration theory is fundamentally normative. then, is not to say that theorists share a common set of goals and values. On the purposes of political integration and on the structure of the political system which might emerge to serve those ends, scholarly consensus is reached only at a hopelessly general level. In practice the different views outlined above con. cerning the purposes and goals of integration, coalesce into twc major schools of thought: those who envisage the formation of s. new, supranational political system, and those who place their emphasis on forms of community lacking state-like institutions and based more on certain underlying social and psychological propensities of peoples to interact and cooperate with each other. Theorists of integration differ even more over the variables they stress in explaining the progress or failure of integration, over the tactics they advise pro-integrational policymakers to follow, and, in Western Europe at any rate, in the nature of their "clientkle" in the political arena. n ~ the anarchy and diversity of integraSuch 0 b ~ e ~ a t i oabout tion studies have provided a recurrent theme in various quarters of the literature for some time now. Leon Lindberg has expressed his dissatisfaction as follows:

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As a contributor to the European integration literature, I have more and more come to feel as if I were excavating a small, isolated portion of a large, dimly-perceived mass. the contours of which 1 could not make out. I know that there are others digging there, too, for 1 can sometimes hear them, but we seldom meet or see each other, and we have seldom organized so as to combine our efforts. What we see as we confront the ever-growing literature on Western European integration is a multitude of events comprising the total economic political, social and intellectual life of six countries and the product of their interactions, and a profusion of theories from a variety of disciplines seeking to order these events and make assertions about presumed patterns of persistence or transformation. But the theories hardly ever confront or complement each other or even appear in any clear relationship to each other.5 The spread of integration studies "horizontally" beyond Europe to embrace comparative regionalism and "vertically" to include studies of global, national and subnational integration has only sewed to heighten this sense of malaise for many scholars. A fundamental diversity of normative bases, then, has been compounded by a considerable disagreement among scholars as the appropriate explanatory modes and methods, and a gradual dispersion of attention among numerous regions and levels of analysis. In a very real sense. integration theorists seem to agree less and less on what they are collectively talking about. On the other hand. the pervasive strength of the normative element has introduced certain structural similarities into these diverse patterns of theorizing about political integration. Few scholars have questioned the basic idea of integration as the movement of a system of states along a continuum from the one extreme of classic. anarchic international relations to the presumably more desirable form of political community at the other extreme. Whatever this terminal community may look like institutionally, the common assumption is that there is one major dimension along which the system changes, whether this change be described in the classic terms of a shift from "balance of power" to "world government" or in cybernetic terms of a learning process on the part of elites or masses.6 A related assumption or expectation is that this political process is unidirectional, sustained by a secular growth in the interdependence of economies, societies, cultures and technologies.

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Crises, breakdowns, regressions -even the presence of articulate political opposition to integration in the system-all tend to be interpreted as temporary setbacks, as consolidations necessary for further growth, or, indeed, as integral aspects of the growth process itself.' Like development theory, integration theory has been slow, indeed reluctant, to acknowledge the possibility of stagnation, degeneration and decay.Wonfronted by the experience of the European Community in the 1960's. however, some scholars have begun to question the capacity of a onedimensional, unidirectional model of integration to direct us to the right kinds of evidence and inference about change in complex systems.9 To sum up, then, the two major concerns of this chapter are, first, to explore ways of resolving or perhaps putting to good use the manifest differences among theoretical approaches to political integration, and secondly, to develop a model of the integrative process which might also be sensitive to evidence of disintegration in some sectors of inter-state relations. A useful direction to look for both these purposes might be toward a multidimensional model based on a comprehensive concept of political community. Such a model might prove applicable, not merely to the integration theorist's traditional subject of regional international organizations, but also to less institutionalized relationships between two or more states (including cases of hegemony) and to the internal politics of individual states. It may thus provide a vehicle for bringing integration theory to bear on Canada's two major political problems: the North American relationship and the future of federalism. Indeed, it may even help us explore the relationship between the two.I0 Political integration, simply defined, is "the process whereby two or more actors form a new actor," and disintegration is the reverse." For our present purposes, we can accept this definition, provided that, first, we take the original actors to be nation-states according to the formal criteria of international society and, secondly, that we d o not assume that the "new actor" will be a state in this same sense. Let us, for the moment, simply describe this new entity as a political community, thus avoiding the implication that it will necessarily be an "actor" having its own goals, decision-making processes and capabilities. One way in which integration theorists have attempted to resolve their differences over the nature of this political community is by suggesting that rival models are only marginally political

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or build in elements which are not political at all. Lindberg, for example, has argued that Duetsch's work amounts to "a theory of social or moral community" and "ignores too much that is politically relevant."'z Nye has observed that many standard definitions of integration in general, and political integration in particular. are really aggregations of concepts, many of which refer to transnational economic or social relationships whose bearing on the political is problematic rather than self-evident." While both these attacks on the problem of conceptual diversity: can potentially lead to a sterile and endless exchange of nominal definitions among different theorists. Nye's disaggregation of the concept of integration at least points us toward a fruitful synthesis of approaches. Rather than searching for the essence of political integration and then each clinging to his version of revealed truth, theorists of integration would do better to recall the hoary image of the blind men and the elephant. What each chooses to call "political integration" or "political community" we might just as easily take to be part of a larger conceptual entity - Lindberg's "large, dimly-perceived mass" unlike anything political scientists have seen before. One way to begin tracing the lines of this creature would be to assume that several of the concepts already advanced in the literature are complementary. On this basis, we can develop a multidimensional model of political community which permits us a new perspective on the normative and analytic aspects of integration theory as well as the policy problems confronted by countries like Canada, involved in integrative relationships. I . The Dimension of Coercive Power To some this will seem a strange place to begin, since Haas' view "that the study of regional integration is unique and discrete from all previous systematic studies of political unification because it limits itself to non-coercive efforts,"I4 is widely accepted. It would seem more productive, however, simply to allow that while unification by sheer force is generally not very interesting theoretically. the possession of coercive power and the threat (open or tacit) of its use by one or more states is potentially a vital element in the process of "peaceful" integration. Coercive power is certainly important in the maintenance of integration in national societies and alliances, even if we cannot always be sure whether its effects are positive or negative." The element of coercive power is central to most classical

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theories of integration. Advocates of federation on a European or a global scale have traditionally reasoned along Hobbesian lines, as indeed have most of their sympathetic critics.lb Integration in this sense refers to centralization of the means of coercion sufficient to defend from without and to keep law and order within (or deter internecine warfare). A political community is "federalized" (or integrated) to the extent that informal political power and formal jurisdiction is distributed among levels of government. It is inconceivable, however, that the preponderance of coercive power be found anywhere but at the centre. The critics of this federalist vision, in pointing to its impossibility and lack of realism, also focus on the issue of coercive power. Since national sovereignty reflects the ability (and represents the legal right) to make war and protect physical security, its possessors are unlikely, in the critics' view, to delegate it to a supranational Leviathan either in times of insecurity (when alliance or selfreliance are held to be more prudent options) or in times of peace (when it is unnecessary). Among contemporary theorists of integration, Etzioni is perhaps foremost in emphasizing coercive power. In his view, a political community possesses "three kinds of integration: (a) it has effective control over the use of the means of violence (though it may 'delegate' some of this control to member units); (b) it has a center of decision-making that is able to affect significantly the allocation of resources and rewards throughout the community; and (c) it is the dominant focus of political identification for the large majority of politically aware citizens."17 His model of the end-product of an integration process is thus a strong, centralized state which monopolizes the means of wercion. Nevertheless, rather than assigning uncritically a central role to coercive power in the process of integration itself, Etzioni poses an empirical question: at what point did successful political communities become integrated with respect to coercive power? Has the integration of force been a prerequisite, a hindrance or a capstone for the total integrative process?'8 A number of theorists, then, conceive of political community at least partly in terms of the use and distribution of coercive power within a system. Drawing on the Hobbesian model, we can suggest that the conceivable range of systems on this dimension is between the pure types of (a) the balanced international system and (b) the monolithic polity in which power is fused at the centre. Whether the number of states in the former system is

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two or more, its basic organizing principles are separation (autonomy of units) and rough equality of power. The latter system is by definition one state in which all power accrues to a single centre. Along this dimension integration (or disintegration) xcurs as change in the number of units among which the control of force is distributed. Such change can occur by conquest, peaceful annexation, voluntary mergers or in the formation of alliances which lead to a supranationally directed military division of labour.'9 Major motive forces in this process will undoubtedly be continuing shifts in the relative power of existing units, brought about by amalgamations, dissolutions, alliance diplomacy and processes of economic growth and technological development in particular states.'O Although there are strong connotations of stability surrounding each extreme of the continuum, we need not draw the inference that various conditions of the system between these points are necessarily unstable. To detect the likelihood and direction of change is clearly an empirical question. It should be evident that shifts of power involve very complex interrelations of variables, variables which might well combine to produce stability in different patterns along the continuum. But to answer empirical questions we need empirical measures. To assess the diffusion of power in the system, it might suffice to count the number of centres of coercive power which exercise effective, exclusive control over territory and population. But to assess the stability of the system at any level of integration means to attempt prediction on the unfirm ground of capability analysis and international stratification theory. Perhaps a useful place to begin would be with the total military budget of each of the units, since this figure incorporates measures of military priority, economic development and population.2' We might then be able to construct a measure of the stability or probable direction of integration in this dimension as a function of the number of centres of power and the degree of equality between them. The problems of inference in such a volatile and symbolically loaded dimension are, of course, enormous. Does, for example, the ratio (over 40:l) of American to Canadian defence budgets mean the inevitable elimination (at least in the NATO-NORAD context) of distinctive Canadian command structures, procurement patterns and, ultimately, defence capabilities?" Or does the increased visibility of such discrepancies have

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co~nter-efTects akin to those of the massive, victorious Union army of 1865 on the will to federate British North America? 2. The Dimension oJ Deci.sion-Making Many contemporary theorists of integration see the political community as essentially a device for making authoritative decisions concerning the allocation of various kinds of values. Political integration at the international level, therefore, is the gradual development of the institutions and practices of common decision-making among a group of traditionally autonomous states. Neofunctionalists have always placed a great deal of emphasis on this dimension, sometimes to the practical exclusion of most others. Haas and Schmitter have argued, for example, that political union "implies any arrangement under which existing nation-states cease to act as autonomous decision-making units with respect to an important range of policies", where "the actors have already transcended their earlier exclusive identification with the pre-existing national state" and where "the politicized decision-making process has acquired legitimacy and authority."" In a more recent article, Haas points out that it may be misleading to visualize this common decision-making system in terms of "ideal types reconstructed from our historical experience at the national level."" Integration of decisions, in short, is not necessarily state-building at the international level. The neofunctionalist writer who has taken this notion of political integration farthest is Lindberg. In his first study of the EEC, he adopted a "cautious" conception of political integration "limited to the development of devices and processes for arriving at collective decisions by means other than autonomous action by national governments."2s The formulation is stronger and clearer in a later article: "The essence of political integration is the emergence or creation over time of collective decision-making processes, i.e., political institutions to which governments delegate decision-making authority and/or through which they decide jointly via more familiar inter-governmental negotiation. Collective decision-making processes are complex; they have multiple properties; hence, we can view the political integration process as the gradual build-up over time of a variety of such properties."'@ Lindberg discerns ten variable properties by which we might measure the extent of political integration and which might serve as dimensions of any collective decision-making system.

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To date the only variables in this list which have been operationalized to any degree concern the scope and level of common decision-making (properties 1-3).>' Whatever the chances for success in developing indices across the full range, Lindberg has already provided us with a useful way of assessing the progress of integration narrowly defined in terms of decision-making. We can see the two extremes of this dimension as points one and live on his scale of the decisiveness of collective processes. At point one, "all policy decisions are made by individual governments by means of purely internal processes.. .," while at point five, "all choices are subject to joint decision in t h e . . .system."28 Points two, three and four represent various types of mixed decision processes, denoting levels of integration at which the system might equally well maintain equilibrium. Having established the functional scope of the system, or the range of issues with which it is concerned, we can score the decisionmaking style in each area according to this scale and thus arrive at an overall picture of the level of integration. In the European Community, for example, Lindberg discerns twenty-two functional areas. In 1957, he scores seven of these at point two on his scale, the rest at point one. In 1970, he judges four (commercial external relations, agricultural protection, balance of payments stability and customs union) to have reached a level of four (most decisions taken jointly but substantial decisions still taken autonomously by states), eight to have reached level three. five to be at two, and five to remain at one.29 Repetitions of this process over time will indicate the progress of integration and the areas where the most change is occurring. In locating decision-making on this scale there is clearly considerable room for inaccurate or subjective judgement. Canadian-American relations, with its lack of formal intergovernmental organizations and its unique mixture of classic open diplomacy, informal quiet diplomacy and extensive socio-economic interpenetration, would seem to present particular difficulties here. In many ways, too, while Lindberg's first three properties will be helpful, it is the other seven (assuming they become operational) which look more interesting in the North American setting. We might also want to add some consideration of institutional effects, differences between crisis and routine decisions, and the role of "nondecisions." Such an approach to political integration is likely to be quite productive, provided that excessive claims are not made for it. If

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the remaining seven dimensions can be developed, the framework should become empirically broader and theoretically richer. It will include assessments of the extent of collective decisionmaking, the energy levels and resources of the system, and the consequences of its decisions. Nevertheless, it should be recalled that the whole enterprise rests on the assumption -not shared by all theorists of integration -that decision-making is the central defining characteristic of political community. At the moment, then, this approach has to be viewed in the context of the ongoing debate over concepts and definitions. 3. The Dimension of Functional Administration One of the preoccupations of traditional integration theory was with institutions and structures on the international level. The functionalists in particular argued that the natural dynamic of transnational institutional growth was the principle of "technical self-determination" in which the nature of functional needs themselves indicated the appropriate structures for handling them.30 It is helpful to see functionalism as part of a larger body of thought on international political change, which postulates a distinction between the political and the non-political (i.e. technical, economic) aspects of societies and points to an increasing tension between the continuing particularism of the former and the growing global interdependence of the latter. Many of the assumptions behind this widely-held theory of political lag are only now beginning to be examined critically, in a growing literature on the political impact of transnational relations." The functional approach can only gain in conceptual rigor from this new attention, particularly if it concentrates on the precise treatment of political variables and on the deterministic assumptions behind much previous writing. In the functionalist literature, the idea of political community is usually dissociated from that of coercive power, and is concerned with policy outcomes or consequences rather than with the institutions and process of decision. Functionalists, as Sewell observes, take their cues from Hobhouse's dictum that "a community is the sum of the functions performed by its member^.'"^ A community can be described as integrated to the extent that it possesses the institutional capacity to solve functional problems in an economically and administratively rational manner. The argument for multinational corporations, for example. as the "wave of the future" and the most potent contemporary force

ECONOMIC AND POLITICAL INTERACTION IN NORTH AMERICA

.

for global integration, derives fundamentally from assumptions about the rationality, efficacy and inexorability of large-scale economic enterprises.'' The essence of this view of integration, then, is that any collectivity -whether formally a single nation-state or a multistate system -can be pictured as a set of economic, social and technical needs in pursuit of a limited range of resources. The problem of integration is thus one of organization, administration and problem-solving. At one extreme of the continuum is the epitome of functional irrationality. a system of small barely viable administrative and political units all striving wastefully toward autarchy. At the other extreme is a system in which resources and administrative structures are perfectly matched to functional needs, that is, where there is a one-to-one relationship between function and structure. It is important to note that while the move toward integration implies increasing the weight of system-wide rather than particularistic standards in creating organizational structures, it does not necessarily imply increased centralization of functional performance. While the criteria of economics of scale and administrative rationality may well imply that, in Western Europe, transport ought to be organized under a single authority for the Community as a whole, or that, in North America, energy policy ought to be planned on a continental scale, it may also be that effectiveness in some functional areas requires administrative devolution. The important point of reference is the system's success in meeting collective needs. In North America, for example, while the International Joint Commission may provide an intergovernmental framework for cooperation in pollution control. much of the planning, negotiation and administration will undoubtedly take place on the level of states and provinces or even local authorities -particularly when action is sluggish at the federal level. In many cases, a North American environmental authority might prove superfluous and even counter-productive. Assessing the progress of integration in a systematic way is somewhat difficult in this dimension. In the absence of any obvious and accepted method of determining the degree of fit between structure and functional need (even assuming we have a precise way of isolating such needs) or of judging the efficiency and rationality of administrative organizations. we might for the moment fall back on a cruder measure. Assuming that the emergence of transnational organizations in a multi-state system

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is a response - however imperfect by strict functionalist standards -to needs which transcend national boundaries, we might simply d o an inventory of such organizations according to a range of categories. The total number of these organizations -and the way in which they are distributed among such categories as transnational corporations, trade-unions, political parties and religious organizations, as well as intergovernmental organizations for general and specific purposes-can be expected to give us a good indication of the degree and, perhaps more important, the character of integrative linkages in the system. An inventory of this kind for North America would certainly show, more than any other measure, the great extent of Canadian-American integration. Comparison with other regions -even Western Europe would probably show that North American organizational linkages surpass those in any other region and that the ratio of transnational to intergovernmental ties is unusually high. 4 The dimension of Socio- Polirical Communication For many scholars, particularly those who share the "pluralist" view of integration, a political community is primarily an "intense, enduring and rewarding" pattern of communication, transaction and interaction between pe0ples.3~ Whether these peoples are, or continue to be, separated by formal political boundaries is seen as less important than the "sense of community" or the "mutual responsiveness" which sustains their relationships. Many inferences, some more justified than others, can be drawn from the analysis of such patterns of communication. Some merely claim that these patterns can serve as partial indicators of the degree of political integration in a sy~tem.'~Of more interest here, however, is the definition of community itself in terms of such patterns, and the accompanying argument that integration takes place as a self-reinforcing process of growth in their volume, salience and mutually-perceived value. While perceptions and other social-psychological variables clearly play some kind of intermediary role in this process (often described as a process of "social both the dependent variable (political community) and the independent variables are represented as quantifiable patterns of social behaviour. The basis of this view is that the emergence of formal institutional structures and decision-processes, far from being the essential feature of political integration, is merely the culmination of a

ECONOMIC AND POLITICAL INTERACTION IN NORTH AMERICA

temporally prior and causally necessary process of informal community-formation. The spectacular changes demanded by federalists, and even the quieter, gradual increases of central decision-making authority stressed by the neofunctionalists, often attract our attention away from the more important "mute forces of history, the societal shifts" by which these less fundamental formal changes might be predicted.)' This argument will not seem novel to many Canadians, concerned as they are over the possible long-term political impact of growing north-south flows of trade, investment, population and communications. In terms of patterns of wmmunication, transaction and interaction, we can define the integrated political community as a highly mobile society in which there are no internal barriers or inhibitions to flows of socio-political communication. A corollary of this would seem to be an increase -as measured by the same kinds of indices- in the differentiation of this community from others around it. At the other extreme is a system in which the elites and the publics of each unit in the system are indifferent to, unaware of, or uninvolved witl-., those of every other unit. Our spectrum thus runs from total indifference to total m o b i l i tion. In assessing how far along this dimension to place any particular system, what measures would we want to look at? In this respect, the wmmunication theorists are well-equipped with a broad arsenal of possible indices. Indeed, our difficulty here is not in any shortage of indices, but in the choices to be made between them and the judgments implied about what they signify. As an initial step, we can distinguish between the social acts of communication (transfer of information), transaction (transfer of economic goods) and interaction (contact among individuals) and group the indices accordingly.'g Under the heading of wmmunication the indices used normally include some measure of the volume or intensity of mail flows and telephone calls between states in the system, and often add measures of mutual attention such as the extent to which the electronic mass media and the publications (both mass and specialized) of one society are "consumed" by others. As concerns transactions, the major indices refer to the volume of trade and investment flowing across boundaries within the system, although, in strict economic terms, we might wish to include the flow of the labour force here as well. Interactions, finally, can be measured in the frequency of meetings between officials of the countries concerned, the volume of diplomatic representation, 54

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and the extent of tourism, travel and exchanges of personnel. AU these will provide gross measures of the degree to which the societies concerned have penetrated one another.39 In order to isolate what might be called an "integrative effect," it is useful to qualify such absolute figures by comparing them to what might be expected according to random patterns of behaviour, in which we cannot predict the destiny of communications flows from knowledge of their origins. Groups of states which are integrated will appear as positive deviations from this expected pattern.40 While in principle such an approach can be applied to any mode of communication, transaction or interaction between states, in practice its use has largely been limited to trade. It might be argued in any case that it is reasonable to assume a close correlation between trade flows and most of the other indices discussed above and that, subject to empirical verification of this relationship, we might take some kind of relative trade index as the single most important indicator of socio-political community. Canadian-American trade figures are likely to reflect the volume and balance of communications, transactions and interactions generally in the North American system. In 1970 this trade totalled about $20 billion, which represented 16 per cent of United States total trade and about 2% per cent of its GNP. The equivalent Canadian figures were 67 per cent and 23 per cent, which perhaps illustrates as well as anything the unequal mutual dependence which constitutes the socio-economic basis of an "integrative hegem~ny."~'

5. The dimension of attitudes Until quite recently, the attitudes of elites and mass publics were of relatively little interest to integration theorists. References to a psychological dimension of political community have tended, on the whole, to be made in passing by scholars intent on measuring other things. Neofunctionalist definitions of integration often refer to a shift of loyalties or of the sense of identification to a new centre,4' but usually political attitudes are analyzed as part of the support for political community defined in terms of decision-making processes.'3 Functionalists refer to the sense of community compounded from habits of cooperation learned by individuals through experience with international agencies, but again these attitudes are seen largely as a resource for further institutional development. For some scholars, however, psychological variables are vital 55

ECONOMIC AND POLITICAL INTERACTION IN NORTH AMERICA

to the basic definition of political community. In Etzioni's view, a political community is (among other things) 'the dominant focus of political identification for the large majority of politically aware citizens."'4 In Deutsch's work, too, this dimension is essential, sicne he argues that "both society and community are developed by social learning and that a community consists of people who have learned to communicate with each other and to understand each other well beyond the mere interchange of goods and ser~ices."~5This concept of community, so well understood in the literature on nationalism and political development, can form the basis of a distinctive dimension of political integration at the international level. A useful way to develop this dimension would be to follow the distinctions drawn by Lindberg and Scheingold, first between identitive and systemic support and, secondly, between utilitarian and affective attitudes.46 To modify the first pair slightly, we can say that identitive attitudes concern the relationships of individuals and groups within the system, while systemic attitudes concern perceptions of, and feelings about, the system itself. Utilitarian attitudes, briefly, are based on "some perceived and relatively concrete interest," while affective attitudes refer to "a diffuse and perhaps emotional response" to some of the vague ideals of A system can be considered integrated to the extent that internal political boundaries are irrelevant to identitive attitudes and that elites and publics are preoccupied-in both the utilitarian and the affective senses - with the system as a whole. The scale thus runs from mutual apathy and particularism at one extreme to total absorption and identification at the other. With respect to identitive attitudes, it has been suggested that behavioural data on trade, travel and communications might, within certain limits, provide us with a good set of indices on peoples' attitudes to each other. The problems of inference here, however, are difficult, and it would seem better to try for more direct evidence.46 A considerable amount of research has been done in Western Europe through elite interviews and polls of mass publics, asking respondents to indicate their degree of affection for other countries, their level of trust in those countries and their perceptions of common interest with them.49 Collected over time, these data can give us a picture of how communal attitudes are changing. For North America, our data base is much less developed. especially with respect to American attitudes to Canada.50 56

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To get at systemic attitudes a similarly direct approach seems the most valuable one. Elites and publics can be asked their views on the broad purposes and specific policies of the integrating community. Some questions can elicit information on respondents' level of awareness of the emergent community as compared to their local or national communities, while others can be directed toward the affection felt for the idea of integration or for its institutional manifestations. Clearly, while it is possible in principle for the inclusive community to displace the constituent units almost completely in the attention and affection of the population, we would not necessarily expect growth in this systemic awareness and affection to occur at the expense of the other levels of community. Integration might simply mean a relative increase. in the context of an overall expansion of public political sophistication. Using the literature on international political integration as a resource, then, it is possible to construct a multidimensional framework which draws together a number of different theoretical approaches and suggests the possibility of historically unprecedented forms of community as the outcome of international integration. Combining the diverse approaches to the field has been justified by the argument that, in the absence of any consensus on the nature and purposes of the integrative process, it is as reasonable -and perhaps a great deal more productive of researchable hypotheses - to stress the elements of complementarity between approaches as it is to stress the conflicts.*' What this framework provides is essentially a way of photographing the dependent variable at any point in time. It constitutes a model of political community which allows for a multiplicity of possible outcomes for integration and suggests a number of indices by which the movement toward certain outcomes might be measured. Although increased integration may well prove more "inevitable" in some dimensions than in others, the framework as a whole represents an attempt to escape the unilinear, teleological models so tempting and so prevalent in the study of political or social change. It is, for instance, quite conceivable that a system could remain stable with a high degree of attitudinal integration, a moderate level in the functional and communications dimensions. and a low level in the coercive and decision-making dimension. This last observation raised, in a somewhat new fashion, the familiar range of empirical questions concerning the forces which 57

ECONOMIC AND POLITICAL INTERACTION IN NORTH AMERICA

might aid or hinder the progress of political integration either generally or in specific dimensions. It is reasonable to think that some of these factors will be of particular importance to one or two dimensions at most, and have negligible impact in others. Other factors may operate across the board, applying to all five dimensions - although in different ways and with different weight. As might be expected, integration theorists have not been able to agree on even a rough standard inventory of the major independent variables which might be held to account for political integration. The earliest systematic effort to produce such a list is the one by Deutsch and his colleagues in the North Atlantic study, in which at least nine conditions were found to be essential for an "amalgamated security c o m m ~ n i t y . "A ~ ~later effort in the same theoretical vein produced a list of ten possible "integrative factors" as a guide to resear~h.~'Among the neofunctionalists, the most widely accepted list has been that produced by Haas and Schmitter, which contained nine elements divided into background conditions, conditions at the time of economic union, and process condition^.^' Nye has recently brought out an inventory of factors favouring the formation of economic unions, an inventory which, inasmuch as it incorporates most of the factors considered important by other scholars, probably represents something fairly close to the current consenSUS.)~

Nye distinguishes between process mechanisms, or "forces that follow from the creation of a new organization and exert pressure on decision-makers for integrative or disintegrative responses," and integrative potential, or the conditions which determine the probability of positive responses to integrative pressures and affect the strength of initial commitment when the regional organization is formed.56 If we examine the fourteen factors he lists under these two headings, it becomes clear that with a few minor changes almost every one can be linked tentatively to one in particular of our five dimensions of political community. Of course it is possible to detect secondary associations for several of the factors- indeed it could be argued that some of them have importance for all dimensions. Nevertheless, it might be useful to set out what seem to be the strongest associations between Nye's factors and our dimensions. This should point us, in the manner of a pre-theory, to fruitful areas for research. It should also provide a kind of cognitive map showing the major preoccupations of integration theorists in their search for causal linkages. 58

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TABLE l 2 -secondary association

I -primary association

Dimensions

Process Mechanisms

Sociopolitical Coercive Decision- Functional power making administration mmmunication Atlihtdes

I. functional linkage of tasks 2. rising transactions 3. deliberate linkages; coalition formation 4. elite socialization 5. regional group formation 6. ideological-identitive appeal 7. involvement of external actors

2 2

I

I 2 I

I 2

2

2

Integrative Potential

I 2 I 2

I

2

I

2

I

B. Perceptual Conditions I. perceived equity of

benefits 2. perceived external cogency 3. low (or exportable) costs

I

2 I

2

A. Structural Condirions

1. svmmet~/economic equality biunits 2. elite value complementarity 3. existence of pluralism 4. capacity of member states (responsive adaptive)

I

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As a cognitive map. this table reflects the stress on decisionmaking and functional performance which has dominated recent integration theory, particularly the work of Haas, Lindberg, Schmitter and Nye. Conceivably, then, we might wish to extend the list of factors by searching for others which bear more on the coercive, communications, and attitudinal dimensions. As a pre-theory the table suggests a possible two step research strategy for integration studies. As a first step. we might adopt the restrictive assumption that integration is a self-contained, autonomous process in each of the five dimensions, that there is a particular complex of independent variables and a particular speed and style of change associated with each dimension, operating largely independent of changes occurring in the others. Indeed, many of the prevalent models of the integrative process associated with each of these dimensions suggest that the process of change is largely self-contained and self-sustaining, given the initial input of integrative potential for "background conditions." For Deutsch and his followers, community-formation is a spiralling, self-reinforcing process of social learning through communication; for the functionalists, the growth of institutions to meet initial needs creates a new set of needs and expectations leading to further institutional development. Within each dimension, too, it may be that the process of change occurs at a different pace and according to a different design. In the dimension of coercive power. the process might be of a rapid, revolutionary order. In decision-making and functional administration, the appropriate model appears to be one of incremental growth (epigenesis or stage-by-stage assembly of components). In socio-political communication and attitudes, finally, change would seem to take on some of the character of a diffusion process. The first step would thus be dimension-by-dimension analysis. For example, the table suggests that with respect to decisionmaking our central concern might be the neofunctionalist hypothesis -put forward by Haas in the Uniting of Europe which links the growth of common decision-making processes to the formation of supranational coalitions by interest groups and the strategy of deliberate functional linkages by the central authorities in a setting of social and political pluralism. As a second step we can then relax our initial assumption about the watertight nature of the dimensions. The multidimensional framework, in fact, compels us to take a broader perspective and to ask questions about the relationship between integrative processes occurring in one dimension and those occurring in the others. Some such questions are raised indirectly by the

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existing literature. As mentioned earlier, for instance, neofunctionalists assume a relationship between the supranationality of decision-making and the growth of a psychological "sense of community," or an increasing identification with the central institutions. Federalists recognize that pressures to bring control of coercive power under a single centre often arise from an increased sense of functional interdependence among the states concerned. Changes in decision-making processes and in political attitudes are important components of integration according to functionalists, even though their emphasis is on administrative structures. In some cases the linkage between dimensions may simply reflect the multiple incidence of a common single factorrising transactions, for example, may affect integration not only in the "primary" dimension of socio-political communication but also in the functional and attitudinal dimensions, by increasing perceptions of functional interdependence and by altering the utilitarian and identive aspects of attitudes. In other cases, integration in one dimension -hitherto of little impact elsewheremay suddenly reach a critical level where it alters the variables affecting other dimensions. Three related sets of theoretical questions arise from these observations. The first concerns causal relations betwen dimensions. Etzioni has noted that students of integration differ as to the direction of causal arrows, some pointing to wercive elements, some to social-psychological, some to functional, as the "prime mover" in an overall integrative process.5' More recently, Nye has argued that different strategies of integration assume different causal sequences among the variables relating to his dimensions of economic, social and political integ~ation.'~On the regional level it would appear we have enough cases of different strategies to begin testing some of these propositions. How, for example, does the pace of overall integration compare between systems where the coercive dimension became highly integrated first (Eastern Europe) and those where the prior dimensions are those of functional administration and sociopolitical communication (United States-Canada)? The second set of questions concerns how the rate and direction of change in one dimension affects those in another. It has been assumed, perhaps too easily, that there are no trade-offs to be made between dimensions. or no costs accruing to integration in one dimension from the speed of integration in another.S9 But it might well be asked whether a high degree of centralization of wercive power or decision-making might not become counterproductive -at least beyond a certain point-for integration in 61

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the attitudinal dimension. Again, success in integrating functional administration might remove incentives for supranational decision-making or the centralization of coercive power. In pursuing such questions we might find that the relationship between integration in each pair of dimensions takes a distinctive curvi-linear form." There are clearly many such possibilities, which a multi-dimensional, reversible model allows us to explore. The final set of questions has to d o with the optimal "mixes" of integration in all the dimensions for the growth, stability or retraction of integration - whichever one is inclined to prefer. Is a strategy of "balanced growth" across the hoard more productive of a high level of integration than a strategy of inducing a "creative tension" through the unbalancing advance of one dimension? Is integration most easily and permanently halted by the curtailing of socio-political communication and transnational functional cooperation ("close the 49th parallel"), or by more dramatic resistance and retraction in the dimensions of coercive power and decision-making (an end to NATO, NORAD and "quiet diplomacy")? Clearly the answers to such policy questions will depend on how productive this framework proves to be for empirical analysis. However much it might violate certain "common sense" notions of international political integration, the multidimensional, open-ended approach described here would seem to offer some new perspectives on traditional questions, and perhaps to point the way out of some of our quandaries of theory and policy. Foolnotes

I. In a seminal neofunctionalist study, The Uniring of Europe (Stan-

ford, 1958), Emst Haas refers to the goal of integration as "a new political community, superimposed over the pre-existing ones." The institutions of this community "possess or demand jurisdiction" over the national states (p. 16). For a recent reformulation of this goal, see L. Lindberg and S. Scheingold, Europe's WouldBe-Polity (Engelwood Cliffs, 1970), esp. ch. 3, and E. Haas, "The Study of Regional Integration: Reflections on the Joy and Anguish of Pretheorizing" Inrernarional Organization, vol. 24, no. 4 (1970). esp. pp. 630-636. 2. K. Deutsch, et. al., Polirical Community and the North Atlanrrc Area (Princeton, 1957), pp. 3-9. 3. See, for example, B. Russett, Communiry and Conrenrion: Brirain and America in rhe Twentieth Cenrury (Cambridge, Mass.,1963); J. W.Burton. International Relarions: A General Theory (Cambridge,

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4.

.

5. 6.

7.

8.

9.

10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

1965). and, for an exposition of a strongly "pluralist" European policy. A. Grosser. French Foreign Policy Under De Gaulle (Boston, 1967). ch. 6. See the special issue of International Organization, edited by J. Nye and R. Kwhane, on "Transnational Relations and World Politics" (vol. 25, no. 3, 1971). L. Lindberg, "The European Community as a political System", Journal of Common Marker Studies, vol. 5, no. 4 (1967), p. 345. For the classic continuum, see I. Claude. "The Management of Power in the Changing United Nations," International Organizalion, vol. 15, no. 2 (1961). pp. 219-235: for the learning model, see H. Teune, "The Learning of Integrative Habits" in P. Jacob and J. T o s m o (eds.), The Inregration of Political Conlmunities (Philadelphia, 1964). pp. 247-282. For such arguments or assumptions, see L. Lindberg, "lntegration as a Source of Stress on the European Community System", in J. Nye (ed.), International Regionalism (Boston. 1968). pp. 231-268. and E. Haas, "Technocracy, Pluralism and the New Europe" in Ibid.. pp. 149-176. For a critique of development theory along these lines, see S. Huntington. "Political Development and Political Decay," World Politics vol. 17, no. 3 (1965), pp. 386-430. Lindberg and Scheingold, op. cit., ch. 9: L. Lindberg "Political lntegration as a Multidimensional Phenomenon Requiring Multivariate Measurement". International Organization, vol. 24, no. 4 (1970). pp. 649-731. On this problem see the contributions by Claude Masson and Garth Stevenson in this volume. J. Galtung, "A Strudural Thwry of Integration." Journal of Peace Research, vol. 5, no. 5 (1968), p. 377. Lindberg, "The European Community as a Political System." op. cit., p. 345. J. Nye, Peace in Parts (Boston. 1971). pp. 24-28. Haas, "The Study of Regional Integration," op. cir., pp. 607-608. Since October 1970 this question has assumed some importance in Canada. See D. Smith. Bleeding Hearts. Bleeding Country. (Edmonton, 1971). 1. Claude. Swords into Plowirhares (4th edition. New York, 1971). ch. 18 contains a review and critique of world federalist ideas and assumptions. A. Etzioni, Political Unijirotion (New York, 1965). p. 4. Ibid., pp. 37-41, 72-73. Cf. the models of "peace through empire" and "peace through federation" in R. Aron. Peace and War (New York, 1960, ch. 24. Both are based on power as a central variable. A. Organski, World Pofiticr (2nd edition, New York, 1968). ch. 14 ("The Power Transition").

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21. Or we might decide to broaden the notion of power underlying this dimension and to use some e e n e d index such as GNP. 22. See, for example. the chapter by John Kirton in this volume. 23. E. Haas and P. Schmitter, "Economics and Differential Patterns of Political Inteeration." in lnrernarional Polirical Communirier; An , pp. 265-266. Anthology (Cew ~ o i k 1966). 24. Haas, "The Study of Regional Integration" op. cir.. p. 631. Cf. Haas, "Technology, Pluralism and the New Europe," in Nye, op. d l . , p. 151, on supranationality as a unique style of international decision-making, "because of the nature of the participants, the context in which decisions are made and the quality of the decisions produced." 25. L. Lindberg, m e Political Dynamics o j European Economic Integration (Stanford, 1963). p. 5. 26. Lindberg, "Political Integration as a Multidimensional Phenomenon," op. cit., p. 652. Cf. definitions used in other articles in the same wllection, by Nye (pp. 798-799). Schrnitter (p. 836) and Scheineold (0. 1001). 27. Briefly, the remaining seven concern the flow of demands, the resources of decision-makers, the style of leadership. the modalities of bargaining, the effects of mllective decisions, compliance to these decisions, and their distributive consequences. For details, see Ibid.. OD. 661. 679-717 28. bid.; 673.' 29. Ibid., pp. 673-674. Cf. Lindberg and Scheingold, op. cit.. pp. 6482. 30. D. Mittany, A Working Peace System (Chicago, 1966), pp. 72-73. 31. J. Nve and R. Keohane. "Transnational Relations and World ~ o l i t i b :An Introduction," Inremarional Organizarion, vol. 25, no. 3 (1971). pp. 329-349 and the Conclusion by the same authors. pp. 721-748. For a samdc of .~olicv-oriented literature which embodies . this notion of politkal lag. see L. Armand and M. Dranwurt. Le Pari Europken (Paris, 1968). 32. J. SeweU, Funcrionalism and World Politics (Princeton, 1966). p. 17. C t Mitrany, op. cit., pp. 163-164. 33. For an analysis of this argument, see R. W. Cox "Labor and Transnational Relations," International Organization, vol. 25, no. 3 (1971). pp. 579.584. 34. H. Alker and D. Puchala. "Trends in Economic Pattnership: The North Atlantic Area 1928-1963," in J. Singer (ed.), Quantitative Inrernorional Politics (New York, 1968). p. 288. 35. Ibid., p. 288. 36. K. Deutsch, "Communication Theory and Political Integration," in Jamb and Toscano, op. cit., ch. 2. 37. Ibid., p. 51. Cf. K. Deutsch, Nationalism and Social Communication (Cambridge. Mass.. 1953, ch. 5). For a critique. see W. Fisher, "An Analysis of the Deutsch Sociocausal Paradigm of

- ..

p:

POLITICAL INTEGRATION

Political Integration." Inrernarional Organization, vol. 23, no. 2 (1969). pp. 259-290. For a different set of distinctions, see Nye and Keohane, op. cir., p. 332. K. Deutsch, "Transaction Flows as Indicators of Political Cohesion." in Jacob and Toscano, op. cir.. ch. 3. Alker and Puchala, op. cir., pp. 290-293. On the concept of integrative hegemony, see the chapter by Andrew Axline in this volume. Haas, The Uniting of Europe, p. 16; Haas and Schmitter, op. cir., pp. 265-266: Lindberg, The Polirical Dynamics, pp. 5-6. See, for example, Lindberg and Scheingold, op. cit.. pp. 38-63. Also R. Inglehart. "Public Opinion and Regional Integration," International Organizarion, vol. 24, no. 4 (1970). pp. 764-795. Etzioni. ap. cir., p. 4. Deutsch, Nationalism and Social Communicarion, p. 91. Note the important psychological dimension of the definition of a "security community" in Deutsch, el. al., Political Community and the Norrh Atlantic Area, p. 5. Note the difference between these categories and those used by Etzioni, op. cir. Lindberg and Scheingold, op. cir., p. 40. Ibid.. pp. 42-45. For examples of such an exercise, see K. Deutsch, L. Edinger, R. Macridis and R. Merritt. France, Germany and the Western Alliance (New York, 1967); Inglehart. op. cit.; R. Merritt and Puchala. Western European Perspecrives on international Ajjairs (New York, 1968). For remarks on the problems faced in applying this approach in less developed areas of the world, see Nye, Peace in Parts, pp. 44-47. For some findings,see thechapter by John Sigler in this volume. On the principle of complementarity and its repercussions in scientific theory, see f.Matson, Tlte Broken Image (New York, 1961), pp. 131-140, 150-152, 175,243. Deutsch, et al.. Polirical Cammuniry and the North Arlanric Area. pp. 46-59. Three more conditions were held to be possibly essential (p. 58). Pluralistic communities, however, were found to be far less demanding oftheseconditions (p. 65). P. Jacob and H. Teune, "The Integrative Process" in Jamb and Toscano, op. cit., ch. 1 Haas and Schmitter, ap. cir., pp. 266-276. Nye, Peace in Parts, pp. 64-87. Note that this model is to apply only after the initiation of integration through the formation of a new . regional organization. (p. 64). Ibid., p. 64and p. 75. Etzioni, ap. cir.. p. 55. Nye. Peace in Parts. pp. 48-54.

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59. For doubts about such assumptions in the development literature, see Huntington, op. cit.; E. Nodlinger. ''Political Development: Time Sequences and Rates of Change". World Politics, vol. 20, no. 3 (1968). pp. 494-520: and C. Whitaker. "A Dysrhytmic Process of Political Change", ibid., vol. 19, no. 2 (1967), pp. 190-217, esp. p.

60. I am indebted to Professor Joseph Nye for this suggestion.

,

.

I N T E G R A T I O N A N D INEQUALITY. N O T E S ON T H E S T U D Y OF I N T E G R A T I V E HEGEMONY

W. Andrew Axline

The process of integration in general has come to be defined by the conditions under which it has been studied, namely, regional intergovernmental organizations aiming to create benefits from the economic results of freer trade among the members. A more general concept of integration, however, may permit the study of situations other than free trade areas and common markets from the perspective of integration theory: for example, groups, or pairs of nations which find themselves in a closely dependent or interdependent relationship as measured by various indicators, but which lack formal "integration" institutions. Thus, we may ask whether relationships between England and Ireland, the United States and Mexico, the Soviet Union and Czechoslovakia, and the United States and Canada can be better understood when examined as some form of integration. It is not expected that "integration theory" can apply part and parcel to these kinds of relationships, which differ greatly from the actual situations out of which the theory was developed. But the suggestion here is that the point of view, the focus of attention, and even some of the hypotheses of integration study can shed light on situations such as the economic and political relationship between the United States and Canada. Before attempting such a gross transplant of theory to the specific United States - Canada case, some knowledge about the feasibility and utility of looking at other similar situations is necessary. This requires a comparative approach which will allow the study of different but similar cases which may provide empirical evidence of the kinds of patterns to be expected.

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The following sections treat the principal questions of comparative study of integration and relationships among states of unequal power. The Comparative Study of Integration In political science, comparative analysis has offered some hope of a substitute for the "controlled" conditions of the laboratory and for the capacity to "manipulate" variables. In observing phenomena across relatively similar social contexts the observer can assume that perceived changes in the dependent variable are the result of changes in the independent variable (which has been "manipulated") and not the result of exogenous variables which have been "controlled" by choosing the most similar contexts.' Students of comparative politics have been fortunate enough to have at their disposal for study a number of different states which have permitted the exploitation of comparative analysis in cross-national studies. And within the past decade even more sophisticated frameworks have been developed to take into account the emergence of societies differing significantly from the previously dominant modern, Western, developed society. Unfortunately, the very nature of international relations imposes great limitations on the use of comparative study. There is only one global international system. There are, however, a number of international subsystems across which comparative study can be undertaken, as well as the possibility of comparison between national and international systems. Presently, the regional economic unions that have provided the major contexts for the study of political integration comprise international subsystems that omer many of the advantag& for comparative study. With their very highly developed institutional structures and their relatively important powers of decisionmaking, these regional organizations offer a more controlled environment for the comparative study of political processes. Indeed, in the more recent neo-functional literature of economic and political integration the important advantages of studying these processes within the institutionalized structure of regional organizations are iecognized even to the point of- using the degree of institutionalization as an important variable indicating a level of integration.' Similarly, the "most similar systems" design for the comparative study of pairs or groups of states involved in integration could be exploited by taking the total population of pairs of

INTEGRATION AND INEQUALITY

countries in the world and limiting the cases to be studied and compared to those pairs which manifest a great disparity in power, and a significant degree of interaction. Limiting attention to states in this similar situation controls certain "exogenous" variables, i.e. the disparate power, and the fact of extensive interaction, and thus they presumably do not "explain" differences in the political phenomena being studied. The Canadian-American example would presumably fall into this category. Using different levels of analysis is another way in which the advantages of comparative study can be exploited. There is much diversity of opinion about the dependent variable to be used in integration study, particularly between the neo-functionalist and transactionalist traditions. For the most part the dependent variable (the phenomenon to be explained) of the neo-functionalist model has been an attribute of the regional union, i.e. the level of integration, (represented in institutional or policy terms) while often, particularly in transactionalist studies, exchange of goods or information, and sometimes elite or mass attitudes are considered to be the dependent variable.' Recently, more attention has been given in the neo-functionalist literature to the individual national policies toward the regional organization. In Philippe Schmitter's revised neo-functional model "rational actor strategies" are an important intermediate variable, and in a recent article I have examined the possibility of pursuing a comparative foreign policy framework for the study of integration with the degree of "integrativeness" of the foreign policy of each member state as the dependent ~ a r i a b l e . ~ In the preceding chapter Charles Pentland provides a concise survey and summary of the various "dimensions" of integration, the different indicators that may be used to measure integration.' The dimension of integration under study may be measured as an attribute of the union or dyad, such as the amount of autonomy of the common decision-making machinery, the number of shared functional institutions, and the degree of socio-political communications. It may also be measured as an attribute of the member countries of the union such as attitudes of national elites and masses, or policies of the constituent units toward the integrative union. The shift in level of analysis of the dependent variables from the union to the national policies allow comparisons within and between unions. Thus, for example, national policies of countries in integrative relationships with great disparity in power can be examined.

