1. In view of the difficulties arising from the increasing volume of low-cost imports, especially from Japan and more recently Hong Kong, the fact that these difficulties will probably be intensified, and the concern expressed by Ministers about the problem, the Interdepartmental Committee on External Trade Policy has studied the matter and makes the following report and recommendations.
2. In the past five years imports of a variety of manufactured goods from Japan have been increasing so rapidly as to cause serious difficulty for a number of Canadian secondary industries. On the other hand, it must be recognized that Canadian consumers have benefited substantially by these cheaper imports, and this has been particularly noticeable among some of the low income groups and areas. Although it is hard to measure, it is likely that the loss in employment in particular lines, competing with low-cost imports, has been partially offset by increased employment in other branches of the economy whose products are bought in larger volume by Canadian consumers as a result of savings realized through purchases of low-cost imports. Also, such low-cost imports, directly and indirectly, have had the effect of keeping down the cost of living and therefore wages and costs of production.
3. The normal instrument of protection of Canadian industry is of course the customs tariff. For a number of products, however, rates of duty high enough to have a significant impact on imports from several Oriental countries would have a prohibitive effect on imports from other countries. The social structure in Japan is such as to make available to industry a large and docile labour force willing to work hard for extremely low wages. For somewhat different reasons the same phenomenon is also experienced in Hong Kong. When this inexpensive labour supply is combined, as it is in Japan and Hong Kong, with plentiful modern capital equipment, costs of production in labour-intensive activities are inevitably very low. The existence of this unique problem is recognized generally in the western industrial countries and in one way or another they all take some steps to deal with it. It has also been recognized as a problem by the GATT, which is now studying it and considering possible lines of solution. However, the course of the study in the GATT so far does not give any encouragement to hope for a general solution at any early date.
4. Canada has important reasons to ensure that economic relations between the West and Japan do not deteriorate to the point where Japan will be forced to turn to Communist China or the Soviet Union for closer trade and economic ties. The difficulties which arose in the 1930’s following the breakdown of normal trade relations between many Western countries and Japan are, of course, examples of the serious dangers that could arise from trade isolation or retaliatory policies.
The Scope of the Problem
5. Canada’s two main sources of troublesome low-cost manufactured imports are Japan and Hong Kong, principally the former. Since 1953 (the year before the Trade Agreement between Canada and Japan was signed) exports from Japan to Canada have increased from $14 million to $103 million in 1959, with particularly sharp increases in the most recent years. Among the industrial nations Canada has become the largest per capita buyer of Japanese goods; larger by a small margin than the United States, but five times above the thirteen European countries (taken together) which comprise the inner Six and the outer Seven.
6. The difficulties which have occurred are due not so much to the general level of Japanese shipments as to their concentration in sensitive lines. The Japanese have said that it is in their own interests that the growth of their exports to Canada should proceed on an orderly basis. The Canadian authorities, for their part, have agreed that an increase of 5 to 10 per cent in a good year, depending on the product, and on whether the Canadian producers were experiencing difficulties, would constitute an orderly rate of growth. The Japanese have since maintained that no such specific commitment has been made by them.
7. It was foreseen that problems of this kind might arise in trade with Japan. When the Trade Agreement was negotiated in 195431 it was accompanied by an Exchange of Letters reserving to Canada the right to determine values for ordinary and special (i.e. anti-dumping) duty purposes on imports of Japanese goods in the event of serious injury or the threat of serious injury to Canadian producers. This right has not yet been exercised. The Canadian Government has preferred so far to rely on export restraints applied by Japan. These restraints were at first imposed voluntarily on exports of a few products to Canada, following their imposition on exports to the United States. In the past two years they have been extended substantially. This was done after strong representations by the Canadian Government following serious flooding. In many cases the export quotas have been set at levels negotiated between the two Governments.
8. In spite of these negotiated export quotas which now cover a preponderant part of Japan’s textile exports as well as several non-textile items, the problems continue to get more difficult. In 1960, in textiles, shipments of several items which are not under quota have been increasing significantly. Outside the textile field there have been rapid, disorderly increases in a number of products, for example, electronic tubes, transistor radios, and buttons. It has become increasingly difficult to persuade the Japanese to deal quickly with problems as they arise, and to adopt adequate export restraints.
