In the Statement of Principles for Economic Cooperation signed by Canada and the United States in October, 1950, the two governments agreed to coordinate the economic efforts of their two countries for the common defense.¹ It was also agreed that the optimum use should be made of the resources and facilities of both coun­tries. As this is the principle that should govern military procurement both in Can­ada and the United States, it is felt that it should form the background for any discussion on military procurement problems.

In May, 1950, the United States agreed to develop a program for reciprocal purchasing of military equipment in Canada up to $25 million for the fiscal year ending June 30, 1951 and this objective was later increased to $100 million.² On the accompanying table? (see Table 1) it will be noted that U.S. military purchases reached $84 million, which was not far off the American objective. Expenditures on radar, amounting to almost 40 million, formed a large part of this total, while 3 inch 50 calibre twin mounts accounted for another $23.6 million. An order for Arctic huts amounted to $5.3 million. In the ammunition and explosives field, U.S. purchases of picrite and practice bombs were around $3 million in each case.

Canada, on the other hand, put no ceiling on military procurement in the United States, and in the same period our purchases totalled $316 million (see Table 2). fi The main reason for this heavy volume of purchases was the Canadian Govern­ment's decision to standardize of U.S.-type equipment and in the beginning, a large part of this has to be bought in the United States. Equipment for two Army Divi­sions accounted for $110 million at the end of June, 1951, while another $130 mil­lion went into the F-86 aircraft program. Orders for Beechcraft came to $14 million and for A.A. fire control (T.33) amounted to $12.5 million. Provided our defence program continues as presently planned, it is not expected that this high rate of purchasing will be maintained indefinitely. Once the initial equipment with U.S.­types is completed and as we get into production in this country, expenditures of this kind should level off.

In considering the imbalance in procurement between Canada and the United States, as shown in the accompanying tables, there are certain factors to be taken into consideration. These figures show only orders placed by the two governments. Not included in the Canadian figures are orders placed in the United States by private firms that have defence contracts from the Canadian Government. Nor do the figures show any of the Canadian orders placed through agents in Canada of U.S. firms. While the degree of under-statement of Canadian defence orders in the United States cannot be estimated, it is no doubt of substantial proportions.

The U.S. figures, on the other hand, are based on the records of the Canadian Commercial Corporation, which has acted and continues to act as the procurement agency for the U.S. Armed Services in Canada. As the Americans point out, these figures do not reflect heavy U.S. expenditures in Canada on basic raw materials such as copper, nickel, lead, etc.

As was to be expected when starting a new arrangement, some operational diffi­culties were encountered during the first year of reciprocal defence procurement. These difficulties have been somewhat greater in the case of Canadian firms obtaining sub-contracts from U.S. prime contractors than has been the case in direct government orders. However, one case in which the Canadian government has had some trouble was in connection with orders that involved obtaining per­mission to manufacture U.S.-type equipment in this country. This permission from U.S. patent holders and from U.S. authorities to make certain U.S. types of war stores was, in some cases, somewhat slow in being granted. Once manufacturing rights were cleared, there was on occasion further delay in obtaining drawings, specifications and production data. In this instance the problem was largely a mechanical one, due to the bulk and number of these items, making it difficult, for example, to gather together the several hundreds of drawings sometimes required for one contract. This situation was, however, called to the attention of the U.S. Secretary of State by the Canadian Minister of Defence Production. Since then, great improvement has been noted, although detailed information needed in the production of a number of items is still lacking.

Another problem has been that of customs duties on defence articles. This is a problem which has affected the sub-contract picture, as direct procurement by the U.S. government is allowed to enter the United States duty free. Emergency purchases of war material, if imported in the name of the one of the three Secretar­ies of the Armed Services or of a few other government agencies, can enter on a Duty Free Entry Permit. All other imports of military items into the United States are subject to duty at full value of the finished article and not at the value of the imported component (i.e. the value added in Canada). This has tended to discour­age the letting of sub-contracts outside the United States. In Canada, all imports of war materials are subject to full duty.

Discussion on the subject of customs relaxation has taken place between offi­cials of the two countries. Last April, Canadian officials advised the Chairman of the U.S. Munitions Board that they were prepared to recommend to the Canadian Government proposals for reciprocal free entry into the two countries of certain military end items, provided the ultimate purchaser was the Government of the United States or the Government of Canada. The suggested list was the first seven items of the U.S. list of D.O. priority ratings, viz., aircraft, guided missiles, ships, tanks and military vehicles, weapons, ammunition, and military communication equipment. The Americans indicated general agreement with the broad conclusions arrived at in Ottawa but nothing decisive has been done to date, although it is understood that the Americans are working on the problem. In a recent meeting in Washington, it was stated that an enabling amendment to the existing legislation was being drafted. It is understood that any steps toward the elimination of duty would have to be reciprocal.

Canadian firms trying to secure sub-contracts in the United States have also experienced some difficulties under the "Buy American" Act. Under this Act, all government purchases of supplies for public use in the United States, its posses­sions and territories, have to be made in the domestic market. There are, however, certain exceptions to the Act, which permit purchases abroad if it is inconsistent with the public interest to buy in the domestic market; if it would unnecessarily increase the cost to do so; or if the materials are not available in the United States. In such cases the Secretaries of the Departments concerned have to grant the excep­tion. In the operation of the reciprocal purchasing program, this procedure has been found to be somewhat cumbersome and efforts are being made to have the Secre­taries' authority delegated down to local procurement officers. So far this has only been done in the case of the Air Force, where the authority has been delegated to Wright Field. It has also been found that there is lack of understanding on the part of local procurement officers as to the procedure involved in applying for exemp­tion under the "Buy American" Act and an unwillingness to consider the placing of sub-contracts in Canada. Efforts are being made in the Washington office of the Department of Defence Production to deal with this problem and to secure more definite instructions with regard to U.S. military procurement in this country.

The outlook for reciprocal military purchasing in the coming fiscal year is, on the whole, more promising. General Marshall announced recently the authorization of up to $300 million in purchases of military supplies in Canada during the present fiscal year. Under a directive issued on June 29th by the Acting Secretary of Defense, waivers of the restrictive features of the "Buy American" Act will be granted up to $100 million for each of the three Armed Services. Another impor­tant step is the decision to reactivate and expand the Joint Industrial Mobilization Committee. It is hoped that through closer personal contacts of sub committees at the working level many of the difficulties experienced in the first year of operation will be ironed out and that defence orders placed in Canada will be increased.

¹ Voir/See Volume 16, Documents 775-795.

² Voir/See Volume 16, Documents 771 and 778.