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For analysis of pairs and groups of states in disparate power relationships a shift in the level of analysis away from "explaining" changes in the level of integration is particularly desirable, for the primary concern is not the level of integration of the "union" as a dependent variable, but rather the impact of integration on the two countries in a situation of greatly disparate power. This is especially true for the study of CanadianAmerican relationships, where Canadians are preoccupied with the effects on Canada of the close ties with the American giant. Neither the neo-functionalist nor a comparative foreign policy model of integration is totally adequate to examine the most important questions that are likely to be generated by students examining the effects of integration under conditions of inequality. Instead, a model which employs both the "linkage" effects of the neo-functional and comparative foreign policy models, and some of the variables and levels of analysis of the transactional school of integration would be most fruitfuL6 Linkage implies a two-way relationship between phenomena at the international level, such as level of integration of the union, or foreign policy, and the domestic level, such as attitudinal data or transnational relations. By choosing integrating groups and pairs of countries with dominant members as the object of study. the implication is that the fact and degree of integration are not the principal dependent variables under consideration, but rather the principal concern is results, both on external behaviour (foreign policy) and on internal behavior (societal impact) of integration under conditions of disparity. Of course one of the main interests might be the likelihood of greater or lesser integration under different circumstances, in which case the model for study would be closer to the traditional approach of explaining higher degrees of integration on the basis of conditions within the participating countries

The definition of integration found in the literature of the transactions approach is much less tied to the formal level of power of regional institutions, and therefore is more amenable to the study of integration that does not involve the establishment of elaborate regional institutions. This definition of integration is also more sociological than in the neo-functional model, making it more relevant to the important questions involved in the study of integration among unequal partners, where internal consequences are of primary concern. In the Canadian situation, then. the shifting of the level of

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analysis to the explanation of the impact of integration will permit disciplined study of such questions as the effect of close interaction with the United States on Canadian foreign policy, on the use and distribution of Canadian resources, on the control of Canadian industry and commerce, etc. The following section elaborates the various different levels of analysis that result from modification of the traditional way of asking the integration question. It also suggests important questions of Canadian policy which can be examined at each level of analysis. Integration and Inequalily Before it is possible to elaborate the different ways in which the impact of integration can be studied in conditions of greatly disparate power, some effort must be made to clarify the way in which the terms integration and inequality are being used. At this stage the definition of integration will be purposely drawn as broadly as possible, so as to encompass the great variety of questions that are raised in the following elaboration of several different levels of analysis. Integration means a number of different things to students of integration, and at this time I want to suggest that a number of these approaches might be fruitful in studying integration under conditions of great disparity, although only one definition can be used at a time, and some will certainly be more useful than others. Obviously a precise statement of the definition of integration must be made before proceeding to the operational stage of research. In the broadest sense integration means interdependence. The political frontiers which formally establish the boundaries between autonomous sovereign states are weakened among states that are interdependent in that these boundaries do not provide the isolation or autonomy that they formally represent. In this sense all the countries of the world are more "integrated" with each other than they were a century or two ago. But some countries are more integrated than others. This may be the result of conscious political decisions on the part of national political leaders to establish formal institutions of a regional nature endowed with powers to take decisions which have effect within the domestic social, economic, and political life of the member countries. An example is the case of the European Community. Or it may be the result of individual decisions taken by citizens of countries which have as their aggregative result a high degree of economic transactions, movement of persons, and exchange of communications as in the case of the United States and Canada.

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AMERICA

One important result of both of these situations is that important decisions affecting the national life of the countries involved are taken by individuals, groups, and institutions outside their national socieites. Charles Pentland has set out the principal "dimensions" which represent the ways in which a condition of integration may be manifested and measured, including coercive power, shared decision-making, joint functional administration, mutual social and political transactions, and homogeneity of elite and mass attitudes. By observing activities along these dimensions, conclusions can be drawn as to whether a condition of integration is present, and to what degree. The condition and degree of integration is an empirical question, and the EEC and United States-Canada are offered as examples. Sufficient analysis of Europe has been done to make clear that the concept of integration applies there, but with respect to Canadian-American relations the empirical investigation is still to be done to see if the example is an apt one. There are more important questions to be asked once the appropriateness of the integration model is established, and these questions imply different levels of analysis and a limitation of the definition of integration to one of the specific demensions suggested. Gross inequality, or disparity of power between a pair of countries in a situation of integration, is also to be taken as a condition rather than the active exercise of this known advantage. Again, in a broad definition this gross inequality is represented by great discrepancies in indicators that have traditionally been considered as elements of national power. These include the level of military capability, the size and degree of industrialization of the economics, the size of the total population and its productivity, the total land area and its climatic and topographical characteristics, etc. Two countries are said to be in a situation of gross disparity of power when there are large differences between them on all or most of these indicators of national power. Presumably there is some "threshold" beyond which the disparity in power is so great as to have an important influence on the nature of the relationship between the two countries in general, and more importantly, on the interactions between countries in a situation of integration in particular. This would be called hegemony. The presence of this condition of great disparity. like the condition of integration. is to be empirically determined. Just as Canada and the United States were suggested as an example of a situation of integration, so are they offered as an example of a

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pair of countries manifesting a great disparity of power, also subject to "hard" empirical verification. But again the establishment of this empirical condition of inequality is only preliminary to the more important questions of the effect of disparity of power on interactions between pairs of countries in a situation of integration. Since the principal question of interest involves the effect of disparity on integrative relationships the pairs of countries to be used as the population for such an inquiry could be inductively established by selecting all the pairs of countries manifesting a determined degree of integration, and from among those choosing the pairs in which the criterion of gross inequality is met. The effect of disparity can be inferred from differences observed between the total population of integrative dyads and those manifesting disparate power. The discussion here has been entirely in terms of pain of countries, or dyads, but until it can be established otherwise it is postulated that the same kinds of relationships will be found in groups of countries in a situation of integration where one partner is greatly dominant. Obviously this broader definition of integration may have somewhat different implications for the unequal pairs of nations finding themselves in a situation of integration than it has for the dominant and subordinate partners of a customs union. In the latter case the countries are integrating into a new political or economic grouping, while in the former it is more likely to be seen as a case of the weaker country "integrating" into the stronger. Yet in the two situations similar questions can be asked about the processes and results of integration. The fundamental analytical and normative questions that are to be suggested in this paper can be divided into the following categories.' I) What are the conditions under which integration is most likely to take place? This question represents the major thrust of much of the regional integration literature in which the level of integration of the union is the dependent variable and the various conditions surrounding the background, founding, and operation of various common markets are the independent variables. It is to be understood that stating the question in the affirmative (i.e. assuming increasing degrees of integration) does not imply that the process of integration may not be reversed. Integration and disintegration are equally possible outcomes. Unlike most of the

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Conditions within the union as a

AMERICA

Level of integration of the union

FIGURE I

regional integration literature, this paper suggests study of the level of integration at the unit level (the constituent country) as well as at the level of the union or dyad. In the case of integration at the union level, it is the degree of integration that is considered the dependent variable. with the independent variables being attributes that are summed across the members of the union. Such things as cultural homogeneity, similar historical experiences, and common language are cnnsidered as contributing to the likelihood that the societies will achieve a higher degree of integration. Usually, this framework has not examined the intermediate level of formal decisions, public or private, which may actually bring about the increase in integration. This level of analysis allows comparison across unions, but not not within unions as the dependent variable is an attribute of the union as a whole. Thus it is possible to make comparisons between unions that are hegemnnial in nature, and those that are not, but comparisons cannot be made between individual constituent societies within, or across unions. Interesting questions can be asked, however, about the relative likelihood of increases in integration in unions that are marked by great inequality, or hegemony, and those that are not. Indeed, the importance of a "core area" in the development of security communities as suggested by Deutsch et a/.in the study of integration in the North Atlantic area is an example of this.8 In the North American case one might ask what characteristics of Canada and the United Stat? or of the Canadian federation are most conducive to a change in integration of these unions. In other words, what are the background conditions within the union as a whole which will cause a movement either toward or away from integration of that union. These conditions may be expressed as attributes summed across the units or in

INTEGRATION AND INEQUALITY

terms of relations between the units. For example, it has been hypothesized that a situation of geographical contiguity or racial and cultural homogeneity will favour the integrative p r o ~ e s s , ~ and also conversely their reduction or absence will hinder it. Also the neo-functionalists have suggested conditions which favour the "politicization" of unions already displaying some degree of economic integration.1° Figure 1 graphically illustrates this general hypothesis. Policy implications can be drawn from framing the research question in this way. For example, the Canadian government may wish to reduce cultural homogeneity across the United States-Canada boundary through limitations on the amount of American television programming to be carried on Canadian networks and thus to impede or slow down the integrative process by actions directed at this level. At the same time. this government may attempt to increase cultural homogeneity within Canada by pursuing policies designed to encourage development of French language usage throughout Canada. The relations underlying these policies are found in this formulation of the question. 2) A second strategy for research is to ask how do the characteristics of the individual units of the union or of the relational characteristics of the units affect the degree to which policies favoring or impeding integration of the union are pursued by these units? It may be observed that within economic and political unions the pursuit of integrative activities by member units toward the union varies with the individual characteristics of these member units. This kind of study could be approached from a decisionmaking point of view or could be cast in a comparative policy study context. The goal might be to explain the integrative policies in terms of the independent variables one has chosen to consider. They may be a series of background conditions, or aggregate attributes of the society as sometimes chosen in the comparative study of foreign policy. In any case the disparate power relationshtp among the integrating states could be considered as an important intervening variable. Figure 2 illustrates this formulation of the question. One interesting application of this research design is to the comparison of common markets," but it could be utilized to make some observations about Canada in the North American context. One would expect that the degree to which the policy choices of the Canadian provinces

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Conditions within each unit of the

Integrative activity at the level of the

FIGURE 2

favour or impede integration is a function of the characteristics of those units. for example their size or level of economic development. In order to influence these policies the federal government might choose to implement policies of its own which alter conditions within the province and thus increase the tendency of that province to pursue actions favourable to the union. For example, if less developed Canadian provinces are more likely to pursue non-integrative policies, as suggested by some findings of integration studies,I2 the Canadian government wuld attempt to reduce inter-provincial disparities through various kinds of payoffs, hoping to encourage integrative provincial policies. 3) A third question which provides another variation on the integration paradigm asks, how does the degree of integration existing in a union affect the activities of the member units of that union? In other words, the activity of the units is the dependent variable and the level of integration of the union is the independent variable.

:

',

Some of the most important questions for the national policy maker will be asked at this level. The generalizations formulated on the basis of these questions and the basis of relevant normative considerations discussed below provide the basis for policy-making. The impact of integration can be considered within three different systemic contexts, the international, the union (dyad) and the national society. At the international systemic level, for example, there has been an important shift in bargaining position in trade negotiations between the United States and Europe as a result of the common negotiation position of the member States of the EEC. At the level of the dyadic system of United States - Canada. the high percentage of Canadian foreign trade accounted for by the United States places a serious limitation on

! INTEGRATION AND INEQUALITY

the Canadian bargaining position in economic matters. Finally, at the level of the national system the example of the effect on German Farmers of the EEC'S Common Agricultural Policy can have on the shows the imvortant impact that integration national socieiy. These effects and interactions (linkages) are not unique to situations of integration within disparate dyads. but are vresent in any international system with' a relatbely high degree of interdependence. This third kind of relationship is shown in Figure 3. Again this offers interesting prospects for research in the North American context. The constraints on an independent Canadian foreign policy imposed by close interdependence with the United States can be examined using this design. In an asymmetrical power relationship this constraint seems likely to be greater for the subordinate partner than for the dominant one. This design is also relevant at the national-subnational level. To a degree, the nature and scope of the policies of the units (states or provinces) is a function of the integration of the union (federation), and differences between United States federal-state relations and Canadian federal-provincial relations can be partially explained by differences in the fonnal nature of the two federal systems (level of integration).

Activity at the level of the unit

Level of integration of the union

FIGURE 3

4) A fourth variation of the integration question asks, what is the effect of integration of the union on the relationship between internal political activities within one member unit of the union and another? Studies within this framework are more difficult to characterize in a simple "more or less" kind of relationship, and will usually involve observations about specific issue areas in which domestic decisions are constrained because of an integrative relationship. Figure 4 illustrates this variation. In effect this formulation of the question describes a given level of integration as a domestic political constraint on the members of an integrating dyad. Comparing across unions the level of integration can

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Integrative

Activities within

Activities within

Context FIGURE 4 become an explanatory variable as in the previous example. And as in the preceding variations this relationship is relevant for policy questions in the North American setting. For example, a crash programme in the United States to develop very cheap sources of atomic energy would have an important economic impact on certain sectors of the Canadian economy, and the direction of the effect might vary from sector to sector. The effect of this integrative situation may be described as a redistribution of values in one country as the result of policy decisions taken in another country. And it is precisely this effect that is the principal source of disquiet and motivation behind certain kinds of Canadian nationalism. Of course the decisions in country A that affect the redistribution of values in country C need not be governmental policy decisions. They may be decisions of various kinds of nongovernmental organizations, amone which the multinational corporation is the example most often cited by students of transnational politics." Although these four research strategies have been stated in terms of the integrative or disintegrative activities, and the examples of activities have been mostly policy-making, it should be understood that we have limited ourselves to this particular dimension of integration only for illustrative purposes. The rneasure of integration might take the form of transactions, attitudes, institutional development or any other dimension on which integration is usually measured. Likewise, where "integrativeness of policy" is suggested as a variable any other dimension which measures a unit's tendency to favour integration of the union could be substituted. The range of normative questions relevant to integration is, of

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course, limitless, and will depend upon the societal context. Just as the impact of integration can be analysed according to the international, regional, or national impact, the normative considerations depend on whether one is considering global values such as world peace, regional values such as preservation of western civilization, national values like linguistic or cultural preservation, or values which divide a society such as arguments over the most desirable form of government. The normative questions have been almost totally ignored by the analytical literature on regional international integration. In Europe these questions have been much more immediate because of their direct effect on the populations concerned. One of the more important of these normative conflicts was the confrontation of the French dirigiste tradition and the German free enterprise approach in the EEC. These normative considerations. however, provide the basis for any policy analysis of integrative hegemonies. They would. seem to be even more important in the case of integration between pairs of states where there are strong value differences between the national societies, and particularly where ethnic or language and cultural minorities in one society see an unfavorable shift of power resulting from integration. It is for these reasons that the study of Canada as a subordinate partner in an integrative relationship with the United States has aroused such a lively interest. Integration and Inequalitjc Some Suggested Relationships The suggested categories of questions stated above provide a useful means of organizing some suggested relationships that may be found in the study of integrative hegemonies. These suggested relationships, in turn, can serve as rough guidelines to a framework in which comparative or case studies can be carried out. It is impossible to be exhaustive in such an enterprise, and consequently the examples were aimed only at giving an idea of the kinds of propositions that are likely to he interesting and fruitful in this kind of research.

1) THE LIKELIHOOD OF INTEGRATION UNDER CONDITIONS OF GREAT DISPARITY As suggested in the preceding section, the study of integration within disparity at the union level of analysis can be fitted into the more traditional formulation of the integration question. The dependent variable is the degree of integration of the union, and

ECONOMIC AND POLITICAL INTERACTION IN NORTH AMERICA

-

the independent variables of great variety can be found among the extensive literature on the subject. The major emphasis, however, will be put on the condition of great inequality, e.g. the effect of the disparate power relationship on integration. In effect, analysis at this level implies comparison with integrating unions without great power inequality, in order to make observations about (a) the relative likelihood of integration under conditions of relative equality and inequality and (b) differences in relationships between particular independent and dependent variables in the integrative process in the two contexts. The literature in international relations is by no means unanimous on the effect of disparity of power on interaction. In the realist school of international relations, power, (especially military capability) is seen as a particularly crucial factor in international intercourse. A. F. K. Organski sees states of similar capability as having a tendency to interact,14 and in a more integrative framework Johan Galtung contends that the greater the similarity and higher average power level of a nation-dyad the greater the level of collaboration." On the other hand. alliance theory often postulates the opposite relationship, reasoning that military weaker states will seek to augment their security by establishing close ties with a stronger power and that the stronger power responds in order to prevent the resources of the smaller power from falling into the hands of the enemy.I6 The literature on international political and economic integration is also divided on the effect of disparate power on the integrative relationship. Amitai Etzioni asserts that disparate power tends to increase the likelihood of integrati~n,'~ and Deutsch's study of political community in the North Atlantic area emphasizes the importance of a dominant core area to the integrative process. In unions based upon economic integration, Joseph Nye points out that there is a difference in the relationship between economic power (as measured by total GNP) and integration (measured in trade), between unions of developed countries and unions of underdeveloped ones.I9 Among developed countries with disparate economic power relatively high degrees of integration as measured by trade have been achieved, while the integration of underdeveloped countries seems to be limited to countries having relatively small disparity of economic power. This difference can be better understood by looking at economic integration from a development point of view. According to the traditional theory of cust~msunions, countries with eco;

C

INTEGRATION AND INEQUALITY

omies of different size and structure (i.e. complementary) are quite likely to benefit from economic integration, and therefore economic unions are likely. However when this theory is applied to underdeveloped countries it is unlikely that the benefits of economic integration can be realized.20 The economies of the underdeveloped countries do not satisfy the criteria of the traditional theory of customs unions. Analysed from this point of view, one would have to conclude that underdeveloped countries cannot benefit from integration, and that therefore the establishment of economic unions in underdeveloped countries is undesirable and presumably unlikely. This is not the case, however. We see a number of economic unions of underdeveloped countries achieving differing degrees of success. The reason for this discrepancy is twofold. First, the underdeveloped countries are not likely to be able to benefit from the static marginal increases in produnivity that have comprised the major focus of analysis of studies of integration in developed countries, but they do stand to profit from some of the longer term dynamic benefits that imply structural economic change. Second, the goals of economic integration in underdeveloped countries are based upon a different normative structure. While trade diversion is to be avoided in developed common markets, it provides a means of import substitution, an important step toward economic development, in underdeveloped wmmon markets. The goal is not to make marginal increases in industrial efficiency, but simply to establish some industrial production, even at relatively low levels of efficiency." Seen in this light, then, there is no expectation that a customs union is more likely to be established among developed rather than underdeveloped countries. We can, however, predict some differences in the effect of power inequalities on integration among developed and underdeveloped countries. These differences are usually referred to as "'spread" and "backwash" effects.2' In economically developed customs unions where there is a concentration of economic power, the elimination of economic barriers has the effect of distributing benefits in such a way as to reduce the original disparity. The opposite effect is found in underdeveloped economic unions. and concentratjons of economic power are accented with the elimination of barriers so that the relatively rich get richer and the poor get poorer. Whereas this reasoning provides some justification for Nye's observations that disparate power retards integration, other empirical findings by Cobb and Elder suggest that disparate 81

ECONOMIC AND

POLITICAL INTERACTION IN NORTH AMERICA

levels of economic power have little effect on the likelihood of integration." Although economic power will be one of the most important elements of power inequalities in integrative situations with a high economic content (i.e. EEC, CACM, Canada-United States, Quebec-Canada) it certainly is not the only measure of inequalities in national power. The variables most relevant will depend upon the operational definition of integration used, and it is not expected that there will be total congruence on all indicators of power disparity. Using an example of economic integration, a simple general hypothesis can be developed for integrative hegemonies by suggesting the effect that the inequality between partners will have on relationships described in the theoretical literature of integration. For example, it might be supposed that the increased competition and subsequent rationalization of industry resulting from elimination of formal economic barriers will occur more rapidly in situations of grossly disparate economic power, or the opposite. One possible general proposition concerning the effect of gross inequality on integration, then, can be stated as follows: The efject oJ independanr variables which are contriburory to integration will be increased (decreasedl under conditions of hegemony. This proposition could be tested in its general form, or it could be disaggregated according to the kind of integration the particular independent variables, and the nature of the inequality. For example, a particular proposition might be as follows: a high degree of economic competitiveness will lead to a higher degree of economic integration in economically disparate integrative relationships than in relationships of economic equality. Here economic competitiveness is seen as being a condition favorable to integration, and disparity is seen as accenting that positive relationship. 2)

INTEGRATION STUDIES AT THE UNIT LEVEL UNDER CONDITIONS OF GREAT INEQUALITY

Of greater interest in the study of integration within disparity, particularly in the case of pairs of societies, is the effect of the hegemonial relationship on policy at the national or unit level. Integration studies have for the most part been interested in the phenomenon at the union level and only recently have been concerned with national "strategies" of integration. It has been the level of integration at the union level as discussed in the

INTEGRATION AND INEQUALITY

previous section that has been the dependent variable in most integration studies. The different "roles" in the integrative process have been discussed only in the context of their contribution to the overall integrative level. These "roles," however, and their effects on the policies toward the integrative situation itself, are of greater interest to the student of integrative hegemonies. The basic question then will be to investigate the effect of gross inequality on the policies of the constituent units toward integration. The general proposition again will concern the degree to which integration is affected by disparate power between the integrating nations. This time, however, a distinction can be made between the effect of power disparity on the policy of the dominant country toward integration and on the policy of the subordinate country. Returning to the economic effects of integration in underdeveloped countries we can postulate that the most integrative policies toward the union will be manifested by the dominant member in terms of economic power, and that the least integrative policy will be manifested by the subordinate member. This, of course, assumes that the governments are aware of and sensitive to the backwash effects supposedly disadvantaging the lesser developed regions. Because of the spread effects among customs unions of developed economies, there is no expectation that the policy positions of the dominant and subordinate members will parallel that of the underdeveloped integrating hegemonies. In integrating dyads without formal institutions for integration we might expect the effects of dominant or subordinant power positions on national policy to be more accented. This is because governments are likely to be more sensitive to control over internal social matters passing to foreign governments and institutions than to regional organizations in which they participate, albeit in a subordinate role. The general form of a proposition concerning the policy of members of integrative hegemonies might be as follows: The ejfect of independent variables which are contributory to integrafive policies o/ integrating units will be increased (decreased. reversed] in units which are dominant (subordinatel menlbers of integrating hegemonies. The subjecting of this proposition to empirical tests will again involve the specification of a particular kind of hegemony and a similar specification of the kind of integration under observation. Thus military hegemony would be expected to have an impact on military integration, a question which is addressed in John Kirton's essay in this volume.24 0,

ECONOMIC AND POLITICAL INTERACTION IN NORTH AMERICA

DOMESTIC IMPACT STUDIES OF INTEGRATION UNDER CONDITIONS OF GREAT DISPARITY

3)

The study of impact of integration on the national societies corresponds to the "feedback" effects of increased integfation of the union on the constituent units. In terms of the comparative foreign policy literature these are called "linkage" effects from the international system to the national system. Studies of integration at this level of analysis are quite different from the traditional way integration has been looked at. First, little attention has been paid to this aspect of the integrative process, and second, these kinds of questions are less likely to be put in terms of the straightforward "more or less' relationship. The nature of the impact of integration on the national societies opens a varied range of possibilities that makes its study more interesting and more complex. It is this type of question which holds by far the most interest for Canadians, as witnessed by the essays in this collection dealing with the substantive issues of Canadian-American relations. These issues have received much attention, but for the most part they have not been put into the theoretical context of integration. The domestic impact of integration must be distinguished from the level of integration of the union, whether integration is being measured by an institutional or transactional variable. It is the effect of the increased integration that is to be discussed here. For example, attitudes are a phenomenon that could be considered either an efffect of integration or a measure of it. Often the decision to consider certain phenomena as indications rather than effects of integration rests entirely at the discretion of the researcher and depends on his particular interests and goals. In addition to the attitudinal impact of integration which has been the object of some study in the integration literature. many other kinds of quantitative and qualitative changes can result from integration. Indeed, it is the expectation of thse changes in the economic sector that lies behind the motivation for the establishment of customs unions. Often these changes imply an alteration of the distribution of values or even the changing of political and economic structures in national societies, which is why such sensitive political questions are raised. It has been suggested that a "linkage" relationship exists between the level of integration of a union of states and the level of integration of the constituent states. This relationship has been noted at the global level, the regional level, and the

INTEGRATlON AND I N E Q U A L I ~

national level. Emst Haas has postulated that there will be an inverse relationship between the level of integration at the global and regional level.2s The proposition that the level of national integration is related to the level of international integration is also found in Deutsch's study of the North Atlantic area, and it could be said that the proposition is implicit in the studies of relationships between internal and international conflict behavior undertaken by Rudolph Rummel and Jonathon Wikenfeld.26 Usually the relationship is viewed as an international result of a domestic source, but the two way linkage possibility is clearly recognized. One of the more explicit expressions of this relationship is found in Etzioni's Political Unification. Here the relationship is seen as a two-way interaction, and Etzioni suggests that the effect of disparate power on an integrating relationship is to emphasize the impact. According to this hypothesis, when integration is taking place the weaker subunit of the union will be experiencing internal integration at a faster rate, and this subunit integration will be higher and more accelerated, the greater the degree of power inequality.27 Based on Etzioni's obsewation we would expect increases in integration between the United States and Canada to have an integrative effect on the Canadian system, which in turn would have the parallel effect on the integration of Quebec.28 This question is one that is particularly relevant to Canada, and it is a major focus of attention in the essays of Garth Stevenson and of Claude Masson in this volume.2g Some empirical evidence of the relationship between internal (Canadian) and external (United States-Canada) integration is given in Sigler's essay.30 This specific example, as well as other questions of domestic impact of international integration, are the kinds of studies that will be of most relevance for the national policy decisions to be faced by governments. Such effects as the possibility of reduction of the political role of British labor within the larger context of the EEC and assimilation of Spanish culture in an ever closer integration of Puerto Rico in the American system are analytical questions of great normative import. Answers to these questions are necessary for the pursuit and preservation of desired values. 4)

NORMATIVE ASPECTS OF INTEGRATlON AND INEQUALlTY

The preceding essays in this section have referred to the normative foundations of both economic and political theory of integration. A desire for world peace and an increase in global

ECONOMIC AND POLITICAL INTERACTION IN NORTH AMERICA

economic welfare were the respective value bases of these theories. Now it would seem that "security community" has been achieved among the European and North Atlantic states, and the benefits of economic integration are being realized in Europe and reformulated in the third world. The most pressing value questions related to integration today are not questions of global integration, but rather questions of the individual in society and the national policies that will best serve these individual values. A societal decision to promote or impede integration will depend upon the national values to be served or destroyed by that integration. And groups and individuals in society will consider the same questions in light of their collective or individual values. An underdeveloped country which 1s tempted to establish contacts with a modem state for investment and market advantages will have to weigh the costs of participating in an integrative scheme with a dominant partner. Although some absolute economic benefits may accrue the relative economic disparity may increase, an unacceptable result. If the dominant partner has a capitalistic economic system the integrating hegemonial relationship may prevent the establishment of socialism necessary to undertake economic development. Beyond the fundamental question of equitable distribution of resources, or "exploitation," there are questions of economic and political structure. Can a particular kind of economic or social system be developed or maintained in a situation of integration with an overpowering partner? Presumably these are questions that will be most pressing for the subordinate partner, and they are not at all foreign to the thoughts of Canadians, Quebeckers, Cubans, Finns, Puerto Ricans, Czechs, or even Britons. It may be discovered that the backwash effects and other results of developed-underdeveloped integration operate in situations of integration under conditions of gross inequality even when both partners are considered to be "developed" according to usual global standards. Such a possibility is reflected in the fear that Canada, a developed country, would be relegated to the role of a society of "hewers of wood and drawers of water" in a highly integrated North America. In cases where a separate culture or language is present in the society of the subordinate partner, questions of assimilation are important value considerations for integration under disparate power. This importance is reflected in the significant position accorded cultural and linguistic homogeneity among factors influencing integration. Integration may seriously weaken the relative

86

INTEGRATION AND INEQUALITY

position of the minority culture in the domestic political system, or threaten its very existence. The problem of the maximum size of society to permit responsive democratic government is a problem raised in classical political philosophy that is particularly relevant to integration. As integrated societies assume continental or even global proportions this problem takes on immediate significance. As influence or control of important decisions affecting the lives of individuals in societies pass to persons and institutions beyond any control of these individuals, integration raises the problem of a democratic crisis. Contemporary scholars have raised this problem within the context of the state based on modern technology, and the problem would seem to be even more accented in integrative situations." In both Germany and Italy courts have had to deal with conflicts arising from threats to democracy posed by the European Community legislative and judicial system in the light of constitutions formulated with specific safeguards against a reestablishment of fascism. In Germany a case involved the delegation of legislative authority to the EEC without sufficient responsibility, and in Italy the question had to do with the deprivation of Italian nationals of their "natural judge."12 Both cases provide us with an example of the normative impact of integration on democratic s t r ~ c t u r e s . ~ ~ In Canada, as many of the following essays in this volume indicate, there is a very high level of concern about the effects of closer integration with the United States. There is no clear agreement as to whether or not integration is increasing or decreasing, as to whether or not the results are, on balance good or bad, or even as to the basic normative principles according to which such a determination is to be made. Presumably, the undesirable effects resulting from a situation of integrative hegemony will be attacked by policies aimed at reducing or reversing integration rather than reducing or reversing the state of inequality of power. The former would seem to be more within the capacities of the subordinate partner than the latter. The subordinate partner can utilize whatever advantage he possesses even in a situation of subordination. This might derive from his position as a supplier of essential raw materials or from his control of a particular geographic location. In that case a policy of disintegration might not be the optimum choice, particularly if it would eliminate the milieu for bargaining and package deals.

ECONOMIC AND POLITICAL INTERACTION IN NORTH AMERICA Of course the policy itself will be the result of the conjunction of both the analytical and normative considerations of integrating hegemonies, and its success will depend upon the degree t o which accurate knowledge and correct conclusions concerning these analytical and normative aspects can be arrived at. Hopefully the guidelines offered in this paper will provide some direction to studies which will provide that knowledge. Footnotes

1. The most similar systems design for comparative study is discussed in Adam Rzeworski and Henry Teune. The Logic of Comparative Social Inquiry (New York: John Wiey and Sons, 1970). 2. In particular see Joseph Nye's use of the categories of economic integration from Bela Balassa in his revised neo-functional model. Peace in Parts, op. cir.. p. 28-30. In another study I treat the level of commitment represented by the Balassa categories as a constant across the eEc and CACM. W. Andrew Axline, "Comparing Common Markets: National and Regional Integration in Europe and Central America," presented at the annual meeting of the international Studies Association, San Juan, Puerto Riw, 1971, p. 8. Also Leon Lindberg and Stuart Scheingold, Europe's Would-be Polity (Englewood Cliffs: Prentice-Hall, 1970). 3. Lwn Lindberg and Stuart Scheingold view integration as a process of system change in Europe's Would-Be Polity, op. cit., while Hayward Alker and Donald Puchala identify political integration with the relative level of economic intercourse in "Trends in Economic Partnership: The North Atlantic Area," in J. David Singer, ed., Quantiratiw International Polilics: Insights and Evidence (New York: The Free Press, 1968). 4. Philippe Schmitter, "A Revised Thwry of Regional Integration", in International Organization (Fall, 1970), pp. 836-838. W. Andrew Axline, "Free Trade Areas, Common Markets, and the Comparative Study of Foreign Policy," in Journal of Common Morket Studies, vol. 10, (December 1971). pp. 163-176. 5. Charles Pentland, "Political Integration: A Multi-Dimensional Perspective" in this volume. 6. The term linkage is not used in the neo-functional literature but the concept is important for feedback impact on the national polities. See Leon Lindberg. "The European Community as a Political System: Notes Toward the Construction of a Model," in Journal of Common Marker Studies (1967). pp. 344-387. 7. For a list of the principal variables treated in the traditional study of integration see Philip E. Jacob and Henry Teune, "The Integrative Proass: Guidelines for Analysis of the Bass of Political Community." in Philip E. Jamb and J a m s V. Toscano, The

INTEGRATION AND INEQUALITY

Integration of Political Communities (New York: Lippincon.

1964). pp. 1-45. 8. Karl W. Dewtsch et 11. "Political Cmmuaity and the North Atlantic Area," in Inrcnrrrtienel Pdiricsl Cermmumities, op. cir., pp. 1-92. 9. Cf. Rilip E. Jawh and n d r y Tewie, "'Fhe Integrative Ptoeess: G ~ i d e l for i Andysis of the Bahes of Mitical Co~nmunity" in Philip E. Jacob and J a w V. Toscam, ?kIn~egrationof Pdificol ComwMlies, ep. cir. Coarppay, 1Bdrlk pp. 1-45,

10. Ernst B. H w fnd M i p p e C. Schmitter, "Emomics a d Differential P a m of Political Integration: aajsctions h t Unity in Laiin America" in Internorionel Politicd Communities, op. cit. pp. 259-299. The nw-fundimlit positioa has cvdred greatly s i w this h,Wion,and a wmmsr). of the premx6 state of tbe schod can be had from Joseph S. Nye, Jr.. Peeee in Ports (Boston: Littk &own & CO., 1971). I I. W. Andrew Axline, "Comparing Common Markets: National and R e n i w l Inteention in Wee and Centnl A&ca," oa. d l . W. ~n;drew~ x l i k "Free , ~ ~ n Areas, d i Common h4arkeG. and the Comparative Study of Foreign Policy," op. cif. 12. The hypothesis wncuningihe kvel of~oconomicdevelopment and iotegrative poky is derived from the d i f d i o n s on d v i c a l economic intagration theory n-ry to make it applicable to umow among derdeveloped countries. See in perticular Bela Balrllassa, Ecmemic D e u e l ~ n arrd t inteeroticm (Mexico: Centro & Estudios Mmistarios Larim mericanos, INS). Also Tayseer A. J a k r . "The Rrdevance of Traditional fntegration Theory to Less Dsw4op.d Cowrtries" in Journa4 of Common Marker Srudies. vol. 9 (Mack, 1971). pp. 254-267. 13. Saa pariicdarly bt keradwtory and amdd is i dqtm of Robmt 0.K w b pprd Joseph S. Nye, Jr. &. "Transnational Rdaeions a d WorM Politics." in Iwrrmtional DrgdMTion. vol. 25 (Summer 1971). 14. A. F. K. Organski, Ww/d Bditics (New York: Kn@, ,968). 15. Johm G w "Eaut-Wat Interaction Mterns." in Jorrrnal of Prace Resewck, v d . 4 (1%). pp. 146-177. 16. %6 George Liska, Natims in Alliance: The Limits of lnterdependence (BsEtiraore: The Johns Hopkins Ras. 1959) and Hans Morgenthm "Allianas En Thcay and Rlctice" in Amold Wolfen, d. A l t k c e Pdicy in the C d d War (Bdtimen: The $ohm Hopkins Reas, 1959). Alw A r d d Wdfers, "Stre6m and Strains k Going it with 0 t h . ' ' in hid. 17. Amitai Etzioni. Poliricd Umjicotion: A Comparative Study of Leaders and Forces (New York: E M , Rinehart and Winston. 1965) pp. 10, 297.) 18. KarlW.Devtpchs(d..op.rit.,p.10.

roc WIlOiom E. F i r . "A* *k Orrunimri~(Spring. 1969). m.2S4-190.

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INTEGRATION AND INEQUALITY

the ideas of C. Wright Mills, Herbert Marcusc, E r i Fro

Jules Henry, Paul Godman. Jacques Ellul, John Kenneth braith, Henry Karid, etc. For a discussion d these cases see W. Andrew Axline, European Conamunity Law wl Organizationel Dewlopwpent (Dobbg Ferry, N.Y.:Oeesrta F'nbligtians, 1968). pp. 107-117. See Karl Kaiser, 'Transnaimal Relations as a Threat to the Democratic Rocess." in Internarional Organizorion, v d . 25 (Sprjng 1971). pp. 706-720. Kaiser concludes that transnational r e l a t m erode ths democratic praass.

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PERSUASIVE I N F L U E N C E : T H E CASE O F T H E INTEREST EQUALIZATION TAX1

Gerald Wright

What distinctive means of intergovernmental influence are created by the development of a condition of economic interdependence? One such means is a strategy of persuasion which aims at convincing the adversary to count one's own interests among his pre-eminent values. The negotiator tries to pin his counterpart's attention to the transmission links which join the two economic systems and ensure that the initiator of a narrowly self-interested action will himself not be insulated from its undesired effects. This mode of influence is available to both members of an interdependent dyad. Yet bringing it to bear effectively places a premium on the intellectual resources of the foreign policy apparatus, on the competence with which facts are marshalled and organized, and weighed for their psychological impact as well as their logical relations. These are resources which Canada would naturally seek most strenuously to exploit, to compensate for her greater vulnerability to the national policies of the United States. In this article I examine the way in which the asymmetrical condition of Canadian-American interde~endencehas evoked the employment of the strategy and, at the same time, set limits to its usefulness. The American Objective The objective of successive United States balance of payments programmes in the 1960's was to stem the increasing outflow of American dollars. During the post-war period the United States was providing, in the form of its balance of payments deficits, the major growth element in the reserves of a great many coun-

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

tries. In the late 1950's, however, this outflow began to shake confidence in the American dollar as the principal international currency. The restoration of convertibility to the currencies of the European countries signalled their apparent regaining of the economic competitiveness which they had lost because of the War, and made the American economy appear sluggish by comparison. The danger was compounded by the strong possibility that the lessening of international confidence in the United States would cause major conversions of the outstanding dollar balances, a large portion of which were held in monetary reserves. The successive balance of payments deficits were being accompanied by a steady outflow of gold as foreign central banks converted their dollars into gold by accepting the standing United States offer to sell it to them at $35 an ounce. In 1963 the fast diminishing gold reserves were approaching the level of shortterm liabilities to foreign official agencies. This faced the United States with the need either to take serious measures to rescue its balance of payments, which would have been harmful both to its allies and the domestic economy, or to cancel its commitment to convert dollars into gold. This commitment was both a basic psychological underpinning of the international monetary system and a symbol of American prestige at home and abroad. The general trend of remedial policies in the latter part of the Eisenhower and early part of the Kennedy Administrations was towards export promotion policies, "Buy American" programmes for foreign aid and military procurement, encouraging tourism and investment in the United States, closing down foreign tax havens for American companies, and trimming customs exemptions for American tourist purchases. By 1963. however. the major source of concern to United States officials had become the outflow of long-term capital, particularly in the form of new issues of foreign securities. Canada was consistently the largest single recipient of private capital outflow from the United States, and benefitted from over half of the new issue borrowings there. By Oversight or in Repri.~al?

On July 18, 1963, Resident Kennedy sent a balance of payments message to the Congres~.~ Reportedly, he had been much exercised by the news of a large Quebec Hydro-Electric Commission borrowing (which was intentled to finance the purchase

PERSUASIVE INFLUENCE

of privately-owned utility companies in that province), but it is likely that a comprehensive attack on the United States payments problem had been in preparation for some time. In the message, he reaffirmed his determination to maintain "the dollar as good as gold, freely inter-changeable with gold at U.S.$35 an ounce." By far his most significant request was for legislation enacting a temporary one-time tax on American purchases of foreign securities from foreigners. This tax was to apply to both outstanding securities and new issues, at rates ranging from 2.75 per cent on short-term bonds to 15 per cent on long-term debentures, and at a flat rate of 15 per cent on preferred and common shares. An exemption for the developing nations, including Israel and Mexico, which were the only two to make serious use of the New Yosk market, was included in the President's message.] During his press conference on the Interest Equalization Tax proposal, the Secretary of the Treasury, Douglas Dillon, remarked that Canada would be hardest hit of the countries affected by the Tax.4 Canada had consistently been running a large current account deficit with the United States. (According to Bank of Canada statistics, the deficit was $1,143 billion in 1963).I The importance of an assured inflow of American capital was viewed differently from different perspectives. For the Canadian monetary authorities it was the means upon which they relied to pay for most of the current deficit; for Canadian provincial, municipal and corpoate borrowers it represented access to a market with unexcelled depth and efficiency upon which they depended to meet their capital needs. Yet preceding years had witnessed a growing sense of concern in Canada over the extent of American ownership of Canadian industry. A budget which the new Finance Minister, Walter Gordon, introduced on June 13 attempted a diminution of American investment in Canada by means of a discriminatory withholding tax on dividends paid abroad and a 30 per cent "take-over tax" on sales of shares in Canadian companies by Canadians to non-resident corporations or individuals. Understandably, many observers, not all of them of a nationalist stripe by any means, have.since concluded that the application of the Interest Equalization Tax to Canada was a form of retaliation against Mr. Gordon's b u d ~ e t . ~ The circumstances give this hypothesis some support. Canadian dependence on the American capital market was no secret.

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

Canadian officials had been trying for some time to impress upon American counterparts that the self-interest of the United States required an accommodation of Canada's capital needs, that to disturb their bilateral transactions by whatever corrective action was being contemplated would be to sacrifice mutual benefit. The lesson of interdependence appeared to have been driven home when the communiqut issued after a meeting of Prime Minister Peanon and President Kennedy at Hyannis Port referred to the Canadian deficit with the United States and its bearing on the policies that each country should follow towards the other. The President and Prime Minister stressed the interest of both countries in the balance of payments between them and with the rest of the world. The Prime Minister drew particular attention to the large United States surplus in the balance of current payments with Canada and noted the importance of allowing for this fact in determining the appropriate policies to be followed by each country. It was agreed that both countries should always deal in a positive and cooperative manner with developments affecting their international trade and payments.' Further, the Kennedy Administration had previously shown itself very conscious of the importance of the strength of the Canadian dollar for its own currency by forebearing to retaliate against the imposition of emergency import surcharges by the Diefenbaker Government in June of 1962. Most of the international support for the Canadian dollar, then under a speculative attack on its fixed exchange rate, was marshalled in Washington. In view of the evident impossibility of American immunity from Canadian economic dislocation, policies very different from that of a penalty tax on Canadian borrowing in the United States would have appeared appropriate. The Administration must then have been unusually provoked to have instigated such abrasive action. Perhaps. those who suspect retaliation have suggested, they were seizing the opportunity to deliver a sharp reminder of the mutual obligations of interdependence to a finance minister who did not share the spirit of continental cooperativeness. None of the Canadians who dealt with the matter, at either the political or official level, have ever subscribed to the notion that the Interest Equalization Tax was intended to put a bump-

PERSUASIVE INFLUENCE

tious Canada in her place. All were impressed by the apparently genuine astonishment of Americans, particularly Secretary DilIon, at the turmoil into which Canadian political and business circles were cast by the announcement of the Tax. They explain the failure to grant Canada an exemption by the compartmentalization of policy development within the cumbersome, disjointed structure of the United States Government. Discussion of the measure to curtail capital outflow was strictly contained within a small group in the Treasury, where sensitivity to Canadian interests has been considerably less than in the State Department or even, at times, the White House. From the point of view of the draftsmen of the Tax, a wider sounding of opinions, with the attendant risks of leaks, rumours and the interference of other agencies, doomed the chances of decisive action to bolster the capital account. (At the sub-political level of the State Department there was, indeed, little enthusiasm for the global approach of the Interest Equalization Tax, as opposed to considerable support for a selective attack, by way of a large-scale offset agreement, on the problem of West Germany accumulating American dollars.)S "Retaliation" is simply the emotive colouration we give to the second step in a perceived sequence of action and reaction. To conclude that the circumstances do not justify its attribution is not thereby to spirit away the perception of a relation between events. The turmoil of the Canadian financial markets in the aftermath of the announcement of the Tax was certainly not anticipated by officials in the United States. At least one official participating in the development of the new measure has said, however, that an exemption for Canada was given consideration prior to the announcement. In an oblique sense, it is also likely that the American reaction to the Gordon budget figured in the decision not to grant such an exemption. The way in which this happened does not really bear out the extravagant suspicions of alarmists who believe every American action harmful to Canada to be retaliation against an exercise of political independence. Yet nor does it lend credence to the simplistic explanation of the extension of the capital restriction to Canada as merely an instance of American absence of mind. In bilateral discussions previous to July, 1963, the American officials had proposed that Canada invest her American dollar reserves in the form of a financial instrument designed specially for the purpose, which would not have shown as a liability in the

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

United States presentation of the balance of payments statistics. (At that time, Canadian holdings of American dollars were mostly invested in United States Government treasury bills which, according to the prevailing liquidity definition of the balance of payments, showed as a liquid claim on the United States.) The Canadians had manifested little enthusiasm for this arrangement which would have clearly signified that the integration of the two economies had proceeded to the extent that one of the public trappings of independent status, governance of the monetary reserves, was being delivered up to the predominant partner. No encouraging response having been made to their initiative, Treasury officials thought they had got a clear message of the way in which the Canadians wanted the bilateral relationship to develop when the new Liberal Government brought down a budget apparently intended to stem the flow of American investment into the country. Canadians, better able to take the measure of the Pearson Government, were more likely to. view the Gordon budget as an aberration. Those Americans professionally involved with intra-continental capital movements, however, understandably obtained the impression that Canada wished to stand on her own feet. Henceforth, it appeared, the most mutually satisfactory method of treating Canadian-American economic issues was to include these in the purview of policy towards other western nations rather than accord the country any special dispensations. Such dispensations would apparently cost Canada in terms of national self-esteem and, colliding so clearly with the intent of the Gordon budget, would be difficult to defend before congressional committees. If the foregoing accurately represents the thinking of United States Treasury bureaucrats, then they probably felt themselves pulled in opposite directions. On the one hand, their previous handling of the bilateral relationship suggests that the notion of special status contained considerable appeal for American officials. On the other hand, part of the underlying objective of the United States was a quick and dramatic statistical improvement, which was needed to restore a psychological climate of international confidence in the American economy. The core of that objective was presentational; Canada had been offered a chance to contribute to its achievement and bad failed to seize it. It followed that Canadian capital drawings (which had been unusually high in late 1962 and early 1963) had to be at least

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temporarily diminished. This consideration underlay the expected difficulty with Congress, and the problem that was undoubtedly anticipated in explaining a Canadian exemption to Japan, the other country sure to be seriously affected by President Kennedy's action. It is still speculation to suggest that Mr. Gordon's dkmarche tipped the scales in favour of the preference for uniform application of the Tax and against special status. Yet consideration of the events immediately preceding July, 1963 adds an important element to the prevailing explanation of that decision in terms of the organizational process of American government. That new element is the evident polarity of oficial views of Canada's relation to United States economic interests. It was to be further illuminated by succeeding interactions of the two governments in the 1960's. and it was to set distinct limits to the effectiveness of Canadian persuasion.