9. Moreover, there has recently been a rapid increase in imports from Hong Kong of several kinds of textile product which Japan has placed under export control. This tends to undermine the protection the Japanese controls would otherwise have afforded to Canadian producers. The Japanese are naturally concerned about the tendency of Hong Kong exports to benefit from the existence of Japanese export controls.
Canadian Exports to Japan
10. Solutions to deal with the low-cost import problem should, if at all possible, be such as not to impair the access to Japan for Canadian exports. After the United States and the United Kingdom, Japan is Canada’s third largest export market. Total exports have fluctuated but have displayed a generally rising trend from some $97 million in 1954 to about $140 million in 1959. Exports in 1960 are likely to exceed $160 million. The largest item by far is grain and flour, followed by oilseeds, pulp, aluminium, iron and metal ores, asbestos, coal, chemicals and a number of others.
11. Formally, Japan is in balance of payments difficulties and maintains close control over imports from all sources. Imports are “planned” on the basis of estimated availability of foreign exchange and are subject to licence, although some 700 items are readily licensed under the “automatic approval” system. Within the last two years, Japan’s economy has grown stronger and her balance of payments position has greatly improved. This growth appears to be soundly based and the time has come when Japan should relax controls in imports, particularly on those products which Canada sells. However, Japan still retains a highly effective machine for regulating imports including state trading in grain. If Japan decided to retaliate against an action by Canada it would have methods ready at hand. There are pressures now in Japan for higher tariffs on certain important items: so far these have been resisted.
Possible Courses of Action
More rigorous insistence that Japanese and Hong Kong exporters meet the normal requirements of our Customs law in respect of value for duty.
12. Japanese exporters have not been co-operative in furnishing the home market information required for a proper determination of the fair market value. Where this information is not available, there is provision under Section 40 of the Customs Act for the Minister of National Revenue to prescribe the manner of determining cost of production, gross profit or fair market value. This section is applied, where required, against exporters from other countries through the device of advancing invoiced values by a certain percentage, which is subsequently withdrawn when information is supplied to enable the determination of values envisaged by the Customs Act.
13. Members of the Committee are of the opinion that the use of this Section is justified against Japanese exports, including exports subject to Japanese voluntary controls. This course is followed with regard to other countries trading with Canada and there is no reason why Japan should be given preferred treatment. It is suggested, however, that the Section should first be applied to one or two products on a trial basis to bring forcibly to the attention of Japanese exporters and to the Japanese Government that full information must be furnished to meet the requirements of our Customs Act. While this action will enable the Department of National Revenue to ensure that the valuation provisions of the law are met, it will not by itself solve the problem of low-cost imports. Even when we get accurate information about fair market values in Japan we can expect these to be low because of the fact that Japanese costs on these fields are much lower than ours. There might of course be some deterrent effect on imports into Canada arising out of the threat of advances over invoiced values.
14. Similarly, in the case of Hong Kong, a more rigorous approach should be adopted in respect of the valuation provisions of our law. However, before applying Section 40 of the Customs Act, values investigations should be intensified, preferably through the use of a Customs investigator.
15. The foregoing course should be followed as part of the normal administration of our Customs law in the ordinary course of trade.
16. In the category of exceptional measures, there would appear to be three possibilities worth examining: export restrictions imposed by the exporting country, the application by Canada of fixed values for duty, and the application by Canada of quantitative import controls.
Exports Restrictions Imposed by the Exporting Country
17. Since Japan prefers to rely on the system of so-called “voluntary” export controls, this is the course which would most likely avoid retaliation against Canadian exports. There is therefore a prima facie case for relying on this to the extent that it proves capable of meeting our needs. If this system is to meet our needs, however, the Japanese will have to be willing to react more quickly and more effectively to Canadian requests.
18. As regards Hong Kong, it is most doubtful that any system of “voluntary” export controls will be possible.
19. In the event of material injury or threat of injury to Canadian producers there is provision under Section 40A(7)(c) of the Customs Act for the Governor in Council to authorize the Minister of National Revenue to determine the value for duty or to prescribe the manner in which such value shall be determined. Moreover, as noted above, the exchange of letters accompanying the Agreement on Commerce between Canada and Japan, signed in 1954, reserves Canada’s right to determine values. It provides that in determining the level at which such values shall be established, Canada shall take into account the prices of like or directly competitive products being imported at that time from other countries. The Japanese Government has taken the position that the GATT, rather than the exchange of letters, in fact governs trade relations between the two countries, and that failure to resort to GATT techniques could be challenged by the Japanese.