The Canadian Reaction News of the Interest Equalization Tax came to Ottawa in a meeting, on the morning of July 18, between Finance Minister Gordon and Merlyn Trued, Deputy Assistant Secretary of the Treasury for International Affairs.9 It was an almost complete surprise. Nor did Canadian officials, though they were certainly disquieted by the news, immediately grasp its exact significance. Their thoughts were abruptly and alarmingly clarified by the panic that at once hit the Canadian business community. A massive wave of selling engulfed the Toronto Stock Exchange, reflecting the realization that American investors would be prevented by the Tax from continuing their large purchases of Canadian equities. On July 18 and 19 the Canadian dollar weakened drastically; most of the $110 million decline in the exchange reserves for July occurred on those two days. Businessmen evidently feared that a rise in Canadian interest rates, which would have been necessitated by the new Tax if American capital were to continue to be attracted into Canada, would halt the shaky economic recovery under way. Further, the likelihood of an immediate devaluation, or at very least foreign exchange controls, probably caused United States subsidiaries to hurry the movement of dividends and available cash out of the country. In the evening of July 18, the American emissary was taken to see Paul Martin, the secretary of State for External Affairs. Discussion between the two lasted till the early morning of

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Friday, July 19, and it was at that time that the request for an exemption for Canada was made. Finance Minister Gordon later telephoned Secretary Dillon and told him that the imposition of the Tax would probably cause Canada to devalue her currency for the second time in just over a year (the previous devaluation had been undertaken by the Diefenbaker Government in May, 1962). He then asked for an appointment for his officials for the following day. It was already evident to the Americans that something would have to be done, for the Canadian financial markets were in absolute chaos. By Friday evening the way was being cleared for some kind of Canadian exemtpion. The Ra.vrninsky Argument

The first of a series of much-derided "pilgrimages to Washington" arrived at the Treasury Department on the morning of Saturday, July 20. The Canadian Government had sent Louis Rasminsky, Governor of the Bank of Canada, to be principal spokesman. He was supported by A. F. W. Plumptre, Assistant Deputy Minister of Finance, Edgar Ritchie, Deputy Under Secretary of State for External Affairs, and Charles Ritchie, the Canadian Ambassador to Washington. They faced a quartet of American representatives- Secretary Dillon, Under Secretary of the Treasury Robert Roosa, Under Secretary of State George Ball, and Stanley Surrey, Assistant Secretary of the Treasury for Tax Policy. The argument put forward for Canada by Mr. Rasminsky was that inflow of capital from the United States was Canada's major means of financing a considerable deficit in trade and invisible transactions with that country. tf this capital inflow were interfered with, it followed that Canada could no longer afford a large bilateral current deficit. The Canadians had not made up their minds as to precisely what action would be taken. Moving to a higher level of interest rates stuck in the craw of a government that had promised to defeat unemployment, whereas another devaluation threatened a snowballing withdrawal of international confidence. They also wanted to avoid being specific, in order not to give the impression of threatening retaliation. Action aimed at cutting the current deficit could not, however, avoid reducing imports from the United States: adjusting trading and payments relationships with other countries could not possibly suffice to make up for the reduction of capital inflow. In its efforts to improve its own balance of payments the United States would be no further ahead. 144

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Mr. Rasminsky drew to the attention of the Americans that his country was actually making a net contribution of around $250 million a year to the United States balance by her overall deficit with that country. It followed from the fact that Canada's official reserves had not increased in recent months that her surplus in transactions with countries other than the United States was going to support the American payments position. As well as being counter-productive, the application of the Interest Equalization Tax to Canada was, therefore, seriously misdirected. The problem the United States was creating for its own export trade could be adduced the more convincingly because the immediate likelihood of Canadian counter-action was backed by some conviction of the structural interdependence of trade and capital flows. Whether there was an organic relation between balance of payments needs and capital drawings was debatable. Such unpredictable, idiosyncratic factors as habit and institutional links did affect the extent of a country's drawings from a single capital market. Still. the Canadians believed that, as a Canadian minister would later tell the Americans publicly, "Roughly speaking, every dollar of capital invested in Canada by U.S. residents flows back into the States more or less immediately in payment for at least a dollar's worth of goods and services imported by Canada from the States".lo

Quid Pro Quo As a result of the meeting, a joint communiqu6 was issued on July 21 stating that the legislation would be altered in order that the President "would thus have the flexibility to permit tax free purchases of new issues needed to maintain the unimpeded flow of trade and payments between the two countries.. . ."" It appeared that the Canadians had achieved their objective, or rather, most of their objective, for trade in outstanding securities was explicitly excluded from the exemption. The Canadian Government continued to make efforts to obtain a total exemption. While they did not succeed, the capital outflow that was expected to be caused by retention of the tax on outstanding securities never materialized either. For the partial exemption thus afforded her, Canada had to provide her own gage. One paragraph of the joint communiqut issued on July 21, 1963, was to compose an injunction repeated many times, in tones both muted and magisterial, plaintive and peremptory, over the succeeding five years. 145

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The Canadian authorities stated that it would not be the desire or intention of Canada to increase her foreign exchange reserves through the proceeds of borrowing in the U.S., and it is the hope and expectation of both governments that by maintaining close consultation it will prove possible in practice to have an unlimited exemption for Canada without adverse effects on the United States.12 Why did the Canadian officials yield a "quid pro quo" for an exemption which, they had argued, was actually necessitated by the economic interdependence of the two countries? Their answer was that the concession was minimal, hardly a significant impingement on the future freedom of action of Canadian governmer~ts.~'Admittedly, this opinion may have been greatly influenced by a sense of tremendous relief that the exemption had been obtained. Yet within the Government there was considerable satisfaction with the prospect of being able to maintain reserves around their existing levels and no desire that these should grow larger. Indeed, the Minister of Finance saw the communiqu& of July 21 as something of an assist to his own efforts to persuade the Governor of the Bank of Canada to maintain a low level of interest rates in order to stimulate the economic recovery that was still far from complete. Why did the American officials demand an undertaking to limit Canadian reserves, in return for the exemption? They never really accepted Mr. Rasminsky's contention that the prevailing interest rate differential of approximately one per cent on longterm government bonds was just wide enough to attract sufficient capital to Canada to balance the current account deficit.14 With the possible exception of Secretary Dillon, they were lukewarm in their acceptance of his protestations that the Canadian Government simply could not, whatever its inclinations, let interest rates depart too far from U.S. rates, and was certainly of no mind to do so in view of the persistence of unused economic capacity. If the exemption were granted without any commitment from Canada, they had no concrete assurance that Canadians would not worsen the American problem by overborrowing in New York and other financial centres. As it was, the eventual granting of an exemption left a residual of resentment among Treasury officials that Canada had been the undeserving recipient of an untoward act of generoisty. Rather than the reserves ceiling. which was difficult to inspect,

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the American negotiators would have preferred the Canadian Government to impose strict controls over private borrowing in the United States. This was rejected on the ground that it would have infringed Canada's federal division of powers. The provincial governments were the borrowers most dependent on the New York market, not only because of the size of their capital needs but also because of the leverage access to United States funds gave them in their dealings with the very small number of Canadian underwriters. They would have challenged the legitimacy of such controls at once. In addition, the need for new issue borrowing to compensate the current account deficit was obviously going to vary from year to year, with the other components of Canada's overall balance of payments. But it is likely that the Americans conceived of the ceiling as a substitute for such controls and had much the same expectations for the one as for the other. In the upshot, each side read the achievement of its own intentions into the rather vaguely worded communiqut issued on July 21. Each side assumed, or at least pretended to assume, that agreement implied a common understanding of the issues. But it is difficult to square Mr. Gordon's public assurance that Canada wuld now borrow freely in the United States marketIs with a statement issued by Under Secretary Roosa, implying that Canada had agreed to reduce her borrowing in the United States. The goal of the United States effort was to reduce foreign long-term offerings to the level of the 1959-1961 period, he said. "While we agreed to Canada's exemption from the proposed tax, Canada has undertaken to do whatever the government there considers necessary to accomplish the objective we had in mind in proposing the tax in the first place."16 The intended concreteness of the reserves commitment dawned only gradually upon Canadian officials. As another example of potential confusion, the communiqut had stated that "it would not be the desire or intention of Canada to increase her foreign exchange reserves through the proceeds of borrowings in the United States." This could be taken to imply that the reserves level could move higher as long as the rise could be accounted to an improvement in Canada's (already favourable) current balance with countries other than the United States. When, however, Canada became a creditor with the International Monetary Fund, in December, 1964, the two governments "agreedMunder some protest from the Canadian representatives on the

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joint Balance of Payments Committee-that the "net creditor position" in the Fund would be considered a part of Canadian official reserves. Lumping the IMF creditor position in with Canada's gold and United States dollar holdings dispelled any doubt that the reserves had, in fact, been "frozen" at the June, 1963 level of U.S. $2,692 million (with some unspecified allowance for unavoidable fluctuations). The circumstance whereby Canada's third country surplus was being contributed to the United States reserves had now been transformed into a commitment to that effect. It is hardly any wonder that, given the difference in emphasis between each side's version of the joint communiqu6, the agreement held considerable potential for misunderstanding in later years. Circumstances were to evoke these differences in starker form than mere subtleties of interpretation. On the American side, the worsening of the payments problem, which went on despite the lnterest Equalization Tax, was bound to reinforce their officials' notion of the agreement of July, 1963, as a promised Canadian ronrriburion to solving the problem, not, as the Canadians were wont to phrase it, a regularization of the status quo. On the Canadian side, the happy coincidence of policies appropriate to treating the state of the domestic economy with those designed to moderate the inflow of foreign capital could not last forever. It is impossible to separate empirically the inhibiting effect of the reserves ceiling on Canadian monetary policy in the 1960's from other constraints such as the Pearson Government's heavy fiscal requirements and the fixed exchange rate. Yet from 1965 on, the Bank of Canada permitted expansions of the money supply that definitely appeared untoward in the light of evidence of growing inflationary pressures and the development of what the Governor himself termed a dangerous inflationary psychology." The inference which many observers have drawn is that the Government could not restrain the increase in the money supply because of the need to keep Canadian interest rates in range of American rates.'s Otherwise. a massive flow of American funds would have been attracted into the country; breaking through the reserves ceiling and risking the application of the Interest Equalization Tax. Mr. Rasminsky has often protested that the figure of the money supply (which is usually defined as the combined total of currency outside the banks and chartered bank deposits payable in Canadian dollars) is not an accurate

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reflection of the full spectrum of credit conditions in the econmy.^^ Yet detailed exegesis of his annual reports for 1965 through 1968 confirms the view that the authorities found the imperative of staying in range of the ceiling to clash with the demand management policies they considered desirable. The plausibility of this inference is more important than how well it explains the course of Canadian monetary policy. Rather than seriously intensifying Canadian dependence on the United States, the reserves commitment articulated the substantial degree of dependence that already existed. This gave rise to the widespread impression in business circles that the monetary authorities were powerless to tackle the inflationary spiral. That impression, fed by the public statements of some leading businessmen.20 probably contributed to the major crisis of confidence in the Canadian economy which occurred in 1968, at a time when the trade balance was actually quite strong. By arguing that highly calibrated regulation of the inflow was a practical impossibility. the Canadians managed to win a certain amount of lee-way in the management of their reserve level. Mr. Roosa's goal for Canadian new issue borrowing was decidedly not achieved. But the several occasions on which the reserves went over the limit - most notably in late 1965 -raised congressional hackles in Washington and thereby caused the Canadian Government twice to stop Canadian borrowers going to New York. This unusual intervention only further alarmed the business community, accustomed to the smooth, untroubled operation of the common capital market." The flexibility permitted their reserve level ac!ually weakened the Canadian authorities' argument when, in 1967, they began to protest strenuously about the inhibiting effects of the ceiling. Not until after it was rendered superfluous by Canada's concession to the American demand that her U.S. dollar holdings be placed in the form of special non-negotiable securities, was the 1963 commitment finally "re-defined" out of existence, in December, 1968. At the same time as agreeing to the reserves limitation, the Canadian Government also agreed not to permit foreigners to borrow in the Canadian capital market, which would have been a means of evading the Interest Equalization Tax. This was the first of a number of measures to prevent the "pass-through" of American capital to Europe. Such measures would become more sophisticated and concrete as the American efforts to plug the main capital drain intensified. Several years later, in February of

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1966, when the International Bank for Reconstruction and Development offered a $10 million bond issue in Canada (pursuant to the Bank's policy of spreading its financing around among member nations), it was in fact necessary for the Canadian Government to obtain Washington's approval of this. In 1963 this further restriction did not appear to be much of a hardship since, because of the undeveloped condition of the Canadian capital market, there had been very little history of foreign borrowing. An equally salient point, however, is that no public statement of this particular agreement was ever made until, in March of 1966, the new Minister of Finance, Mr. Sharp, mentioned that the policy had been in effect "for some time."21 If, after a while, it ceased to be a secret, any effort to advertise it was certainly discouraged." The Canadian Strategy Karl Deutsch has described the basis for an exercise of persuasion. To be susceptible to persuasion, men must already be inwardly divided in their thought. There must he some incompatibilities in the facts they remember or in the facts they can be induced to accept. There must be some contradictions, actual or implied, among their habits or values. In short, there must be something for persuasion to get started on, and something substantial for persuasion to maintain its hold for longer period~.~' The negotiator of Canadian-American issues can shift, as his purpose requires and his adversary's tactics permit, between two contrasting perspectives of the bilateral relationship. The continent can be conceived as made up of two impermeable national units, or as two systems tightly hound together by a complexity of transmission lines. The ability to replace one way of mentally organizing the facts of the relationship with another gives the negotiator a possible purchase on the attention of his opposite number. If the adversary can be made to recalculate his advantage in terms of a different perspective, he may come up with very different policies. In the perspective of a world of qualitatively similar political units, improvement in one country's payments position simply appears to require a worsening in the aggregate position of the others. In the perspective of economic systems connected by

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multifarious economic linkages-such as the common capital market and bilateral commerce in goods and services -the calculation of national advantage to be gained from payments restrictions is more complicated. It suggests a policy that discriminates among countries depending on the quality and intensity of hilateral linkages and the proportional significance of those linkages within respective systems. In the episode that has been described here, the U.S. Administration had concluded that a conspicuous improvement in the United States balance was imperative if the American dollar were to continue to be a reserve currency. That was at least an arguable conclusion,2~but the Canadian officials did not dispute it. Instead, they appeared to accept the Americans' underlying definition of the payments problem and attempted to change the official view of Canada's involvement with that problem. The Canadian negotiating team did not explicitly articulate the linkage perspective. Yet they implicitly urged it on the Americans by their practical arguments. A concept of two interconnected, mutually sensitive, economic systems was the ordering principle behind Mr. Rasminsky's contention that Canada's capital drawings were going back into her current account deficit. The related argument that the restriction of Canadian access to United States capital would have been self-defeating was supported by pointing to the heavy preponderance of CanadianAmerican linkages in comparison with economic ties between Canada and the rest of the world. The Canadians desired the Americans to infer from this that the two countires stood in a unique relation to each other and should, therefore, make common cause. For it promised to be much easier to preserve essential interests -such as access to capital for economic development and government social programmes - if these interests were associated with American objectives, rather than conceived to be diametrically opposed to them. A subtle shift of perspective on continental payments relations in the Interest Equalization Tax case was simply part of a sustained strategy of persuasion that was evoked by the first American attempts to remedy the balance of payments, and vzriants of which have been observed more recently.>6 The Canadian argument was expounded not solely in crisis negotiations but in speeches and articles of ministers, in numerous sessions of the Joint Cabinet Committee on Trade and Economic Affairs, and of the Balance of Payments Committee, and

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methodically formulated in the speeches and annual reports of the Governor of the Bank of Canada." The vigour of the Canadians' response, and the systematic development of their argument, were consequences of the concentrated attention which they were both able and obliged to devote to a single bilateral relationship. Canada's ecanomic policy makers were by then conditioned to a thorough acceptance of the view that economic developments in the United States were a more significant influence on developments in Canada than any domestic policy instrument. They had no need to be reminded of the degree to which private decisions taken within the American system had helped shape the course of Canadian economic growth and even, on occasion, acted to transmit United States Government policy north of the border. Not surprisingly, there was a certain complementarity of strategy of influence with "the spirit of Hyannis P ~ r t , " ' ~the spirit of good neighbourhood that Canadian political leaders were working so zealously to sustain at this time. They proceeded on the basis that America's balance of payments problem was one for the joint management of the continental economic system to solve. By the infection of example and preachment, this assumption could be made self-fulfilling. that is the Americans could be encouraged to adopt the same perspective on bilateral issues. Canadian policy was thus to propagate the practices and values likely to reinforce the continental perspective in the minds of Washington policy makers. Such apparently voluntary initiatives as sales of gold to the United States to compensate (in small degree) for the Gaullist policy of siphoning American gold reserves to undermine confidence in the dollar.29 and some exercise of moral suasion over Canadian institutions and investors to prevent the "pass-through" of American funds to the lucrative Eurodollar bond market.30 and purchase of "Roosa bonds" with funds received in return for the power benefits of the Columbia River devel0pment.j' provided concrete examples of national action aimed at mutual benefit. The style of bilateral dealings espoused by the Canadian Government was likewise intended to both reflect and further the development of a very special relationship. It was a style marked by a remarkable informality, ease of access and confidence in the other side's honesty and good will. To the extent that the Canadians could surreptitiously intrude themselves into Washington decision making, they could counteract the American predilec-

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tion for uniformity in the application of foreign economic policy. They valued their private channels of communication to the American Government, the knowledge that positions could be tentatively advanced without commitments being made, the understanding that domestic predicaments could he used to justify the asking of favours, as indeed the Amer~canswere accustomed to do themselves. As one Canadian official explained, the reserves commitment could be undertaken with such small concern in 1963 because no one doubted, at the time, that if i: were to prove a serious burden, the Americans would remove it for the asking. Along with the reliance on private, informal channels for dealing with the United States Government was Canadian unwillingness to engage in more direct, explicit, public forms of communication. The vagueness and imprecision that accompanied bilateral negotiations, the lack of frankness in explaining their consequences to the home audience, served well the purposes of Canadian officials, despite their disappointment in the rather rigid construction put on the reserves commitment. At this time they were becoming particularly sensitive to public criticism of Canada's being tied too closely to the United States, and this sensitivity was naturally magnified at the political level. It paid them to keep popular perceptions of negotiated arrangements as fuzzy as possible, for in the public arena it was not easy to make an entirely convincing distinction between cooperaliveness and compliance. A surreptitious style thus compensated for the political side-effects of the Canadian strategy. The case of the Interest Equalization Tax yields a strategy type that is bound to recommend itself to governments of nations with closely intermeshed economies. It is a means of seeking to restrain the undifferentiated application of another government's global policies, where these affect the operation of mutual linkages. Whether that government will change its policy should still depend on its calculation of advantage. Once persuasion has a basis to get started, however. example and exhortation can be used to affect the way the calculation turns out. A Failure of Per\ua\ion It is a fair judgement that Canada survived the United States balance of payments programmes of the 1960's reasonably well, notwithstanding the jeremiads of Mr. Eric Kierans. The fundamental objective of keeping access to American capital was, by

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I ;,

and large, secured. Yet the persuasive talents of the Canadian officials did not suffice to gain the objective of an assured and cost-free exemption from the Kennedy-Johnson measures. For the American negotiators confronting the continual leakage of capital abroad, and the Canadian involvement with that leakage, the conceptual starting point remained a picture of two governments entering upon a deal, one to give and the other to get. That the Rasminsky argument was never really internalized by American officials is evident in the fact that on three separate occasions -in June, 1963 (as recounted here), December, 1965, and January, 1968 -the American Government applied capital restrictions to Canada in a manner that ran precisely counter to Rasminsky's precepts. Three times the United States attempted to exact from Canada a contribution to the solution of its problem that the Canadians considered grossly out of proportion to their ability to pay and to their responsibility for the problem's existence. Furthermore, the sense of their argument was that governmental intervention on either side was unnecessary (and possibly detrimental) to the operation of the continental capital market in a way beneficial to both countries. Yet the Canadians were forced on each occasion of exemption to rearrange their policies somewhat, in accordance with American preferences, most notably in the case of the 1963 reserves ceiling. That each of these occasions was transformed into a bargaining exercise represented a failure of persuasion. It was the conviction of most of the Canadian officials who participated in the bilateral negotiations in the 1960's that their American counterparts never understood the operation of the linkages binding the two economic systems, never grasped the degree of interdependence which the two countries had come to share, and thus never drew the appropriate implications for United States policy. Time and again during this period (and more recently, in the crisis which followed President Nixon's economic measures of August, 1971). Canadian bureaucrats were to complain bitterly of the mixed incompetence and myopia of their opposite numbers, who could not be made to see the common interests of the two nations. Their exasperation was compounded by the considerable turnover of senior public officials, characteristic of the American political system, which frequently resulted in a fresh group of American acolytes to be trained anew by their wearying Canadian school-masters. Thus it appeared, at any rate, to the members of a public service whose

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attention could be much more narrowly and continuously focused on a single and overridingly important bilateral relation ship. The interrelation of capital and current account, and Canadian and American economies, occasionally figured in American officials' justifications of the various Canadian exemptions that were, after considerable disruption (which included a massive assault on the Canadian dollar in the aftermath of the announcement of President Johnson's 1968 programme) grudgingly accorded. Yet the episode of the Interest Equalization Tax leaves the strong impression, which American officials have confirmed. that it was the possible spill-over of a Canadian financial crisis into the United States which weighed much more heavily in their decision making.I2 To be sure, the threat of such a spillover reflected the structural interdependence of the two national economies, but to be fully effective in ensuring immunity from the periodic purgatives applied by the United States, the Rasminsky argument had to be grasped at a higher conceptual level that that of the immediate impact of such measures on world money markets. The Americans never came to grips with Mr. Rasminsky's case, either to accept it or to refute it. The kernel of that w e was an analysis of advantage, and yet it is doubtful that the Governor analyzed their advantage in a way they felt to be entirely convincing. Their own assessment of the payments picture emphasized the symbolic importance of stemming the capital outflow, which meant an immediate and considerable statistical improvement. They felt the pressures of the moment to a greater extent than the Canadians always gave them credit for. Rasminsky could only penetrate their thinking when he had a financial furor at his back. The Limits of Per.suasion There is a more basic, possibly more important, reason for what was at least a partial failure of the Canadian strategy. It goes deeper than the forensic ability of the Canadian negotiators, the comprehension of the Americans, or their calculation of advantage. The experience af the Interest Equalization Tax and its aftermath suggests, in my view, the limitations of a strategy that exploits the condition of interdependence on behalf of a govemment that seeks at the same time to preserve, in substance and appearance, a considerable degree of free action.

rnd CANADIAN POSITION IN NORTH AMERICAN INTBGRATION

By logical extension of the strategy type herein described, Canada should have been multiplying and intensifying her bilateral linkages with the United States in order to strengthen the argumeQt that the Canadian economy represented a primary American interest. Canadians themselves have been powerfully attracted by that line of reasoning. Just before the crisis of July, 1963, the new Minister of Trade and Commerce, Mitchell Sharp, was suggesting to Interior Secretary Udall a joint study of the development of all forms of energy resources in North America, his immediate interest being to offset internal American pressures for cutting Canada's exemption from oil import quotas." Advocates of continental free trade, for example Professor Harry Johnson, have argued that the surrender of tariffmaking and associated powers of economic control would be a small price to pay for the consequent immunity from almost all American actions inimical to the Canadian economy. In the wake of America's balance of payments problem, Professor Johnson drew the moral that "if Canada is to have a privileged position in the American capital market it will have to associate itself more definitely with the U.S. against the European countries whose balance-of-payments surpluses have been threatening the dollar."3' The more dependent country's effort to secure the continuance of a desirable level of bilateral transactions describes a mechanism whereby progress along that dimension of Charles Pentland's integration model could have spurred the integration of functional administration and decision-making for the continental economy.3s A privileged position in the application of American policies - including the guarantee that that position would be respected in the foreseeable future - could possibly have been extracted from Washington by dint of accepting some formalized constraint on Canada's freedom of action. Such constraint was the concomitant of staking an inviolable claim for consideration in the continual free-for-all between highly competitive and single-minded political forces that is the Washington policy-making process. That was a price the Canadians were not, however, prepared to pay. They would voluntarily conform to the requirements of a continental economic system, particularly when that system offered a means of shielding Canadian interests from the potentially harmful actions of the much more powerful partner. They would not accept the loss of control resulting from more exten-

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sive functional integration or a greater scope for joint decisions. Three episodes illustrate this Canadian restraint. At least once in the mid-sixties Treasury oficials prepared a trial presentation of an integrated statement of the Canadian-American balance of payments with the rest of the world. (The trial presentation was made before the Balance of Payments Committee.) This could have provided the advertisement of Canada's special involvement in a Canadian-U.S. dollar area necessary to make the financial community differentiate between American capital outflow to Canada and that to other countries. Under Secretary of the Treasury Frederick Deming, whose particular enthusiasm this was, held out the hope of special status for monetary transactions with Canada consequent upon acceptance of the proposal. But the idea met with a distinctly cool response from the Canadian representatives and was still-born. In the September, 1963 meeting of the Joint Cabinet Committee, Under Secretary of State Ball suggested the idea of a charter of Canadian-American relations. This promised to regularize the conduct of economic relations by establishing the principles that "both countries should have maximum opportunity to profit from the proximity of their economies" and "that conflicts of national interest be reconciled expeditiously as they arose by the use of special procedures and machinery if necessary."'"he suggestion prompted the appointment of a joint working group to elaborate principles for the conduct of the relationship, but the Canadian ministers shied away from Mr. Ball's particular formulation. Similarly. the Government showed no enthusiasm for the recommendation in the report of that working group (the Heeney-Merchant Report of 1965) that there should be a permanent joint committee at the deputy minister/under secretary level, with a small secretariat of its own." This would have given senior Canadian officials a better opportunity than before to intrude themselves into the development of U.S. policies affecting their country. Yet the same government that preached the virtues of cooperation smelt the dangers of engulfment that such a development portended.'" There is no absolute assurance, of course, that if the Canadians had proven more amenable to these American overtures, they would have enjoyed an easier passage through the monetary difficulties of the 1960's. Yet a retrospective look at American behaviour - including its ambivalent swinging between uniform

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

treatment and the encouragement of distinctive bilateral arrangements - suggests that the divergent pulls on Canadian policy were complemented by the twin strands of official thinking in the U.S. We may recall that one of these strands was the view that the capital outflow demanded a dramatic demonstration of American determination to block it, coupled with a vistble sacrifice on the part of all recipient countries without exception. Their preference for uniformity was reinforced by pressure from Japan and the European states which were sure to resent any Canadian exemption from the burden of the balance of payments programme. Dutch and Belgian officials, in particular, complained bitterly that the U.S. programmes were applied to their countries in the form of legislation and specific prohibitions whereas these were applied to Canada as informal understandings. This made it all the more requisite that the Canadians should be seen to be yielding, in return for exemption from specific measures, some definitive and dependable contribution to the alleviation of the United States' problem. The second, sometimes conflicting, sometimes complementary, element of American thinking was a particular conception of Canada's special status, in terms of the reliability and direction of Canadian national policy. Treasury officials, far from denying Canada's involvement in a continental economic system, considered that it carried wider obligations than the Canadians assumed. By appearing to ignore Canadian-American interdependence, by upholding the principle of uniformity, these officials were also seeking to right what, in their eyes, appeared a lopsided balance of mutual obligations and privileges. Their positive proposals, such as that of an integrated payments presentation, implied joint decision-making in which Canadian policy could be tied to the predominant American interest. The American response to Canadian requests for exemption shows a consistent requirement for more rigid guarantees that Canada's role would remain wholly supportive of the U.S. position, and a corresponding mistrust of Canadian intentions.J9 That mistrust fed off new manifestations of Canadian nationalism. The legacy of the Gordon budget of 1963 was the not inaccurate perception by American officials that a significant portion of the Canadian political elite wished to diminish United States control of the Canadian economy. True, the goal of reducing foreign control would appear to have been beautifully congruent with the objective of cutting the outflow of United

PERSUASIVE INFLUENCE

States capital. Yet a country in which an influential minority advocated major political intrusions into the workings of the continental economic system could not be counted upon to remain merely a harmless extension of that system. To cast the issue in terms that better reflected the political imperatives of the Treasury bureaucrat, special treatment for Canada could not be justified before the Congress if, at the same time. Canadians were seen to be contemplating actions hurtful to American economic interests. The state of Canada's domestic politics thus compromised the credibility of her professions of cooperativeness. That Canadian negotiators shrank from the political implications of their strategy of persuasion was read in Washington as a further sign of unreliability. Undoubtedly, American officials were impressed by the degree to which their Canadian counterparts had to defer to nationalist sentiment and were also inclined to see it as the cause of Canadian unwillingness to join in coordinated decision-making. That perception may be faulted for a not very discriminating understanding of the comparative strengths of political forces in Canada. It served nonetheless as a potent weapon of argument in the battle of policy formation within the bureaucracy, and it achieved several brief, but for Canada traumatic, triumphs. The paradoxical coexistence of these two elements of American thinking implied a fundamental choice for Canada - either stand outside the conceptual horizon of American economic interests or take up a more prominent place within it. Either accept the burden of a reduced capital inflow or pay the political cost of an assured abundance. The Canadians successfully avoided both these horrible hazards. But their effort of penuasion, dressed in the political trappings of cooperativeness, stopped short of what, in American eyes, was the necessary continentalist commitment. The Canadian strategy had run headlong into a dilemma that is central to Canada's position in continental relations. The intensity and preponderance within the Canadian economic system of linkages with the United States make catastrophic the impact of globally oriented restrictive policies applied by that country. Yet a successful claim of special status may require the welding of new or tighter linkages, or both, such that Canadian autonomy is significantly diminished, quite possibly in respect of a wider area than that of the claimed exemption. The policy

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

maker must continually be shifting the terms of his calculation of desirable outcomes between immediate goals and systemic linkages. There is no easy way out, as long as there exists a basic incompatibility between Canadian and American views of the manoeuvrability permitted by interdependence. Over the long term. bilateral links may be adjusted, as Canada has lately contrived, more or less purposively, to improve her current account balance and to develop new sources of capital. That will require either alternative provision of the benefits derived from the linkages or a shift in schedules of value preferences so as to diminish the importance of those benefits. In the short run, the challenge to the negotiator is the task of preventing the fundamental issue arising in the form of the stark alternatives described here. He must tly to evade the dilemma's horns by the invention of efficacious stratagems for muddling through. Footnotes

I. A large part of the information on which my discussion of Canadian-American negotiations in this article is based comes from interviews with several Canadian politicians, and with a number of Canadian and American officials -from the Departments of External Affain, Finance and the Bank of Canada, in Canada, and from the Departments of State and the Treasury in the United States. These interviews were conducted in Toronto, Ottawa and Washington, mostly in 1971 and 1972. A number of persons interviewed requested that their remarks not be attributed to them. For that reason, these interviews are not individually cited in the footnotes. 2. U.S. Congress, House, Committee on Ways and Means, Hearings. on H.R. 8000, A Bill to Amend the Internal Revenue Code. 88th Congress, 1st session, 1963, pp 8-9. (Hereafter cited as House Committee on Ways and Means Hearings). 3. The Interest Equalization Tax Act was superseded by new legislation several times after it was RnaUy approved by Congress in September, 1964. The changes had the effect of prolonging and broadening the scope of the tax. 4. Peter Newman. The Distemper of Our Times (Toronto: McClelland and Stewart, 1968), p. 27. 5. Bank of Canada. Statistical Summary Supplement, 1968, p. 156. 6. See A. E. Safarian's remarks in "Retaliation: The Price of lnde oendence." a svmoosium in Steohen Clarkson ed.. An Indeoendenr >oreign ~ o l i c /or j Cnnada ~ c ~ l e l l a nand d Qtewart. 1968). p. 50; and Canadian-American Committee, Recent Cana-

oron onto:

PERSUASIVE INFLUENCE dian and U.S. (iovernment Actions Ajfecting U.S. Investment in Canada (1964). o. 17.

15. 16.

17.

18.

United ~tates'i;lformation Service, "Joint CommuniquC following meetins between President John F. Kennedv and Prime Minister ester-B. Pearson, Hyannis Port, ~assafhusetts, May 10-11, 1963", Selected U.S. and Joint Documentation on Canada-United States Ajfairs, January. 1963 -September, 1964, p. 12 (Hereafter cited as U.S.I.S. Selected U.S.and Joint Documenmtion.) The Under Secretarv of State for Economic Affaris. Georee Ball. was the only membir of the State Department whd was i k o l v i with the development of the Interest Equalization Tax proposal. Earlier that day, the Finance Minister had had the unpleasant task of telling James Rockefeller. Chairman of the First National City Bank, tiat he would not be permitted to operate a large subsidiaj in Canada. Somewhat paradoxically, as he sought to stop one intra-continental linkaee from heine welded. he was launched into a desperate effort to p;event the su&ering of another. Mitchell Sham. "Sienificant Develoornents in Canada-U.S. Economic ~ e l a t i d ~ s "Ahdress , to the ~ i i v e r s i of t ~ Rochester, May 5, 1966, Department of External Affairs, Statements and Speeches, No. 66/21. "Joint statement on modification of the proposed U.S. interest equalition tax, Washington, D.C. and Ottawa, July 21, 1963". u.s.r.s. Selected U.S. and Joint Donrmentation, p. 22. Ihid. One of the Canadian negotiators told me bluntly that no commitment on reserve levels was made by Canada in the July 20, 1963 mecting. See Secretary DiUon's testimony, U.S. Congress, House, Committee on Banking and Currency, Hearings, Recent Changes in Manetary Policy and Balance-of-Payments Problems. 88th Congress, 1st. session. Julv 23. 1963. o. 103. Globe and ~ a i ~iu i y22, ib63. Quoted in Herbert Bratter, "Washington Reports", The Canadian Banker, vol. 70 (Autumn, 1963). p. 58. According to U.S. Treasury data, the average net total of new issues of foreign securities hv Canadians in the United States in the 1959-1961 oeriod was approximately $300 million. The figure for 1962 was $457 million and for the first half of 1963 it was estimated at $590 million. Louis Rasminsky, "Monetary Policy and the Defence of the Canadian Dollar". Address to the Canadian Club of Victoria and the Federated Council of Sales Finance Comoanies. Victoria. October 17. 1965. pp. 14-15. For different views of the effect of the reserves ceiling, see Thomas J. Courchene, "Resent Monetary Policy in Canada", Journal of Money. Credit and Banking. 3 (February. 1971): Robert Dunn Jr.,

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

Canada's Ex~eriencewith Fixed and Flexible Exchan~eRates in a l North ~ m d r i c a n Capital Market ( ~ a s h i n ~ t o nCanadian-

19.

American Committee. 1971): and Grant Reuber. "Recent Monee . (February tary Policy in Canada". ~e Banker's ~ a ~ a z i n 203 and March, 1967). See for example [bid., pp. 14-15 and Louis Rasminsky, "Central Banking in the Canadian Financial System", Lecture to the 20th. International Bankine Summer School.. Oueen's Universitv. .. Kineston, August 15. 1967: p. 12. For example, the remarks by W. E. McLaughlin, Chairman of the Royal Bank, to the Bank's annual meeting in 1966 (Globe and Mail, January 14. 1966). See, for example, the rather hysterical editorial reaction of the Financial Times of Canada. November 15, 1965. Canada. House of Commons. Debates. March 16. 1966.. a. 2755 (~ereafiercited as Debates). "Mr. T. C. Douglas (Burnabv-Coauitlam): Was there anv auid oro quo concession made to the united stat& government ikeiurn'for giving Canada a certain exemption under their foreim securitv tax? MI. Gordon: No, Mr. speaker. There were no &rangeme& or agreements or conditions or undertakings that were not set out in the joint communiquC." On August 21, 1963. Secretary Dillon briefly mentioned this aspect of the Canadian undertakine. (House Committee on Wavs and Means, Hearings. 1963, p. 166): Karl W. Deutsch, Nationalism and Social Communication (Cambridge: M.I.T. PTsS. 1966) p. 78. For a private Canadian observer's criticism of the U.S. definition of the problem, see R. M. Macintosh, "Guideline Gamesmanship: A Canadian View", The National Banking Review, 3 (June, 1966). The amment that the United States was defeatine its own aumose was among those to be raised by the Canadian iini~terial'deie~ation to Washinaton which asked for exemotion from the 10% tariff t 1971. (Globe o n d ' ~ a i 1 August , 17, 1971). surcharge on ~ i g u s 19, For examples, see Mitchell Sharp, "Significant Developments in Canada-U.S. Emnomic Relations". and Louis Rasminsky, Address to the U.S. Bankers' Association for Foreign Trade, Quebec City, May 25. 1964, pp. 5-6. Lester Pearson's term. Debates. July 22, 1963, p. 2348. S i x sales were made in 1966 and 1967, totalling $350 million. See especially the Finance Minister's request to Canadian investors of March 16, 1966, not to purchase "off-shore" securities of U.S. corporations (or their non-Canadian subsidiaries). (Debates. March 16, 1966, p. 2755). Bank of Canada, Annual Report of the Governor for 1965. p. 41. "Senator Douglas. This (the Canadian exemption) was in response

-

.

20. 21. 22. 23.

24. 25. 26.

27.

28. 29. 30.

31. 32.

.

PERSUASIVE INFLUENCE

33. 34. 35. 36. 37.

38.

39.

to the very heated protests of Canada that the interest equalization tax would make their problems more difficult? Secretary Dillon. It wasn't so much a question of protests. It was a question of what happened in Canada when this tax was announced. There was a psychological reaction there which we have always felt was larger than the facts warranted but there was no doubt of the reaction. In the financial field, psychology can create facts - it had here - and there was a real panic on the Canadian markets. There was no doubt that, if this exemption had not b a n properly granted, the Canadian dollar. which bad only recently had a firm par value established, would have been devalued once more and that would have been very bad for the whole international monetary system including our own interests." (Senate Finance Committee hearings of late June, 1964, quoted in Herbert Bratter. "Washington Reports", The Canadian Banker. vol. 71 (Autumn. 1964). p. 109. Financial Post. June 3, 1963. Harry G. Johnson, "Canadian-American economic integration: a time for decision". Journal of Canadian Studies. vol. I (August. 1966). p. 31. See Charles Pentland. "The Integration of Political Communities at the International Level: A Multidimensional Perspective", in this volume. Arnold Heeney's account in A. D. P. Heeney, "Independence and partnership: thesearch for principles". International Journal, vol. 27 (Spring, 1972). p. 159. Livingston T. Merchant and Arnold Heeney. "Canada and the United States: Rincipla for Partnership". United States Infonnation Service, Canadian-American Relations. 1867-1967, vol. I, p. 34. See Maureen Molot, "The Role of Institutions in Canada-United States Financial Relations", in this volume, for a fuller statement of the Canadian Government's reasons for shunning this recommendation. 1 do not suggest that in the minds of every American official these two positions were rationally thought out and coherently fonnulated. An American conception of Canada's obligations was. however, contained in an address by Mr. George Ball to the American Assembly on April 25. 1964. He implied that there existed a set of continental "ground rules" which forbade politically motivated interference with the prevailing condition of economic interdependence. (u.s.1.s. Selected U.S. and Joint Documentation. p. 85).

/

CHAPTER 7

T H E ROLE O F INSTITUTIONS I N CANADA-UNITED STATES RELATIONS: T H E CASE OF NORTH AMERICAN FINANCIAL TIES*

Maureen Appel Molot

The institutional dimension of interstate integration is one that many authorities on international community building consider crucial. Those who envisage the integration process primarily as one of conscious community formation suggest that the swpe of institutional decision-making and the breadth of institutional activity may be taken as indicators of the progress of integration between nations.' As Charles Pentland summarizes this approach, "political integration at the international level . . .is the development of institutions and practices of common decision-making among a group of traditionally autonomous ~tates."~This is basically the view of the neo-functionalists, though they do not necessarily agree on the authority that the central institutions must possess for integration to occur.' This paper will examine this approach to integration in the specific context of the Canada-United States monetary and balance of payments relationship. The North American institutional system prov~desa striking contrast to the west European case and, as a result, suggests some questions about the wnccptualition of interstate integration principally in terms of shared institutions and common processes of decision making. Although by many criteria the * This is a revised version of a paper presented to the Inter-University Seminar in International Relations, Ottawa, April 8, 1972. Peyton Lyon and J a m a Hyndman made a number of s u g g a t i 0 ~and comments which assisted my revisions. Much of the information in the paper was obtained through interviews with senior Bank of Canada. Department of Finance and Department of External AKairs officials who spoke with me on the condition that they remain anonymous.

THE ROLE OF INSTITUTIONS IN CANADA-UNITED STATES RELATIONS

Canada-United States dyad is highly integrated, the North American relationship, unlike that of the European Economic Community, has little in the way of formal structures. Various Canada-United States bodies do exist, and one, the International Joint Commission, dates from 1909, but none of these entities is endowed with broad decision-making authority. Rather, they tend to be given limited powers, chiefly advisory, in a specific area of concern, be it water and boundary problems or issues of a generally economic kind. Though the number of joint Canada-United States agencies has grown since 1909, most of them are simply committees that meet from time to time for the exchange of information or for offering advice to the two governments on specific problems. There is no interest, at least on the Canadian side, in changing these bodies into more authoritative institutions with staffs of their own and wider spheres of jurisdiction. Canada-United States institutions only exist "in those functionally limited areas where they are politically acceptable,"l and these are not extensive. There are at least two explanations for this negative attitude toward institutions. One is the lengthy history of cordial relations between Canada and the United States and the record of consultation on matters of mutual concern. There has never been that sense of urgency felt in postwar Europe to formalize ties as a means of preventing future discord. The second and more important reason for the relative lack of central institutions is the strong Canadian aversion, to be outlined later in this paper, to the establishment of any international machinery that might restrict the freedom of Canadian decision making. An examination of two of the more important Canada-United States institutions should illuminate the role these structures play in North American integration and also suggest some shortcomings in the decision-making approach to interstate integration. I will describe the two Canada-United States bodies, the Joint Canada-United States Committee on Trade and Economic Affairs and the Canada-United States Balance of Payments Committee, that are of most direct relevance to the balance of payments and monetary ties between the countries and will then discuss the role that institutions play in the relationship. Among the queries to be considered are: (1) the degree to which the committees are used for purposes of consultation; (2) the degree to which they are used for joint decision making, both in crisis and non-crisis situations; (3) the extent to which committee

THE CANADIAN POSITION IN N O R M AMERICAN INTEGRATION

practices have become routinized and, as a result, have generated expectations about committee utilization: (4) the degree to which Canada has been able to use her institutional relationship with the United States to her advantage in consultative and bargaining encounters; and (5) the degree to which the Canada-United States institutional relationship can be taken as an indicator of interstate integration. The time period under examination is July, 1963, to December, 1968. During this five year span, both members of the North American dyad became extremely concerned about their respective balance of payments and were forced by circumstances to develop an appreciation of their interdependence in monetary problems. On the American side, both the Kennedy and Johnson administrations introduced measures designed to rescue the deteriorating American payments position. Three of these, the Interest Equalization Tax, the Voluntary Cooperation Program of December, 1965, and the Mandatory Direct Investment Guidelines of January, 1968, applied to Canada in whole or in part and necessitated intergovernmental negotiations to adjust capital flow restrictions to the Canadian situation. In the main, after either domestic economic crises, persuasive arguments, or both, Canada received exemptions from the American controls; in return for free access to American capital sources, Canada undertook to assist the United States with its continuing payments battle.6 The principal argument used to win exemptions for Canada was that it was not adding to the American payments problem. On the contrary, the United States enjoyed a balance of payments surplus with Canada, and there was nothing it could do in its transactions with Canada to ameliorate its over-all deficit. Any American attempt to restrict the outflow of funds to Canada would simply be countered by Canadian reductions in American imports. One restrictive move would thus offset another, and neither country would gain.' A second component of the Canadian case, and one that became more important with time, was the link between the strength of the Canadian and American dollars. A devaluation of the Canadian currency, which became a possibility during the Canadian economic crises of 1963 and 1968, would have had serious repercussions for the American dollar and, in 1968, for the whole international monetary system. The balance of payments relationship between Canada and the United States was thus one in which the size

THE ROLE OF INSTITUTIONS IN CANADA-UNITED STATES RELATIONS

differential between the two nations was mitigated by other factors. The positive Canadian contribution to the United States payments position introduced an element of complementarity into the economic relationship which allowed the Canadian negotiators to bargain with their American counterparts on a relatively equal basis. President Kennedy announced the Interest Equalization Tax (IET) on July 18, 1963. The IET was imposed on certain types of international capital transactions and was to be paid by American citizens who purchased new or outstanding foreign equities and debt obligations. Canadian stocks and bonds which. by definition, were foreign securities, were included under the original provisions of the IET. The announcement of the tax precipitated a financial crisis in Canada as investors acted on their fears that the IET would result in a marked decrease in the flow of American money into Canada. The Canadian dollar fell to its lowest rate in thirteen months and might have fallen further had the Bank of Canada not entered the exchange market to support it. On July 18 and 19, Canada's foreign exchange reserves declined by approximately $United States I 1 I miUion.' The effects of the IET on Canada were serious enough to necessitate immediate action by the Canadian government, and the decision was taken to seek an exemption. A team of top Canadian officials9travelled to Washington on July 20 for this purpose. Using the arguments outlined in the previous paragraph, these officials convinced members of the Kennedy administration to -grant Canada's request for special status.10 The Voluntary Cooperation Program (VCP), made public in December, 1965, consisted of two parts, one administered by the Federal Reserve Board (FRB), the other bv the Devartment of Commerce. About the midclle of ~ovember, thd American administration submitted a draft of its proposed new capital flow restrictions to the Canada-United States Balance of Payments Committee for discussion and comment. The FRB guidelines for long-term borrowing were, from the Canadian viewpoint, the more serious set of controls. After Committee consideration of the measures. negotiations for a Canadian exemption began with only the most senior officials of both sides participating. The Canadian team was composed of a very few officials from the Finance Department and the Bank of Canada. They argued that Canada's exemption from the IET would be negated by the application of the Federal Reserve Board directives to Canada '

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

and, moreover, that this latter program would restrict Canadian a m to American capital sources even more completely than the former would have done. Under the IET, borrowers would pay what amounted to an interest rate penalty, whereas under the FRB guidelines, capital to borrow simply would not be available. A Canadian exemption from the FRB guidelines was agreed upon before President Johnson announced the VCP on December 6, 1965. The Department of Commerce aspect of the program continued to apply to Canada. The 1968 United States balance of payments guidelines were more severe than their predecessors and an indication of the increased seriousness with which the American administration viewed its payments deficit. This set of guidelines, which like the 1965 VCP had two parts, was formulated in extreme secrecy and, according to a member of the Canadian Finance Department, was the one instance up to that time of a major United States payments scheme about which there was no leak. A senior United States Treasury official informed the Canadian Embassy in Washington of the 1968 United States measures on December 30, 1967. On that day, and the one following, senior officials of the Finance Department and Bank of Canada studied the program with the Treasury emissary and then awaited the presidential announcement of the mandatory direct investment guidelines, which came on January 1, 1968. Canadian officials were distressed by the specific application of the new United States regulations to Canada, but expected that the investment directives would have a very limited effect on the country. In fact, the guidelines, which were superimposed on a situation of some domestic and international uncertainty,'' were the catalyst for an economic crisis that brought the Canadian dollar very close to devaluation. Although American officials emphasized that the 1968 United States guidelines were not intended to harm Canada, members of the Canadian business and financial communities interpreted the American measures differently and moved large sums of money out of Canada. A statement of reassurance issued by United States Treasury Secretary Fowler." and action by the Bank of Canada to bolster confidence in the Canadian dollar,'' could not stem the currency outflow. The crisis ended only with the March 7 announcement of a complete Canadian exemption from "all the United States balance of payments measures affecting capital flows that are administered by the Department of Commerce or the Federal Reserve System.14 The

THE ROLE OF INSTITUTIONS IN CANADA-UNITED STATES RELATIONS

Canadian exemption was negotiated at two successive meetings between top Canadian oficials and their American counteiparts: on March I, Finance Minister Sharp met with Treasury Secretary Fowler to discuss the Canadian situation; on March 6, a few very senior Canadian bureaucrats reiterated the increasingly intolerable Canadian position and worked out the exemption statement. Let me now turn to a discussion of the role of the two most relevant Canada-United States institutions in the events that have been sketched. The Joint Canada-United States Committee on Trade and Economic Affairs The Joint Canada-United States Committee on Trade and Economic Affairs is a general policy committee at the cabinet level established by an exchange of notes between Ottawa and Washington on November 12. 1953. Although this ministerial committee is less structured than many joint Canada-United States bodies, it is a central piece of the interstate consultative machineryNsbecause the ministers who participate are responsible for functions where the interdependence of the two economies is most substantial. The Committee was created to provide a forum for peridic consultation on trade and other economic matters. A Canadian statement outlined the functions of the Committee as these were conceived in 1953:

(I)

(2) (3)

To consider matters affecting the harmonious economic relations between the two countries'; In particular, to exchange information and views on matters which might adversely affect the high level of mutually profitable trade which has been built up; To report to the respective governments on such discussions in order that consideration may be given to measures deemed appropriate and necessary to improve economic relations and to encourage the flow of trade.I6

Its concerns have since widened to include current subjects of common interest, such as the protection of the environment. Though it has usually met yearly since its inception, there are no fmed dates for Committee meetings. These alternate between the two capitals and are arranged at the convenience of both governments. The meetings are suficiently flexible that there was no session in 1968. for example. because the Canadian delegation

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

preferred to postpone discussions until the Nixon administration had assumed office. All four Committee meetings between 1963 and 1967 considered the Canadian and the American balance of payments situations and the policies each administration was pursuing to improve its position. At the first such gathering in which members of the Pearson government participated, held in September. 1963, the Canadian ministers concentrated on explaining the Canadian payments position to their American counterparts. The IET was then only three months old, and the Canadian delegates repeated the arguments that had been made to obtain the Canadian exemption-that Canada contributed positively to the over-all United States payments position. On balance, the Canadian Committee members felt that this argument succeeded. The Joint Committee met again in April, 1964. This session also discussed the policies Canada and the United States were following to ameliorate their payments deficits and, once more, the Canadian participants underscored the contribution Canada made to the United States payments picture. Although the United States payments program called for a decrease in goods imported into the United States and for an increase in exports, the American Committee members appreciated the Canadian desire to expand the volume of Canadian exports to the United States; without this expansion, Canada would have to limit her imports from the United States, a step which would not improve the American payments outlook. The most publicized Joint Committee session, from a balance of payments perspective, was the one that convened in Washington in March, 1966, not long after the announcement of the December, 1965, Voluntary Cooperation Program. For a third time, the Committee discussed the balance of payments positions of both countries and the measures introduced by the United States administration to bring its external accounts into balance. The American delegates reaffirmed Canadian exemptions from rET and from the Federal Reserve Board's guidelines and emphasized that United States investors remained completely free to purchase new issues of Canadian securities.17 From the Canadian viewpoint, the most important product of the 1966 meeting was the section of the communique that stated that the United States Commerce Department guidelines were not intended to induce Canadian subsidiaries of American corporations "to act in any ways that differed from their normal busi-

THE ROLE OF INSTITUTIONS IN CANADA-UNITED STATES RELATIONS

ness practices"'8 and urged these affiliates to behave like good corporate Canadian citizens. Although the Canadian government publicly denied any concern over the extraterritorial aspects of the United States guidelines, official actions indicated some cahinet disquiet about the potential impact of the directives on subsidiary hehaviour. Respondents recalled that the Canadian government approached this meeting determined, for domestic political reasons, to obtain clarification of United States intentions. The United States government, for its part, agreed to the communiqut, feeling that words were only words and could be interpreted by either side as it saw fit. At the June, 1967 meeting, the American delegates reiterated the determination of their government to strive for as much improvement in the United States payments equilibrium as the costs of the Vietnam war would permit. The Committee also discussed the movement of capital between the two countries and noted the mutual benefits that accrued from the arrangements providing for free access by Canadian borrowers to the United States capital market.19 The Joint Ministerial Committee has been described as a symbol of "the close and friendly relations existing between the two countries" and as "evidence of the interest which each country has in a great number and variety of economic questions affecting the other,"20 hut assessments of the role of this Committee in the Canada-United States relationship vary. The Committee meets sufficiently irregularly that there is no expectation that a decision by either government must be postponed until a Committee session has been arranged. Its meetings supplement and reinforce the very frequent contact which occurs between official representatives of hoth governments. As one Canadian official phrased it, "the ministers on hoth sides need an organized way to get their feet under the same table." On the other hand, this bureaucrat continued, "one cannot expect them to deal with as many specific prohlems as the Balance of Payments Committee does." The Ministerial Committee is primarily a site for the exchange of informat~on and expressions of concern between members of the two administrations, for the identification of prohlems and a review of the evolution of the relationship in critical areas. The sessions are not seen as the appropriate forum for solving outstanding issues. The statements and counterstatements made in 1966, for example. by the Canadian and American participants about the potential impact of the

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

United States guidelines on subsidiary behaviour allowed each side to convey its views and worries about issues and policies pursued by the other. Thereafter each party would analyze the concerns of its partner and perhaps act accordingly. Little bargaining of any substance takes place. The limited negotiation, as distinct from discussion. that does occur merely consummates, fo~mally~agreements already concluded by senior public serva n t ~ . ~Following ' the general session, the conference breaks up into smaller groups to permit delegates and their advisers to confer with each other on more specific topics. Canadian cabinet ministers considered all the Committee discussions useful because they provided another opportunity to explain the Canadian position to the United States. One former Canadian participant suggested that for this very reason the Committee sessions were more important to Canada than they were to the United States. Moreover, the Committee does facilitate systematic communication between ministers of the two countries. But whenever a crisis has arisen as, for instance, in July, 1963, over the Interest Equalization Tax or in March, 1968, over the mandatory investment guidelines, the Joint Ministerial Committee was not convened. Personal contact between ministers and senior ofticials of both countries was relied upon to search for a solution. The Canada-United States Balance of Payments Committee

This committee was established in 1963 after the introduction of the Interest Equalization Tax and the hurried negotiation of the Canadian exemption. Before the American announcement in July, 1963, there had been no close contact between Canada and the United States on balance of payments questions. The crisis that followed President Kennedy's message demonstrated the need for regular discussions on this subject, and the procedures utilized to deflate the crisis were formalized by the creation of the Balance of Payments Committee. The IET thus marked a turning point in Canada-United States relations in the payments area because it initiated the consultative process in a continuing and serious fashion. On the Canadian side, the public servants who participated in the Balance of Payments Committee sessions included representatives from the departments of Finance, Trade and Commerce. and External Affairs, the Dominion Bureau of Statistics. and the

THE ROLE OF INSTITUTIONS IN CANADA-UNITED STATES RELATIONS

Bank of Canada.22 During the period under study, the Canadian chairman was an Assistant Deputy Minister of the Department of Finance. The American members of the Committee corresponded to the Canadian representatives. There were participants from the departments of the Treasury, State, and from the two sections, Policy and Statistics, of the Commerce Department, as well as from the Federal Reserve Board. The American chairman was the incumbent Assistant Undersecretary of the Treasury. The Committee met for the first time in late 1964 or early 1965 and thereafter convened twice a year at the call of the chairmen. The sessions, which alternated between Ottawa and Washington, usually lasted for a couple of days, though they might be as short as one day. Like their superiors on the Ministerial Committee, the Canadian representatives on the Balance of Payments Committee had to remain sensitive to the United States political calendar. The Balance of Payments Committee did not meet during the latter part of 1968. for example, because the Canadian half felt that the new United States administration should be represented at the next Committee sesslon. The Canadian unit of the Committee was more cohesive than the American, because the composition of the latter changed not only with the election of a new administration but also during the tenure of that administration. From the inception of the Payments Committee to the end of 1968, the Canadian membership remained relatively constant. In contrast. the American delegation had four chairmen during this period. This consistency in the composition of the Canadian delegation meant the members knew each other well and worked together easily. One Canadian representative on the Payments Committee suggested that, because of the changing United States membership, the relationship between Canada and the United States through the Committee had not developed as far as it might have, and moreover, the Americans recognized the limitations resulting from their variable representation. Although there is little doubt that permanence in the Committee membership assists the consultative process, there are factors more important than its lack which explain the limited role the Payments Committee plays in Canada-United States financial relations: the most crucial of these is the style of personal contact that has developed between the very senior bureaucrats on each side with responsibilities for

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fmancial and monetary affairs; the second is the Canadian fear of any highly institutionalized Committee relationship with the United States. With the experience of a few meetings, the agenda of the Balance of Payments Committee sessions was standardized. Participants considered the two countries' current and forecasted balance of payments positions and any proposed policy changes. Discussions focused primarily on American payments difficulties and on the American attempts to rectify its payments deficit, but also included communication over Canadian steps to fulfd the obligations incurred as a result of exemptions from the United States payments proposals. For example, the December, 1965, Voluntary Cooperation Program and the 1968 guidelines for non-banking financial institutions and non-financial corporations were submitted by their governments for Committee analysis and comment. Committee gatherings were informal and no minutes were exchanged, though each side maintained its own records of these consultations. Through its discussions and the exchange of information, the Committee hoped to prevent crises between Canada and the United States over balance of payments problems and programs. In this endeavour, it enjoyed only limited success. After the 1968 Canadian dollar crisis, the Committee functioned sufficiently effectively that the 1969 meeting of the Joint Ministerial Committee had no balance of payments issues on its agenda.23 At the same time, however, the Balance of Payments Committee was not able to forestall the 1968 crisis. Unlike earlier United States payments schemes, the mandatory direct investment guidelines were formulated in extreme secrecy and were not presented to the full Payments Committee for scrutiny. Members of the United States Payments Committee team may have participated in the formulation of the program, but their Canadian counterparts did not see the new program until the day before President Johnson announced it. Canadian participants on the Committee met with the United States Treasury emissary to learn the details of the 1968 measures and then drafted the Canadian reaction to it. This hastily convened December 31 meeting in Ottawa cannot he equated with a full Committee session which might have forecast more accurately the impact of the provisions on Canada. The Balance of Payments Committee, furthermore, did not meet to seek a solution to the dollar crisis. The delicate negotiations that this situation demanded were undertaken by Finance Minis-

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HE ROLE OF INSTITUTIONS IN CANADA-UNITED STATES RELATIONS

ter Sharp and a few very top-echelon Canadian financial officials and their American counterparts. Nonetheless, Canadian members of the Balance of Payments Committee suggested that the Committee has played a useful art in Canada-United States financial relations. The semibnual meetings did increase mutual understanding of the individual Canadian and American payments situations and of the relationship between them. Moreover, this frequent contact on payments matters augmented the trust between Canada and the United States at least with regard to payments questions. One Canadian participant recalled that Treasury Secretary Fowler was willing to grant Canada an exemption from the 1968 U.S. mandatory direct investment guidelines despite the wishes of his staff. Canada, for her part, lived up to the letter of the exemption agreement, something which pleasantly surprised Treasury officials. By late 1968 the United States recognized that Canada was straightforward in her approach to the American payments deficit and agreed that there was no longer any need to monitor Canadian reserve levels.z4 While there were definite reasons why the Johnson administration had to assent to a Canadian exemption from its mandatory guidelines, and equally specific explanations for the December, 1968, decision to remove the ceiling on Canadian reserves, this Finance Department official attributed some credit to the Payments Committee for an improvement in the atmosphere of Canada-United States financial ties. The Committee provided continuity and a venue for contact which enabled a larger number of Canadian public servants to become acquainted with their American counterparts than would otherwise have been the case. With the exception of the chair-. men, Committee members tended to be lower in rank than those officials who handled the financial crises that erupted between the two countries from 1963 to 1968. To these more junior officials, the Committee was important, for without this regular contact they would have very few occasions to meet with their American opposite numbers. Finally, the inclusion of representatives from the departments of Trade and Commerce and External Affairs forced officials from the Finance Department and the Bank of Canada, who were concerned more directly with financial and monetary problems, to broaden their presentations to Committee meetings. Conversely, the participants from the non-financial departments benefited from the exchange of infor-

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

The United States-Canada Balance of Payments Committee remained of secondary importance in the North American financial relationship however. As one senior Canadian Finance Department official described it, "the Committee exists to keep the facts straight and the junior men happy." Major innovations in the relationship and Canadian exemptions from American programs were not the product of Committee sessions, hut rather resulted from personal contact between officials senior to those who sat on the Committee, though including the Chairman from each side and one senior adviser from the Bank of Canada and the Federal Reserve Board. In short. the Balance of Payments Committee was not an institution for solving crises. Nor, it appears, was the Committee the vehicle through which some of the more contentious payments problems between the two countries were discussed. After the Committee meetings had ended for the day, the two chairmen plus the most senior Committee representatives from the Bank of Canada and Federal Reserve Board held private working sessions at which, as one official put it, "they let their hair down."z5 It is simply too difficult for a fair-sized committee of bureaucrats to have a frank policy discussion on problems with political overtones. It was at these informal meetings, for example, that the Canadian reserves picture was analyzed, because it was felt that the matter was too sensitiveZ6to be considered freely by the entire Payments Committee. These private sessions, furthermore. allowed more open examinations of the Canadian and American payments situations, and of forecasts for the future, than did the gatherings of the whole Committee. These private t2tes-a-tctes between four senior financial officials were, in effect, one facet of the most important means of communication between Canada and the United States on financial problems, namely, personal contact among upper echelon members of the relevant departments. Personal Contact Frequent personal contact by telephone and at meetings with the United States Treasury secretaries was the most important means by which the Canadian finance ministers participated in the North American financial relationship. Finance Minister Gordon established this pattern of personal communication during the IET crisis when he remained in Ottawa during the exemption talks in Washington and was informed of the progress of the negotiations by phone. At the end of July, 1963, Gordon went

THE ROLE OF lNSTITUTIONS IN CANADA-UNITED STATES RELATIONS

to Washington to argue the case for a Canadian exemption from the Interest Equalization Tax in person. Thereafter, during the duration of his tenure as Finance Minister, Gordon conferred from time to time with Treasury secretaries Dillon and Fowler about the United States payments picture and about possible American action to alleviate the growing United States deficit. For example, prior to the announcement of the February. 1965, United States guidelines, Gordon was advised of the contents of this new American program by Dillon; at the end of July, 1965, Gordon met with Dillon in Washington to review the Canadian and American balance of payments pictures; and during the latter half of 1965 Gordon and Treasury Secretary Fowler discussed United States payments difficulties and the proposed changes in the Voluntary Cooperation Program for 1966. This contact on payments issues between Finance Minister Gordon and his American counterpart continued during the 1965 Canadian election campaign, with calls by Fowler to inform Gordon about American concern over the United States payments deficit. Because Gordon resigned from the Pearson cabinet three days after the November 8 election, he did not participate in the negotiation of the Canadian exemption from the Federal Reserve Board half of the December, 1965, Voluntary Cooperation Program. Had he not resigned, Gordon suggested that he would have gone to Washington to confer with Fowler about the latest American measures. He was confident that his rapport with the United States Treasury Secretary would have allowed him to be blunter in his comments on the Commerce Department's guidelines and in his demands for modification of the program as it applied to Canada than the new Canadian Finance Minister, who was unfamiliar with his American counterpart. Gordon considered personal contact, and the informal sort of discussion it permitted, essential to the conduct of the Canada-United States financial relationship, and certainly of more value than committees in handling crises. From his point of view, there was no continuing institution that really worked. When a crisis erupted, people got together and discussed the problem. It was therefore advantageous for the Canadian Finance Minister to he on close terms with the United States Treasury Secretary. Any time spent building and solidifying these personal ties was time used wisely. Finance Minister Sharp, too, attested to the significance of personal contact as a form of communication between the Cana-

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dian and American administrations, suggesting that he "personally (found) it very useful to have periodic private conversations with the Secretary of the United States Treasury, Mr. Fowler on the telephone, over the dinner table, or even at an office desk!"" Sharp discussed the Canada-United States payments relationship with Treasury Secretary Fowler a number of times during his tenure in the Finance portfolio, but most continuously during the Canadian dollar crisis in early 1968, when he conferred with the American Secretary almost daily by phone. On March 1, 1968, as mentioned above, Sharp met with Fowler in Washington to consider the situation of the Canadian dollar and to explain the increasingly intolerable position in which Canada found herself. Instances of personal contact between top-echelon Canadian and American administrators with responsibilities for financial relations between the two countries abound. Canadian teams composed of a few very senior Finance Department and Bank of Canada officials met with their American counterparts, and at times also with the United States Treasury Secretary. to negotiate the Canadian status under specific American payments programs. These bargaining sessions included the ones which produced Canadian exemptions from the Interest Equalization Tax, the Federal Reserve Board half of the December, 1965, Voluntary Cooperation Program, and the 1968 mandatory investment guidelines. During 1967 and the latter half of 1968, senior Canadian public servants discussed with United States officials the possibility of removing the ceiling on Canadian reserves of American dollars. In addition to these sessions necessitated by the application of various United States payments measures to Canada, senior Canadian officials conferred with their American counterparts formally and informally in the context of joint ministerial and Balance of Payments Committee meetings, and during frequent individual trips to Washington or to Ottawa. International monetary and balance of payments gatherings. such as the International Monetary Fund's Group of Ten and the OECD'S Working Party Three, provided other occasions for personal and informal discussions of Canada-United States financial ties. The network of personal relationships that developed between senior Canadian and American administrators with responsibilities for international finance relations stemmed from the intimate

THE ROLE OF INSTITUTIONS IN CANADA-UNITED STATES RELATIONS

connection and direct style of operations to which these officials had become accustomed. Very often these personal relationships were of long standing. perhaps begun at universities, during occasional service in the other capital, or as a result of participation in international meetings, and built up over the years. Whereas officials from other departments met when a problem of mutual concern arose, officials of the Department of Finance and Bank of CBnada were almost constantly in touch with American administrators of comparable rank and responsibility. Much of this contact evolved because of the nature of the questions under consideration. Problems such as the negotiation of the Canadian exemption from the December, 1965, Federal Reserve Board guidelines, or the review of the Canadian reserves level, lent themselves to special arrangements between the relevant departments and were looked upon as strictly financial, rather than as intergovernmental matters. Though representatives from the Canadian Department of External Affairs and the United States State Department were included in their respective national delegations to formal committee sessions, the faceto-face internation financial consultations proceeded, in the main, without the participation of members of these two departments. Senior Finance Department spokesmen were critical of the External Affairs Department's lack of expertise in economic questions and suggested that the Department's exclusion from economic discussions resulted partly from its reluctance to recognize "that a large part of international relations today is comprised of economic and financial relations." These officials prized the uniqueness of their relationships with their American counterparts and were desirous of preserving their style of conducting Canadian-American financial relations. These upper echelon administrators envisioned their role in the Canada-United States financial relationship as one of problem solving.28 They left the expression of political opinions to members of the government and to comparable American fig- -.:-',s ures, and preferred to act behind the scenes to prevent crises or .':':.;. to deflate those that developed. Perforce their orientation was pragmatic, with the goal of. reaching solutions or negotiating compromises that would generate a minimum number of future problems. When a ,problem arose. senior officials from both countries attempted to frame the most practicable solutions: they could not afford to consider the more theoretical, though none'

I

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

theless crucial, questions of the type and extent of CanadianAmerican links that were most desirable and the implications of these links. Members of this small coterie of top Finance Department and Bank of Canada oficials emphasized the pre-eminence of personal diplomacy as a means of conducting Canada-United States financial relations. Formalized Canada-United States wmmittee sessions did have a role to play insofar as they provided some visible machinery for joint consultation, created a backdrop for meetings between individuals, and permitted the systematic consideration of many issues by more junior bureaucrats. In effect, the committees functioned as a kind of joint early warning system, because they enabled each side to discover the concerns of the other. But as one official commented, "the committees are not that vital: if they had not existed, we would have learned about American problems in other ways." There was. however, no substitute for personal contact as a means of evaluating American thinking and for discussing the most sensitive aspects of Canadian-American financial relations. That the major innovations in the relationship -for example, Canadian exemptions from United States payments restrictions and the concessions accepted in return -rarely emanated from the committees, but rather were the result of face-to-face bargaining between the most senior officials, diminished the prestige of the existing joint institutions and enhanced the role of personal contact in the realm of Canadian-American financial relations. An Evalualion of the Role of Institutions

Contact between Canada and the United States on financial and balance of payments matters from 1963 to 1968, both through committees and personal meetings between ministers and senior public servants, was "institutionalized" in a manner that appeared to satisfy both members of the North American dyad. Some intergovernmental consultation took place in an institutional setting, though no bargaining over issues of great contention transpired in committee sessions. Rather, the committees were used for general discussions, statements of position, and the exchange of information. Although the procedures at committee meetings were routinized to a large degree, sessions were wnvened when it suited the participants, and there was no expectation that the meetings would reach conclusions that would have any signifcant impact on Canada-United States relations. Nor

THE ROLE OF INSTITUTIONS IN CANADA-UNITED STATES RELATIONS

was there the expectation that a meeting would be held before either side adopted new policies which might affect the other, though on occasion committee sessions did discuss policy innovations and implementation procedures. Finally, no joint decision making, at least in the realm of Canadian-American financial relations, occurred at committee meetings. In sum, though formal structures existed. their role in the dyadic relationship was not emphasized. Personal contact between Canadian and American policy makers and officials was and remained a crucial component of Canada-United States communication and was more important to the conduct of the relationship than committee sessions. Both an exchange of information and, if necessary, joint decision making took place at face-to-face meetings between senior representatives of the two governments. As the negotiation of the Canadian exemptions from the United States balance of payments programs, for example, suggested, the real problem-solving apparatus resided in ad hoc exchanges between a few very senior members of each administration. The existing "mix" of institutions and personal contact worked fairly well from a Canadian viewpoint. After the initial shock of the application of the Interest Equalization Tax to Canada, Canadian-American communication on balance of payments problems and capital ties between the two countries was satisfactory for the most part. Sessions of the Joint Ministerial Committee and of the Balance of Payments Committee provided the Canadian government with well-used opportunities to explain the Canadian position to the American delegates. As the smaller participant in the North American dyad and as the partner preoccupied with the North American relationship, Canada recognized the need to educate the United States about the Canadian situation. In face-to-face bargaining encounters, the style of Canada-United States contact also worked to the Canadian advantage. Because of the attention Canadian officials must direct to Canada-United States ties and the familiarity they must have with various facets of the relationship, Canadian negotiators were able to outline the links between the Canadian and American payments balances and to convince their American counterparts of the need to exempt Canada from the United States measures. The one instance in the 1963 to 1968 period when the machinery did not function as well as Canada would have wished was that which preceded the announcement of the January, 1968,

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

mandatory United States investment guidelines. Canada was advised of this new American policy a couple of days before President Johnson made it public, but there was insufficient time for Canadian officials to analyze fully its potential impact on Canada, let alone argue against Canadian inclusion under the program. This cannot be equated with consultation. When either side was particularly concerned about an issue, as the Americans were about their payments deficit in late 1967, intergovernmental communication tended to fall off. However, once the Canadian dollar crisis of early 1968 unfolded, Canadian and American officials resumed their pattern of frequent contact. One reason Canadian officials expressed satisfaction with the style of conducting Canada-United States financial relations, despite occasions like January, 1968, was the flexibility this approach permitted Canada. Canadian officials were extremely reluctant to enter into any highly formalized institutional relationship with the United States. This, they felt, might lead to political differences with the United States insofar as that country might expect some discussion of all contentious matters, including those of a primarily domestic nature, prior to the making of decisions. Senior officials did not feel that the possibility of influencing United Sates policies with respect to Canada could compensate for the additional political constraints that the existence of supranational institutions would introduce. Moreover, a change in the method of conducting Canada-United States relations might restrict the Canadian approach to bargaining with the United States and make it more difficult for Canada to use to her advantage the kind of intergovernmental contact, namely, faceto-face meetings, preferred by Canadian actors. In more informal settings, the size differential between the two countries was less blatant than it would likely be in more formal situations; under the former circumstances, Canadian officials seemed more confident of their ability to present their case and to use proven negotiating ploys such as an appeal to United States long-term interests.29 With the creation of formal machinery would come the possibility of either large power domination of the institution and the concomitant likelihood of large power negotiating successes, or of superpower rejection ofjoint decisions if there were regarded as antithetical to its interests. Finally, the existence of supranational structures might complicate the already difficult Canadian domestic political process. Over some issues the federal government might find itself pulled in different directions by the expectations of interstate policy

.

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THE ROLE OF INSTITUTIONS IN CANADA-UNITED STATES RELATIONS

discussions and the need to weld a national viewpoint from among conflicting provincial and other constituencies. Under situations of domestic political uncertainty, there is always the possibility of even greater American influence on the Canadian aggregation process. On all these grounds Canada, as the smaller member of the North American dyad, might find her manoeuvrability limited.'O The reactions of Canadian political and administrative actors to the Merchant-Heeney Report's proposal that "the Joint Committee on Trade and Economic Affairs establish a joint committee of deputies which could meet frequently on behalf of their principals and be available at short notice to consider any emergent problem")' exemplify both this Canadian reluctance to participate in a highly institutionalized relationship with the United States and the precise but limited role Canadian actors expect formal bodies to play. The intent of the Report's authors was the creation of a committee with a small secretariat that could meet more frequently and examine problems more dispassionately and systematically than the Joint Ministerial Committee. When politicians meet there is a public expectation of results, whereas when public servants get together there is less attention directed at their sessions and therefore greater likelihood of success in anticipating and solving differences between Canada and the United States. The permanent committee was not envisioned as a substitute for personal contact between members of the two administrations, but rather as a complement to it. That the Pearson government did not endorse the Merchant-Heeney recommendation was evidence of its lack of interest in, if not apprehension about, the establishment of what would have been a more formal and potentially powerful joint Canada-United States body than either the Joint Ministerial Committee or the Balance of Payments Committee. One member of the Pearson cabinet suggested that. given the disparity in size between Canada and the United States, Canada would have gained nothing by the creation of the committee, but would have surrendered the right to her own initiative. Senior public servants were more outspoken in their criticisms of the committee proposal. The committee of deputies was a general one. they argued, for which there was no real need. The Joint Ministerial Committee was, in effect, this kind of generally-oriented committee. Officials preferred to continue the practice of convening meetings on specific subjects when a problem arose. The committee of deputies, moreover, might be counter-productive; infor-

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

mal, face-to-face contact was easier and usually more effective. There was also the possibility that, because of the heavy work load faced by deputy ministers, these senior administrators might delegate their committee duties to more junior officials, particularly at a meeting in which a deputy felt his department had little interest. Finally, the proposed committee raised a number of potentially difficult political questions for Canada. Top echelon administrators feared that the United States might use the committee to apply leverage to Canada on controversial issues and that, furthermore, American administrations would expect committee sessions before decisions were taken on contentious national or mutual problems. If Canada acted without consulting the committee, she might be accused of bad faith. Though a couple of respondents speculated on whether or not the United States would have applied its 1963 and 1968 balance of payments measures to Canada if the committee of deputies had existed, none suggested that any hypothetical change in American policies would have justified the creation of the committee. In short, senior administrators were wary about the creation of formal long-term Canadian-American committees and envisaged them as replete with dangerous overtones for Canada. Once arrangemenu have been institutionalized, it is often ditTicult, if not impossible. to let them lapse. If formal institutions play the very limited role in the Canada-United States financial relationship that has been described, can they be considered either as an indicator of North American integration or, alternatively, as a brake on the integration process? The existing joint machinery certainly is not an accurate indicator of the extent of dyadic integration. Ties between Canada and the United States are much closer than the formal structures and the use made of them imply. In fact, the variety and depth of North American links and the number of public and private transnational actors probably militate against containing even a majority of Canada-United States contacts within a formal institutional framework. With only two participants in the North American relationship, there is less need for formal institutions than there might be in a larger grouping of states. In a more extensive integrating group, moreover, the smaller partners may feel less inhibited by the structures, wony less about their domination by the more powerful group members, and more realistically expect to use the machinery to their own advantage than Canada could in the

THE ROLE OF INSTITUTIONS IN CANADA-UNITED STATES RELATIONS

North American setting. Yet the North American institutional situation as an indicator of interstate integration may not be that unique. Evidence from the European Economic Community suggests that the growth of institutional capacity may not be keeping pace with the expansion of interstate ties. In the European case, as in North America, intergovernmental cooperation and ad hoc agreements, in contrast to "the gradual development of an institutional infrastructure,"" may be sufficient to cope with crises and to push integration to new levels. The North American experience, despite its obvious difference from the pattern of integration in Europe, suggests at the very least that measurement of the progress of interstate integration by the criterion of institutional growth alone will overlook significant aspects of the process. Do the existing joint Canadian-American institutions act as a brake on the process of North American integration? In a formal sense, the machinery does play this restraining role. The Canadian aversion to the creation of formal structures with supranational overtones is representative of the general Canadian reluctance to enter into any comprehensive, planned, integrative relationship with the United States. For its part, the United States may be equally content with the existing institutional arrangements. It is not clear how far that country would be willing to go toward the development of a more structured relationship with Canada.3' Any step such as the establishment of supranational institutions which would force a more systematic American appraisal of the dyadic relationship might lead to difficulties for the United States, because American actors perforce are less cognizant of the totality of their relations with their dyad partner than Canadian actors can afford to be. Because Canadian actors must be more conscious of the North American relationship and pay greater attention to it, the institutionalization of North American ties might enhance Canadian capabilities more than American ones. On the other hand, the nature of Canadian-American institutions and the manner in which they have been used over the yean may have contributed positively to North American integration. Though this suggestion runs counter to the belief that the absence of supranational machinery means no integration, it is possible that the preference of Canadian officials for personal contact as a means for reaching intergovernmental accommodation, and the tendency to reach limited ad hoc agreements to

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deflate crises, may well have resulted in more extensive Canada-United States ties than the more consistent use of institutions would have produced. This style of interstate bargaining tended to underplay the need for each side to define precisely what it felt it was undertaking when agreeing to insterstate accords. If informality was conducive to integration, it was because there were very few pressures to analyze either the long-term ramifications of Canada-United States financial negotiations or the impact of the agreements on other aspects of dyadic relations. It is possible that short- and longer-run Canadian interests might have been better served if Canada-United States issues had been handled more formally, with some of the publicity that accompanies high level consultations. With less quiet diplomacy, both the Canadian public and Canadian negotiators might have been more certain about the arrangements and obligations undertaken by Canada at interstate bargaining sessions. Institutions mgith reduce flexibility. but they might also contribute to a more comprehensive view of the over-all direction of the Canada-United States relationship. Epilogue: The 1963 to 1968 Period in Retrospect The suggestion that the atmosphere pervading Canada-United States financial relations was "gentlemanly" takes on a sense of irony in light of the changed relationship between the countries since August, 1971. In retrospect, the 1963 to 1968 period appears somewhat unique from two vantage points, the complementary nature of the Canadian-American balance of payments relationship which allowed Canada to bargain successfully for exemptions from the American payments measures and the informal "Finance Department to Treasury" manner in which North American financial affairs were conducted. Although differences in the fabric of the relationship were evident as far back as the May, 1970, Canadian decision to float the dollar, the announcement of the United States surcharge and the total failure of the Canadian exemption mission to Washington inaugurated a new era in dyadic ties. The reasons for the new attitude towards Canadian-American relations in both countries, but particularly in the United States, lie in the changed world views of their respective administrations: in the American case, this reassessment was perhaps illustrated most dramatically by the introduction of the import surcharge: in the Canadian case. the change was revealed by the release of the Trudeau government's 186

THE ROLE OF INSTITUTIONS IN CANADA-UNITED STATES RELATIONS

foreign policy reviewl4 and later by the reaction generated by the recognition of the altered American view of Canada.35 In turn, these changes have had an impact on the mode and atmosphere of Canada-United States communication on monetary and related balance of payments questions. The role of joint Canada-United States institutions, always limited, has been further de-emphasized since the end of 1968. The Balance of Payments Committee has not met since 1969, while the Ministerial Committee on Trade and Economic Affairs last held a session in November, 1970. Although officials were reluctant to attribute the lack of committee meetings to changed perceptions of North American ties, and suggested that the need for consultation would persist regardless of differences of view. it is possible that a combination of the domestic preoccupations, both economic and in 1972 electoral, of the participants and the somewhat less friendly North American atmosphere have combined to relegate these interstate sessions to a lower level of priority. The formal machinery appears to play an even less important part in the relationship under situations of tension than it did when relations were generally cordial. A more marked change has occurred in the realm of informal contacts between members of the two administrations on financial and balance of payments matters. The informal personal relationships have been replaced by formal inter-country communication. As one senior Finance Department official phrased it, "the new direction in Canada-United States relations leaves little room for the kind of relationship we had in the 1960's." Whereas in the 1963 to 1968 period it was considered quite appropriate for officials of the two financial departmerits to have direct exchanges with each other. under present circumstances this style of contact is regarded as completely inappropriate. Contentious issues concerning the two countries, once looked upon as "strictly financial," to be handled by officials of the relevant departments without participation of the departments of External Affairs or State and from time to time without the involvement of cabinet members, now demand top level attention and the use of proper diplomatic channels. Finally, during the !ast year there has been a change in the way in which outstanding problems between Canada and the United States in different issue areas of the relationship have been handled. Previously issue areas tended to remain relatively discrete.36 at least in terms of the conduct of interstate bargain-

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

ing. This was certainly the case with respect to monetary and balance of payments matters which were discussed alone without any spill-over, for example, to trade or resource questions. There were two bases for this approach. The first was the internationally accepted view that balance of payments disequilibria were managed by monetary means; this meant that trade talks muld proceed without consideration of payments balances. The second was the Canadian desire to maintain the atmosphere of Canada-United States relations on as amicable a plane as possible: Canadian actors deliberately refrained from linking issues because they feared that this practice would undermine the cordial negotiating atmosphere that is so crucial to the protection of Canadian interests. The adoption of "coupling" tactics by Canada might well lead American officials to embrace a similar strategy with a likely deterioration in the ability of the two countries to reach accommodation on outstanding questions of mutual concern. This set of premises has now been shattered. No longer are balance of payments and trade problems separate. Finance Department officials with responsibilities for CanadaUnited States monetary relations now must he cognizant of North American trade patterns and differences and recognize the potential for spill-over from one sector of the dyadic relationship to another. While there are no signs that economic controversies have had an impact on contacts between the two countries in other areas such as defence or environmental concerns, the overt linking of various issue areas under the general economic umbrella is a departure from the old bargaining approach. Whether this change in negotiating strategy will persist remains to be seen. The breadth of dyadic ties does militate against the extension of coupling tactics throughout all areas of the relationship. Nonetheless, a precedent may have been set. At the same time, this new style of Canadian-American relations has resulted in greater communication between Canadian government departments, a change which might produce a more systematic and broader view of the drift of the North American relationship. 1. For example. Ernst B. Haas. The Uniting of Europe. 2nd ed. (Palo

Alto: Stanford University Press, 1968): Ernst B. Haas and Philippe C. khmitter, "Economics and Diflerential Patterns of Political Integration: Projections About Unity in Latin America." Inrernorional Organizarion, vol. 18 (Autumn, 1964). pp. 705-37: Leon

THE ROLE OF INSTITUTIONS IN CANADA-UNITED STATES RELATIONS

Lindberg, The Political Dynamics of European Economic Integration. (Palo Alto. Stanford University Press, 1963): and Leon Lindberg and Stuart Scheingold, Europe'.~Would-Be Poliry (Englewood Cliffs, N.J.: Prentice-Hall Inc.. 1970). 2. Charles Pentland. "The Integration of Political Communities at the International Level: A Multidimensional Perspective." in this volume. 3. Joseph S. Nye, Jr., "Comparative Regional Integration: Concept and Measurement." Inlernarional Omanization, vol. 22 (Autumn, 1968). p. 866. 4. Others include the Cabinet Committee on Joint Defence, the Cabinet Commitlee on Trade and Economic Affairs, the CanadaUnited States Interparliamentary Group, the Great Lakes Fisheries Commission, the International Boundary Commission, the North American Air Defence Command, the Pacific Halibut Commission. the Pacific ~ ~ ~ Salmon ~ ,Commission. the Permanent Joint Board on Defence, the ~ i l i t a r ycooperation Committee, the Regional Plannine Grouo. the Canada-United States Balance of Payments committee. a i d the Roosevelt Campobello lnternational Park Commission. List taken from Livingston T. Merchant and A. D. P. Heeney, Canada and the United States: Principles for Partnership (Ottawa, June 21. 1965). Annex C. lhereinaRer referred to as the Merchant~ e e n e ~ ' ~ e and ~ $ )~ e ~ a r t m eof n tExternal Affairs. "Canadian Government Instrumenls for Condudine Relations with the United States." n.d., Appendix A. 5. Joseoh Nve. Peace in Parts: Inrecralion and Conflict in Re~ional 0rgkiza;ok (Boston: Little, Brown and company. 1971). p:6. 6. There were a number of wavs in which Canada agreed to help the battle. In July. 1963, in return for United States fight its the IET exemption, Canada agreed to maintain her reserves of American dollars at or below S2.7 million. This figure was lowered subsequently to $2.6 million and later to $2.55 million. In early 1966. Canada undertook to prevent pass-throughs by requesting Canadian financial institutions and individuals not to purchase U.S. off-shore securities. In March, 1968, in return for the exemption from the mandatory guidelines. the Canadian government undertook a more comprehensive form of pass-through controls (by issuing investment guidelines to banks, non-banking financial institutions. and corporations) and also agreed to purchase special non-marketable issues of United States Government securities 7. The Governor of the Bank of Canada phrased the Canadian exemption argument as follows:

-

~~~

~

~~~~~~~

-

"Canada has characteristically run a very large current account deficit with.. .(the United States). This deficit has been

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

financed in part by a new inflow of capital from the United States, but in part also by the excw of receipts over payments in our current and capital account transactions with the rest of the world. . . "According to our estimates. Canada has run a current account deficit with the United States over the last half dozen years which has been on the average about $250 million larger than the net flow of capital into Canada from the United States. To put it another way, on balance, the United States received from Canada an average of about $250 million a year in foreign exchange which it used to help finance its deficit with other countries. . . for many years the sum total of transactions between Canada and the United States has not added to the balance of payments problems of the United States, but on the contrary has been a source of strength to that country.

8. 9.

10.

I I.

.

Remarks by Louis Rasminsky, Governor of the Bank of Canada, before the United States Bankers' Association for Foreigrl Trade. Quebec City, May 25. 1964, pp. 5-6. Bank of Canada. Annual Report of the Governor to the Minisrer of Financefor rhe Year 1963, (Ottawa, February 1964). p. 48. The group consisted of Bank of Canada Governor Louis Rasminsky; A. F. W. Plumptre, Assistant Deputy Minister of Finance; A. E. Ritchie. Assistant Under-Secretary of State for External Affairs; and C. S. A. Ritchie. the Canadian Ambassador to Washington. Finance Minister Gordon remained in Ottawa and was advised of the Droeress of the talks bv. phone. The IET continued to apply to trade in outstanding Canadian securities. For a more detailcd discussion of the Interest Euualization Tax and its impact on Canada. see Gerald Wright. .'~ersu&iveInfluence: The Case of the Interest Equalization Tax" in this volume. Domestically, the Canadian political scene was uncertain. Prime Minister Pearson had announced his resignation as leader of the Liberal Party in December, 1967, plunging the country into a leadership contest. To this political vacuum was added, on February 19, the defeat of one measure of the minority Liberal government's budget. Moreover, concern about inflation was increasing in Canada, and there was some anxiety that inflation was eroding the competitive position of the Canadian dollar. The international economic picture was in a similar state of flux: the November, 1967. devaluation of sterling generated strains on the international financial system that increased with the recognition that the United States was not coping with its balance of payments dilficulties successfully. This nervousness in the international exchange markets began to be reflected in speculative activity against several currencia, including the Canadian dollar. Finally, the general uneasiness

.

-

.

THE ROLE OF INSTITUTIONS IN CANADA-UNITED STATES RELATIONS

in the world about the price of gold stimulated heavy speculation in that metal before and aRer the announcement of the United States payments measures. 12. A United States Treasury news release on January 21. 1968. emphasized that:

...the new United States balance of payments program does not call for and is not intended to have the effect of causing abnormal transfers of earnings or withdrawals of capital by United States companies having investments in Canada. Moreover, the United States Government has already made it clear, and now repeats, that Canadian subsidiaries of United States corporations are expected to act as good corporate citizens of Canada. The new United States balance of oavments nromam covering private capital flows and the ~ a n a d i a nexdmpiions from the interest equalization tax provide scope for continued large flows of capital to Canada. 13. For example, the Bank raised the bank rate from 6 percent to 7 percent, drew on its reciprocal credit facility with the Federal Reserve System, and requested Canadian chartered banks to diswuraee chanees in the orevious borrowine oractices of Canadian subsi&aries. Department of Finance news release, March 7. 1968. Department of External Affairs, "Canadian Governmental Instruments for Conducting Relations with the United States," n.d., p. 3. Department of External Affairs, Ottawa. Exrernal A/joirs, 9. November 1957, p. 323. Sec the discussion of the 1965 Voluntary Cooperation Program above. 18. The Commerce Department half of the Voluntary Cooperation Roeram reauested "moderation" in levels of new direct investment in Canada. united States corporations were also requested to maximize exports, to repatriate short-term financial assets and income from abroad, and to utilize foreign sources to fulfill their borrowing requirements. The Canadian government was particularly concerned about the defmition of "'direct investment" under the Commerce Department guidelines, because the United States definition included the undistributed profits or retained earnings of foreign subsidiaries. At this March. 1966, meeting "Canadian ministers expressed their concern over the possible implications for Canada o f the United States voluntarv. .droeramme-on direct investment and the relations of this programme to the position of Canadian subsidiaries of United States corporations." Both quotations from House of Commons Debates, ~ a k 9.h 1966, p. 2348. 19. External Ajfoirs, vol. 19, (July, 1967). p. 297. At the June, 1969, meeting of the Ministerial Committee. participants talked about the

-.

-

-

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

20. 21.

22. 23.

24. 25.

26.

27. 28.

balance of navments situations in a eeneral way. but had no balance of pay;nents problems on their agenda becakse the wntinuine civil service mmmittee on the subiect had dealt with them. ~ G e r n aAjfoirs, l vol. 7 (October, 19g5). p. 270. The role of senior ~ u b l i cservants in we~arinathe eroundwork for the Ministerial Coriference was sugg&ted by ~ariokofficialsof the Finance Department as well as by other interviewees. A report on the 1970joint Ministerial Committee meeting noted with regard to Canada-United Slates energy discussions that "most of the bargainins on details of trade in enem resources occurred in a ioint wmmitt& of senior olficials. The lzsession was in washingion two weeks ago. . . " Edmonton Journal. November 24. 1970. l%e Privy Council Office had been invited to Balance of Payments Committee meetings but had not participated up to the end of 1968. The most reccnt Balance of Payments Committee meeting was in 1969. The lack of Committee meetings is. to some extent, related to the changed atmosphere of Canada-United States financial relations, which is discussed in the epilogue of this paper. See footnote 6, above. The reserves agreemerit was rescinded in December, 1968. Referring to these private sessions, one Finance Department official commented, "you don't usually get the very hard negotiations in the committee. thoueh vou mieht eet a different reaction from the trade people on this. w e in ~ i a n &live in a more gentlemanly world." Although in light of the developments in Canada-United States financial and balance of payments relations since August 15, 1971, this d s c r i ~ t i o nof financial discussions may seem rather ironic, the quotaiion does capture the atmosphere of consultations and discussions which Finance Department personnel considered crucial to the conduct of the financial relationship in the 1963 to 1968 period. See the epilogue of this paper for comments on the changes in the relationship since August, 1971. The level of Canadian reserves of United States dollars was a sensitive question for various reasons: among these were its impact on Canadian monetary policy, the fad that the Canadian government had, from time to time, laken steps such as the purchase of leno bonds to lower its reserve levels, and the fact that the government had twice requested Canadian borrowm to postpone new offerings of securities issues on the New York market. The longer the ceiling lasted, the more conscious Canadian government and business actors were of it. Address by the Honourable Mitchell Sharp, Minister of Finance, for the 1966 Cutler M u r e at the University of Rochester, Rochester, N.Y., May 5, 1966, p.l I. Kal I. Holsti suggests the same interpretation of oliicials' views on

THE ROLE OF INSTITUTIONS IN CANADA-UNITED STATES RELATIONS

Canada-United States relations. He notes that "conflicts of interest and diplomatic irritations are essentially "problems' to be solved rather than major wnfrontations to be won at all wsts through campaigns and stratagems of diplomacy and threats." "Canada and the United States." in Steven L. Spiegel and K. N. Waltz (eds.), Conflict in World Politics (Cambridge: Winthrop Publishers, Inc., 1971). p. 383. Ibid., p. 384. A quotation in Dale C. Thomson and Roger F. Swanson, Canadian Foreign Policy: Options and perspectives (Toronto: McGraw-Hill Ryerson Limited, 1971), p. 138, provides a further illustration of this Canadian position. The authors quote "a wmment by one Canadian to an American friend: My Canadian fear of anything that looks like integration clashes with your American desire to set up an orderly and rational process. I am afraid of anything that l~&dsto a rational organizatidn of North America.. . I am particularly wary of any procedure which suggests policysharing except $ very limited ways because I think that such a profedlire means that we surrender our right to dissent." Merchant-Heeney Report, p. 27. Leon Lindberg and Stuart Scheingold, Europe's Would-be Polity, (Englewood Cliffs: N.J., Rentice Hall, Inc., 1970). p. 287. John Sloan Dickey. "The Relationship in Rhetoric and Reality: Merchant and Heeney revisited," International Journal, vol. 28 (Spring, 1972). p. 180.Foreian Policy . .for Canadians (Ottawa: Information Canada, 1970i The wmplete failure of the Canadian mission to Washington to secure an exemotion from the import surcharge forced the govemment and the public to realize that Canada-Gited States dations had entered a new era. The Prime Minister expressed the need for a new look at the North American relationship in a television interview on September 23. 1971:". . . I don't think they know much or care really much about Canada. . . if it becomes apparent that they just want us to be sellers of natural resources to them and buvers of their manufactured products.. .1 repeat we will have to r&sess fundamentally our relition with them, irading, political and othcnvisc . . ." Quotation taken from Canadian Institute of Intcrnational AlTairs, lnterna~ional Canada, vol. 2 (September, 1971). p. 173. Holst, "Canada and the United States," in Spiegel and Waltz (eds.), op. cit., p. 385.