20. While favouring the continuation and intensification of the Japanese system of export controls, the Committee is of the opinion that the Canadian Government should stand ready to fix values for duty in cases of injury or threatened injury where the Japanese decline to act promptly or effectively.
21. The levels at which values should be fixed will present problems. For the sake of our export interests and the interests of Canadian consumers it is not desirable that the values should be such as to amount to a virtual embargo on the products in question. Yet they must be restrictive enough to provide adequate assistance to the affected Canadian producers. It will not be easy to find the values for a variety of goods which will effect an appropriate balance between these two requirements.
22. Assuming that Hong Kong cannot or will not apply export controls, the fixing of values for duty would appear to be the only device available to Canada under present legislation. In order to prevent Hong Kong’s exports from undermining the Japanese controls on exports to Canada, the Committee expects it will soon become necessary to fix values on certain imports from Hong Kong. This will raise an awkward problem. Our trade agreement with Hong Kong is the General Agreement on Tariffs and Trade (to which Hong Kong is a party through the United Kingdom). The GATT escape clause in respect of damage or threat of damage (Article XIX) requires that any defensive measure be non-discriminatory. On a strict interpretation of this we would have to apply the same values on imports of these items from Japan even though Japan had already co-operated by limiting its exports to an agreed figure. This would clearly be unreasonable, and we would therefore have to try to persuade Hong Kong that the measures Japan was taking were the equivalent of the measures we were applying against Hong Kong.
Quantitative Import Restrictions
23. This is a drastic measure and the Committee would not recommend its adoption at this time.
24. It may be accepted that the use of quotas allows fairly precise regulation of quantities actually imported. As compared with the application of fixed values over a wide range of items, import controls could be used more precisely to provide the degree of protection required while admitting reasonable quantities of sensitive imports. In relations with particular countries, import controls make it easier to strike an appropriate balance between the need for protection, and the need to provide for a reasonable volume of imports from important trading partners.
25. On the other hand, the disadvantages of employing quantitative restrictions are imposing.
(a) They would require new legislation. The Government would doubtless experience difficulty in confining the use of controls to imports from low-range countries. Canadian industries which experience competition mainly from Europe or the U.S. (e.g. automobiles) would feel as entitled to protection of this kind as industries which experience competition mainly from Asian countries.
(b) The widespread use of quotas on imports would prejudice our efforts to maintain and further promote non-restrictive terms of access for Canadian exports to important markets.
(c) The application of quotas to a few countries would raise the complaint of discrimination and would lead to serious difficulty in our commercial and political relations with Asian countries.
(d) The Government might well be drawn into a system of “rationing” the imports under quota. At a minimum, extensive machinery would be required to determine what importers would be licensed to import items under quota, and what volume of such trade could be conducted by individual firms.
26. The Committee feels it should point out that this problem of low-cost imports is likely to be a permanent one, increasing in scope and intensity. As time goes on it will be necessary for the Government to decide in more and more cases what low-cost goods from Asiatic and other developing countries are to be allowed to enter Canada in large volume over our ordinary tariffs, which are not a serious barrier to them. If the gains from trade are to be obtained both in export markets and cheaper goods for Canadian consumers, it will be necessary in due course for the Government (or some agency designated to act for it) to decide which Canadian industries are to be protected against such low-cost competition and in which lines, and which industries are to be allowed to succumb to such competition, either quickly or slowly. The Committee has not endeavoured in this paper to deal with this difficult problem of policy.
Procedures for Dealing with Representations Concerning Low-Cost Import Competition
27. Apart from decisions as to what actually might be done in present circumstances, there arises the question of whether existing procedures for examining and dealing with requests from Canadian industry for relief from oriental competition are, in themselves, adequate. Under present procedures requests are directed to the Department of Finance where officials study the request, ask for such additional information as may be available, make a judgment (having regard to the export and consumer interests as well as the problems of the Canadian producers) and submit a recommendation to the Minister of Finance. Once the Minister has made a decision the officials (and in some cases the Minister himself) negotiate with the Japanese. Officials in Finance keep other Departments informed of what they are doing and invite their participation at crucial stages in the negotiations.