CHAPTER 8

CONTINENTAL INTEGRATION A N D CANADIAN UNITY Garth Stevenson

The purpose of this paper is to explore the possibility that Canadian-American relations and national unity, two topics that have been of perennial concern to Canadians, are in fact closely related. The current stresses and strains of Canadian federalism, the growing assertiveness of the provincial governments, and the diminishing effectiveness of Ottawa's brokerage politics, have been apparent at least since 1960. In the same period economic integration between Canada and the United States has increased to an unprecedented level, and has aroused an unusual degree of anxiety among the Canadian people. The possibility that these simultaneous developments are directly related at least deserves examination. The perception of a possible relationship is not new. Internal threats of disunity and disintegration, and external threats to identity and independence, have always forced Canadian nationalists to battle on two fronts. Canadian nationalists have sought to integrate the diverse provinces and regions of their transcontinental country at the same time as they have tried to resist or reverse any tendencies towards integration between Canada and the United States. While struggling with both, Canadians have not necessarily viewed them as related, and they have never been in full agreement as to whether the internal or the external threat was the more serious.' At times there has been little apparent concern about either while at other times, as in the last few years, both have seemed equally threatening. An intuitive consciousness of some relationship between the two threats has, however, underlain much discussion of Canadian affairs, and even at times the policies of governments. Such

CONTINENTAL INTEGRATION AND CANADIAN UNITY

actions as the building of the CPR,the disallowance of Manitoba railway legislation in the 1880's. and the creation of a national broadcasting network in the 1930's have been equally motivated by the fear of American domination and the fear of internal disintegration. A thin line of intellectual tradition, which perhaps begins with Harold Innis, has likewise drawn attention to the relatedness of the internal and external threats. In The Fur Trade in Canada, lnnis developed the idea that the transcontinental network of trade and communication created by the fur trade foreshadowed the future territorial boundaries of the Canadian state.-us the maintenance of the network, or of later networks based on new types of trade and new technologies of communication, could easily be seen as the basis of Canadian independence vis-a-vic the United States. In some of his essays Innis stood this theory on its head to treat the Canadian-American relationship as the independent variable, but he never seems to have explored the theme very systematically.' Perhaps better known is the work of Donald Creighton, who depicts a connection between the development of natural resources, the diversion of trade patterns from east-west to north-south, and the increased power of provincial governments after the First World War.' Khayyam Z. Paltiel has suggested that financial contributions by American-controlled resource industries to provincial party organizations have made those organizations more independent of their federal wunterparts and thus exacerbated federal-provincial c~nflict.~ The fragmentation of the Canadian political economy as a result of American direct investment is an important theme discussed by Kari Levitt in Silent Surrender.6 The present paper builds on these scattered insights from the past and will hopefully suggest future lines of inquiry. Dimensions oJ Conrinental Integration

Charles Pentland's multidimensional perspective on integration is a useful starting point for inquiry because it helps in identifying the more important aspects of Canadian-American integration.' In doing so it suggests possible relationships with the centrifugal tendencies in Canadian federalism, tendencies which can themselves be seen as a multidimensional process of dis-integration. Pentland's five dimensions are the following: coercive, decision-making, functional, trans-actional, and attitudinal integration. Before suggesting which dimensions might have signifi-

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

cant effects on Canadian federalism, I will sketch in outline the nature and extent of Canadian-American integration along each of the five dimensions. The dimension of coercive power seems to have two aspects: externally focussed coercive power and internally focussed wercive power. Externally focussed coercive power is often regarded, although I think erroneously, as the principal raison d'Ptre of the nation-state. Its nature and significance largely depends on the source and magnitude of the perceived external threat to security. In 1867 the major perceived threat to Canadian security came from the United States; actually in the form of the Fenian raids and potentially through military action by the United States government. This threat was one motive for Confederation, and its existence probably contributed to the power and legitimacy of the federal government vis-&is the provinces. More recently the United States has been widely perceived by Canadians as an additional target of external threats to the security of Canada, rather than as their source. As a result of this perception the externally-focussed coercive power of the two countries began to be largely integrated on a continental basis from 1940 onwards. This was particularly true after the establishment of NORAD in 1957. NORAD is based on the assumption that in a crisis situation the externally-focussed coercive power of Canada and the United States would be completely integrated in a single chain of command. Although a perceived external military threat was one motive for Confederation, it is unlikely that the federal government today derives much authority or legitimacy from its role in military defence. Undoubtedly it did so during the Second World War, when most Canadians were content to have their country governed almost as a unitary state. With the development of thermonuclear weapons. however. Canadian defence policy became largely irrelevant to national security, except perhaps insofar as it influenced the policy of the United States.8 Consequently, one might assume that the federal government derived little authority or legitimacy from its responsibility for military defence. Insofar as any government did so in.the eyes of Canadians it was probably, until about 1964. the government of the United Stat&. In the last few years few Canadians have been much concerned about external military threats. and the military factor today probably has little or no effect on other dimensions of either national or continental integration.

CONTINENTAL INTEGRATION AND CANADIAN UNITY

Internally-focussed coercive power is also an area where a considerable degree of continental integration exists. Collaboration between the federal police forces of the two countries, particularly in the storage and retrieval of information by cybernetic means, appears to be close and continuous. Probably the "Cold War" and the mutual fear of Communist espionage and subversion on the part of the two police forces was a decisive factor in bringing this about. The secrecy with which police work is largely enveloped makes this rather disquieting form of integration difficult to measure or assess. Integration in terms of decision-making comprises at least four types of situations: (I) situations where one government in effect makes decisions for both countries. (2) situations where decisions are made by intergovernmental bodies. (3) situations where intergovernmental bodies formally lack decision-making power but in fact have decisive influence on the content of decisions. (4) situations where joint decisions are made on an ad hot basis after informal consultation. All four types of situations have occurred in relations between Canada and the United States. Situations of the first type have occurred in the well-publicized instances when Canadian subsidiaries of American corporations complied with American anti-trust and trading with the enemy legislation by desisting from actions that would have been permitted under Canadian law. A rather different type of case, in that the Canadian government voluntarily surrendered some of its sovereignty. would be the conditions accepted by Canada in return for exemption from the United States Interest Equalization Tax in 1963 and the American restrictions on capital outflows in 1968.9 In the first case Canada accepted a ceiling on its foreign exchange reserves, which restricted its freedom to set interest rates. In the second case Canada agreed to ensure that Canadian subsidiaries of American firms did not evade the restrictions and also agreed to invest a portion of Canada's foreign exchange reserves in United States government securities. Situations of the second type are relatively rare in Canadian-American relations, although the paucity of "supranational" machinery is a misleading indicator of the actual extent of integrated decision-making. NORAD is one intergovernmental body with real decision-making powers, at least in situations of crisis. The International Joint Commission can make certain decisions without reference to the governments, but its independent sphere of authority is extremely limited. Situations of the

third type are much more numerous and important, and would include the activities of such bodies as the Permanent Joint Board on Defence, the Canada-United States Committee on Trade and Economic Affairs, and the Canada-United States Balance of Payments Committee. The latter two are described elsewhere in this volume. To suggest that a body such as the Balance of Payments Committee is not a case of decisionmaking integration is merely a variation of the longdiscarded assumption that civil servants only "give advice" rather than making decisions. The fourth type of situation is the most inconspicuous but almost certainly the most important. Informally integrated decision-making is facilitated by the geographical proximity of the two capitals, particularly since the development of air transportation and the long-distance telephone. Common use of the English language is also a significant factor. Similar background, values, and professional training and skills of civil servants in Ottawa and Washington makes informal consultation easy and natural. On the other hand these informal relations seem to be somewhat less intimate today, than they were in past years.10 particularly since President N i o n announced the import surcharge in August 1971. Functional integration, the third dimension, can be found in many spheres of activity, including "international" trade unionism, commercial advertising, organized religion, professional hockey, popular entertainment, service clubs, and the job market for university teachers. As this list suggests, many aspects of functional integration almost certainly have little or no effect on the Canadian political system. The aspect of functional integration that seems most likely to be relevant is economic integration. This would of course include American ownership of Canadian industry, the aspect of functional integration that has been most frequently discussed by Canadians in recent years. The degree of functional integration which this implies, in Pentland's sense of "system-wide rather than particularistic standards in organizational decision," varies from one industry to another, and even between firms in the same industry.[ The degree to which subsidiary firms act in terms of continent-wide rather than strictly Canadian standards is of course one of the major issues in the Canadian debate on foreign ownership. Intergovernmental agreements, such as those on defence production sharing and the automobile industry, may

encourage integrative tendencies in the private sector. Decisions by one government, such as a decision in Ottawa to authorize the export of natural gas, or in Washington to authorize the import of crude oil, may do likewise. Because of governmental and intergovernmental decisions, an economic sector might become largely integrated on a continental basis without substantial transfers of ownership taking place. Alternatively. a Canadian-owned firm might extend its operations in the United States, as some have done. Thus American ownership of Canadian industry is only one aspect of continental economic integration. Economic integration between Canada and the Uni\ed States has generally increased in recent years and continues, by most available indicators, to do so. The proportion of American ownership in different sectors of the Canadian economy continues to increase, although the increase is now financed mainly by internally-generated profits of existing subsidiaries, rather than by new inflows of American capital. Transactional integration, the fourth dimension, is closely related to functional integration and resembles it in comprising a variety of different aspects. Among these aspects would be included commodity trade, capital movements, immigration, travel, and the flow of messages in both printed and electronic media. Probably the most important aspect in its effects on Canadian national unity is commodity trade, which is closely related to functional economic integration. The tendency since the Sewnd World War bas been for an increasing proportion of Canada's trade to be conducted with the United States. Canadian exports to the United States averaged 9 per cent of GNP, by value, in the years from 1948 to 1965 inclusive, reaching a high of l l per cent only in 1950. In 1966 they were 10 per cent of GNP, in 1967 1 I per cent and in 1968 and 1969 they reached 13 per cent of GNP. On the other hand exports to other countries averaged about 7 per cent of GNP in the years 1948 to 1965 and then fell to a postwar low of just over 5 per cent in 1969.i2 While the United States' share of world trade has declined with the recovery of Europe and the rise of Japan, its share of Canadian trade has actually increased. Canadian markets .and raw materials are more important to the United States now than ever before. The last dimension, that of attitudes, is rather complex. The identitive-systemic and utilitarian-affective dichotomies must be taken into account.lVn addition the attitudes of political and

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

economic elites must be distinguished from those of mass publics, since they differ both in their content and their consequences. It is highly probable that there is a greater tendency towards continentalism in terms of identitive attitudes than in terms of systemic attitudes, and a greater tendency in terms of utilitarian attitudes than in terms of affective attitudes. The often-heard statement that one should be "pro-Canadian but not antiAmerican" appears to mean that one should reject systemic identification with an integrated North America but retain identitive attitudes of friendship towards individuals and groups in the United States. Systemic-affective attitudes of the Canadian mass public have become less favourable to continental integration under the impact of the war in Southeast Asia, the racial and urban crises in the United States, and the failure of recent American political leaders to attain the popularity in Canada of an Eisenhower or a Kennedy." Systemic-utilitarian attitudes have become less favourable to continental integration in part because the United States is no longer perceived as providing military protection to the same extent as before, but mainly because of evidence that accelerating American control of the Canadian economy no longer confers economic benefits as was automatically assumed in the past. Public opinion polls in recent years have shown growing support for curbs on American direct investment and even for the repatriation of enterprises now under American control.'> The fact that a clear majority of Canadians now support such measures would seem to conlirm Black's thesis, presented elsewhere in this volume, that American investment makes the absorption of Canada less rather than more likely.16 However, this ignores the distinction between mass public opinion and the opinions of economic elites. The great and growing importance of American trade, American-controlled enterprises, and American governmental decisions for the Canadian economy means that Canadian nationalism no longer corresponds with the self-interest of the Canadian economic elite. Although there are scattered individual exceptions, particularly in untypical industries such as book publishing, almost all Canadian economic elites are hostile towards any manifestation of economic nationalism. This fact can be easily documented by reading the speeches of leading businessmen reported on the business pages of Canadian newspapers. Even

CONTINENTAL INTEGRATION AND CANADIAN UNITY

the spokesmen for industries which Canadian government policy protects from foreign competition appear to share in the continentalist consens~s.'~ Attacks on American control seem to be interpreted as attacks on business itself. So far at least, these attitudes have had more apparent influence on the policies of federal and provincial governments than the very different attitudes expressed in public opinion surveys. Having sketched in outline the nature and extent of continental integration along each of the five dimensions, I should make explicit my concept of the relationship among the dimensions, before proceeding to discuss the ways in which they are linked to Canada's internal dis-integration. Although the relationships between the dimensions are undoubtedly numerous and complex. a simple and plausible model would be one that treats functional integration as the independent variable and sees other dimensions of integration as dependent on it. This of course is in accordance with the classic functionalist theory. Functional integration in the form of American control of Canadian industry and resources largely accounts for the intrusion of American law into Canada, the tendencies towards inter-governmental decision-making and the restraints on Canada's freedom of action (dimension two) the dominant role of the United States in Canada's external trade (dimension four) and the continentalist attitudes of Canadian businessmen (dimension five).lU Other relationships doubtless exist, but these seem to be the most decisive. In the pages that follow I will argue that four aspects of continental integration have actual or potential consequences of national dis-integration. The four aspects to be discussed are American direct investment, the development of Canadian natural resources for American markets, integrative trade agreements, and integrated decision-making. The first three aspects can all be considered as part of Pentland's third dimension, while the fourth corresponds with his second dimension. The disintegrative consequences can also be viewed in terms of the five-dimensional model. National integration is affected most noticeably in its second dimension (decision-making) but also in the third, fourth, and possibly fifth dimensions. Direcr Invesrmenr

The statistics on American direct investment in Canada havc

20 1

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

become fairly familiar, but its political consequences are less familiar.'g There is evidence, however, that the absence of restraint on American direct investment in Canada tends to promote the disintegration of Canada in terms of decisionmaking (dimension two), transactions (dimension four) and attitudes (dimension five). The continuing availability of American direct investment stimulates a competition among provincial governments to attract it. The absence of tariff barriers between the provinces means that it is not necessary to locate within a province to serve its market. The provinces are thus under continual pressure to lure industry within their borders to create "growth" and "jobs." This can still be done in part by the traditional methods of keeping minimum wages low, discouraging labour organization, and creating a "climate" favourable to private enterprise. The greater mobility and bargaining power of American corporations, as well as the characteristically Canadian assumption that they offer managerial and technological benefits unobtainable elsewhere. have, however, exacerbated the competition and forced the provinces increasingly to resort to more direct methods. Corporations that agree to locate or expand their operations in a province are offered direct grants, loans, tax concessions, or provincial guarantees of their securities. Most of the provinces have created economic development or planning agencies whose major task is to compete against other provinces for foreign investment through such means. Offices are opened in the United States to publicize the incentives available, advertise ments are placed in periodicals read by American businessmen, and provincial politicians and officials travel south to spread the word in person. Such activities directly affect the distribution of decisionmaking power in Canadian federalism, since they bring the provinces into areas of action where the federal government traditionally pre-dominated: economic development and transnational relations. Provincial policies of economic development make it increasingly difficult for the federal government to carry out its own economic functions with the provinces often operating at c r o s s - p u r p o s e ~ . ~ the ~ tsame time the provinces demand additional access to tax fields so that they can manipulate incentives more effectively, and in part also because of the burden that development programmes impose on their treasuries. Since other provinces are viewed as competititors for an alleg-

CONTINENTAL INTEGRATION AND CANADIAN UNITY

edly scarce supply of American investment, and since the federal government is seen as an intruder that may seek to end the game or alter the rules to some other province's advantage, this situation contributes to the unusual degree of tension, conflict, and mistrust in federal-provincial relations, by contrast with other established federations. Federal-provincial relations are apparently seen as a zero-sum game by many of the participants, a perception that would probably tend to reduce the degree of attitudinal integration in the Canadian federal system. Although the need to overcome regional economic disparities has been cited. by Mr. Trudeau and Mr. Stanfield among others, as justification for an open-door policy on foreign investment, there is little evidence that the open door policy has contributed much to solving this problem. Competition among provinces to attract investment tends to favour the already rich provinces over those which are struggling to catch up. In this connection it is interesting to note that Ontario accounts for 58.2 per cent of the taxable income of foreign-controlled manufacturing enterprises in Canada, and that the proportion of manufacturing under foreign control is higher in Ontario than in any other region." This suggests that foreign-controlled manufacturing firms have an even greater tendency than indigenous ones to concentrate their operations in Ontario. One study attributes this in part to the tendency of American-controlled firms to locate their Canadian operations as close as possible to the American head office. Since most American head offices are along the New York-Chicago axis, the nearest Canadian region is almost invariably southern Ontario.2' In the case of American firms, although not of European or Japanese firms, Ontario's other natural advantages are reinforced by this additional factor. The provinces with less to offer must provide better incentives to attract less desirable firms, often with no net gain to the provincial treasury.?' Only the corporations benefit from interprovincial competition to attract investment. American-controlled firms in Canada can hardly be unaware of this, and the fact gives them a strong incentive to use their influence in support of the centrifugal tendencies in Canadian federalism. Paltiel's observations about federalism and party finance need not apply only to the resource industries.Z4 , American capital is admittedly only one factor among many that contribute to regional economic disparity. Yet insofar as it is a factor contributing to regional economic disparity it proba-

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

bly contributes indirectly to reducing Canada's integration in terms of the attitudinal dimension. Prime Minister Trudeau has suggested that regional economic disparity is a threat to national unity, and presumably the attitudinal dimension is what he has in mind. Although the proposition has not really been tested, there is some circumstantial evidence to support it in the form of a poll which asked Canadians whether they felt the most "attachment and identification" with the nation as a whole. their province, or their region.25 The nation as a whole was chosen by 78 per cent in Ontario, 65 per cent in British Columbia, 62 per cent in the Prairie provinces, and 46 per cent in the Atlantic provinces. suggesting that among English Canadians commitment to "the nation as a whole" correlates to some extent with the prosperity of one's province or region. Whether greater prosperity in Quebec would increase commitment to Canada among French-speaking Quebecers (only 18 per cent of whom favoured Canada as a whole in the poll cited) is of course much more questionable. Another consequence of American direct investment is to reduce Canada's transactional integration by shifting trade patterns from east-west to north-south. American-owned branch plants tend to trade very extensively with their parent firms, but are less likely to compete against them in overseas markets. The increasing American orientation of Canada's external trade has already been noted. Trade with the United States is much less likely than overseas trade to involve movement from one province to another. Such trade also lessens the federal government's role since it does not use National Harbours Board facilities. nor does it, in the case of intra-company transactions, involve the federal government in its role as a promoter of Canadian exports. Natural Resources The rapid development of Canadian natural resources in response to American needs is a form of functional integration between the two economies, being premised on the assumption that the balance of competitive advantages justifies a division of labour whereby Canada exports raw materials to the United States and the United States exports finished products to Canada. This form of continental integration tends to weaken Canada's national integration in terms of decision-making (dimension

CONTINENTAL INTEGRATION AND CANADIAN UNITY

two), functionalism (dimension three) and attitudes (dimension five). Canada's economy has been dominated at different periods of time by different resource industries dependent on foreign markets, the "staples" which Innis saw as decisive factors in Canada's social and political, as well as economic, development. In recent years the most important resource industries have been pulp and paper, lumber, mining, and oil and gas, each of which dominates a particular region of the country. All of these resources have been exploited largely by American capital and for American markets. All are largely, and some are almost entirely, exploited by American-controlled firms today. Regardless of ownership, the resource industries are highly dependent on public and private decisions made in the United States. All of these resources fall under provincial jurisdiction and control. In 1867 this fact, like the resources themselves, was considered of little consequence.26 As the resources developed, however, they tended naturally to augment the power and importance of the provincial governments in relation to the federal government. Innis, as noted previously, was among the first to recognize this.27 At the time he wrote, Ontario and Quebec were the principal beneficiaries of resource development. Since 1945 the Western provinces, particularly Alberta, have developed extensive mineral resources as well, becoming less dependent on agriculture. Resource development has given provincial governments, where resources exist, power and status as the source of timber rights, mining leases, and exploration permits. Quebec, Ontario, Saskatchewan, Alberta and British Columbia have also gained sizeable revenues in the form of resource royalties.28 Much of the economic activity of provincial governments is oriented towards resource extraction, including some building of highways, the provincially-owned railways in Ontario, British Columbia and Alberta, and even the provincially-owned electric power utilities. The mining, smelting and pulp and paper industries together consume about two fifths of the electric power produced in Canada.29 In several provinces two cabinet ministers, and in all but Prince Edward Island at least one, are exclusively concerned with servicing these industries. Since particular types of resources are very unevenly distributed among the provinces, the rapid development of the resource industries has brought into being a collection of highlyspecialized provincial economies, loosely linked to one another

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

and highly dependent on markets in the United States. Exports to the United States from all provinces except Ontario are dominated by the resource indusaies. Lumber, pulp, and paper accounted for 55 per cent of exports to the United States from the Pacific region of Canada (British Columbia and the Yukon) in 1970. Crude oil, gas and byproducts comprised 59 per cent of exports to the United States from the Prairie region, while pulp and paper comprised 42 per cent of exports to the United States from Quebec. Conversely, American imports of specific resource products from Canada are in many cases drawn overwhelmingly from a single region: 89 per cent of oil, gas and byproducts from the Prairie region (mainly Alberta) 75 per cent of lumber from British Columbia, 77 per cent of nickel from Ontario and 72 per cent of iron ore from Quebec, to give only a few e~amples.3~ For all such industries, the action of the provincial governments, and in some cases of a single provincial government, is of crucial importance." The federal government by contrast plays a rather marginal role, aside from its power to regulate gas and electricity exports through the National Energy Board.32 The importance of provincial regulation gives the resource industries an obvious interest in the outcome of provincial elections. Their financial support doubtless contributed to the political durability of such provincial Premiers as Duplessis, Manning, and Bennett, all of whom were good friends of the resource industries and strong supporters of provincial autonomy. The specialized nature of their provincial economies induces many provincial governments to act as the spokesmen, at federal-provincial conferences and elsewhere, for the resource industries on which their provinces depend. This tendency exacerbates the conflict in federal-provincial relations, makes the federal government's task of aggregating regional interests into a national economic policy more difficult, and encourages the already-powerful provincial governments to gain more autonomy, particularly in their dealings with the United States. Since federal policy is likely to conflict with an economic interest concentrated in one or a few provinces (as when Ottawa restricts gas exports) provincial governments and resource industries share an interest in restricting the federal government's control over the economy and seeking a provincial veto over its economic policies. The reported statement of a former British Columbia cabinet minister, W. K. Kiernan, that his province would be better off economically if not part of Canada bears witness to

CONTINENTAL INTEGRATION AND CANADIAN UNITY

this state of mind.)' It is not surprising that the president of the Canadian Pulp and Paper Association was the co-author of a book proposing a radically decentralized constitution to replace the B.N.A. Act.34 Although these attitudes of economic and political elites do not seem to be shared by the general population, they are clearly a factor in the weakening of Canadian unity. Provincial autonomy in this context really means the freedom to by-pass Ottawa in dealings with American corporations and governments. Ultimately this challenges the federal-jurisdiction over external affairs. The role played by Premier Bennett's government as a third party in the Columbia River negotiations between Canada and the United States was one example of this .j5 In another case, that of the agreement between Saskatchewan and New Mexico to regulate potash production, Ottawa was not involved, and Washington was involved only indirectly through its decision to restrict imports of Saskatchewan potash.36 More recently, the government of Alberta has requested "observer status" at negotiations on energy resources between Canada and the United States, with Ottawa reportedly resisting because of the precedent this would set for other international negotiations.37 All of these cases suggest that the development of highly-specialized provincial resource economies oriented towards American markets increases demands for provincial autonomy and reduces the need to rely on a strong central government in Ottawa. Integrative Trade Agreements

The Defence Production Sharing Agreement of 1959 and the Automotive Products Agreement of 1965 are so far the only examples of bilateral trade agreements between Canada and the United States designed to integrate particular industries on a continent-wide basis. In December 1969 however the United States government proposed a "continental energy policy," by which it apparently meant a similar integrative arrangement concerning the energy resource industries, particularly oil and gas. Despite the adverse reaction of many Canadians to this proposal, and the subsequent abandonment of the offending phrase, discussions on energy matters between the two governments have continued. The extension of integrative arrangements to additional sectors of the North American economy cannot therefore be ruled out as a possibility. The benefits which are expected from arrangements of this

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

kind include greater efficiency through specialization, economies of scale, and, on the Canadian side, guaranteed access to American markets and improvements in the balance of payments. These are not, however, the only effects of integrative arrangements. Their tendency is to reinforce existing trends in the Canadian economy towards both regional specialization and orientation to the American market. Thus integrative trade agreements, even if not actually in the natural resource sector, share and reinforce some of the political consequences already noted with reference to the natural resource industries. Specifically, these measures of functional North American integration tend to weaken Canada's internal integration in terms of decisionmaking (dimension two), functionalism (dimension three) and transactions (dimension four). Because of the specialization and distinctiveness of the various provincial economies, the impact of integrative arrangements for specific industries is likely to be concentrated in a single province or region. Defence Production Sharing, as Kirton points out elsewhere in this volume, has had an impact overwhelmingly concentrated in Ontario and Quebec. To an even greater degree, the direct effects of the Autopact have been concentrated in Ontario, which accounted for 93 percent of Canada's motor vehicle and parts exports to the United States in 1970.38 While concentrated in a geographical sense, the impact of the Autopact has by no means been confined to the firms directly engaged in the production of motor vehicles. Hundreds of smaller firms manufacturing parts and accessories, many of them Canadian-owned, have also been affected, not to mention such basic industries as rubber, glass and steel. Thus it is no exaggeration to say that the Autopact has fundamentally altered the nature of southern Ontario's industrial economy. Historically, as everyone knows, that economy was based on a protective tariff that ensured it a captive market in the hinterland regions of Canada. Even when the firms that benefitted from the tariff were American-owned, as increasingly they were, they were oriented almost entirely towards Canadian and British Commonwealth markets. National unity and the rejection of continentalism, from Confederation onwards, were both firmly based on the self-interest of Ontario's economic elite, while the economic costs of both unity and independence were largely borne by other regions. The tariff promoted a functional division of labour

CONTINENTAL INTEGRATION AND CANADIAN UNITY

among Canadian regions and stimulated Canadian integration on the transactional dimension as well. This model of the Canadian political economy, while still perpetuated by political and journalistic rhetoric, is increasingly remote from reality. With Defence Production Sharing and the Autopact, vast sectors of Ontario's secondary manufacturing are now oriented largely or entirely towards American markets. The health of the Ontario economy depends less on decisions made in Ottawa about freight rates and tariffs than on decisions made in Washington about defence contracts and the automotive industry. Canadian unity and Canadian independence are of diminishing importance to Ontario's economic elite. As Thomas K. Shoyama has pointed out, it is no longer even true that Ontario's economic dominance within Canada is reinforced by the tariff. Recent studies have suggested that a North American customs union would stimulate industry in Ontario and considerably increase the province's competitive advantage over other Canadian regions.39 Besides having the highest proportion of foreign ownership in manufacturing of any Canadian region, Ontario is now more closely integrated with the United States than any other region in terns of the transactional dimension. Between 1966 (the first full year of the Autopact) and 1969, Ontario's total exports of all products to the United States more than doubled, while its exports to the rest of the world increased by only 12 percent. By 1969 the United States took 81 percent of all Ontario exports, compared to 61 percent of exports from all other regions of Canada.do About half of Ontario's motor vehicle production is now exported to the United States. On the other hand, transactional integration within Canada has been adversely affected; the western Canadian market for motor vehicles is now supplied by plants located in the United States, rather than in Ontario. From being the metropolitan region of Canada and the principal beneficiary of Confederation, Ontario has moved towards the position of being, in effect, a province like any other." Like the other provinces, it is becoming more economically integrated with the United States and less with the rest of Canada. Like many of them, it relies on exports to the United States which are overwhelmingly provided by a single industry. With 55 percent of all Ontario's exports to the United States, the automotive industry has become for Ontario what lumber is for British

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

Columbia, oil and gas for Alberta, or potash for Saskatchewan: a largely American-owned industry, dependent on American markets, vulnerable to American decisions, and giving the province distinctive economic interests which Ottawa cannot be relied upon to repre~ent.~Z Ontario has reacted, like the other large provinces by seeking more autonomy with which to defend its economic interests, and in particular by seeking direct links with Washington, where decisions vital to those interests are made. In 1971 Premier Davis announced plans to open an office in Washington to maintain communications between the Ontario government and political decision-makers in the United States. This was at a time when anxiety about the Autopact safeguards and about protectionist measures announced or taken by President Nixon was at its height. Ottawa opposed this arrangement and, after nearly a year of federal-provincial discussions, it was announced that the Ontario ofice would operate within the Canadian It is a clear indication of Ottawa's present weakness vis-b-vis the provinces that this compromise, while reportedly unsatisfactory to its own diplomatic officials. was the best it could obtain. Despite the lessons of the Autopact, there is always a possibility that Ottawa might try to appease regional economic interests by negotiating similar integrative arrangements in other sectors of the economy. Yet it seems clear that the tendency of such arrangements is to weaken the ties of Canadian federalism and reduce Ottawa's power to control the economy as well as its authority in the field of external affairs. A continental energy policy, even with a more innocuous label, would not be conducive to Canadian unity. In the long run it would probably increase, rather than reduce, the difficulty of accommodating Western economic interests within Canadian federalism. Decision-Making Integration In assessing the impact of decision-making integration between Canada and the United States it should be remembered that decision-making integration is of four types, all of which exist to some extent in the North American situation. These are decision-making by one government for both countries, formal decision-making by intergovernmental bodies, informal decisionmaking by intergovernmental bodies, and ad hoc decisionmaking on the basis of consultation. All of these have developed in response to various forms of functional and trans-actional

CONTINENTAL INTEGRATION AND CANADIAN UNITY

integration between the two countries, particularly in the economic field. Insofar as the first type of decision-making integration has meant a loss of decision-making power in Canada, it is the federal government, rather than the provinces, that has suffered. To the extent that further decision-making power is lost, it is the federal government that will likely continue to absorb the loss. The management and regulation of the economy is today the principal function and rai.~ond'ctre of central government. The Canadian government's inability to perform this function in recent years has resulted less from the callousness or incompetence alleged by spokesmen for opposition parties than from the effective transfer of the necessary powers to the United States. The levels of unemployment, inflation, and interest rates in Canada rise and fall in close parallel with similar trends in the United States, with only slight variations attributable to decisions taken in Ottawa. It has been said that income and corporation tax in Canada cannot deviate too far from American levels, for fear that capital would migrate to the United States.44 Defence Production Sharing and the Autopact have placed vast sectors of the economy under the effective jurisdiction of Washington, rather than Ottawa. A continental energy policy would presumably prevent the federal government from regulating energy exports through the National Energy Board and would virtually deprive it of any control over the development of energy resources, outside of the northern territories. On the other hand, provincial powers over permits, leases, royalties, and so forth would not he affected. Other major areas of provincial concern, such as education, social services, and municipal affairs, are not likely to he directly affected by continental economic, or indeed political, integration. Any weakening of Ottawa vis-2-vir Washington can only weaken its hand in dealings with the provinces. If Ottawa cannot regulate the economy, the principal argument for a centralized federalism loses much of its validity.'s If Ottawa cannot, or will not, defend its prerogatives against the slow erosion of national independence, the provinces are encouraged to believe that it will not resist their own demands for greater autonomy. Finally, and perhaps most seriously, the shift of effective power from Ottawa to Washington leads the provinces to seek direct contacts with Washington and thus to challenge the federal government's jurisdiction over external affairs.

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

The consequences of the other three. types of decision-making integration are more difficult to assess. The intergovernmental machinery that exists between Canada and the United States is still very limited, and its formal decision-making powers even more so, so that it perhaps has little effect. It is at least arguable that the development of more elaborate and more powerful intergovernmental machinery might actua!ly strengthen Ottawa's hand in relation to the provinces, at least in the short term. This would he particularly true if Washington agreed to channel all of its dealings with Canada through the intergovernmental machinery, and hence through Ottawa, rather than dealing directly with the provinces. It is possible, though, that Washington would rather not create stronger intergovernmental bodies, perhaps in part for this very reason. As we have seen, however, ad hoc decision-making after informal consultation between the two governments is far more important and extensive than decision-making that relies on intergovernmental agencies. By its very informality, such consultation creates an obvious precedent for interaction between Washington (or state capitals) and the provinces, without raising legal questions about the power to make treaties. Since the provinces have such distinctive economic interests, and such close ties with the American economy, the temptation to move in this direction must be very strong, particularly as their own decision-making processes and personnel become more effective. Culturally and geographically, Queen's Park is no farther from Washington than Parliament Hill. From the American viewpoint as well, it may seem more sensible to deal with Alberta about oil, with Quebec about iron ore, or with Ontario about automobiles, rather than dealing with a Canadian federal government that is less closely concerned with any one of these industries. Thus Ottawa's habit of close and informal consultation with Washington could well rebound, in the long term, to Ottawa's disadvantage. As the provinces have become more closely tied to the American economy, they have become less reliant on decisions made in Ottawa and on the federally-regulated infrastructure oE interprovincial and overseas trade. While the smaller provinces still depend on federal equalization payments, or on the Wheat Board's ability to find overseas markets, Ontario, Quebec, British Columbia, and Alberta seem to regard the federal government as increasingly irrelevant to their needs. Over the last

CONTINENTAL INTEGRATION AND CANADIAN UNITY

fifteen years pressures from these four provinces have forced successive federal governments to surrender a large part of their tax resources and decision-making powers. The governments of the larger provinces have also demanded the right to be consulted or directly involved in determining federal policy on such matters as taxation, external trade, monetary policy, and the location of airports. Although the Quebec government of Jean Lesage was the first to make such demands, Ontario has recently been most insistent in doing so. Provincial representation in the federal cabinet is apparently no longer considered an adequate safeguard for provincial interests in areas of federal jurisdiction. To match their growing power, the governments of the larger provinces are increasingly surrounded by the formal attributes of sovereignty. Quebec is so far the only province to designate its legislature as the "National Assembly," but most of the provinces have adopted official flags in the last few years, and the premiers of Ontario and Quehec are now officially referred to as "Prime Minister."46 Alberta, Newfoundland and Quehec have ministries of inter-governmental relations. Federal-provincial conferences in recent years have resembled meetings of sovereign governments at the headquarters of some international organization. Ottawa's response to the erosion of its power has on the whole been a passive one. No federal government in recent years has seriously attempted to raUy public opinion against provincial demands: when they resist at all their preferred strategy has been to enlist the support of the smaller provincial governments against the larger ones. The federal share of the major direct taxes has been reduced, and the present government has offered to share the indirect sales tax as well, although this would require a constitutional amendment. Direct federal grants to universities have been terminated, and the federal government now seems inclined to reduce its participation in health and welfare programmes. The Tmdeau government's proposals for constitutional reform would require a "consensus" involving most of the provinces as a precondition for any conditional grant or shared-cost programmes." There is little reason to suppose that these tendencies in Ottawa will be reversed in the near future. Aside from its close ties with the economic elite, the federal Liberal party is heavily reliant on support from Quebec, a province which is both hungry for American capital and hostile to any centralization of power

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION

in Ottawa. The Progressive Conservative party could only take power in Ottawa, if at all, with the support of the same economic elite that finances the Liberals, and their long term of office at Queen's Park has helped to make the Progressive Conservatives into strong supporters of provincial autonomy. Thus Ottawa is unlikely to use its broad range of constitutional powers to resist either continental integration or the growing power of the provinces. Since public opinion in both Ontario and the West seems to favour a reversal of continental integration, it lqight be expected that provincial governments west of the Otta$ River would try to respond to this sentiment. The government headed by Premier Davis of Ontario has in fact moved/'to restrict American ownership of the book distributing and securities dealing industries, while Premier Blakeney's government in Saskatchewan has cancelled an American-sponsored pulp and paper project and has attempted to restrict non-resident ownership of farm land. Premier Barrett of British Columbia has promised to abandon his predecessor's emphasis on rapid resource development as weU as the tmculent role that British Columbia has played in federalprovincial relations. On the other hand, it is difficult for any government voluntarily to restrict either its autonomy or its revenues from natural resources. Bringing foreign-owned firms under public ownership, as Premier Barrett has indicated he may do in some cases, costs money in the short term, particularly in the case of federally-incorporated firms which cannot be expropriated, meaning their shares must be purchased on the open market. In any event, the business-oriented governments in Ontario and Alberta, where most of the major American-owned industries are concentrated, are unlikely to take more than token measures. A major reversal of continental integration would require both federal and provincial governments to adopt policies that would be strenuously resisted by Canadian and American economic elites. Only in the struggle against those economic elites could Canadian independence and unity be re-established. Footnotes I. In 1970 a sample of Canadians were asked what they understood

by the term "Canadian nationalism." Twenty-five per cent associated it with national unity, 22 per cent with "personal dedication to Canada" and 10 per cent with independence from foreign wn1.1

CONTINENTAL INTEGRATION AND CANADIAN UNITY

2. 3.

4.

5. 6. 7.

8. 9.

10. I I.

12. 13. 14.

trol. 46 per cent muld not define the term at all. The ~rominence of national unity rather than independence in these responses perhaps refleas the eNed of the October crisis. Canadian Institute of Public Ooinion Reoort. 30 December. 1970. Harold innis, ~ h e ' ~ uTrade r in Canada (revised edition, Toronto: University of Toronto Ress. 1956). See his Essays in Canadran Economic History, edited by Mary Q. lnnis (Toronto: University of Toronto Ress, 1956) particularly "Significant factors in Canadian economic development," "Economic trends in Canadian-American relations." and "Great Britain, the United States and Canada." Donald Creighton. Canada's First Century (Toronto: Macmillan. 1970). pp. 179-181. K. 2. Paltiel, Political Pprty Financing in Canada (Toronto: McGraw-Hi. 1970). pp. 5-6. Kari Levitt, Silent Surrender (Toronto: Macmillan. 1970). pp. 142-153. "Political integration: A Multidimensional Perspective." in this volume. Jon B. McLin, Canada's Changing Defence Policy (Baltimore: Johns Hopkins, 1967). p. 213. Interestingly enough, the Interest Equalization Tax was in large part a response to excessive borrowing in the United States by Canadian provincial governments. See Peter Newman, The Distemper of our Times (Toronto: McCleUand and Stewart, 1968), pp. 26-27. For one assessment, see Chades Taylor, "Harsh new diplomacy in U.S.," in The Globe and Mail, 29 September, 1972. Some interesting information on specific firms can be found in Litvak, Maule, and Robinson, Dual Loyalty (Toronto: McGraw-Hill. 1971). Canada Year Book. 1970-71, pp. 1086 and 1179 and 1963-64. p. 915. See Charles Pentland, op. cir. For evidence that the prestige of the United States among Canadians declined sharply from 1963 to 1967, see C.I.P.O.Report, 25 March, 1967

15. See C.I.P.O. Report, 14 October, 1970 and 28 November, 1970. Also Ottawa Citizen, 12 February. 1972. 16. See Naomi Black, in this volume. 17. See the speech by the chairman of the Bank of Montreal reported in The Globe and Mail. 3 February, 1972. Mr. Hart was reported to have deolored the "orettv narrow view" of those who wished to restrict ~ m e r i c a ndireci in~estmentand even to have called for the removal of "immature" restrictions that prevent forei~n - banks from operating in Canada! 18. "Canada'a relationship with the United States is not primarily due, 215

THE CANADIAN POSITION IN NORTH AMERICAN INTEGRATION as is often claimed, to the strong ties of trade that exist between the two countries. Rather the pattern of commodity trade reflects the ties of corporate integration through the agency of direct investment by American companies.. . .Commercial expON by Canadian-controlled enterprise are replaad by inter-company transfer and politically negotiated barter deals." Kari Levitt, op. cit., p. 38. The political consequences are not confined to fedenl-provincial relations, but it is that aspect that will be considered here. An example is the conflict between the Department of Regional Economic Expansion, trying to stimulate industrial growth in Quebec. and the Ontario Development Corporation, which tries to attract industries from Quebec into eastern Ontado. Canadian Fonun. December. 1971. "A Citizen's Guide to the Herb Gray Report." page 19. D. Michael Ray, "The Location of United States Subsidiaries in Southern Ontario," in L. Gentilcore (ed.) Geographical Approaches to Canadian Problems (Scarborough: Rentice-HaU,

.,.

1971\

For examples, see Philip Mathias, Forced Growrh (Toronto: James Lewis and Samuel. 1971). Supra., note. 5. The Telegram Canada '70 team, A Summary Coasr to Coasr (Toronto: McClelland and Stewart. 1969). pp. 76-77. W. L. Morton, "Needed Changes in the Canadian Constitution" in G. Hawkins (ed.) Concepts of Federalism (Canadian Institute of Public Affairs, 1965). Suora.. note 3. ~ i n a d bYear Book. 1970-71. p. 1163. The Canadian Pocket Encyclopedia, 25th. edition (1969). p. 95. Canada, Statistics Canada, External Trade Division (unpublished material). This was demonstrated when oil stocks on the Toronto Stock Exchange fell in response to new tax policies announced by the government of Alberta. 7he Globe and Mail. I August, 1972. This power bas been exercised in opposition to provincial wishes. as in 1971 when the Board refused to allow the export from Alberta of 2.7 trillion cubic feet of natural eas whose exnort had been approved by the provincial energy board: See canadion News Facrs, 1971. D. 732. Canadian ~ e h . 7Facrs, 1967, page 22. Marcel Faribault and Robert M. Fowler, Ten to One: The Confederarion Wager (Toronto: McClelland and Stewart, 1965). This episode is discussed in Peyton V. Lyon, Canada in World Aflairs: 1961-1%3 (Toronto: Oxford University Ress, 1968). pp. 375-385. See John Richards. "Prairie free enterprise politicians say howdy

CONTINENTAL INTEGRATION AND CANADIAN UNITY

37. 38. 39. 40. 41.

42. 43. 44.

45. 46.

47.

to the potash cartel," in Canadian Dimension. vol. 7, no. 7 (January-February, 1971). The Globe and Mail. l l March, 1972. Canada, Statistics Canada. External Trade Division (unpublished material). Thomas K. Shoyama, "Prairie Union: Some Implications for Economic Policy," in D. K. Elton (ed.), One Prairie Province? A Question for Canada (Lethbridae. 1970). Ontario,. ~ e p a r t m e n tof ~ G d eand Development, "Ontario Exports by Countries," 1969. Ontario was, for obvious reasons, the only province where the traditional form of economic nationalism, based on a high protective tariff, ever gained widespread suppoFt. It is sometimes assumed that the newer varieties of economic nationalism have a similarly narrow geographical base, but public opinion polls show that this is not the case. Restrictions on foreign ownenhip are just as popular in the West as in Ontario. See the C.I.P.O. Reports for 18 May 1968, and 14 October 1970, as well as Nick His' article on western reactions to the Gray Report: Ottawa Cilrzen, I2 February, 1972. The 55 per cent figure is from Statistics Canada, External Trade Division, (unpublished material). The Globe and Mail. 2 August. 1972. "McGovern bears watching up here too," by I. H. Asper, in The Globe and Mail, 20 July, 1972. The mobility of capital is admittedly a global phenomenon, but its mobility between Canada and the United States is increased by the predominance of Americancontrolled subsidiaries in Canada and by other aspects of economic integration between the two countries. Thii seems to have been realized in 1956 by the Quebec Royal Commission of Inquiry on Constitutional Problems (the Tremblay Commission) See its Report. Volume 11, p. 299. W. A. C. Bennett of British Columbia also preferred this title. but his successor, as part of a more conciliatory approach to federalprovincial relations, has restored the use of "Remier," The Globe and Mail. 6 October, 1972. Canada, Federal-Provincial Grants and the Spending Power of Parliament. (Ottawa, 1969). pp. 38-50.

Section 111:

INDEPENDENCE OR INTEGRATION FOR CANADA: POLICY CONSIDERATIONS

INTRODUCTION

The main intent of this volume is to examine the usefulness of the theory of political and economic integration as an analytical tool for the study and understanding of the Canadian-American relationship. An effort has also been made to relate the papers to current Canadian policy issues. The essays in this final section are seen to belong under the policy heading because they present a synthesis of the constraints and possibilities for Canada resulting from the integrative linkages of the Canada-United States relationship as a whole, and from the realities and linkages operating within the Canadian federation. Moreover, they do so in terms of the authors' value choices and offer conclusions supporting particular policy approaches. Before introducing these essays, a short discussion of the relevance of the integration approach to the analysis of real issues facing policy makers, and to the formulation of realistic policy choices, might be in order. One of the greatest difficulties involved in any comprehensive study of Canadian-American relations is that of combining under a single rubric the enormously broad, intensive and varied strands of interaction between the two countries. The great attraction of integration theory is precisely that it offers an overall analytical and explanatory framework. It is by no means the only theoretical approach which might be used. But for a global view, the definitions and conceptual frameworks put forward in the first section of this book seem promising for policy analysis as well as for academic research. The theoretical papers themselves combine to clarify many of the imprecisions in the concepts we use, and to focus

INDEPENDENCE OR INTEGRATION FOR CANADA

attention on central questions where ambiguities and differences of opinion persist. One of the problems not resolved by these theoretical contributions relates to the relevance and compatibility of the economic formulation of integration persuasively presented by English, with the political perspective discussed in the Pentland, Axline and Black papers. For English, integration is "any system providing the basis for systematic and recurrent transactions enlarging the swpe for economic interdependence." He rejects the usefulness of a terminological distinction between cooperation and integration and argues that "if one approaches international integration on an interdisciplinary basis, it is quite inappropriate analytically to require elements of formal supranationality." He advances a definition of international social equilibrium as "that state from which no nation is tempted to depart because reduction in independence or any other benefits of nationhood exceeds the benefits of policies leading to increased interdependence or new forms of interdependence," and he later formulates the hypothesis that there is "a level (or range of levels) of integration that maximizes the social benefits to the participating partners." In contrast, Pentland reminds us of the widely accepted view of political integration "as the movement of a system of states along a continuum from the one extreme of classic, anarchic international relations to the presumably more desirable form of political community at the other extreme." He offers a definition of integration, as "the process whereby two or more actors form a new actor," with disintegration as the reverse: this "new actor" need not be a state like present nation-states, but may simply be envisaged as a "policy community." The question may be asked whether these economic and political concepts of integration are sufficientlycompatible to permit a useful inter-disciplinary dialogue on the subject, or whether the two disciplines are in fact talking about different things. English's argument that it is analytically inappropriate to require elements of formal supranationality in any concept of integration which can serve both disciplines, is well taken, and Pentland's defintion can satisfy this requirement. The problem is elsewhere. On closer reflection, the English formulation remains ambiguous and appears to strip integration of much of its distinct meaning. In the English view, theconcept of integration is hardly differentiated from that of interdependence; the only difference is a slightly greater degree of

INTRODUCTION

assured durability and stability in an integrating situation and a built-in bias for the further growth of interdependence. English avoids the issue which is central to the whole of the political science reflection on inteeration. the remise that inteeration involves the gradual transformation of two or more states into some new entity, which may or may not be a new state. The debate in political science is about the nature of the critical and observable transformations taking place in integration processes, and about the relationships between these different kinds of transformations, but there is agreement that it is the presence of such transformations which confers a distinct meaning to the concept of integration, and which distinguishes integrating systems from other political systems. Unless this idea is also included in the concept of economic integration, there may be little meeting ground between the two-disciplines. This definitional problem is admittedly an especially difficult one for economics. Even in political science, the distinction between integration and interdependence is not easily made in a world in which national boundaries are becoming less relevant and transnational forces ever more important. But for economics, national societies have always been "penetrated" by flows of trade. capital and know-how. The reality of an international market has long coexisted with the world of nation states. If there is a really meaningful and useful distinction between the general phenomenon of growing interdependence, and economic integration, wherein does it lie and how can it be identified and measured? English attempts to establish the distinctive character of integration in terms of the criterion of "systematic and recurrent transactions enlarging the scope of interdependence". which certainly gets close to the essence of the phenomenon in economic terms. One wonders, however, whether his definition should not also incorporate the notion of transforming or merging distinct national markets into new and larger entities. This would remain a qualitative rather than an exact criterion, for the perception by firms of a single, wider market could be acquired well before all economic barriers were removed: still this perception would constitute a kind of threshold between looser forms of economic interdependence, and integrative situations. This could apply in a number of dimensions such as external trade, capital movements, transport, energy. technology, etc., and of the various levels and stages of here the analysis English economic inteeration would retain fullv its usefulness and validitv. In keeping with his hypothesis about international social equi-

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librium, English rejects the notion of an inevitable trend toward economic integration, as well as the view that the maximization of economic benefits from international relations is to be found in removing from them all avoidable obstacles. Yet he recognizes that the bias in economics is for more integration, and his own definition of integration incorporates this bias. In fact, his theory seems to rest on the view that while economic factors tend to favour more integration, non-economic factors can operate either for or against it, and may produce conditions of at least temporary equilibrium. This notion of international social equilibrium may be valid, and perhaps future research wiU tend to substantiate it; at this point, however, it is important to bear in mind that, while plausible, it is not yet backed up by much evidehce from the real world. This equilibrium concept seems to be even more strongly held in the political science corner, and fits in well with current efforts to remove the normative bias in favour of integration from the theory associated with the process. Pentland's conceptual framework, with its five dimensions, does this impressively and convincingly. However, even if one accepts the assumption that the process of integration can operate in either direction, it seems important to recognize explicitly that some factors do tend to operate persistently in favour of greater interdependence and integration, while others can act either way, and still others appear generally to resist integration. Pentland's dimensions are primarily intended to permit systematic research and empirical verification, but if the distinction between the thrust of the different factors proves to be valid, those encouraging greater integration, in particular the economic and technological factors, will need to be given greater importance and distinctiveness in his multidimensional model. This discussion of concepts and definitions may seem far removed from the more concrete realm of policy. Yet aside from their obvious importance for research and analysis, such questions also have a bearing on the analysis of concrete issues in CanadaUSA relations, and on the debate about the desirable courses for Canadian policy. Thus, as noted above. one of the concerns of the theoretical essays is to remove from the concept of integration any notions of inevitable fonvard movement and irreversability. These were present in the terminology derived mostly from the European experience, and tended to impede the understanding of quite different

INTRODUCTION

integrative experiences elsewhere in the world. Other distortions or difficulties could arise, however, if the search for a "neutral" terminology were carried to the point where factors persistently promoting movement along the path of integration were not clearly recognized and made amenable to measurement and analysis. This point could be relevant, for instance, to the discussion of the assessment made in the Honourable Mitchell Sharp's review of the trends in Canada-United States integration and their policy implications for Canada.' In his article, Mr. Sharp considered that the extent and momentum of integration between the two countries, notably in the economic and cultural areas, had increased in the post-war period, and that this process posed growing problems in terms of presewing a meaningful Canadian independence and national capability to shape our social, economicand cultural development. The definitions and concepts we use also affect other concrete questions of interpretation. The English essay for instance, advances the view that, in economic terms, more integration with the United States in the area of trade (through a free trade area) could bring important benefits for Canada and be combined with a reduction of integration in other areas (e.g. capital movements), without leading to more political integration. This interesting and important proposition runs counter to much of the current trend of public comment in Canada and contrasts with the governmental assessment presented in Mr. Sharp's paper. Since much of the argument hinges on the political and social implications of further steps of economic integration. serious debate clearly could benefit from a good inter-disciplinary base. Is more integration with the United States detrimental to the cohesiveness of the Canadian Confederation? If there are optimum levels in the various dimensions of Canada-United States integration. which can best reconcile Canadian aspirations? Can effective national policies be developed and applied to achieve and maintain them in a country in which political power is as divided as it is in our confederation, and in which regional interests are so prominent? On these as on other basic questions, the quality of analysis and of assessments will depend, in part, on the adequacy and coherence of the conceptual framework used and on the availability of good empirical studies applying it. The transition from analysis to policy studies involves a defini*Canada-United Sto1e.r Relarionr; Options /or the Future. lnternalionol Per.~pectiwr.Special Issue. Fall 1972.

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tion of goals and values which policy must seek to further. Analysis should help to identify the constraints on policy and the limits within which policies can operate. Policy choices or options are essentially alternative means of furthering certain specified goals. Policies. however, must seek as a rule to promote a variety of goals at the same time, such as independence, national unity, economic growth, social justice, and the reduction of regional economic disparities. "Trade-offs" are involved, since policies which further one objective may be detrimental to another. Priorities among goals must be set, and these depend not only on what seems desirable, but on what seems possible in the real world environment in which these policies must operate. In other words, the particular mix of goals and priorities one adopts depends not only on one's value preferences, but on how one analyzes the constraints and possibilities of theenvironment in terms of these values. The opening essay in this section by Gilbert Winham is founded on a rejection of the notion that there is an inevitable trend towards integration between Canada and her southern neighbour. In adopting this position, Winham ranges himself with the view of integration processes taken by most contributors to this book, including the authors of the theoretical essays. Canada does have some room for choice, even if the United States should come to regard continental integration as a desirable objective, a proposition for which there is, so far, little supporting evidence. Winham's main concern is not so much to suggest what Canadian objectives, priorities and policies should be, but rather to demonstrate that Canada has important assets in bargaining with the United States, if only they are clearly understood and skillfully used. Among these, Winham stresses the greater ease with which Canada, because of its smaller size and the much greater importance for it of Canadian-American issues, can mobilize its resources at the public level and present a coherent bargaining position. There are possibilities also of taking advantage of the divisions which often exist between the United States government and American business interests, as was sufcessfuUy done in the cases of Arctic sovereignty and the Canada-United States auto pact. The main theme of Claude Masson's essay is that a policy of greater independence vis-d-vis the United States, which means reducing the constraints on Canada, requires the achievement of a new consensus among its constituent regions. This. in turn. involves redefining its industrial structure, promoting a diversi226

INTRODUCTION

fied cultural life, making room for a language other than the continent's main language, and reducing regional disparities. For Masson, the interactions between the North-South and EastWest linkages are of crucial importance. In this perspective, Quebec presents a distinct challenge. For while Quebec is conscious of the constraints imposed by the presence of foreign economic interests, its concerns embrace all nowFrench speaking interests, including Anglo-Canadian interests centered outside the province. The importance it attaches to preserving and extending the French language and culture in Quebec. and to attaining a high rate of economic growth to provide employment for its labour force, require a high rate of investment with substantial outside financing, and that Quebec should "strike its own hargain" with the multinational enterprise, on terms respecting its personality. The study by John McDougall examines the principles underlying decisions of the National Energy Board, and concludes that proposals for a Mackenzie Valley pipe line must be rejected if Canadian integration is to be given priority over the integration of North America. Finally, A. E. Safarian's contribution discusses the impact of foreign investment and foreign control of sectors of the Canadian economy on the quality of Canadian life. Notwithstanding the large capital inflows of the sixties, the relative rise in foreign ownership and control has been negligible, and the weight of dividend and interest outflows in relation to GNP is substantially less than it was fifty years ago. Foreign enterprises have brought many benefits to Canada and their performance in terms of Canadian objectives has most often been superior to that of resident Canadian enterprises. In the total context of Canadian-American relations, United States investments are seen by the author as imposing few critical constraints: the real policy issues relate to how we use the potential for economic development which they represent. Much of the criticism which has been voiced of foreign investment should really be levelled at the inadequacies of our industrial, competition, tax, resources and other policies.

CHAPTER 9

CHOICE A N D STRATEGY in

CONTINENTAL RELATIONS Gilbert R. Winham

Every once in a while it is useful to be reminded that the processes of history are not inevitable. Some of the current literature on continental relations projects the defeatist impression that Canada is unable to withstand an inevitable trend toward integration with her southern neighbor. This impression is wrong, and works a grave disservice. If Canada, or any nation, is to maintain an independent position alongside an energetic neighbour which is militarily stronger, and economically larger, it will be through a strategy of intelligently pursuing the alternatives that are open. Such strategy requires the ability to deal in subtleties, and there is nothing particularly subtle about inevitable trends. The notion that integration is an inevitable force is challenged by the histories of both North American neighbors. Theories of political integration duly observe the importance of social and economic trends in uniting peoples, but the record shows that internal integration in both nations came as a result of.delicate negotiations, and might have gone the other way. Integration produced a unified federal structure in both countries, but in neither case was it a casual happenstance. It resulted from the acts of assessing choices, calculating advantages, and expending the effort necessary to persuade the uncommitted. n e act of federation was above all a bargain, brought about by the strategy of those committed to integration. In the present context. the relevance of the federal histories of Canada and the United States is to suggest that integration of these two nations today could not w m e about without enormous political commitment

CHOICE AND STRATEGY IN CONTINENTAL RELATIONS

and effort on both sides of the border. Another observation can also be made from the past. If strategy and skillful bargaining could be put to work to bring about integration, could these not today be cornerstones in the defence of a society that wished to avoid integration? It is often assumed by the proponents of a more independent Canada that closer continental links are sought by the United States. The evidence for this position is not especially convincing, even considering the tendency of Americans to see Canada as "not much different." There has been no significant sentiment in the United States for such a move, and certain vested American interests which compete with Canadian producers, particularly in resources, might be expected to vigorously oppose emnomic integration. Moving from actual evidence to hypothetical projections, however, one might speculate that closer relations would be in the future economic interests of the United States. Canada has space and resources, which will become increasingly attractive to Americans as shortages crop up. Closer political and social relations with Canada would likely make these resources more secure for the United States, and would also increase the prospects for using them on more favourable terms. On the negative side, there are not many costs -such as loss of identity that might deter the Americans from closer relations with Canada. From the Canadian perspective, the price of closer relations is hardly as light. Closer relations with the United States would probably submerge the Canadian presence. The issue is not as extreme as statehood for Canada-which sheds more heat than light -but rather it is the more subtle effect that integration would have on maintaining a national infrastructure and social fabric. Consider one example. Plans for diversion of Canadian waters have been drawn up by the Parsons Company of Los Angeles envisaging a 400-mile long reservoir in British Columbia which would service aqueducts stretching from the American mid-west to northern Mexico. This plan, and others like it, have the potential of remaking the physical map of Canada. To the extent that physical features, settlement patterns and political life are linked, these plans could have profound effects on Canadian national and local life as well. Only partly in jest. my McMaster colleague. Professor Lewis, once suggested that Canada might demand the cession of Alaska in return for diverting waters to the United States. This would he a fanciful gesture, but it might

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shift American perspectives away from considering water diversion as just another engineering project. The prospects are that Canada will not find a continental approach appealing, even though Canadians may increase their dealings with the United States in resources and other matters. To the extent the Americans lind continentalism favourable, considerable room for disagreement is opened up in what is basically a harmonious international relationship. In this context it makes sense not only to ask what are the basic choices Canada has in hemispheric policy, but also what are the bargaining resources and strengths it has in dealing with the United States. In some respects, this is an unusual question. It is so often assumed that America has overwhelming capability to affect Canada that basic strengths in the Canadian position are easily overlooked. As a forerunner for developing continental stretegy, some consideration should be given to what arena places Canada in the best competitive position. Canada, as Prime Minister Trudeau once remarked, is greatly affected by the private acts of Americans, and by the public acts of the American government. In the private arena the activity of foreigners is characteristically undirected, and little control is exercised to insure that this activity promotes national goals. This is no accident, of course, since the philosophy of liberalism in both North American countries dictates a substantial amount of individual freedom. The upshot is, however, that undirected private activity can in the aggregate have a profound effect on national life, especially in the smaller of the two countries. The issues of cultural penetration and economic control point out the disadvantages Canada has in the private arena from close contact with the United States. On the other hand, Canada is advantaged in dealing with the American presence when issues are raised to the public arena, and handled through the medium of formal diplomatic exchange. This has been historically true, and there are strategic reasons why it will continue to be the case. Canada better mobilizes its resources at the public level, a point which the nationalist Left has been making for some time. But more important -and generally ignored by the Left - Canada has certain bargaining advantages that come from dealing formally with the United States. Compared to the United States, the Canadian governmental machinery is certainly smaller, and therefore probably

CHOICE AND STRATEGY IN CONTINENTAL RELATIONS

more efficient in representing national interests. Canadian negotiating positions are typically prepared by senior officials who know each other well and who have long-standing experience in their areas. By contrast, United States negotiating teams have no comparable organization memory and this problem is exacerbated by the American tendency to bring in persons outside government service to handle external affairs. As a result, much of the American effort is often wasted in internal decisionmaking rather than external bargaining. The matter goes further than the negotiation process. When it wmes right down to it, the United States has not been politically well organized to conduct diplomacy with Canada, or anyone else for that matter. Canadian diplomats might disagree with this point, since it is bad form to be gulled by another nation's weakness, but the fact remains that the strength of American diplomacy wmes from the sheer preponderance of the American nation and not from the efficiency of United States diplomatic efforts. The Presidential/Congressionalsystem fractionalizes political power and makes it difficult to establish a unified position prior to or during external negotiations. Furthermore, United States diplomacy is made less flexible by the independent power of the Senate in foreign policy, even though American negotiators often try to use this weakness to their advantage. In continental matters, these problems have been compounded by the lack of importance most continental issues have for Americans. The American foreign policy establishment suffers from the disadvantage of having a plethora of agencies that have some say over wntinental policy, without having any one focal point that can co-ordinate policy. The Canadian desk in the State Department is supposed to fulfill this function, but it is frequently by-passed in important matters, as bilateral trade talks have indicated. Due to lack of co-ordination, the United States Government is not well geared to defining or pursuing in a consistent fashion its national interests vis-his Canada. In the absence of a well-oiled machinery, the Americans rely on ad hoc efforts by capable individuals, and on an uncharacteristic muddling-through approach.' Disarray in the American establishment has left Canada relatively freer to define wntinental relations than is probably realized. The Americans are not in a convenient position to plan major departures in continental policy, and in fact the United States has initiated less in this area than it has in other parts of

INDEPENDENCE OR INTEGRATION FOR CANADA

the world where it has interests. This may be simply because there has been nothing the United States wanted to initiate, but one cannot discount the possibility that being organized to initiate policy and seeking to initiate it may be related. If having an army leads one to use an army, as some argue, Canadians may be relieved that the United States lacks a streamlined machinery for dealing with its northern neighbor. Of course. this could work in reverse. If relations ever become less relaxed between the two countries, one harbinger of this would probably be a reorganization of the machinery for representing American interats.2 The lack of co-ordination in the American government for dealing with the Canadians leads,to certain expectations regarding Canadian-American relations. One can expect, for example, that Canadian initiatives in foreign policy will be less encumbered by American objections than the nationalists would have one believe. Protests are a form of policy, and to be successful they require the same co-ordination and effort that other forms of policy require. There are numerous recent examples of Canadian initiatives in foreign policy that have been met with quiet acquiescence by the Americans, or at most by unenergetic objections. Canada's policy toward NATO and its U.N. voting behaviour on China were largely ignored by the United States, despite the fact that they ran counter to United States policy. Canada extended its jurisdictional claims over territorial waters, and substantially advanced the legitimacy of its position in the Arctic. Both occurred at the expense of American policy, and were met with sharp but unsustained protests from the State Department. One wuld hardly cast the United States in the role of helpless giant in its relations with Canada, but it is interesting to speculate just how the United States would go about organizing a meaningful protest of Canada's independent policy toward Cuba or its position on American draft-dodgers-even if there were the will in some quarters to do so. The striking thing about Canada's independent stance from the United States is not that it exists, but that there is so little ability on the Canadian side to distinguish occasional criticism from serious policy dinerences. The Canadian mentality is overly-prepared for new examples of Yankee heavy-handedness, which may serve a useful function of keeping the Americans aware of Canadian sensibilities. More likely, however, it only perplexes Americans and creates misunderstanding, which is cer-

CHOICE AND STRATEGY IN CONTINENTAL RELATIONS

tainly not in Canada's interests. Canada's national aspirations are defensible in terms of the values the Americans preach, if not practise, and there is some advantage in being clear about this. Over-reacting to the American presence simply squanders a valuable political resource. There will be issues on which the United States is serious, and where an independent Canadian position may have to be vigorously maintained. Trade is such an issue, and energy and water may be issues in the not-too-distant future. Negotiations on these subjects will go better for Canada if they start from an attitude of sympathetic understanding on both sides. The current trade issue underscores another 0bSe~ations about the organization of the American foreign policy process toward Canada. Canadians, with good reason, are used to thinking of their association with the United States in terms of a "special relationship." This thinking includes the assumption that the United States will deal with Canada on a preferential basis. The surcharge announced by President Nixon in August 1971, coupled with the unwillingness of Washington to exempt the Canadians. shook this assumption and put the North American relationship on a somewhat different footing. The question now is whether this is indicative of future Canadian-American relationships. There are reasons to expect the United States is less disposed to treat Canada as a separate case than it may have previously. In the first place, the disorganization of the policy-making machinery which deters the development of United States continental initiative3 also inhibits the treatment of Canada as a special case. It takes organization, effort, and political clout to make exceptions to general policy decisions, and these do not appear to exist where Canada is concerned. From this perspective the efforts of Finance Minister Benson to have Canada exempted from the United States import surcharge were predictable. There were isolated pockets of support in the United States government for Benson's position, but they were not enough to forestall the application of a general rule to Canada. The second reason why Canada's special treatment may decline is that the United States' position in the world is now undergoing a considerable metamorphosis. The United States is under fierce monetary pressure, which is the telltale weak link in the armament of great powers. Efforts to correct their long-run deficit will make the Americans less charitable toward other

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nations in the future. The payments problem, however, is only indicative of other more fundamental changes. With some assistance from current White House thinking, the world is today changing from a bi-polar system to a multi-polar, balanceof-power arrangement. The new arrangement could mean a more shifting, transitory system of alliances would replace the stable divisions which have characterized the Cold War. In such an arrangement U.S. behaviour toward its traditional allies would be more unpredictable than at any other time since World War 11. Whether this would affect the Canadian-American relationship remains to be seen, but what does seem likely is that the United States will have less ideological reason to be supportive of Canada in the future. The Canadian strategy for dealing with its southern neighbor should take advantage of the fact that the United States, like Canada, is a widely diversified society. Canadians readily appreciate this about their own country, and recognize the effect of diversity on their bargaining position with the United States. For example, policy disagreement between the provinces and the federal government on matters of continental concerns increase the opportunity for the Americans to drive a hard bargain with Canada. This may become a future concern in dealings over energy resources, given the differing views between Ottawa and the western provinces on sales of natural gas and oil to the United States. It may also be a concern in the foreign investment question, for the distance that Ottawa can go in reducing American control in the Canadian economy is limited more by attitudes within the provinces than by the expected reaction from the United States. The most important division on the American side which could affect Canada's bargaining position occurs between the United States federal government and the American business community. The principal interest of American business is to return a profit on investment, and whether this is done at home or abroad is of secondary importance. The United States government is chiefly concerned with protecting the national interests of Americans, and this nationalistic goal can run counter to business investment goals. Both the federal government and the business community in the United States can have a significant impact on Canada, but because they are occasionally at odds in the foreign policies they seek there are opportunities for Canada

CHOICE AND STRATEGY IN CONTINENTAL RELATIONS

to balance one off against the other. At the very least. Canadian policy-makers should be discriminating enough to separate analytically the interests of these two forces. By way of example, there are two points which illustrate the differences Canada should anticipate in dealing with the government and business community of its southern neighbor. In the first place, Canadians are accustomed to the inattentiveness of the United States government, and American public opinion generally, to life north of the border. This may be aggravating, but on the whole it works to Canada's advantage. American inattentiveness makes the pursuit of an independent policy somewhat easier. However, inattentiveness is not characteristic of important sectors of the business community. For example, it is probably safe to say that Detroit has a better idea of where Canada is going in the next decade than vice versa. This, incidentally, is not a good state of affairs, especially at a time when environmental concerns are pressing the auto industry toward the most revolutionary changes of its existence. The Canadian government should expect the American industrial giants to be well-informed on affairs in Canada, and it should be prepared itself to deal with those firms on a highly knowledgeable basis. Second, the ability of the Canadian government to invoke an anti-American sentiment in Canadian public opinion has long been a bargaining advantage for Canada. This is an advantage that works better against the American government than against American business interests. Public opinion in Canada about the activities of United States firms is divided, which makes it less available as a bargaining tactic. Furthermore, the most important problems raised by the activities of American firms -such as the truncation of the Canadian production process-are not easily explained to the mass public. and there is the real danger that any attempt to mobilize public support would backfire. Foreign investment is responsive to the state of opinion in host countries, and any government which encouraged adverse reaction might risk losing desirable investment in the process. The recent policy of Canada on the Arctic sovereignty question demonstrates the usefulness of making a distinction between government and busihess interests in the United States. Canada's policy on the Arctic vis-ci-vis the United States was a highly successful one. and for that reason it was probably an aberration.

INDEPENDENCE OR INTEGRATION FOR CANADA

There are few enough instances of well-played hands anywhere in foreign relations, and when they occur they merit something more than a passing glance. The original voyage of the S.S. Manhattan - which touched off the issue- was initiated by a private company to assess the possibilities of transporting oil through Arctic waters. The purpose was not to test national sovereignty in the Arctic. It did this only because the question of sovereignty was indeed not very clear, despite the fact that Canadians have long considered the Arctic as their domain. By the normal tests of occupation and control, Canada had never built a very strong case for Arctic sovereignty. Neither, of course, had any other nation, which left the area in an indeterminate status for most nations. The prospect of commercial exploitation raised by the Manhattan voyage increased the value of the Arctic, and not surprisingly made the question of ownership more important than it had been previously. The position of the United States government of wanting the Arctic Ocean declared as international waters put pressure on Canada to define its claim. The Canadian response was to skirt the question of sovereignty per se, and instead to pass environmental legislation governing the use of Arctic waters. The tactics of this response were sound. A strong declaration of sovereignty by the Canadian government would have only occasioned a renunciation by the Americans, and there was no guarantee that Canada would have greater success than the United States in gaining support from other nations. On the other hand, legislation generally creates presumption of sovereignty, and the type of legislation in this case improved Canada's position because it was an example of physical control over the area. Both international law and common sense dictated that Canada's claim to the Arctic would be improved by regulating the use of the property. There is a difference, however. between passing legislation and having the legislation accepted and complied with. Canadian t a d i a were especially effective on this score because of the position they left the Americans in. The American owners of the Manhattan -the Humble Oil Company - were interested in a second voyage, but Ottawa's environmental legislation first required that they meet certain shipboard specifications and be certified by Canadian authorities prior to the voyage. The company was not in a position to resist these requirements, even if it had wanted to. The United States government, on the other

CHOICE AND STRATEGY IN CONTINENTAL RELATIONS

hand, had no choice but to acquiesce, or else to attempt a very awkward interference with the legal commercial activities of a private company. Humble Oil complied with the Canadian legislation, and in the ensuing voyage the Manhattan was escorted by Canadian icebreakers. The voyage thus set a precedent in a visible way for the application of Canadian law to the activities of American firms in Arctic waters. Lest anyone miss the point. the Canadian government made public the exchange of letters between Ottawa and the president of Humble Oil. The division between the United States government and husiness interests has been evident in a second instance of Canadian-American relations. Again, it has been worked to Canadian advantage. In the early 1972 trade talks between the two countries, the strongly-held position of the United States government was to revlse the United States-Canada auto pact in order to reduce America's current payments deficit with Canada. The Canadian government strenuously resisted the extent of the changes proposed by the Americans, and its position received support from the three leading auto manufacturers in the United States. General Motors, Ford, and Chrysler have benefitted from the auto pact, and indicated to both governments their reluctance to see this agreement altered. These representations improved Canada's position in the negotiations. Writing in The Washington Post, Claude Lemelin observed, "Knowledge that the Detroit-based industry is less than keen on changes is a major reason why the Tmdeau government has felt able to hold its own before Washington's onslaught."' The divergent interests of American government and business could have important effects on Canada's future economic relations with the United States. In the case of the Arctic or the auto pact, Canada found its relations with American business to be an asset in responding to a challenge from the United States government. The greater challenge of the future, however, may come from America's businessmen and not its politicians. There exists the possibility that Canada may share some interests with the United States government that will affect its dealings with American business. The thrust of recent discussions on multi-national enterprises bas been the question of how much direct foreign investment a nation can accept and still retain control over its national life. It is assumed that national interests can be threatened by international economic life. What is interesting is that these discussions

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have produced little thought on the possibility that international ~5 economic life could threaten the national interests of capital exporting countries as well as host nations. If there were doubts 3 on this score, the proposed Hartke-Burke legislation in the United States directed against foreign investment should serve as :. adequate proof. Foreign investment is becoming unpopular in the United States Congress because it exports capital and entrepreneurial ability, which are instrumental in creating employment in the United States. The argument is simply that American capital should remain at home where it serves American interests, and not he invested abroad where it might have been used more efficiently. Were the Hartke-Burke bill to become law, the prospects are that United States firms would be forced to concede foreign markets, or to convert themselves into foreign corporations. The bill would also of course deter further investment. The economic . - - C effects on Canadian income would possibly be harmful, but there would be a reduction in the extent of American participation in the Canadian economy which would be in keeping with the spirit of the Herb Gray report. The irony is that just as the Canadian government itself is considering steps to safeguard . Canada's economy for Canadians, the American government :.. may do the job instead. 3 There is little chance given the Hartke-Burke bill at present. hut deterioratine economic conditions could make its oassaee conceivable in ;he future. ~ o r e ~ l i k e the l ~ , United Staies $11 find less severe ways to cut back foreign investment, such as the export incentives of the DISC legislation enacted in 1971. Before things go much further, it would seem desirable that the Cana- >L dian and American governments try to work out a common position on foreign investment. Both countries have similar interests although dissimilar motivations. There is probably room in this situation for some agreement, and it is in Canada's interests to have whatever voice it can in investment controls the Americans might contemplate. The Canadian government should be alert to the possibility that implementing the concerns revealed in -. +? the Gray Report might in part he done through negotiations - ' q with the United States government. For those who wish to make the distinction, there is a differ- :I, ence between increasing the integrativeness of nations and maintaining a diplomatic c ~ l t u r e .The ~ former implies that interests 1 3 are converging along the most important fronts and that a blur-

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CHOICE AND

STRATEGY IN CONTINENTAL RELATIONS

ring of distinct national positions is a normal and expected thing. The latter suggests that particular interests can be quite distinct, save for a general desire to maintain amicable relations, and that points of conflict are to be negotiated in a compartmentalized fashion to prevent hard feelings from spilling over from orie area to another. The latter process has characterized CanadianAmerican relations over the 20th century, but it will continue to work only if both nations (particularly Canada) make the effort to remain distinct, and if both make the effort to carry on friendly exchanges. When all is said and done, the integration model is a nice idea for promoting sanity in world politics, but it won't work. The diplomatic culture model could achieve this goal just as well, but it takes work. It is in the interests of both Canada and the United States to know how to get what they want from one another, while at the same time wanting what is reasonable to expect they should get. What saves this proposition from being self-evident is the fact that what nations want from a relationship is a function of what they can achieve. Nations that negotiate skillfully are less likely to be frustrated in their international dealings, and hence are more able to contribute to a peaceful world order. This is perhaps the principal lesson the international community can learn from the diplomacy practised in North America.

Footnotes I. The United States "Canadian establishment" has been usefully

described by Swanson although the author dissents from some of my views. Roger F. Swanson "The Organizational Interface of the United States Policy Process Toward Canada," Internarional Journal (Spring 1972). 2. The subsequent occurrence of the stalemate in bilateral trade talks through 1972173 and the upgrading of the Canadian desk in the State Department would seem to substantiate this argument. 3. The Washington Post, February 20, 1972, p. FI. 4. Diplomatic culture is a theme discussed in Kal Holsti "The United States and Canada", in Spiegel and Waltz, eds. Conflicl in World Polifics (197 1).

CHAPTER 10

E C O N O M I C RELATIONS BETWEEN QUEBEC, C A N A D A A N D T H E U N I T E D STATES* Claude Masson

The United States has recently undertaken or planned certain measures that have only one purpose: to increase the number of available jobs in the United States, specifically through a substantial improvement in the American balance of trade. Such a policy obviously makes a short-term Canadian response necessary. But, insofar as it results in more long-term repercussions, in practice it amounts to a strategy. Canada cannot respond to it without adopting a planned course of action of her own. It is this aspect of the question that should, I think, come under our scrutiny now. It seems pointless to try to talk about a Canadian plan of action, or more generally, about the problem of our relations with the United States, without considering the regional aspect. As a country, Canada is the result of a compromise between its regions. Perhaps this is why, except for brief periods, it has always searched for "national" goals. It would be astonishing if its attitude vis-&is foreign investment, for instance, were completely unaffected by this. Can independence vis-ci-vis the United States become one of Canada's aims? To aim at independence would probably be part of an effort to minimize the restrictions now felt. This aim becomes much more important when the country seeking greater autonomy claims to have qualitatively different aspirations from those of the "Big Brother" - less pollution, more social equality, a rejection of the "melting-pot" concept in culture and language and so on. But I submit that in seeking independence from the This article war translated from ihe French by Valerie A MelnikoN

ECONOMIC RELATIONS

United States, Canada would essentially be trying to find ways to revise the existing compromises between its regions: in particular, it would be concerned with outlining a new industrial structure, with furthering the diversity of cultural life, with making room for a language other than the one used by the majority on this continent, and with reducing regional disparities. For Quebec, as for the rest of Canada. the presence of foreign economic interests is undoubtedly restrictive. But the rest of Canada itself acts as a restraint on Quebec's ambitions. Thus, if it is true to say that Canada as a whole needs to be "remodelled," it is just as true that Quebec feels obligated to rebuild itself on the basis of its own aims. Then how can a province "unlike the others," that wants to fashion itself a more autonomous future, be included in an eventual reconstruction of Canada? What does Quebec want? Among other things it wants a higher income per capita,. faster development, less unemployment, mote importance given to French as a working language and better social security. But the restrictions that are imposed by a foreign economic presence in Quebec are not felt in the same way as those that are imposed on her by the rest of Canada. For the Quebecker anyway, one of the challenges is how Quebec can become part of a multinational firm without losing her distinctive identity. Quebeckers seem to have a more positive attitude towards the multinational firm than they adopt towards the rest of Canada They see in the former the only feasible way to enter world trade, while in the latter many can see an obstruction that history has not convinced them is insurmountable. Another avenue is, however, open to Quebeckers: the proposed State of Quebec. And what a fair number of Separatists hope for in Quebec is a "deal" between the multinational firm and the State of Quebec, perhaps as much as a "New Deal" between Quebec and the rest of Canada. This is why some Quebeckers do not want a national foreign investment policy that would not fundamentally change those compromises which were reached in 1867 between Canada and its different regions, and which all have been judged by them, rightly or wrongly, to be unfavourable to Quebec. Neither do they want continued protectionism that would deprive them of a dangerous but nevertheless essential lever that they are determined to control for themselves.

The two essential aspects of the problem are therefore as follows: 1) How can French-speaking Quebec become a part of an international economy through the intermediary of the State and the multinational finn? 2) How can Canada's industrial structure be reorganized so as to lessen regional disparity? Both put the existence of Canada itself in question. The first aspect has many facets. First and foremost there is the problem of French as the working language. There are extra expenses for a multinational firm working in French in Quebec. In some cases, the advantages Quebec can offer make up for this. In others, might it not be necessary to take this factor into account in the framework of a new policy concerning foreign investment by granting special privileges to those firms that are willing to move to Quebec? For Quebec such a practice would cut the cost involved in establishing the policy of using French as a working language. It would become one of the "new" compromises. It is doubtful that more extensive economic involvement of Canada as a whole with the United States would make it easier for us to solve our cultural problems or guarantee our survival on the North American continent. Admittedly, it would seem that, up to now, American firms set up in Quebec have generally speaking managed to integrate French-speaking Canadians to a greater extent than have English-Canadian firms, but even so the question is still, as previously stated, that of the participation of the francophone workers in the direction of a multinational or "transnational" firm. First there is the question of politics: the rise of the new French Canadian middle-class to executive positions within the firm. In every economy there are communication networks that enable those concerned to make informed and responsible decisions. One of the problems that the FrenchCanadian workers has to deal with is that of gaining access to information through these networks. It was through the nationalization of electricity that some of our people were finally given a chance to gain "key" positions in the industry. To put it more generally, one of the most important aspects of not only an economic development programme but also an educational program in Quebec should be precisely the establishment of a system whereby French Canadians are given far more

ECONOMIC RELATIONS

opportunity to take part in the direction of their own economy. Then there is the cultural problem: that of adapting French Canadian culture and values to the world of "big business." Finally. there is the social problem: that of questioning the motives of the firms themselves and, more broadly, that of challenging the goals of all economic activity as such. As I have already emphasized, the three-fold nature of the questions raised by the growing number of foreign firms established in Quebec has led some of them to suggest that within the scope of any development programme for Quebec a much greater part should be played by publicly-owned firms. For instance, we already have the General Finance Company and Hydro Quebec. It is quite possible that some of the aforementioned problems can be solved quite simply in a system where public ownership is more widespread. However the benefits are unlikely to be obtained free. Among the possible drawbacks is the difficulty of finding a large enough market for some of the publicly-owned firms since they would not be connected in the usual way to the networks formed by any large private firm. It should be added that the efficient working of such firms might well be endangered at least in terms of existing North American standards, inasmuch as administrative procedures followed and retained because of their more congenial French-Canadian character would be at variance with those that are current elsewhere. These are only conjectures, but it is worth paying them some attention if, as is sometimes stated, the French Canadian feels out of place in any large private firm for reasons other than not being able to do his work in his mother-tongue. In such a case. giving French the status of a working language in a firm established in Quebec, or giving French Canadians more opportunities for advancement to executive positions in the firm would not necessarily be the solution to the problem. In short, as far as the first aspect of our problem is concerned, any "deal" between Quebec and the multinational firm has still to be formulated. It is not likely that any federal contribution on this plane would be very substantial. The second aspect of the problem is no easier to grasp than the preceding one. Because Quebec is in the throes of formulating its ambitions, it has to face a great challenge: that of its economic expansion. To expand does not simply mean to produce more from year to year; it means above all to increase the output per unit or

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.

.

'

productive resources utilized. Recent studies have shown that three main factors are responsible for a rise in production in any economy: research and technological progress, the quality of the work force especially at the managerial level, and last, the quantity of mechanical equipment in the form of tools, instruments, machines and even cornputem, which are available to each worker. Furthermore. an economy cannot capitalize on these assets unless it is able to sell its products and services on a very extensive market. These various requirements have one thing in common: they demand considerable investment. Whether in the private or public sector. such a large-scale investment programme would involve certain expenditures. The growing investments would, at a given level of production, lead to relatively lower private spending unless a larger volume of solid backing could be counted on to flow in from abroad. Nevertheless, during a period of under-employment it should he possible, at least in theory, to increase investments without finding it necessary to alter the level of private spending and without borrowing more from abroad. If we accept that in Quebec unemployment is woven into the fabric of society, we must realize that it would he difticult to decrease it by simply relying on an increased demand, because of the risk of provoking run-away inflation in the Canadian economy as a whole. We are also forced to admit that, for a while at least, a programme of more substantial private or public investment could only be financed by cutting down on private spending to a certain extent; or by more extensive use of resources from sources. Both these options raise certain issues, and make it clear that the nature of the economic development that Quebeckers want needs to be outlined in detail. If our people ¬ or will not borrow more from abroad because such an ipflux of foreign capital might mean a greater foreign domination of our industry and natural resources, then measures to finance a more significant proportion of our economic growth ourselves should he taken, whether by paying more taxes, or by saving more, and the funds thus obtained would be made available to private and public investors alike. Yet we might still ask the question: are we already "too" Americanized, are not our consumer spending expectations already "too" excessive for us to consent to such sacrifices when

ECONOMIC RELATIONS

the rest of the North American continent might be able to manage without them? Among those who have already considered this dilemma, several have voiced serious doubts as to the ability and the desire of Quebec to finance her own economic expansion to a greater extent, even if all her available capital were mobilized. If these doubts are well-founded-and a good many of them probably are -then we must look to capital from abroad. As we have seen, this has always played a vital part in the economic development of Canada and of Quebec. But, as I said before, it now brings problems. And these are not the same for Quebec as for Canada, not altogether, at any rate. It is only natural that the English-speaking part of Canada should express fears or reservations when faced with the fact of direct foreign investment in Canada. The wish to preserve a distinctive national character, culturally, politically and socially, together with an increasing awareness of the danger of Canada's economy passing further and further into the orbit of the American giant, makes any public expression of these anxieties easy for us to understand. Basically, it is the entire national policy since 1867 that should be called in question at this point, certainly by those who try to be rational in their opposition to the foreign takeover of the Canadian economy. When Canada was constituted in 1867. the first task undertaken was that of building a so-called "national" economy, conceived as being a prerequisite for the preservation of a Canadian identity distinct from that of her giant neighbour. In fact, it was a matter of diverting a part of the north-south trade in an east-west direction. It was deemed necessary to create links between populated zones far-removed from each other. In order to do that we launched into a programme of railway construction. A tariff policy of a fairly protectionist nature was elaborated in order to make the industrialization of Canada possible. Finally, knowing that Canada possesses vast natural resources, we counted on these to barter for goods and services from abroad that we were incapable of producing here. All that has been achieved, thanks in part to foreign capital, first British, then American. Thus Canada made progress along the lines set out for it. Today the situation is as follows: the Canadian economy is fairly well diversified even though the exploitation of natural resources

INDEPENDENCE OR INTEGRATION FOR CANADA

is still of paramount importance. Even so, our manufacturing industry is not, as a whole, very effective. Founded 'on the principle that it was to serve the Canadian market primarily, then, secondarily, the markets of the Commonwealth, it was sheltered during its growth from foreign competition by tariff policy. It was expected to provide the Canadian public with a duplicate. more or less, of the range of goods and services supplied to the American public. Canadian manufacturers must, henceforward, try to become more specialized and to find new markets. International trading shows a marked tendency towards greater competition. Furthermore, Canadians expect a much higher standard of living, and increased productivity and therefore, a more intensive specialization is the only means by which this can be attained. Paradoxically some Quebeckers reject the national policy of 1867 for quite different reasons. Their opposition comes not so much from the fact that it might have been responsible for the solidly entrenched American presence in Canada, as is asserted in some French-Canadian and English-Canadian circles, but much more because it favoured Ontario to the detriment of other provinces, more specifically, Quebec. Taken to its logical conclusion, this argument leads us to recommend a change in the rules of the game; for instance, there should be a customs union or free-trade zone between Quebec and the United States so that Quebec can obtain a larger share of the profits gained from the influx of American capital. There are some very clear inferences to be drawn from the preceding analysis. If we must choose between a protectionist, "isolationist" economic policy for Quebec (especially in the event of separation from the rest of Canada, a policy that would, after all, be nothing but a small-scale repetition of Canada's experiment during the last hundred years), and a flexible economic policy, readily embracing the need for specialized production, we should, without hesitation choose the latter. The former would probably create more diversity within the Quebec econand, for a while, provide employment for all our young le entering the work force whatever their speciality. Howr, the decline in the rise of the standard of living that would ow, would, at a certain point soon tempt the workers of ebec to look elsewhere for what Quebec fails to offer them, in te of the barriers of culture and language that have to be rmounted by any French-speaking Canadian leaving Quebec.

ECONOMIC RELATIONS

Since 1950, the economic progress of Quebec has depended to a great extent on the development of manufacturing industries. The growth in the sector of secondary industries leads to the creation of new jobs by introducing new manufacturing processes and new products. Even so this growth makes certain demands. The use of increasingly complex machinery, mechanization or automation demands skilled labour. The work force of the primary sector trying to move into the secondary sphere has to face some very serious problems of re-orientation. Furthermore, the ratio of manpower needed per production unit tends to diminish in manufacturing industries. Thus the number of available jobs does not grow as fast as we might have hoped. For instance, the value of production in Quebec processing industries rose 100 percent between 1950 and 1963. During the same period employment, by contrast, rose by a little less than 17 percent. A glance at our past and at the nature of the present economy of Quebec also leads us to believe that the primary sector will still be capable of playing a very important role in the future. From the historical point of view we are forced to conclude that periods of rapid economic expansion in Quebec have, for the most part, coincided with completion of projects designed to exploit our natural resources. Even today it is mainly in what must be considered essentially primary industry that productivity and therefore salaries are high. This should not be a surprise given the nature of the resources Quebec possesses. In short, it seems evident that, as far as the United States alone is concerned, there will always be an increasing demand for natural resources. We have but to envisage, for instance, the scope of their needs for water and electricity. If this is a valid point, the inferences that can be drawn regarding future plans are fairly clear, yet it is not certain that they will not conflict with other aims. Basically, it would be a question of stimulating the exploitation of Quebec's resources by means of an appropriate programme of expenditures within the infrastructure, for example. Such a policy might entail a greater effort to open up Quebec's north. It would certainly involve an enormous influx of foreign capital, but nothing would hinder the Government of Quebec from sharing in the financing and ownership of new enterprises. After all, doesn't the Federal Government own a large number of shares in Panarctic Oils Limited, operating in the north-west of Canada? Isn't this a truly "national" aim? What seems essential is that in the context of the set of

INDEPENDENCE OR INTEGRATION FOR CANADA

I

compromises on which a "new" Canada might be based, the multinational firm must be forced to operate within the framework of a plan for a more equitable sharing among the different regions of the net profits that it will evidently earn. But that will be possible only if Canada itself is willing to question those compromises that have, so far, fostered its survival. Should it revise its transportation policy, its policy on energy, its agricultural policy, its policy with regard to science? More generally, what many Quebeckers fear at the present time is that the desire of a few "rich" Canadians to take advantage of nationalism will lead the country into policies that can only accentuate regional disparities. Seen in this light, what Canada should be seeking is possibly a comprehensive agreement with the United States that would, on the one hand, allow them easier access to the natural resources they need. and on the other, give Canada the opportunity to sell its manufactured products throughout the North American market. Such a plan contains great dangers, but, perhaps the time has come to take such risks. I cannot see how Canada can do otherwise and survive. If such a plan were to make allowances for the inherent regional differences in Canada I think that Quebec might accept it. Whichever way she turns, she knows that, no matter what, she cannot afford not to take risks. Of the two points examined in this analysis, only the second deals with the Quebec-Canada-United-States triangle. The first, that of the promotion of the language and culture of Frenchspeaking Quebeckers, is o n e with which the Government of Quebec must confront the economic interests presently vested in Quebec. Whether or not these interests are Canadian has little relevance to this basic problem. All things considered, from the cultural point of view, it therefore seems to me that the nature and form of the challenge facing Quebec are relatively independent of Canadian policy vis-a-vis the United States, provided two conditions are observed: I) that Quebec keep her essential control in the matter of language, education and culture; 2) that the Quebeckers, through their own native energy and skills, succeed in making their survival possible. The practical application of the first condition is obviously dependent on any innovations or revisions in the Canadian con-

ECONOMIC RELATIONS

stitution that, sooner or later, must be made. The second condition can only be put into practice by the Quebeckers themselves, with the help of the French-speaking world. As for the second point, that of the industrial structure and strategy in Canada, I can only conclude by repeating that Quebec would resent any revision of policy regarding foreign capital that was not based on the sharing of the net economic profits that each province derives from its union with Canada. But this is not all: it is the effectiveness of the Canadian economy as a whole that, aside from any consideration of the benefits of such profit-sharing, might well be improved by a change of strategy.

REGULATION VERSUS POLITICS: THE NATIONAL ENERGY BOARD A N D THE MACKENZIE VALLEY PIPE LINE* John N . McDougall

The controversy occasioned by the anticipated construction of the Mackenzie Valley pipe line' is widening to encompass a broad range of questions including the proper development of the Canadian economy, the rights of native people, the protection of the Arctic environment, the security of the North American continent, the economic and political independence of Canada, and the use of Canadian energy resources for the maximum benefit of Canadians.' This paper addresses the two questions which are bringing the others into focus: Should a pipe line be built in the Canadian Arctic? Should additional volumes of natural gas and oil be exported from Canada? Some perspective on the Mackenzie Valley proposals and, indeed, on the past two decades of petroleum development reviewed in this paper, may be obtained from the interpretation of Canadian economic history which centres on the political economy of staple exports. Whatever the merits of the wntending theories concerning the export of staples as a factor in Canadian economic development, the political consequences of this export have certainly been exten~ive.~ These have been caused primarily by the large investments in transportation which are periodically necessary to bring a particular good to its foreign market.' Fundamental political changes have been instigated in order to provide the institutional and political bases for new or improved transportation facilities. Examples are the Act of Union in 1840 as a prelude to improvements in the St. Law-

*

This chapter i s nn edited version of a paper presented by the author to B e Annual Meeting of the i. .r.*.. Mantrenl. Aug. 1973.

REGULATION VERSUS POLITICS

rence waterway, and Confederation in 1867 as a prelude to the extension of railways eastward and westward from Central Canada. The state has become involved in major transportation ventures in two principal ways. First, it has provided generous financial and other resources to particular private interests whose enterprise wuld be thereby moulded to the purposes of the state. These allocations have been so vast at times that only through the constitution of a new political order wuld they be made feasible. Secondly, transportation in Canada has consistently been associated directly with the security and unity of the state, either as the motivating factor, or as the dominant consideration with respect to the routes to be adopted. The relationship between the building of the continental railways and the presence of several distinct but coincidental threats to Canadian unity and security is well established. One further political consequence of staple exports and their means of transport deserves mention. Canada has relied heavily not only on the export of raw materials, but also on a single market for those staples. A major change in this market took place during this century, causing a gradual shift from the pattern established by the extraction of fish, furs, timber, and wheat and their transmission to European markets to a new pattern which is still developing around the extraction of pulp and paper, ores, and energy resources, and their transmission to American markets. An important difference is that the Canadian development predicated on the earlier European trade ran, in simplified terms, east-west, and tended to conect various regions of Canada to each other at the same time as they oriented the whole toward Britain. By contrast, the Canadian developments predicated on American trade run north-south and tend to separate the various regions of Canada from one another, and connect these regions to corresponding regions of the United States. Decisions taken by Canadian governments before 1960 concerning pipe line construction and natural gas exports reveal this tension between the east-west pattern of national integration and the north-south pattern of continental integration. Four decisions of significance to this discussion were taken during the 1950's: the first export of natural gas from Western Canada, which went to industrial markets in Montana; the construction of Westcoast Transmission's pipe line and the accompanying export of natural gas from north-eastern British Columbia to the American Pacific Northwest; the construction of Trans-Canada Pipe Lines; and

INDEPENDENCE OR INTEGRATION FOR CANADA

the rejection of an oil pipe line from Alberta to Montreal. AU but the decision concerning Trans-Canada reveal a predominant orientation toward exports and a continental-regional pattern of trade. Concern had been growing throughout the 1950's that Canada ought not to export natural gas to the United States in volumes which either threatened the future availability and price of the fuel to Canadians, or impaired its potential contribution to Canadian economic development. The accumulating public pressure culminated shortly after the pipe line debate in the striking of the Royal Commission on Energy (the Borden Commission), one of the first measures undertaken by Diefenbaker's new government in 1957. The hearings and recommendations of the Borden Commission will be examined here only in relation to gas exports, pipe line construction and the National Energy Board (NEB). The Commission often dealt with these topics together, and many of its recommendations on exports and pipe lines concerned the powers and terms of reference it proposed for a National Energy Board. In addition to its importance in the formation and eventual operations of the NEB, the Commission is significant as perhaps the clearest available indication of the lay of the political landscape aRer a decade of development in the gas industry. The hearings of the Borden Commission constitute the high point of participation by particular interests in the formulation of energy policy, and its recommendations are usefully considered in this light .5 One recommendation translated directly into the Nariond Energy Board Act was that "having regard to the proven reserves of natural gas in Canada and to trends in the discovery and growth of reserves, the export from Canada of natural gas, which may from time to time be surplus to the reasonably foreseeable requirements of Canada, be permitted under license."6 The Commission argued for this recommendation in a manner which also illustrated how it might be made operational. It made, first, a thirty-year projection of supply and demand in the Canadian market and, second, an estimate of the potential exportable surplus which might be available over the same period, depending on the rate of gas discovery and development. It seemed probable to the Comm~ssionthat the upper limit of the reserve projection "would be assured if the industry had the added incentive which would be provided by increased export markets."'

REGULATION VERSUS POLITICS

There is a circularity to this reasoning which has persisted in export policy ever since. It is horn of the producers' argument that the best protection for the supply of gas is its export. The circularity is that the volumes of gas required to justify the export of gas are seen to depend on the export of gas for their development. Whether the rate of discovery and development of reserves has in fact any relationship whatsoever to the rate of export of gas is a question open to investigation. But a problem can arise even if new discoveries are generated. The gas to be exported, and the gas whose expected development is supposed to justify the export are, of course, different lots of gas; the latter may also become available in more inaccessible locations and at higher cost than the exported gas it is to replace. Hence, by allowing exports on the basis of trends in discovery, proven reserves at current prices will be exported while the protection of Canadian requirements will depend on future reserves at higher prices. The Commission seemed sensitive to this danger. It was prepared to concede that future Canadian requirements should be protected by reserve growth trends on the basis that "it would be unfair to the producers to require, at this time, that proven reserves be set aside for all long-term future needs in Canada," but it also urged that "the Government of Canada should require satisfactory evidence in respect of reserve growth trends and evidence that the supplies of natural gas, expected to become available by reason of the trends, are suitably located for transmission to Canadian markets."a The NEB seems to have heeded conscientiously only the first of these injunctions from the Commission. Recommendations of the Commission regarding the price provisions for exports also found their way more or less intact into the N E B Act and the subsequent operations of the NEB. The Commission was concerned that the minimum export price be fair and reasonable, by which it seems to have meant "the price relationship, between Canadian sales and sales for export, should be such that the Canadian sales will not contribute more than a fair and reasonable proportion of the total return to shareholders on their investment in the transmission ~ompany."~The Commission also expressed the desirability of provisions for price escalation during the term of the contract "so that the exporter, and in turn the producers, will participate in any benefits accruing from general price increases in the export markets."lU Finally, the Commission recommended that the regulation gov-

INDEPENDENCE OR INTEGRATION FOR CANADA

erning the price of exports be rescinded. This regulation (Order-in-Council P.C. 1955-907) read as follows: The price charged by a licensee for power or gas exported by him shall not be lower than the price at which power or gas, respectively, is supplied by him or his supplier in similar quantities and under similar conditions of sale for consumption in Canada. The Commission evidently felt that the required price comparisons were too difficult to make." It pointed out that the usual method of determining appropriate prices was based on a computation of cost of service, and that there were various methods of allocating certain of these costs to different types and quantities of sale. Interestingly, the Co mission went on to point out id not take into account "such other factors that the Regulation r as competitive prices and value ok service, factors which many authorities believe should be taken I to account in the setting of prices."lz The Commission evident1 felt that some degree of equality between export and Canadi'n prices was not in itself sufficient assurance that Canadians w yld receive the maximum benefit from the export of natural gm$and recommended that attention be given to the prices of alternative fuels in the export market served. In its recommendations concerning the extent of authority of a National Energy Board to administer energy policy, particularly the issuance of licenses and certificates of public convenience, the Commission added to the considerations with respect to export licenses, "the advisability of encouraging the development in Canada of processing industries relating to energy and sources of energy as distinct from the export of unprocessed raw res~urces."~~ Concerning certificates of public convenience for the construction of pipe lines, the Commission recommended that the NEB be required particularly to take into account, first, the economic feasibility of the project and whether or not such a project is in the national interest and, second, the financial structure, ownership, financing, engineering and construction plans of any applicant, and the opportunity for the people of Canada to participate in the financing, engineering and construction of the p r o j e ~ t . ' ~

k

3

REGULATION VERSUS POLITICS

Canadian energy resources.16 In effect, therefore, its decisions condition the access to markets of Canadian producers of energy, and the availability of energy to Canadian and American consumers. The Board regulates the inter-provincial movement of gas and oil through the granting of certificates of public convenience for the construction of pipe lines, and it regulates international trade in oil and natural gas by this means and by granting licenses for the import and export of oil and gas. The Board, however, cannot regulate directly the price at which gas is sold by either producers, pipe lines or distributors. The one exception is that the Board's granting of an export license is subject to its consideration of the price at which the gas is traded "at the border." The Board was also delegated the power, which it has only recently begun to exercise, to regulate the tolls, tariffs and rates of Canadian pipe line companies. All pipe lines under the Board's jurisdiction, whether they are to sewice export markets, Canadian markets, or both, must receive from the NEB a certificate declaring "the Board is satisfied that the line is and will be required by the present and future public convenience and nece~sity."~bThe Board's discretion is practically unlimited in determining the factors to be taken into account in granting or refusing such a certificate in any individual case: The Board shall take into account all such matters as to it appear to be relevant, and without limiting the generality of the foregoing, the Board may have regard to the following:

...

(e) any public interest that in the Board's opinion may be affected by the granting or refusing of the application." The other considerations listed include the availability of supply, the existence of actual or potential markets, the economic feasibility of the pipe line, and "the financial responsibility and financial structure of the applicant, the methods of financing the line, and the extent to which Canadians will have an opportunity of participating in the financing, engineering and construction of the line." The first major elaboration of these provisions occurred in the course of a decision in July, 1961. This decision, while it involved an application for the construction of an oil pipe line, led the Board to considerations which could readily be applied to any pipe line proposal. The application, by the Matador Pipe

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Line Company, was for the construction of the Canadian facilities necessary to allow an affiliated company to gather oil in North Dakota, deliver it to the applicant at the border, whence the applicant would transport it to the facilities of the (Canadian) Interprovincial Pipe Line Company, through whose facilities and connected facilities it would alternately reach Minneapolis-St. Paul. Several considerations arose out of this proposal. First, the Board was aware that "the effects of successful completion and operation of the project must include some increase in the competitive strength of North Dakota oil in relation to Canadian oil in the markets both reach, either in quantity or in price or in both."18 Any possible objection on these grounds was removed from the Board's mind when no Canadian producer, shipper, or refiner of oil raised objections during the proceedings, and the Province of Alberta submitted a letter stating it would make no objection.19 The second consideration was raised by an intervention in the proceedings by the Soo Line Railroad Company, which was engaged in carrying oil from North Dakota to Minneapolis-St. Paul. Soo contended that "the question which Parliament has delegated to this Board is, "Does the Canadian economy require this pipe line as a pipe line in connection with the transportation needs and necessities of this country?', and submitted further that, "It is not this Board's function to decide whether or not an application for a pipe line should be granted by reason of its overall effect in connection with Canada's economy and intemational relation^."?^ The Board took the Soo argument to be "that the Board would certificate a pipe line which is to transport oil and gas for Canadian needs only."" The Board rejected this definition as being too narrow, and stated that it should take into account "the possible general effects upon Canadian oil production, marketing and transportation which in its opinion might arise from denying or approving this application even though the consideration of these effects necessarily involves some examination of circumstances beyond the borders of Canada."" In particular, the Board noted the Canadian Govemment's declaration of a National Oil Policy and its desire to expand export sales which meant, in effect, gaining access to the United States market and, in turn, maintaining an exemption from American import regulations. Thus, the Board stated that it must consider whether rejection of the Matador application would threaten the success of the National Oil Policy to the

extent that its success depended on American cooperation.'' The Board concluded as follows: Rejection of this application would ill accord with the attitude which has been taken by responsible authorities in the United States to the construction of Canadian-owned pipe line facilities in the United States, the camage through the United States of Canadian oil in Bond, and the access of Canadian oil to markets in the United States.24 This, and the lack of Canadian objections, seems to have been the decisive consideration for the Board. The application was approved. The principles of cooperation, and the economics of interdependence in petroleum marketing, were raised again in an obverse way in 1966 by the Great Lakes project. This was reviewed by the Board in the form of an application to export and re-import large volumes of Canadian natural gas for a twenty-five year period. The point at issue was whether TransCanada would be permitted to transport natural gas from Alberta to Central Canada via the United States. As the Board clearly knew, the character of this project was such as to call into question policies established during the course of earlier government decisions with respect to the original Trans-Canada sysThe construction of gas pipe lines through the United States has always appeared to have economic advantages in terms of costs, construction, time, financing and other factors, but disadvantages with respect to the loss by Canadian authorities of unlimited and exclusive jurisdiction over the entire Trans-Canada system. The Board expressed such reservations concerning the Great Lakes project, particularly with respect to future expansion of the Trans-Canada-Great Lakes system, which the Board felt would require a degree of cooperation between authorities in the two countries that might not be entirely realistic. Thus, approval had to rest on the assumption that the regulatory agencies of both countries will always move in the same direction and within a short time of one another in dealing with inter-related applications by Trans-Canada in Canada and by Great Lakes in the United States. . . .This is a very large assumption and not to be taken for granted.26 Nevertheless, after deliberating upon these and numerous other factors, the Board apparently felt that t h e e drawbacks to the 257

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scheme were overridden by economic constraints, and mitigated by both a sufficient degree of confidence in the continuing goodwill of American authorities and the mutual benefits to be derived from the necessary integration of the North American petroleum economy: The "amity and comity" in relations between the two countries in respect of gas, to which reference has been made in Federal Power Commission decisions, is real and highly valued by this Board. For its part, the Board.. .believes the growing interdpendence of the two countries in terms of energy is mutually beneficial and can be made more so if its development is carefully reconciled at each stage with the national interests of the participating countries." The application was approved. Following an initial reluctance by Cabinet, and humed negotiations among the industry, the applicants, the Board and the Cabinet, the Government also approved the project with the proviso that a fixed percentage of Trans-Canada's shipment to Eastern Canada be carried via the Northern Ontario route. Initially, this percentage was fixed at fifty, but was eventually to reach and remain at sixty-five. These two decisions reveal two of the principles and assumptions upon which the Board bases its judgments with respect to the construction of pipe lines. First, no pipe line, whether or not to facilitate gas exports, should be denied on the grounds that it does not appear to be indispensable to Canada, but only if it is demonstrably not "desirable from the standpoint of the public interest." Moreover, the Board ought to consider all the effects of a denial, even though this necessarily involves some examination of circumstances beyond the borders of Canada. Second, the principles of "amity and comity" between the United States and Canada, first enunciated by the United States Federal Power Commission, ought to govern so far as possible the relations on energy matters between the two countries, as should the general recognition that their growing interdependence with respect to energy is mutually beneficial. The two criteria stipulated in the NEB Act for the acceptability of an application for the export of gas are, first, that the volumes to be exported are surplus to Canadian requirements and, second, that the price at which the gas is sold at the border is just and reasonable in relation to the public interest. The

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complex set of procedures according to which these provisions of the Act are given effect. Stated most simply, this procedure has been to determine the existence of an exportable surplus independently of particular export applications and their specific characteristics. Only if an exportable surplus is found to exist does the Board consider which particular export proposals will be accepted or rejected on the ground of price. In other words, the existence of an exportable surplus is a necessary but not a sufficient condition for the export of gas. The principal concern of the Board has been to estimate Canadian requirements, existing and projected Canadian reserves, and to compare requirements with reserves to determine the size of the gas surplus available for export, if any. This is a highly technical matter, and this study will not comment on the validity of the Board's estimates; it is not necessary to prove that these have erred in order to demonstrate that the Board's use of data, methods or formulae in arriving at such estimates must be a matter for authoritative stipulation, and subject to political rather than purely technical criteria. In making these stipulations, the Board relied on several sources. First, the government of Alberta and its (then) Oil and Gas Conservation Board provided the National Energy Board with several operating principles and formulae. Second, the Royal Commission on Energy established several procedures, formulae and precedents in grappling with similar issues shortly before the Board's creation. Thirdly, over the years, firms in the natural gas industry have individually, or collectively through their trade associations, made significant contributions to these procedures. The significance of the allocation of Canadian requirements between established and future reserves is that it determines the extent to which requirements depend on the rate of exploration and development of gas reserves. Since some part of the protection for Canadian requirements depends on the future development of reserves ("trend gas"), important consideration is the factors which determine the rate of growth of reserves and, hence, the amount of trend gas available to meet future requirements. The Board addressed this point in its 1965 Report: Data in the Albefta Board report indicate that, on an average, 410 exploratory wells have been drilled in Alberta over the past 12 years. The Board believes that this average rate can be maintained during the next 20 years provided the incentives for

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exploring and drilling are maintained at levels comparable to those experienced during the past decade." An important component of these incentives is the size of the market for natural gas, which in turn is largely dependent on the amount of gas exported from Canada to the United States. It is possible to conclude from the concepts and methods employed by the Board that the protection of Canadian gas requirements depends upon the maintenance, and perhaps even the expansion, of the prevailing rate of gas exports. In its Annual Report for 1969, the Board related its dellberations upon applications from a number of firms for gas exports totalling 9.5 trillions of cubic feet (Tcf). During the hearings, the question of the Board's method for the calculation of surplus received attention from a variety of interested parties who leR no doubt that what they perceived to be at stake was the degree of protection of supply afforded Canadian markets or, conversely, the amount of gas available for export. For example, the Canadian Petroleum Association (CPA) stressed "that current and future surplus be calculated in such a manner as will minimize to the greatest degree possible the rest of contractable reserves having to be set aside in excess of those volumes of gas for which the purchasers of Canadian requirements are actually prepared to contract for (sic)."29 The CPA also suggested that projection of current requirements beyond a ten-year period cannot "reasonably meet the test of foreseeability as required under Section 83 of the Act," and recommended several changes in the method of calculating supply aimed at enlarging the estimate.Jo The Independent Petroleum Association of Canada (IPAC)agreed with the concept "that we now have sufficient information about the potential of Canada to justify a liberalition of the formula for determination of surplus."J1 Specifically, the IPAC recommended taking into account 50 per cent of the reserves then classed as beyond economic reach, "and include in that category as discoveries are made the initial estimates of probable reserves for new discoveries."Jl There was, in addition, almost complete unanimity on these points among the producers who dealt with them in individual submissions, Gulf, Shell, ' one exception was Amoco, Amerada Hess, and M ~ b i l . ~The Canadian Fina, which expressed support for the current criteria and methods of calculating surplus.34 Opposition to changes in the Board's established procedures and support for a conservative attitude on exports was voiced

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most strongly by Canadian distributors and consumers of natural gas, B. C. Hydro, Northern and Central, Gaz Metropolitaine, Consumers' Gas, and Union Gas.'> They were joined by all the Provincial Governments represented, except Alberta. Of the transmission companies, Trans-Canada and Westcoast which, unlike Alberta and Southern, serve Canadian as well as American markets, did suggest some changes in methods, but generally argued for a conservative approach to determination of surplus.'" Some of these parties contended that the proposed departures from established procedures would have the effect of freeing for export volumes of gas hitherto reserved for the protection of Canadian markets, increasing the dependence of Canadian consumers on future and more costly supplies. It was, for example, Quebec's view tbat there is no need to accept the suggestion made to include all or part of the reserves beyond economic reach or those deferred for conservation purposes in order to establish available reserves. In fact, these reserves, whether proven or not, are not available to the market, and their inclusion in available reserves could only increase artificially, to the detriment of the Canadian consumer, the surplus for export purposes.l These sentiments echoed those of Ontario, and both provinces pointed out that only by revising its formula for determining surplus could the Board grant all the exports sought.38 The danger which most of the opponents saw in doing so was well expressed by B. C. Hydro: "We are opposed to any policy of committing all known reserves to the support of export contracts, as this would mean that Canadian consumers would be called upon to pay a disproportionate share of future discovery and development costs."Jl The clear concern of all these parties was to protect Canadian markets in terms of the price and availability of gas, in the face of rapidly increasing demand in American markets. Their general insistence was that this protection be afforded, so far as feasible, out of established reserves; their general fear was that protection of supply should depend too heavily on future discoveries. None argued that gas would be unavailable in the future in the sense tbat the required gas was not there or could not be developed. They opposed a liberalization of the surplus calculation because to do so would be to increase the amount of established reserves committed to export markets, which in turn

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would make future Canadian requirements more dependent on trend gas and thus lead to higher prices for gas. Those advocating changes in the Board's methods presented in a different light the relationship between exports, Canadian requirements and future reserves. According to these parties, the best protection for future Canadian requirements is an expanding industry, and the best assurance of this is a rapidly rising rate of exports. As the spokesman for Amoco put it, "New discoveries to be made afford the Canadian consumer the best possible protection for his future gas needs, and these new discoveries will accrue at a rate reflecting the incentive available in the form of rapidly expanding markets, which comes down to The producers' submissions that increasing exports are a necessary condition for expansion is particularly important if future Canadian requirements are dependent upon the development of remote and more costly gas reserves; if this premise is correct the Board would be forced to provide for future Canadian requirements not by denying further exports, but by approving them. If Canadian access to future supply is thus dependent on the producers' access to future American markets, then Canadian consumers must pay the higher prices of remote reserves or limit their use of gas. The Board accepted the plausibility of this argument, and seemed concerned to avoid some of its possibly adverse consequences. In announcing that it was prepared to shorten the normal term of new export licenses, the Board reasoned: This general approach would have the merit of diminishing in some degree the force of the argument, advanced by some Canadian distribution companies and some provinces, that the granting of export licenses for long terms, with full protection as to supply, tends to dedicate an undue proportion of presently available reserves to export markets, leaving Canadian requirements beyond the relatively short term to be met out of gas yet to be discovered, and probably to come at higher cost from more remote areas. If. . increments of export throughout were licensed for relatively short terms, United States and Canadian customers would share more equitably in whatever may be the costs of future increments of supply to be committed to Canadian and export markets41

.

Moreover, the possibility that future Canadian requirements depend for protection on the expansion of the industry is apparently real to the Board: *,..

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The distribution companies will not be adequately sewing their own interests and those of their customers if they fail to contribute their share to the incentive for that increased rate of discovery which is essential if the Canadian gas producing industry is to continue to develop. They cannot safely assume that the limitation of exports will by itself ensure that adequate supplies are available at reasonable prices" These two statements may seem to have taken the discussion some distance from the specific question of the formula and procedures for determining whether a surplus of gas is available for export. That, however, is precisely the point. The apparently technical problem of estimating such quantities as Canadian requirements, Canadian reserves, and trends in discovery, is inextricable from the political question of how to distribute the various costs and benefits associated with bringing Canadian gas to Canadian and American markets; in this sense the Board while acting as a regulative, implementing body is in fact a political, policy-making body. The interested parties consistently press for solutions to the technical questions which will promote their advantage in the distribution of costs and benefits inherent in the decision; the NEB'S surplus calculation thus constitutes a large part of the politics of natural gas exports. The Board has enunciated the principles according to which export prices should be evaluated in the form of three "tests" which it now attempts to apply when considering the price provisions of a proposed export: I) the export price must recover its appropriate share of the costs incurred; 2) the export price should, under normal circumstances, not be less than the price to Canadians for similar deliveries in the same area; and 3) the export price of gas should not result in prices in the United States market area materially less than the cheapest alternative for energy from indigenous sources. There is some doubt, however, whether the Board ever intended this formulation to constitute necessary conditions for the granting of an export license; it has at least once explicitly denied that the three tests have this status,lJ and the record suggests that it has rarely insisted that export prices meet these provisions, particularly the third. The record reveals that, once the Board bas established that

263

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an exportable surplus exists, it has not been very effectively constrained by the export price provisions in the NEB Act in granting export licenses. The Board has rejected only three applications for the export of natural gas; two were rejected on the basis of inadequacies in their export prices; the third was rejected cnder conditions both of inadequate prices and of a scarcity of exportable gas, and it is difficult to know for certain which consideration was decisive." It also appears that the NEB has always seen fit to approve applications for export to the full extent of the existing exportable surplus. Either the NEB has failed to apply consistently any conditions with respect to price which must be met before an export is approved or, alternatively, the Board has consistently applied such necessary conditions and all the exports currently approved have managed to meet them. The question arises whether or not the NEB has consistently applied any minimum criteria for the approval of individual export applications when there are no constraints imposed by a scarcity of exportable gas. In practice, the Board has insisted upon only the full recovery by an export of its costsf-service, and the special circumstances of the Westcoast project seriously undermined even this "necessary" condition. The most neglected of the three tests, however, is the opportunity cost provision-the test requiring that the Canadian gas realize something approximating its full value in the market served. Not only has this been neglected throughout the history of the Board, but in its August 1970 decision it allocated the full 5.8 Tcf of exportable gas available without a single cubic foot being absolutely required to meet this provision. Indeed, in the case of Alberta and Southern. the Board eschewed this test quite consciously and deliberately. The other two major exports appeared to meet the third test under current conditions; but the future prices of the exports were tied, not to price changes in the American market served, but to price changes in the Canadian markets adjacent to the point of export. Thus, if the Board is accurate in saying that the cost of service establishes the floor of the export price, while competition from alternative sources of gas and energy establishes its ceiling, it is also true to say that the Board has tied the price of the exports recently approved to the floor rather than to the ceiling. A search through the reports of the NEB for the overriding principles by which it justifies its decisions on gas exports will turn up most frequently the following three:

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a) the principles of "amity and comity", or mutual trust and good will, between American and Canadian authorities and interested publics on matters pertaining to the development, production and marketing of natural gas; b) the principle that gas exports to the United States can assist Canada in providing service to Canadian markets more cheaply than would otherwise be the case, largely through the medium of economies of scale on pipe line facilities; c) the principle that exports of natural gas encourage the development of a resource, and of regions of Canada, which otherwise could not be economically developed. Under conditions of an exportable surplus sufficient to satisfy all applications for exports, the Board has rarely denied an application for a pipe line or an export on the basis of its stated criteria with respect to price. It has rather tended to override the constraint imposed by its pricing stipulations by reference to one or more of the principles stated above. What this seems to indicate about the Board is a basic export orientation, a disposition to export any exportable surplus found to exist, almost regardless of price. Its ultimate rationale may reasonably be interpreted as: Sell any existing exportable surplus immediately and at prices which reflect cost more closely than value: the resulting development of transport facilities and/or reserves will be in 'he Canadian public interest, since the health and growth of the industry must be of benefit to Canada.45 There must be many industries who would like to have their particular interests so unequivocally identified with the public interest! The evidence presented thus far bears on the Mackenzie Valley question in at least two important respects. One is to reveal the way the NEB makes decisions, the major assumptions and premises on which it justifies those decisions, and the interests which it most consistently takes into consideration or ignores. The other is to establish the current status of matters under the Board's jurisdiction. Both lines of thought seem to point in the direction of approval by the NEB, and the government, of construction of a natural gas pipe line in the Mackenzie Valley, an oil pipe line, or both. This conclusion is not a prediction; it is rather a reasonable expectation based on an interpretation of what the NEB and the federal government appears to have been doing in matters of natural gas and pipe lines since 1960 in the

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case of the Board, and since 1954 in the case of the government. The pipe line (or lines) appears likely unless conditions change politically to a degree sufficient to force the NEB, or the federal government, to redefine its goals and reexamine its assumptions. What changes might militate against approval of the line, and what might we do to produce such changes if we oppose its construction? The record since 1960 contains substantial support for the view that the only condition upon which the Board insists for the export of gas is the existence of an exportable surplus, and that it has also permitted a gradual expansion of the proportion of total available reserves which may be exported by extending the degree to which future Canadian requirements depend on trend gas. In relatively recent decisions, the Board appears to insist on a minimum price for exports, defined by cost of service in two instances and by the relation to Canadian market prices in two others. The Board is apparently unconcerned with the overall effect of exports on the price of gas to Canadian consumers, and has never insisted on gas receiving its maximum value in export markets. If an exportable surplus seems available, the Board is inclined to allow considerations such as cooperation with the United States, and concern for the growth of the industry, to override any determination to obtain the full value of gas in American markets. Concern for, or confidence in, cooperative relations with the United States has also been a consideration in the Board's decisions with respect to pipe line construction. NEB decisions, during the Sixties, contributed significantly to a situation which is now marked by these features: I) The current export of large columns of lower-cost, readily accessible gas reserves and a corresponding reliance upon higher-cost, relatively inaccessible gas reserves, for the protection of future Canadian requirements; 2) the possibility that a natural gas pipe line from the Arctic will be required to ensure for Canadians incremental supplies of natural gas at substantially higher prices; 3) the price of exports tied to Canadian prices, so that the export price will rise not in direct response to the rising value of gas in the export market. but rather to rising prices - well-head prices in the two cases, and Canadian market prices in two other cases - in Canada; and 4) a necessary reliance upon American goodwill for the maintaince of one important pipe line link between Canadian

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sources of natural gas and the principal Canadian market for natural gas. These circumstances appear to be significant deviations from the principles and concerns which were enunciated with some determination by both the government and Parliament before and during the Pipe Line debate, and by a wide spectrum of public and private spokesmen before the Royal Commission on Energy. Particularly with respect to gas export prices, and the effect of exports on domestic prices, the decisions of the NEB appear to deviate from the principles and concerns which prevailed during the Fifties and which partly account for its own creation and terms of reference. Coinciding with this deviation is a gradual decline in the number and diversity of public and private representatives actively promoting their views on these questions. The predominant interests represented consistently and, it appears, most effectively before the Board have been the producers, transmission companies, major Canadian distributors, industrial consumers in Canada, and the Alberta and Ontario governments. The first signs of general opposition to exports to emerge from this group did not appear until the first signs of constraint on supply late in the last decade. Indeed, with the possible exception of the Ontario and Quebec governments acting to protect their manufacturing, commercial, and thermal-electric enterprises, there are few in this group who can be expected to raise concerted opposition to further gas exports and the development of Arctic reserves and an Arctic pipe line. The domestic price of gas can rise without threatening the present markets of the Canadian distributors, or even the future growth of their markets, to the extent that they can pass on the increase to their consumers. This condition seems likely to hold as the general price level for all energy sources in Canada can be expected to rise. It seems probable that groups whose interests are oriented to Canadian markets will support the development of the industry in the Arctic as an assurance of long-term supply and, in turn, support further exports to promote that development and to spread the costs of bringing the remote gas reserves within reach of transmission facilities. They may, however, take a strong stance in favor of some distinction between Canadian and American markets by means of protected reserves or, more directly, by means of a fixed export-domestic price differential. All this suggests that if concerted opposition to the Mackenzie pipe line is to be raised,

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it will come from spokesmen acting on behalf of groups and interests which, generally speaking, have never before confronted the Board. There would appear to be no lack of potential for a broad range of interests attempting to promote their views before the Board and even to block or modify applications for Arctic pipe lines. Rather than anticipate the positions, character and methods of these groups, I will close by indicating my own view of the Canadian national interest on this question: The probable implications of a Mackenzie Valley pipe line are so large that the NEB is not properly constituted to decide the issue. A decision in favor of the line is of course subject to the final approval of Cabinet. More importantly, it is clear that a decision for or against the line is in fact to decide the direction of Canadian economic development, and perhaps even to define our national goals. It is artificial at best to regard this task as a problem concerning the regulation of the natural gas industry, one which can be resolved simply on the basis of facts concerning the resource itself and of theories concerning its most efficient utili; zation. The basic questions are political and will not be resolved through more sophisticated knowledge but rather through public choices. Choices must be made not only to resolve conflicts between different notions of economic rationality -structural balance versus rate of growth, for instance-but to resolve the conflict between economic and other values. Finally, the appropriate task of a regulatory agency is not to define national goals but to regulate private enterprise in the light of national goals. If the National Energy Board has seemed an exception to this dictum, it is largely because of the failure of successive national governments and of Parliament to establish the ends to which national energy policy were to be directed. There is liule to be gained from deciding the Mackenzie Valley question in the same manner. Rather, what is required is an expansion of the growing debate within Canada about the disposition of our energy resources, and its resolution finally at the highest level of responsible government - Parliament. The combination of acts which seems to me to be in Canada's broadest interests may be summarized as fouows: 1) a flat declaration that no pipe line of any description will be built on Canadian soil north of the Sixtieth Parallel: 2) a declaration that no new exports of natural gas from Canada will be approved,

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3) policies designed to replace all foreign crude with Western Canadian crude at Montreal; 4) a declaration that, should nude oil production from conventional sources or from tar sands appear to be surplus to Canadian requirements, including the Montreal market, exports of oil up to that amount will be continued; 5) the setting of the border price of gas exports already approved at levels representing the price of alternative fuels in the markets served minus the cost of transportation from the border, and the imposition of an export tariff to ensure that the differential between these prices and the cost of bringing the gas to the border is received by the Canadian Government. 6) other policies as necessary to ensure the development of oil and gas reserves in Canada south of the Sixtieth Parallel, as Canadian needs dictate. This set of government acts is designed to prevent the construction of a venture of both questionable economic benefit and serious political consequence to Canada. It undoubtedly begs some important questions of economic fact and theory which cannot be directly addressed here. The principal justification for this program is political: apart from the doubtful advisability of exporting non-renewable resources for which adequate Canadian markets are foreseeable in the near future, and aggravating structural imbalances in the economy, it seems highly undesirable to allow Canada to become a bridge over which resources vital to the United States are carried to their American users. Whether genuine or not, security is a large part of the overt justification for the United States relying on North American rather than overseas energy sources. A corridor through Canada for pipe lines linking Alaska with major American industrial centres would be an essential concern to the United States, economically and politically. It would give Americans a new security stake in Canadian territory and politics unlike any that have existed before, and more pronounced. As an exporter of energy, Canada can become no more than marginally important, and certainly never crucial; we simply lack the surplus to our own needs to be anything more; but as a bridge over which America has access to one of its most secure sources, Canada would become a vital link in the United States chain of economic and military security. Primarily for this reason, the complete and categorical rejection of the Mackenzie Valley corridor is recommended.

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The remainder of the program is designed to meet potential objections to this fundamental rejection. The Alberta to Montreal oil pipe line, and the commitment to crude oil exports in excess of Canadian requirements in this and other current Canadian markets, would encourage development of both oil and gas south of the Sixtieth Parallel in lieu of the displaced export markets. This may be necessary if supplies of natural gas adequate to meet future Canadian requirements are to be forthcoming. It also would meet United States objections that, by rejecting all future gas exports, Canada was aggravating an energy shortage in the United States; declared soon, this rejection leaves time under current export licenses to permit a switch where necessary from Canadian natural gas to Canadian oil, or to other sources of fuel. The export tax provision is simply to ensure that Canadians tinally realize the full value of their natural gas exports. Foreign demand for a highly valued commodity, the location of its source, the techniques and facilities required to transport it to the foreign market, and considerations of defence and security, may once again combine to produce a transportation venture with great economic and political implications for Canada. The character of such transportation ventures in the past have always reflected the fundamental economic and political orientation of Canada, both within the country and between Canada and an external power. In the light of this experience, and other considerations, this paper has set forth proposals aimed to head off a North American transportation venture with implications of more complete Canadian-American integration and, as an alternative, to expand the trans-Canada transportation systems with their implications of more complete Canadian integration. Nothing in this paper attempts to justify a decision by Canadians in favor of Canadian rather than North American integration; it may nevertheless reveal to Canadians one of the major forms in which this decision currently confronts us.

NOTES I . A brief but dear description and economic analysis of three Arctic gas pipe line projects which have already been announced is presented in R. Bruce Foster. "Projected Costs of Alternative Sources of Gas," Regularion of rhe Naruml Gas Producing Indusrry (Papers presented at a seminar conducted by Resources for the

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Future Incorporated, in Washington, D.C., 15-17 October, 1970), ed. Keith C. Brown, Resources for the Future Inc., Washington, 1972. An outline and discussion of a proposed oil pipe line is presented in the Financial Posl, December 20, 1972. 2. A useful summary and review of these concerns has been made in a series of articles by Dav~dCrane, Toranro Star, September 22, 23, 25, and 27. Copies of these articles are available from Pollution Probe at the University of Toronto. For further discussion of these concerns, see Aglamek, "What Rice Northern Development," Canadian Dimension, Vol. 7, Nos. I and 2 (June-July 1970); D. H. Pimlott, K. Vincent, and C. McKnight, eds., Arcric Alrernarives (Ottawa: Canadian Arctic Resources Committee, 1973); K. 1. Rea, The Polirical Economy of rhe Canadian Norrh (Toronto: University of Toronto Press, 1968); P. Usher, Bankslander: Economy and Ecology of a Fronrier Communiry. Vol. 3. Community (Ottawa: Department of Indian Affairs and Northern Development, 1971); John Warnock "Mackenzie Valley Pipe-line: A $5 Billion Disaster." Canadian Dimension (October, 1972); J. Laxer, The Energy Poker Game: The Polrrics of ihe Continenlal Deal

(Toronto: New Press, 1970). 3. Kenneth Buckley, in a critique of the staple theory, has distinguished "the staple theory as a theory of economic development and as an economic interpretation of history." He further says of Harold lnnis that, "while lnnis did not subscribe to a staple theory of economic growth, he did use the staple approach to correlate a wide range of political and social developments and explain the character of major institutions within Canada." Moreover, "it is this economic interpretation of cultural change based on the staple theory that provides the consistent element in the work of many Canadian social scientists." See Buckley's "The Role of Staple Industries in Canada's Economic Development," The Journal of Economic Hisrory. xvl~l,No. 4 (December 1958). pp. 439-450. 4. For a detailed elaboration of the points made in support ofthis thesis, see H. G . J. Aitken. "Government and Business in Canada: An InterpreLat~on."Business ffixrory Review. Vol. 38 (Spring 1964). pp. 4-21. See also H. A. Innis, "Transportation as a Factor in Canadian Economic History" and "Transportation in the Canadian Economy." Essays in Canadian Economic History. H . A. Innis, (Mary Q. Innis, ed.) (University ofToronto Rm. 1956). 5. The Borden Commission heard submissions in person from 70 parties and received non-verbal communications from 19 others. By comparison, the submissions heard and received by the NEB in a s;lection of its more contentious decisions are as follows: March 1960, 20 heard and 21 received; August 1966, 12 heard and 19 received; August 1970, 35 heard and 34 received: November, 1971, 29 heard and 8 received. The Board, of course, addresses more narrowly defined questions than did the Commission, but that is one of the ~

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6. 7. 8. 9. 10. 11. 13. 14. 15. 16.

17.

I

points developed below. The range of interests considered by the Commission is here described as broader primarily by virtue of the larger number of mun~cipalities,civic groups, constituency associations. labour union locals, and the like, that made representations to it. First Report, p. 1.1 (Mimeo). Ibid., p. 1.12. Ibid., p. 1.16. Ibid., p. 1.17. Ibid., p. 1.18. I b i d . , ~ .1.19. Ibid., p. 1.20. Ibid., p. 3.5. Ibid., p. 56. For a detailed discussion of the NEB Act and the functions and powers of the Board, see R. C. Carter, "The National Energy Board of Canada and the American Administrative Procedure Act - a Comparative Study," Saskatchewon Law Review, vol. 34 (Summer 1969). pp. 110-1 13; 6. D. Fisher. "The Role of the National Energy Board in Controlling the Export of Natural Gas from Canada." Osgood Hall Law Journal, vol. 9, No. 3 (December 1971). pp. 560-564, Ian McDougall, Chapter 11. NEB Act, S. C. 1959, c. 46, s 44, as amended, re-enacted as R.S.C. 1970, c. N-6. (Hereinafter referred to as "the Act".)

18. Ibid. 19. National Energy Board, Report to the Governor in Council, July 1961. p. 16. (Hereinafter. reports of this kind wiU be cited so as to correspond to the following notation of the above: NEB Report, July 1961). 20. Ibid.. p. 36. 21. Ibid.. pp. 4 3 4 . 22. Ibid., p. 44. 23. Ibid., p. 46. 24. Ibid., p. 48. 25. Ibid., p. 39. 26. NEB, Report, August 1966, p. 6, 7. "The Great Lakes Affair" is discussed in detail as a sequel to the Pipe Line Debate in 1956 in Kilbourn, Ch. 12. See also Miller. pp. 114-119. 27. Ibid., p. 6.12. 28. Ibid. 29. P. 4.26 (emphasis added). 30. Hearings, pp. 5842-3. 31. Ibid.. OD. 5845-7. 32. [bid.; 1859. 33. Ibid., p. 1860. The spokesman went on to say that Amic and Atlantic sources of natural gas ought to be considered by the Board

b:

REGULATION VERSUS POLITICS

34.

35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46.

in the manner recommended as part of the wntractable surplus for Canada @. 1861). Ibid.: Exhibit No. 68 (Gulf): Exhibit No. 70 (Shell); pp. 5862-3 (Amoco): u. 5882 (Amerada Hess), and Exhibit No. 83 (Mobile). ~ o m "rg' e ed the L a r d to include in its calculation of surplus gas reserves wherever they may be found in Canada, but not until it was assured that Canadian crude oil would have full access to the American market, pp. 5898-5906. Ibid., p. 5876. Ibid., p. 5890 (B. C. Hydro); 5941 (Northern and Central); pp. 5956-603 (Gaz Metropolitaine); p. 5961 (Consumers' Natural Gas); pp. 5979-84 (Union). Ibid., pp. 1556-59 (Trans-Canada); p. 5760 (Westcoast). Ibid., u. 6039. Ibid., pp. 6021, 6041. Ibid., p. 5890. Ibid., p. 5863. NEB, Reporl, August 1970, p. 10, 18. Ibid.. p. 10, 19. Ibid., p. iv; "It was never intended, nor is it reasonably possible, to rely on these tests solely or equally in all cases." Consolidated Natural Gas Lid. and Consolidated Pipe Lines Company. See NEB Reporl, August 1970, pp. 10.37-43. Perhaps the most telling wmment on the question of prices is the most general. Agalnst the notorious price of 22 cents per thousand cubic feet obtained by Westcoast Transmission in 1954, we may measure the per unit revenue from Canadian exports of natural gas to the United States obtained in 1968 and 1969; 23.83 and 24.52 cents per thousand cubic feet, respectively. From FPC sources reproduced in R. B. Foster. p. 64. (It is interesting in the context of my argument that neither the NEB Annual Reports nor the Canada Yearbook report the annual revenue obtained in Canada through export sales of natural gas. Only volume is reported.) The per unit revenue from the sale of natural gas in Canada is S.65 per Mcf. Approximately one-half of Canada's annual production is exported.

CHAPTER 12

FOREIGN DIRECT INVESTMENT FROM A CANADIAN PERSPECTIVE*

This study considers some of the basic issues raised by the emergence and growth of multinational firms in the higher-income host countries. It was written with particular reference to Canadian experience, and with comment on both political and economic questions.' The conclusions would not always be relevant to other wuntries, especially lower-income wuntries. Three related concerns are considered. First, the concern that the economic benefits traditionally associated with foreign direct investment are accompanied by high economic costs, both as conventionally defined and otherwise. Second, the even greater wncern that, whether or not economic progress narrowly defined is involved, foreign direct investment poses a threat to political sovereignty or to the exercise of political power, and to cultural distinctiveness. This is particularly the concern with the large American f m s so prevalent in Canada, a concern which is sometimes indistinguishable from the fuller range of questions in the relations between Canada and the United States. Lastly, the growing frustration at the inability to mount effective policies to modify perceived problems, given the differing views on their importance and the highly regional nature of the country and of its government. Economic Benefits and Costs

The expansion of domestic production in a country at full employment is determined broadly by increases in the supplies of the agents ofproduction. and by increases in productivity arising This paper was Snt published in the Journal of Finance. May, 1973 and is reprinted hers by perminion of the author and publisher.

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both from the improved quality and more efficient use of these agents and also from economies of scale. Foreign direct investment contributes to these sources of expansion to the extent that it supplies capital, and that it makes available a range of technology and of access to markets and entrepreneurship which are otherwise not available, or only at greater overall net costs. These potential gains from increased capital stock and improved technology may appear as one or more of higher real wage rates or employment or be reflected in lower prices or better quality of output. An important benefit is the tax payments to various governments from the higher level of output, since doubletaxation agreements between countries allow the host country to tax such firms without losing the investments. It will be clear that whether these gains are realized for the host country and how they are realized depends on a number of assumptions with respect to public policy. In particular, how far can competition in the system be relied on to ensure that the impact of new entry to an industry via new products and processes does spill over from the firm, increasing general productivity or lowering prices rather than being captured solely by the firm? If competition cannot ensure that these potential benefits are realized, can tax and other policies so ensure? A critical point on the effects of foreign direct investment is involved in looking at these questions, which will be considered further below. I am assuming that the host country taxes these at an optimal rate consistent with other objectives of tax policy, and does not largely or fully forego taxes or use subsidies to attract foreign capital. This is clearly a set of decisions within the power of its governments, but it is not costless. The difficulty resides in part in taxing international firms effectively, given the problem of determining transfer prices for unique services within the firm where there is no market price or equivalent, and given the opportunities in such firms for shifting taxable income so as to minimize taxes internationally over time. One major question then is the nature and extent of the benefits which occur through the process of spillovers from the firm, and whether they can. be achieved at less cost in other ways. It has been suggested that two of these-benefits from manpower training. and uncaptured productivity spillovers -may be important possibilities. The gains can come from the movement to domestic firms by executives and others trained in the foreign firm at the latter's cost, education of suppliers in produc-

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tion and quality control and of customers in better use of products, and in numerous other ways. The significance of this to the question of the benefits from foreign direct investment has been recognized for some time. Unfortunately, the empirical tests, admittedly difficult, are still very limited in nature and number.2 The costs to offset against these benefits are quite direct in some cases, such as payments abroad for interest, dividends and business services. Unlike the return on portfolio investment, these costs are variable and tend to grow without further capital inflow to the extent that the firms are successful and the capital base is expanded by re-investment of earnings. The commitment from the viewpoint of the host country, in brief, is open-ended and unknown-terminable by the liquidation of the firm or its sale to domestic owners. Despite considerable shortcomings of both theory and measurement in this area, some useful measures have been attempted of the overall net economic impact of portfolio and/or direct investment in Canada. One approach indicated that, under the full employment conditions prevailing between 1950 and 1956, net foreign investment (both portfolio and direct) contributed up to 20 percent of the growth in per capita real income in that period. A second study, which also uses an aggregate production function, deduces what Canadian domestic output and income might be if the withholding taxes on payments abroad were raised so that foreign investment in Canada became less attractive. This approach assumes that a Cobb-Douglas function is a plausible approximation to the production process, particularly in terms of the assumed ease with which labour can be substituted for capital in production. Perhaps more fundamentally. it is explicitly assumed that full employment can be maintained as the adjustment to increased reliance on domestic capital (and labour, at lower wage rates) occurs. Assume that the tax is raised all the way to the point where only domestic capital is used in production. Under these assumptions, it is estimated that the gross domestic product (produced in Canada) would be 16.5 percent lower. Gross national income (received by Canadians) would be only 3 percent lower, since income payments to foreigners would fall. It is noted that there may be further costs in terms of slower future growth if access to foreign techniques by other means is less satisfactory, but this possibility is discounted. The study concludes that two years normal growth would be lost at most, provided the assumptions are realistic.'

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It is possible to cite other evidence which might be taken as reassuring in terms of the existence of gains to a higher income host country, such as evidence that the cost of foreign equity capital as conventionally measured is comparatively low.$ But this would be to miss some of the more fundamental questions. A whole range of externalities, both positive and negative, have been claimed for direct investment. The list of negative effects is long. What they have in common is a view that important decisions about Canadian-based facilities, made in the context of the international firm and heavily influenced or determined abroad, lead to less than the maximum efficient development of the subsidiary. This outcome is attributed to various forces, such as poor information or lack of interest by the parent's officers, private or public pressures on them to favour facilities at home at the expense of the subsidiary, or limiting of the subsidiary's initiatives by the habit of dependence on decisions abroad. Thus the host country's development is geared away from manufactured exports and research and towards reliance on imports and technology from abroad. More generally, the comparatively large size of the parent companies in the home country and the subsidiaries in the host country, in both cases relative to their domestic counterparts, has raised questions about welfare effects which are familiar from the theories of oligopolistic market structures. This approach raises a prior question about the motives for direct investment, particularly what one might infer from them with regard to welfare effects for the host country. The theory of foreign direct investment is still in an indeterminate state. Two approaches have been particularly fruitful in recent years, that emanating from work on industrial organization and emphasizing the long-term strategy of large oligopolistic firms, and that from international trade theory placing emphasis on national comparative advantages in the production of new products. The industrial organization approach has emphasized such motives as international competition for market shares by oligopolists, assurance of raw material supplies, and protection as an inducement to foreign direct investment.6 Richard Caves has recently examined this approach in a systematic way, stressing the parallelism between domestic and international mergers where markets are geographically separate. To operate abroad successfully, the firm must possess some special advantage in production or marketing which it can draw

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I

on in the new location at a cost which more than offsets the costs of location abroad. Moreover, the return from this advantage is tied to the process of production and distribution, thus favouring transfer abroad by direct investment rather than sale of the advantage. Oligopoly with differentiated products leads the firm t o produce abroad the same goods at home, while attempts to reduce competition or uncertainty by oligopolists (differentiated or not) lead to investment in extractive industry. Differentiated oligopoly has the important effect that it tends to equalize rates of return on equity capital in the same industry across nations but (given barriers to entry of new firms) not necessarily to equalize rates of return between industries in a nation.' The trade theory approach has recently been explored by Harry Johnson in particular. Some recent research on the economics of new product development by Raymond Vernon and his colleagues has strongly suggested that direct investment is frequently identified with comparative advantage in the production of new commercial knowledge in some national markets, and its subsequent application in others. Johnson notes that the return on superior technology can be absorbed entirely by the foreign company. Provided there is no change in prices or quality of commodities to consumers, or prices of factors of production in the economy, and assuming no additions occur to tax revenue, then the firm captures all the benefits of investment. If the foreign firm simply replaces domestic output under these conditions, no gain accrues to the host country. He regards this as unlikely, however, partly because the existing double taxation agreements permit the host country to collect a share of earnings on foreign capital and rents on foreign knowledge. More fundamentally for present purposes, his conclusion that there are gains to the host country rests on the view that knowledge cannot be permanently monopolized, but ultimately becomes a free good. It is easy enough to criticize oligopolistic direct investment firms by reference to more competitive situations, up to and including pure competition. It is not as easy to fault them if the situation in a given market before and after their entry is compared, as has been done in several European countries, for there the evidence most often points to an increase in competition and general p r o d u d i ~ i t y . ~ The view that foreign direct investment per se yields a pattern of industrial development in high-income host countries which is inimical to certain kinds of growth is particularly strongly held in

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Canada. Paradoxically, this view appears to co-exist with a number of careful empirical studies which largely refute it. In the typical case, other things constant, the performance of foreignowned firms in these respects in Canada appears to be as good (or bad) as that of their resident-owned counterparts. This is the case for exports, where performance of foreign-owned firms has been found to be similar to that of resident-owned firms whether one considers all such firms, larger ones only, or only those in manufacturing. The Canadian research performance of foreignowned firms is at least as good as that of resident-owned firms whether considered as a percentage of sales or degree of sopbistication. Again, while both positive and negative effects appear when examining the relation of foreign ownership to industrial concentration and merger activity, the most general conclusion which appears possible is that the extent of foreign ownership has not clearly increased or decreased the degree of competition looked at in these ways. This conclusion is stronger for firms owned in the United States, incidentally, than for firms owned overseas. General empirical tests do suggest, however, that such firms have a higher share of imports in purchases, despite evidence of substantial import substitution over time.9 If one considers experience in other high-income countries, the proposition that nationality of ownership is causally and systematically related to poor economic performance of the firm looks even more dubious. On the contrary, studies for the United Kingdom, Australia, the Federal Republic of Germany, and France, among others, both on an individual industry basis and more broadly, generally have a much more positive set of conclusions than those just cited. United States firms in those countries are criticized for exactly the opposite reason to that advanced in Canada-they are believed, usually correctly as these studies suggest, to have a performance record in exports, research, productivity and other respects which is generally superior to that of domestic firms. The Canadian studies lead to some further questions. The performance of foreign-owned firms in Canada, while it may not be as bad as some fear, is nevertheless not as good as many might have expected from the assumed advantages in access to foreign research, financing and marketing. Why is performance typically not better than in the Canadian-owned counterparts where they exist, and why is the performance of both sets of firms so often worse than the best-practice techniques in the

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United States and elsewhere over long periods? The large and long-standing gap in productivity between Canadian and United States manufacturing generally, and the direct comparisons of subsidiaries with parents, raise questions of this kind. It has been established by aggregative and industry studies that the large foreign-owned manufacturing sector and its domestic counterpart both suffer from too many firms, too many products, and too short runs. It is fairly convincingly established that the most important ultimate determinants of this inefficient industrial structure have been Canadian and foreign protection against trade, a lack of effective competition (partly because of tariffs and a weak anti-combines policy), and badly-devised government industrial policies on research and other matters.'Q Industrial policy may well have dissipated part of the potential gain from both foreign and domestic investment in an inefficient and fragmented structure of industry. Indeed, until recent years, much of what passed for industrial strategy in Canada consisted simply of inducing firms to invest in Canada (rather than importing goods) via a high effective rate of protection. In recent years this has been combined with substantial tax concessions as well, by both federal and provincial governments, partly to induce them to locate in certain regions or to undertake more research activity. To the extent such policies d o not succeed, not only is the specific policy goal unrealized but much of the potential benefit from direct investment is lost both by way of tax loss and inefficient industry. It would be easy to ascribe this general state of affairs to the "branch-plant economy" with which it is associated, without asking where the fundamental causes lie. I suggest that the main responsibility should be borne by the complex of policies historically used to speed industrial development in this country. Even if one shares that view (and especially if one does not), certain opportunities nevertheless exist for potentially profitable intervention in the initial investment or subsequent operations by such firms. A firm with many international affiliations by investment, trade or otherwise-regardless of nationality of ownership -has more opportunities for such matters as tax shifting and sourcing of supplies, whether it uses these opportunities or not. Foreign subsidiaries may certainly have advantages, but it does not follow in any particular case or industry that they necessarily benefit the host country or benefit it as much as is feasible with a more intelligent use of policies to capture more "spillovers"

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and/or taxes. While my presumption would be that there is generally more competition with foreign firms than without, in principle it can either increase or decrease the degree of monopoly or competition. More generally, as Johnson has noted, there is an important dilemma in the creation of new knowledge, for incentives to its production are usually necessary, but the knowledge should be made available to all users without charge in order to maximize the social benefit from it. All of this raises questions perhaps more fundamental than whether foreign direct investment is likely to create net economic gains. The first question is whether these net gains can be maximized, or better, optimized. One set of answers exists in improving the set of policies which determine the social gains of corporate policies generally, without regard to nationality of ownership. My earlier comments suggest much remains to be done in Canada in this regard. Second, even if the gains exist, they might be derived with less cost by alternative forms of access to foreign technology. There is a range of ways in which a project can be undertaken, for instance, licensing, joint ventures, purchase of management services, protection for domestic firms whether private or public, direct investment of various types, or state purchase of technology and distribution without charge to all. These have quite different economic costs and benefits, as well as different political and social consequences. The presumption in some of the literature is that the direct investment "package" of capital, of production and distribution techniques, and of management skills is most often indivisible. Unfortunately it is not yet possible to say, from a social rather than private viewpoint. how far this is so and in what industrial situations a split of the package is least costly with given objectives." The idea that knowledge created elsewhere is costless, however, may prove expensive to a nation in some of the manufacturing industries undergoing rapid technical changes. There is sometimes an assumption in the literature that, without direct investment, such techniques can be bought or created at least as cheaply or effectively by alternative means with no loss in other respects, or perhaps even with gains in them." If a country goes the route of discrimination against direct investment, it should be noted that the best alternative is not necessarily protection of domestic inputs. There is a range of alternatives in terms of access to foreign technology, as just noted, any one of which may be preferable in given circum-

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stances. One can make an infant industry type of argument for domestic ownership, of course, extending protection to inputs by the nationality of the supplier. The constraints of that approach should he noted. They include (I) an argument that there are social benefits from investment in creating new knowledge which cannot be captured by the firm which invests in knowledge; (2) that these are greater for domestically-owned firms than foreign-owned firms; (3) that there is no lower cost way to acquire that knowledge." Thirdly, there is the question of technique, that is, the extent to which one relies on general tax and other policies or on specific policies directed at particular industries or even firms, whether the object is to improve the economic setting for all firms or to try to distinguish between them on the basis of ownership. In both cases the mood in government and to some extent public circles seems to be to attempt direct case-by-case intervention through a screening agency or similar institution, rather than general or market-oriented policies. Either the latter is mistrusted or the former is regarded as yielding more predictable outcomes, apparently assuming that present knowledge and skills give one some confidence in the welfare effects. The direct case-by-case approach also increases bureaucratic costs and powers." Perhaps even more fundamentally, it has been suggested that a high degree of dependence on imported techniques has created an environment in which entrepreneurial effort is dampened permanently. A considerable literature has developed around this theme in low-income countries, but the argument has also been extended to high-income wuntries. One example is the "truncation" argument which provides the framework for a recent government study of foreign investment in Canada. Direct investment, it is argued there, leads to many important activities being performed in the parent firm or country, with the result that significant gaps have occurred in Canada's domestic capacities in these respects. How far have managerial, technical, distributive and financial capabilities been "stunted" because of easy access to supplies of these abroad, mainly through subsidiaries? If one accepts that a certain mass of such activity on an integrated basis is necessary either to give autonomous capacity to exploit innovation privately or to implement policy in this area publicly, the case is made to create more capacity in this area.'* Such arguments can he regarded simply as a plea for more

FOREIGN DIRECT INVESTMENT

protection for skilled domestic groups. As such, their justification would have to be put in terms of infant industry arguments extended to nationality of ownership, with the constraints just noted. Some doubts must be expressed, however, about how relevant this argument is in high-income host countries. First, it is not obvious that it is supported by the evidence directly bearing on it. It has been noted, for example, that the American challenge through foreign direct investment has been met by a quite formidable response from firms in Western Europe and Japan in particular.16 It is certainly true that foreign direct investment predominates in oligopolistic industries with high entry barriers, but the one test in Canada as to whether this association is because of foreign direct investment yields results which are inconcl~sive.~~ The frequent assertion that foreign firms monopolize markets or stifle domestic entrepreneurs is not yet rigorously tested by the counter-hypothesis that there are external benefits from such direct investment - training of managers who then move outside the subsidiary, the education and financing of suppliers, the stimulus from competition, and so on. It may be noted that an aggregative test of whether foreign direct investment merely substituted for domestic capital without adding to capital stock in Canada turned out negati~ely.'~ My second reason for doubting this proposition is that it fails to take into account the ways in which extended protection itself inhibits the development of entrepreneurial skills by removing competition, restricting market horizons. and leading to an inefficient structure of industry. The "truncation" argument fails to test the counter-hypothesis that the continuing reliance on imported inputs associated with foreign direct investment is due not to the presence of such investment but to the policies (including protection) which foster inefficient industrial development and which also entice to Canada excessive direct investment in some industries. A more promising approach would be to achieve more efficient organization of industry through more liberal foreign trade policy, a far more efficient use of competition policy, and more effective government tax and subsidy and regulatory policies. An associated approach is to tackle directly the many market and societal imperfections which continue to make it difficult to mobilize entrepreneurial capital for many purposes. The hindrance to effective national financial markets because of differences in provincial securities regulations is a case

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in point. The historic official restrictions on merchant banking roles, or even on non-controlling equity participation, for many major financial institutions must have formed a formidable barrier to entrepreneurship through much of the history of this wuntry. Finally, under-investment in those educational skills which are more closely related to economic growth is still capable of correction; the graduation of four doctorates in business administration in 1970-71 in all of Canada is hardly a warrant that we are taking seriously the need for research on distinctive business problems here. The linguistic and social barriers to managerial roles for significant portions of the population are being corrected but the pace is still slow. Some of the changes involve minor tax or expenditure changes, other need fundamental attitudinal changes. They are worth taking on their own merit, and they lead to an approach which yields more selfreliant expansion while maximizing rather than sacrificing the gains possible form foreign investment. They also have the major effect that they do not sacrifice the interests of those parts of the wuntry or population whose real incomes are still deplorably low. As Vernon has pointed out, the arsument about the effects of direct investment is concerned to an important degree with the form of the question being asked.I9 The measures cited, with some improvement, can perhaps tell what was the effect in quantifiable, largely economic, terms. They cannot tell you what would have been the effect without direct investment, because we do not know what would have been the quality of the response by domestic entrepreneurs (both public and private) which would have ensued on the one hand, or the terms of access to technology abroad by alternative means, on the other. "What might have been" is an interesting and often important question. At any time in the past an alternative tax, spending or regulatory policy can, with the benefit of hindsight, compound interest, and some sacrifice by preceding generations, give an alternative preferred by the present generation, hence indicate to the present generation the sacrifices it can make for succeeding ones. More seriously, I am sure that careful historical studies can provide much light on the effects of direct investment, provided they allow for the role of other variables in growth and test counter-hypotheses. A related question which should be tackled systematically on an analytic. historic and comparative basis, as noted earlier, is the extent to which the "package of indivisible

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inputs" accompanying direct investment is in fact indivisible, and on what terms. In concluding this section, it should be noted that there is a roundabout nature to the argument on gains from foreign investment. If a country is willing to make the sacrifices required to support domestic saving and entrepreneurial groups for long, substantial growth will certainly occur without foreign direct investment or with non-controlling forms of access to foreign technology. In that sense, foreign direct investment is neither necessary nor suflicient for adequate growth. The question is what sacrifices are involved in that approach and why one should impose such sacrifices on a community. The answer does not lie, I suggest, in any evidence of substantial economic damage, however much one may argue for a correction of particular abuses or for improving the terms of access directly or by a better domestic policy framework. Balance of Paymenu Effects Fears about the balance of payments effects of direct investment come largely from two sources. The fact that direct investment, unlike portfolio, has no term for repatriation, and that retained earnings cause the liability to grow with no continuing capital inflow, is one source of concern. The other is the evident relation between direct investment and substantial imports from the parent firm to the subsidiary. Such imports at first reflect the fact that direct investment in manufactures is to some considerable degree a substitute for trade, which in turn is (only partly) blocked by restrictions of various kinds. Despite considerable import substitution in older products, the import relation continues over time as the parent develops new products. The only way to resolve this range of issues is to do a stage-by-stage analysis of the long-term effects of direct investment on the balance of payments, both directly and indirectly. The comprehensive analyses of this type which are available lend little support generally to such fears from the viewpoint of high-income host countries.zOThe empirical results for manufacturing, while related to a large number of variables, depend particularly on the assumption with regard to import substitution. Where the subsidiary's production is assumed to displace exports which would otherwise have occurred from the parent, direct investment makes a net overall contribution to the host country's balance of payments. If it is assumed the products 285

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would have been produced in the host country in any case, the net effect of direct investment on the host country's payments position is small. In Canada's case, the former assumption yields balance of payments results which are strongly positive, the latter yields results which are slightly negative. Since there is a great deal of historical and other evidence that Canadian governments have persistently attempted to induce manufacturing direct investment in Canada by means of a high degree of protection and otherwise, the former outcome seems the likely one." Two other interpretations of the balance of payments effects appear to have gained widespread currency. One is the view that the benefit from direct investment disappears at the point where the annual inflow of foreign capital is less than interest, dividends and business services paid out in the same year. This is a view particularly prevalent in some writing on low-income countries. Perhaps it had some justification in such situations as a first approximation to short-run balance of payments effects, given the critical role of foreign exchange in development planning and the frequent absence of better estimates. One must emphasize, nevertheless, that the comparison is meaningless either as a measure of the net gain from direct investment or of the overall balance of payments effects. The former measure, as noted earlier, is derived by approximating increases in output directly attributable to the capital minus owners' returns, plus adjustments for social benefits and costs. The latter measure depends not only on capital inflow and earnings paid out currently, hut on exports generated and imports displaced by foreign firms, on assumptions about the effects of foreign investment on the capital stock and income (and hence the balance of payments) in the host country and abroad, and other variables as noted in the studies mentioned earlier. There is no relation, to put it briefly, between income paid out on the total stock of foreign-owned capital in Canada and the annual inflow of capital. A related type of misunderstanding arises from the obsewation that the host country's domestic savings are typically used to finance the expansion of such firms, after some initial financing by inflows of direct investment capital. In Canada this misunderstanding arises from the observable fact that about 90 per cent of the capital used by subsidiaries of United States firms is from sources within Canada. The inference drawn is that Canadians are financing the "takeover" of Canadian industry. Let me leave

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aside certain issues this begs - why sourcing in Canada for supplies and technology is desirable, but not for capital, and indeed the whole issue of whether capital is the critical input from direct investment. On closer examination it turns out that fully 70 percent of the funds used by such subsidiaries in Canada in the year 1967, for example. were cash flows generated within the subsidiaries from retained earnings and depreciation and depletion allowances. These funds are no more owned (or their disposition privately controlled) by Canadians than are the assets which give rise to them, except for some minority shareholdings in subsidiaries. If we define the assets as foreign-owned or controlled, the income which accrues to them must be so defined. That earnings retained in Canada are equivalent to new inflows of capital from abroad would be evident if the earnings were shown as paid out to the parent then reinvested in Canada, as many balance of payments statisticians recommend. Primary Resources In principle it is not clear why primary resources should be treated differently from manufacturing insofar as direct investment is concerned. A general theory of direct investment, for example, should he capable of explaining both phenomena. in practice there are sufficient differences of degree to warrant separate treatment as a sub category of a more general phenomenon. One difference is that the benefits external to the firm are often smaller by way of manpower training and productivity effects, because, for example. the subsidiary is capital intensive or buys little in domestic markets. A second point is that the profits of foreign subsidiaries in primary resources often include substantial rents which the government should collect for maximum benefit, and can collect without adverse supply effect^.^' It is very uncertain what the rents are, however, until the resources have been discovered, the technical problem of production solved, the transport and other infrastructure built, and financing and markets provided. Any bargain struck before all of this bas been successfully undertaken quickly obsolesces afterwards, and generates pressures to capture more of the rents, to secure more processing, and so on." A second difficulty is that the bargaining power of governments in such circumstances varies widely by resource, depending on the ease of access to the resource in other countries, the degree of collusion among firms, and the co-operation (if any) among governments controlling the

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major resources. In Canada the situation is complicated still further by the competition between provinces to attract resource development through various concessions, compounded by the fact that some provinces have relatively few development alternatives. The outcome is to reduce even further the net gain from such investment to the host country. One possible alternative is for governments to set leases and other aspats of contract as short and as flexible as possible, thus permitting re-negotiation more easily, but with variations by type of resources reflecting problems of exploration, the degree of bargaining power in each case with regard to concessions, and the effects on the economy more generally. It is even more important to recognize that the comparative advantage in some types of resource development which Canada possesses cannot be realized more fully without greater and continued freedom of access for processed products t o foreign markets. The substantial presence of many large foreign-controlled corporations in Canada should not obscure that what is involved in these issues, and in issues such as environmental control or tax subsidization, is more a matter of government policy and control of the large corporation in resource development than of domestic to foreign ownership. It is not at all clear why resident-owned firms in primary resource development should be exempted from such questions. There is a presumption for more regulation in the primary resource field than elsewhere for reasons noted above. Whether domestic ownership as such is necessary depends on one's assessment of how far foreign ownership limits the possibilities for effective regulation, as well as the kinds of questions on economic benefits and costs raised earlier. It is time to turn to these broader issues. Some Polirical and Social issue^

The economic consequences of foreign direct investment in relatively high-income host countries would not, by themselves, explain the reaction to such investment. When an economist moves to such issues as national independence he is on slippery ground, not only because they do not lend themselves readily to his customary approaches but also because other social scientists have failed to give those questions the systematic attention they deserve. Nevertheless, venture we must or we evade the issue most often and most fervently raised about foreign direct investment.

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A major relevant question is the ways and the extent to which foreign direct investment affects the ease with which a state can implement its policies, and how far any losses here can be said to cancel out any net economic gains. The question is not strictly amenable to a cost-benefit approach, for people differ widely on both the meaning and the value they will put on independence in the sense just noted. In particular, they differ on which aspects of it should be regarded as an absolute which cannot be traded off whatever the gain in other respects. One useful distinction, although sometimes blurred, is between those aspects of direct investment which are largely or wholly related to the actions of firms in pursuit of their own objectives, and those which are largely or wholly related to the state in the pursuit of its objectives through direct pressures on the firm. . Does the nation state have something to fear, in terms of its .capacity to mount programs, from foreign direct investment as such? The answer must surely be that it does in some directions, but there are important offsets. A multinational firm by definition involves some assets, including important head-office assets, which are located outside the borders of the host country. The multinational firm allocates these and other resources, over time, among its affiliates, within the important constraints of law, economic circumstances and the organizational settings of such firms. If one poses this situation against a firm whose entire assets are located in the host country, or the great bulk of whose assets and head-office facilities are so located, then clearly there is more potential control for a government in the operations of such domestic firms. This is particularly so for the range of administrative policies where corporations are subject to that blend of persuasion and coercion which oflen appears necessary, at least to government bureaucrats, to implement duly passed law. The point involved goes beyond this type of situation. Whatever the actuality, for example, the opportunities for tax minimization through transfer pricing among differing tax jurisdictions are greater for multinational firms. If multinational firms continue to spread, and if governments cannot singly or together implement their policies except at great cost, then there is clearly a loss of sovereignty -and that is true even if one agrees that there is some gain to the national and international community in other respects. Stating the issue in this way raises important qualifications and questions. It is clear that there are different kinds of interna-

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tional business with different degrees of integration with the host and home countries. It is also true that foreign investment is to some extent a substitute for foreign trade,24 and the latter also offers considerable scope for "dependence." It is not clear whether foreign firms are less responsive in practice to government policies, or more likely to escape laws. The studies of economic performance of subsidiaries in high-income host countries, as noted earlier, do not lend support to such views on any generalized basis, whatever specific cases one may take to the contrary. Nor is there much point in discussing actual or potential political costs without looking at actual or potential benefits. Too often the assumption is made that economic integration merely limits or complicates the exercise of some forms of policy. There are both opportunities and constraints in practice, with the opportunities arising in part from the larger and enriched economic base which is available to support initiatives in both domestic and foreign policy. If only constraints were involved in foreign direct investment, or it was fairly easily matched by alternative forms, then governments would long since have acted to severely restrict it. The fact is that we know rather too little to comment in a general way on the effects of the spread of multinationals on a host country's capacity to implement policies. There is no general study of the probable degree of harmonization of national policies which the spread of multinational firms will require, comparable to the studies which approach this same question from the viewpoint of integration by foreign trade. Nor is there any major empirical study on such important specific topics as the effects of transfer pricing practices on tax revenues. In the area of short-run stabilization policy, however, a recent study is fairly encouraging on the question of policy implementation. It covered the period 1951 to 1962 when Canada was on a flexible exchange rate, with some additional work since then, and suggested two conclusions. The first is that autonomous changes in capital flows were accommodated fairly easily by corresponding changes in the current account, and did not require major policy adjustments or major changes in the rate of capital formation out of domestic savings. Direct investment required much less adjustment in the balance of payments than did portfolio investment, and under average conditions was fully accommodated through automatic income adjustments. The study also suggests that foreign capital flows do not so much alter the ability of a country

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like Canada to pursue independent stabilization goals; rather, they give more leverage to some types of policy and less to others, thus affecting the manner in which policy instruments can be used to achieve these goals.2s Earlier it was noted that one can distinguish in principle the effects on independence of the spread of direct investment firms as such from the attempt by the government of the home country to exercise sovereignty over subsidiaries in the host country. There have been a series of situations in the past fifteen years where United States law has been interpreted as extending to American-owned subsidiaries in Canada and elsewhere. These include regulations under the United States Trading with the Enemy Act which, by threatening to levy penalties on the parent, prohibited all trade by such subsidiaries abroad with North Korea, North Vietnam, Cuba and China. Canadian law included no such general prohibition, although strategic goods were not exported to them. Exemptions could be secured from this prohibition on a case by case basis but little is known on how this worked in practice. These regulations have now been substantially relaxed in the case of China, but not the other three countries. provided the transactions d o not involve strategic goods. There has also been some relaxation on trade by subsidiaries with Eastern Europe and the Soviet Union. There have been similar problems in the area of United States anti-trust law, whicb has on occasion been interpreted to apply to subsidiaries abroad because of the effects of the latter on United States trade. Some of the balance-of-payments guidelines of the United States government have been interpreted by some writers as bordering on extra-territorial extension of law. In each of these cases there is a United States. as well as Canadian, interest. On occasion, also, the effect of the United States policy may even be beneficial to Canada economically, as with some anti-trust decisions. Nevertheless, there is a serious problem of erosion of sovereignty for a host country if it fails to assert the principle that its laws, regulations and policies take precedence over foreign insofar as its residents are concerned. It will be noted that the problem arises not because of foreign direct investment as such. but because of the unilateral extension of law abroad through the international firm, which then finds itself caught between two sovereigns with different laws or policies. It is a problem of inter-governmental relations, and the optimal solution involves inter-governmental negotiation and agreement. The Canadian government in particular is well placed

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to launch such proposals, and there are some precedents in international or bilateral law which might be helpful. The field of competition policy might be a good place to start. Meanwhile, few issues are as likely to jeopardize the future of direct investment, at least in Canada, for these types of issues dramatically confirm the view that the presence of such firms directly limits sovereignty and serves as a vehicle for imposing the values and policies of foreign governments on host countries.26 A phenomenon as widespread as multinational corporations inevitably becomes bound up both with the question of the social and political consequences of large corporations and the larger range of issues in the field of Canada-United States relations. When one state is much more powerful than the other and is a major world power as well, terms such as inter-dependence are often likely to take on a one-sided meaning; one state has more of it than the other, and more than it wants on occasion. Here we are at the heart of the Canadian dilemma - the ties through investment, trade, communications, military alliances, population transfer and in many other ways to the powerful and restless giant to the south. I do not have a handy panacea on how to deal with the complications of this relationship, which will always challenge our ingenuity. I would suggest that when certain larger issues are linked closely to foreign direct investment there is likely to be considerable mis-specification. One example noted earlier is the attempt to link foreign firms to the production of what some regard as socially undesirable commodities, or to private wants at the expense of public sector spending. No one would deny that such corporations transmit or create certain kinds of wants, but so do many other processes which involve no direct investment. Another example is the view that such firms may be incompatible with a high degree of planning, and of course, with state ownership, both of which would tend to integrate a firm more fully within a country rather than integrate an industry internationally. Direa investment firms appear to co-exist with varying degrees of planning, but let us grant the point that direct investment as now generally conceived is certainly more compatible with a capitalist than a socialist orientation to enterprise. This leaves a prior question, however, for the difficulty of controlling such firms in a more highly planned society cannot be treated as both necessary and sufficient evidence of the undesirability of such firms or the desirability of more direct planning. We are not even in a position yet to know

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how far it is possible to deal with the problems created by such firms simply by more active and effective use of present instruments of policy, applied either nationally or internationally. What is more likely to determine the fate of direct investment is the kind of monetary and trading system one envisages for the future. Short-term instability in the inflow of long-term capital can probably be handled to some considerable degree by new approaches to conventional policy instruments, as noted earlier. Whether host countries would be willing to live with the economic and political costs to them of major sporadic attempts by the United States government to regulate the capital outflow, the operations of subsidiaries abroad, or the trade balance in particular, is quite another matter. That kind of approach to direct investment, coupled with independent attempts by host countries to improve the social return from it or otherwise regulate it, is likely to be more restrictive of foreign direct investment than the kinds of concerns just noted. An important point about the political and social aspects is the uneven effect of foreign direct investment on private groups within the host country. This may help explain some types of policy responses to direct investment, particularly those which prevent its competitive effects and perhaps those which attempt to secure some of the economic rents for domestic investors. The most convincing general long-term result of more direct investment is that the real wage rate will rise given the addition of capital and the improvement and spread of technology. Given some degree of competition with domestic owners or other subsidiaries, the benefit will come in part through lower prices and improved products. These gains. of course, might be taken in terms of population increase or employment opportunities, depending on such matters as immigration policy and the extent to which technology is labour-saving. Domestic owners of capital and suppliers of technology (i.e. high-skill labour) may gain to the extent they are complementary to foreign-owned firms and to the extent that capital formation and national income have risen. But domestic owners of capital and suppliers of technology may lose if they are competitive with foreign-owned firms, since the presence of the latter can require them to face higher wages rates, lower market prices or a reduced share of the market. Where these competitive effects are not the likely ones but entry to an industry is barred for a time, potential domestic entrants lose in other ways. Moreover, foreign subsidiaries are likely to

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cause further resentment among local capital owners because of their evident dislike of minority share issues, i.e. their unwillingness to share the quasi-rents which are a return on their knowledge or on their market power.27 The effects on the demand for senior personnel are less clear. Foreign investment increases the scope for employing such persons directly and in some cases in the affiliates abroad, and supplies managerial and technical training which may subsequently spill over into the economy. What is also evident in the host country is that some significant percentage of the most senior positions in the subsidiary are filed by nationals of the parent company m o r e so in Canada, incidentally, that in Australia and the United Kingdom.28 All of this produces significant group differences in views on the effects of direct investment, and on policy proposals which might curb such investment. Significant regional differences also occur, and for similar reasons. The low-income regions, such as most of the Maritimes, eastern Quebec and northern Ontario are unable to compete with the more developed parts of the country for capital and technology. Since they have fewer alternative sources of jobs and tax revenue than other parts of Canada, they tend to view with suspicion any measures which might further reduce their access to these. There are also a considerable number of persons in eastern and western Canada. and not only in Quebec, who appear to be almost neutral in their attitudes to direct investment from Ontario and direct investment from abroad.29 A policy which reduces the inflow of foreign capital and technology -and does nothing to substitute for it -may well shift income away from labour and to domestic owners of capital and professionals. One of the studies noted earlier suggests that, if withholding taxes on income paid abroad are raised so that Canada relies entirely on domestic capital, and assuming full employment can be maintained, the rate of return for domestic savers will rise 40 per cent while the real wage drops 17 per cent.10 Restrictive policies might also tend to widen the already wide and persistent regional income differentials in Canada. These effects on personal and regional income distribution can be offset in principle by tax and transfer policies. Whether they could be fully offset in practice is a complicated question, as recent Canadian experience with both tax and transfer policies suggests. The other critical assumption is that nothing is done to substitute for the capital or technology to which access is

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restricted, or to compensate for any other losses such as marketing connections. Of course, some substitutes would be found abroad or created at home, with benefits and costs which are unclear as noted earlier. While it is desirable to find or develop substitutes for some types of direct investment which appear less costly in economic and political terms, some questions about the political process by which decisions of this kind are made raise some doubts that this will be the most probable path for policy. There are other and perhaps easier ways to reconcile group differences to yield agreed policies, especially in a setting where some become convinced that national survival itself is at stake. Breton and others have suggested a theory of the economics of nationalism which helps explain how group differences are reconciled to yield agreed policies in circumstances such as those described here." In essence, nationalism is regarded as a collective consumption good which yields both general and particular benefits. The general benefits accrue to all of those who derive psychic income from investment in nationalism. The particular benefits accrue to those who benefit directly by way of higher real income or better jobs (as well as deriving psychic income) from policies of economic nationalism. The particular beneficiaries, as already noted, tend to be in the higher income groups. The political process involves persuading those who lose economic income or jobs to accept the policies because their psychic income is increased. Most major policies will have some differential impact by groups, of course. Policies in an area as divisive as this one should give close attention to the effects on the policy objective of levelling up economic incomes and opportunities for Canadians. That issue, in my view, has had far more to do with the survival of the country historically than any issues raised by foreign direct investment." In noting this approach as an explanatory aid to certain types of policies I hope you will not infer that I favour it. On the contrary, national feeling and national self-interest ought to serve better ends than this particular form of protection for special groups, and national investment and regulation can yield higher real income and satisfaction where social and private costs or returns diverge. And that is true of both domestic and foreign corporations in Canada. One of the heavier costs of economic nationalism is the way in which it diverts public attention from such issues, focusing it on multinational corporations and

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encouraging policies which will have little or even negative effects on the more important issues. Conclurions

From the viewpoint of the higher-income host country, a large multinational presence in the corporate area brings both benefits and costs, either actual or potential. There are likely to be net economic benefits, with the size depending on how well domestic policy options are exercised in tax policy, competition or regulation. Some other forms of access to international technology may be less expensive economically. and will certainly create less political tension. It is difficult to know the types of industries and situations where this is likely to be the case given present knowledge of the consequences of splitting the package of inputs which come over time with direct investment, and the various possible mechanisms for international transfer of such inputs. The quality of the domestic policy and private entrepreneurial response is the other critical determinant of an outcome where less or little direct investment is specified. Indeed, it is suggested that many of the problems allegedly associated with multinational corporations are not, in fact, due to them. The term has become a catch-all for the problems of control of the large corporation, the failures of domestic policies in correcting abuses of the market system, and a protest against a particular life-style. Canadian policy is an object lesson in this respect, both for the inefficiency and excessive foreign direct investment which Canada's industrial policies have encouraged and for the failure to encourage a stronger capacity to undertake efficient ventures or to transmit knowledge from abroad in other ways. It is inevitable, and in some cases desirable, that host wuntries will attempt to improve the net gain from direct investment, in part by developing techniques to offset the bargaining power which such firms have because of location in several nation states. Some countries will have a high degree of public planning for other reasons, extended also to any direct investment firms. In other countries, I am doubtful that detailed administrative controls are either justified by the evidence of damage or likely to give clear improvements in national welfare given the problems of operating such controls and the state of knowledge of the subject. If I am correct in my view that the economic literature suggests such fimls are highly responsive over time to economic stimuli, and that the influence of ownershio as such is far less

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important than relative prices as determined by comparative advantage and by economic policy, then there are ways to influence such firms' policies far short of direct controls. This takes us to my final point. If one assumes that the host and home country can both gain from direct investment in the case of high-income countries, then independent policy approaches to the distribution of these gains are not likely to maximize the combined outcome. The same is likely to be true of independent policy approaches- to limit some of the disadvantages which accompany direct investment. Indeed, it is not difficult to see situations today across boundaries where unrestricted competition for direct investment or unco-ordinated regulation of it are diminishing the combined social return which might be expected from it. In this paper, I have restricted myself largely to a national framework. Ultimately, domestic policy in this and other respects depends on the extent to which one considers that an international setting for trade and investment and the resulting improvement of international resource allocation is also most likely to be conducive to the national interest. One does not have to accept the view of the unconditional supporters of direct investment, who regard it as nothing less than the basis for a new political world order, to suggest that binational or multinational policy approaches to some of the opportunities and constraints posed by such invatment would be in the national interest. Particularly if one believes that only a few of the criticisms of such firms may amount to mountains of evidence, some of the evidence consists of foothills capable of being ascended by governments, and all too many of the alleged shortcomings amount to nothing more than molehills. Foolnotes I . The scope of direct investment in Canada can be put briefly. Canada accounts for 29 percent of all United States direct investment abroad. Almost 80 percent of all foreign direct investment in Canada is from the United States. In 1969 between 24 and 29

percent of all business assets in Canada were in firms whose voting stock was controlled abroad, depending on whether 50 percent or 25 percent of foreign ownership is taken as constituting.control. Foreign direcl investment is highly concentrated in manufacturing. petroleum and gas. and other mining and smelting industries. where foreign control of capital amounted in 1967 to 57, 74, and 65 percent respectively (or 45, 60, and 56 percent respectively for

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2.

the United States alone). Such firms are much better represented among the larger firms: of the 556 corporations in Canadian nonfinancial industries in 1969 with assets of $25 million or more, fully 298 were foreign-controlled. See Statistics Canada, Canada's Inter national Investment Position 1926 to 1967, and Corporation and Labour Unions Returns Act, Report for 1969, hoth available from Information Canada. Ottawa. See Richard E. Caves, "International Corporations: The Industrial Economicv of Foreign Investment." Economics (February. 1971). on. 1-27. On the eeneral ooint.. see the classic statement of the effects of foreign d y r a investment in high-income host countries, G. D. A. MacDoueall. "The Benefits and Costs of Private lnvestmen1 from ~hroa;: A Theoretical Approach." The Economic Record, (March, 1960). Some suggestive empirical work is in 1. Dunning, American Investment in British Manufacturing Industry (London: Gwrge Allen and Unwin Ltd., 1957): and Donald T. Brash, American Investment in Australion Industry (Canberra: Australian National University PIS. 1966). Rudolph G. Pemer, "The Benefits of Foreign lnvestment in Canada. 1950-1956," Canadian Journal of Economics and Political Science (May 1966). pp. 172-83. The range of the contribution was from 8 to 20 percent with the higher figure more relevant to the extent that a significant part of technical prcgress is implemented by additions to capital stock. The estimate deducts Canadian investment abroad; the contribution of gross inflows alone would be greater. Philip A. Neher, "Capital Movement, Foreign Ownership and Dependence on Foreign lnvestment in Canada and British Columbia"; and John HelLiwell and JiUian Broadbent, "How Much Does Foreign Capital Matter?," hoth in B. C. Studies (Vancouver: Department of Economics, University of British Columbia, Spring, 1972), pp. 13, 31-42. Rates of return for United States direct investment in Canada. measured as net earnings as a percentage of hook value, were 8 percent in the late sixties, having declined from 10.7 percent in the early fifties. These are well below rates of return for United States direct investment elsewhere. Some serious qualifications must be attached to such figures, including the d i f f d t y of determining both the types of returns and the capital base in internationally integrated enterprises. See Donald T. Brash, "United States Invstmen1 in Australia, Canada and New Zealand," in. Peter Drysdale, (ed. Direct Foreign Investment in Asia and the Pacific (Canberra: Australian National University Press, 1972). pp. 95-136. S. H. Hymer in particular put early and major emphasis on industrial organization as an approach to direct investment. See his The Intermtional Operalions of National Firms: A Study of Direct

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4.

5.

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6.

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Investment, M.I.T. doctoral dissertation. Cambridge, Mass.. 1960. 7. Caves, op. cir. 8. See the following by Harry G. Johnson: "The EfIiciency and Welfare Implications of the International Corporation," in Charles P. Kindleberger (ed.) The Internoliono1 Corporation (Cambridge Mass.: M.I.T. PRS, 1970); and "Survey of the Issues," in Peter Drysdale (ed). Direct Foreign Investment in Asiu and the Pacific. The Vernon thesis is discussed in his book, Sovereignty at Bay: The Multinational Spread of U.S. Enterprises (New York: Basic Books, 1971), ch. 3. For evidence on competition and productivity effects, see the sources listed on pp. 158-159of Vernon. 9. For export, imports and research, see A. E. Safarian, Foreign Ownership of Canadian Industry (Toronto: McGraw-Hill of Canada Ltd., 1966), ch. 9: for exports and imports, see B. W. Wilkinson, Canada's International Trade (Montreal: Canadian Trade Committee. 1968); for research see N. H. Lithwick. Canada's Science Policy and d e Economy (Toronto: Methuen Publications, 1969); ch. 4 and 5, For concentration, see G. Rosenhluth, "The Relation Between Foreign Control and Concentration in Canadian Industry," Cunadian Journal of Economics (February, 1970), p. 3. For the experience in other countries, see the sources noted in Vernon in the orecedine footnote. 10. For studies in'this ar& see H. C. Eastman and S. Stykolt, the Turifl and Competition in Canada (Toronto: The Maemillan Co. , Structure in of ~ a n a d a~ t d : , 1967); H. E. ~ " ~ l i s hIndustrial Canada's International Competitiw Position (Montreal: The Canadian Trade Committee, 1964); Economic Council of Canada, Scale and Specialization of Canada's Manufacturing industry (Ottawa: Oueen's Rinter. 1968):.. and A. E. Safarian. op. cit. ch. 7. 11. f o r a discussion with respect to licensing especially. see Jack Baranson "Technolorn Transfer Through the International Firm", Papers and ~rocee&~.s of the ~mer7can Economic Association (May 1970). p. 60. 12. Penner and Neher aooear to favour this assumntion. . . for examvle. in the studies cited aiove. 13. For this range of issues see the two articles by Johnson cited above. 14. For a defence of the direct approach and a discussion of policy approaches generally, see Government of Canada, Foreign Direct Investment in Canada (Ottawa, 1972). 15. Ibid. See also Kari Levitt, Silent Surrender: The Multinalional Corporation in Canada. (Toronto: Mamillan of Canada, 1970); where the argument is extended to the possible effects of economic dependence on the capacity for political decisions as well. The theme noted in this paragraph is an important but inadequately explored assumption in the literature on divesting foreign direct

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investment. See Albert 0. Hirschman, How to Divest in Latin America and Why, Princeton h a y s in International Finance, 1969. 16. Stephen Hymer and Robert Rowthorn. "Multinational Corporations and International Oligopoly: The Non-American Challenge," in Kindleberm. oa. cit.. DP. 57-91. The authors. it should be added, are c r s i d of the consequent spread of multinational corporations, partly bemuse of the limits which they see this placinn- on the scope foinational planning. 17. Rosenbluth, op. (it. 18. For the period 1951-1962as a whole every $1.00 of new direct investment from abroad was associated with $2.00 of additional domestic investment -a figure falalling to $1.50 in recession and rising to $3.00 in boom. See Richard S. Caves and Grant L. Reuber, Capital Tramfers and Economic Policy 1951-1962 (Cambridge: Harvard Universitv Rss, 1971). . cb. . 4. 19. Vernon, op. cit., p. 157. 20. See G. C. Hutbauer and F. M. Adle~. Overseas Manufacturing Investment and the Balance of Payments (Washington, D. C.: Government Printing OWce, 1968); and W. B. Reddaway and Associates, Efects of U.K. Direct Investment Overseas. Final Report (Cambridge University Press. 1968). 21. See Herbert Marshall et. al., Canadion-American Industry: A Study in Internoliono1 Investment (Yale University Press. 1936). p. 209. For a recent emoirical studv indicatine that Canadian tariff policy has had an irhpact on t i e choice Letween exporting to Canada from the United States and oroducine in Canadian subsidiaries, see Thomas Horst, "The Industrial ~&npmitionof United States Exports and Subsidiary Sales to the Canadian Market." American Economic Review, vol. 62 (March, 1972). pp. 37-45. It may be noted that other relatively simple measures, which @re heavily affected by the problem of identifying the return on direct investment, suggst that the Canadian capacity to produce, to export, and to service debt has at least kept pace with the considerable expansion of d i m investment. As a percentage of gross national product, for example, payments abroad of interest and dividends by all fims and governments (not just direct investment firms) have declined from 2.9 percent in the late 1920's to 1.9 percent in the late 1950's and the 1960's. As a percentage of sales of goods and services abroad they have fallen from 16 percent to 9 percent o v e ~the same period. 22. See Caves, op. cit. The discussion here focuses on the case where a primacy resource f i m is integrated with a parent abroad, rather than with a manufacturing subsidiary in Canada. 23. Vernon, op. cit. ch. 2. This chapter also reviews the extensive literature on attempts to control foreign investment in primary resources.

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24. See Horst, op. cit. 25. Caves and Reuber, op. cit. See also Reuber, "Foreign Investment in Canada: A Review," in Douglas Auld (ed.), Contemporary Economic Issues in Canada (forthcoming). 26. Cases involving home governments other than the United States are not unknown. These situations have drawn more protest in Canada than in other host countries, presumably because more national firms exist elsewhere which can undertake the business prohibited to the subsidiaries. For an analysis of this issue. see the Report of the Task Force on the Structure of Canadian Industry, Foreign Ownership and the Structure of

27.

28. 29. 30. 31.

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Canadian Industrj

(Ottawa: Privy Council Olfice, 1968). While there may be various reasons for this, one of the most general seems to be that the value of the subsidiary to prospective domestic owners is less than to the parent. For a discussion of this in the context of a theory of direct investment which emphasizes the minimization of transaction costs, see John McManw, "The Theory of the International Fi." in Gilles Paquet ed., The Multinational Firm and the Nation Slate (Toronto: CollierMacmillan Canada Ltd.. 1972). See A. E. Safarian, The Performance of Foreign-owned Firms in Canada (Montreal: Canadian-American Committee, 1969). ch. 2. See, for example, the Introduction by A. D. Scott to the issue of B. C . Studies, op. cit. Helliwell and Broadbent, op. cit.. p. 40. Albert Breton, "The Economics of Nationalism," Journal ofPolitical Economy. vol. 72 (August. 1964), pp. 376-86. See also Harry G. Johnson, "A Theoretical Model of Economic Nationalism in New and Developing States." Political Science Quarterly, vol. 80 (June, 1965), pp. 169-185. Other elites are involved, as Vernon has argued, op. cit., ch. 6. Government olficials may believe administrative control of business activity more dilficult to maintain. As noted earlier, those who a competing ideology understandably oppose the extension of the largest and often most successful examples of capitalism to their country. The issue becomes even more complicated if important elements of the media, whether for reasons of the psychic income of nationalism or because of competition or both, determine that they have a direct stake in the outcome. The debate on this subject in Canada is not uninfluenced by the fact that the national broadcastine susiem. the dailv newsoaoer with the lareest circulation, and the magazine with theiecond largest all generally warmly support economic as well as cultural nationalism.

circulation^

LIST OF CONTRIBUTORS

W. Andrew Axline is'an Associate Professor of Political Science at the University of Ottawa. Naomi Black is an Associate Professor of Political Science at York University. H. Edward English is on leave from the Department of Economics, Carleton University, and is presently serving as Director of the Centre of Canadian Studies, School of Advanced International Studies, Johns Hopkins University. James E. Hyndman is Minister-Counsellor with the Canadian Embassy in Moscow. John J. Kirton is a doctoral student at the Centre of Canadian Studies. School of Advanced International Studies. Johns ~ o ~ k iUniversity. ni Peyton V. Lyon is a Professor of Political Science at Carleton University. Claude Masson is Chairman of the Department of Economics, Lava1 University. John N. McDougall is a Research Associate at the Centre for Foreign Policy Studies, Dalhousie University. Maureen Appel Molot is an Assistant Professor of Political Science at Carleton University. Charles Pentland is an Assistant Professor in the Department of Political Studies at Queen's University. A. E. Safarian is Dean of Graduate Studies at the University of Toronto. Garth Stevenson is an Assistant Professor of Political Science at Carleton University. Gilbert Winham is an Associate Professor of Political Science at McMaster University. Gerald Wright is Vicepresident of the Donner Canadian Foundation in Toronto.