28. The advantages of this procedure are:
(a) it is relatively speedy, and
(b) the officials concerned can draw upon the special knowledge of the Tariff Section in Finance in respect of the situation of the industry involved.
29. The disadvantages are:
(a) it imposes a heavy burden on the Minister of Finance and on a few officials in Finance who have many other responsibilities and duties;
(b) since the procedures are private it is not obvious to the general public that all interests have been taken into account;
(c) it is not possible with present staff to carry out as full an analysis of each problem as might be desirable;
(d) it is not easy to convince the Japanese that their case has had a full and fair hearing and in particular that a fair assessment of damage to Canadian industry has been made.
30. In the light of the disadvantages in the present system, consideration has been given to what other procedures might be adopted instead. One possibility would be to refer each request to the Tariff Board. This would have the advantage that all parties concerned, including the Japanese, would have opportunities to submit their views and would recognize that an objective study of the problem has been made. On the other hand, the procedures would be slow even if the Tariff Board’s agenda were not already over-crowded. Moreover, the combination of publicity and slowness of procedure would probably give rise to pre-emptive buying on the part of importers which would aggravate the existing problems. In any case since the Board already has as much work as it can carry out in the foreseeable future, it is considered impracticable to pursue the suggestion that the Tariff Board, as at present constituted, might take on this additional work.
31. The possibility that a new branch might be added to the Tariff Board to examine these requests has been considered. The advantage of this would be that an existing institution was being used, an institution which already had experience in organizing public hearings and analyzing submissions. Although additional staff would be required (in addition to one or more new members of the Board) the new staff could presumably be supervised by existing staff or at any rate initiated by them into the Board’s methods of analysis. On the other hand, there would still be a number of disadvantages. The procedures could still be expected to be rather slow since organized public hearings would be involved. Hearings would be held in public and the danger of pre-emptive buying would exist under this system as much as under the first suggestion.
32. A third possibility is the setting up of a new agency which might carry out its consultations and investigations either in public or in private. One possibility might be that the “agency” would consist of one experienced person of recognized stature who might examine problems as they arose but might not necessarily have to devote full time to this. While this scheme would be free from some of the objections to the first two proposals, its success would be heavily dependent on the quality of the individual selected. Further, if its reports were made public they might prove embarrassing to the Government, while if they were kept confidential the Government could not use them in support of its decisions.
33. A fourth suggestion is that a small interdepartmental committee of four or five senior officials from the Departments concerned might be established for this purpose and given a small full-time staff. The Chairman would be an officer designated by the Minister of Finance. The members of such a committee, particularly the Chairman, would have to be prepared to give priority to this work over departmental work and would probably have to devote considerable time to it at least initially. The committee might report through its chairman directly to the Minister of Finance. Once a course of action on a particular application had been approved, the committee could establish a small negotiating team from among its own members to negotiate with the Japanese on the basis of this decision. (It should be noted that none of the three earlier suggestions would themselves provide any alternative to the present system of having one Department carry most of the negotiating burden.) Such a committee could receive deputations, analyze data, consult other interests involved and so forth, but in private rather than in public. It would be useful also for the Committee to provide an opportunity for an applicant industry to make its case in the presence of Japanese representatives so that there would be confrontation of the various interests. One difficulty would be to obtain from the Departments concerned the service of really senior and experienced officials for a function which would involve so much of their time.
34. On balance, it is considered that the fourth suggestion merits consideration as an alternative to the present procedures.
35. In the light of the foregoing, the Committee is of the opinion that the following measures should be taken at this time to alleviate the present difficult situation and recommends accordingly.
(a) From now on, Japanese exporters should be required to furnish information to Canadian customs authorities in accordance with Canadian law so that a proper determination of the fair market value of their products can be made. If they do not, Section 40 of the Customs Act should be applied. Initially this step should be taken on a trial basis to see what the Japanese reaction is likely to be. Similar measures should be taken in respect of Hong Kong.
(b) The Japanese should be pressed to continue the existing system of voluntary restraints, and make it more effective, in cases where their exports are clearly having a disruptive effect in Canada.
(c) If the results of these measures are inadequate and imports of one product or another continue to flood in from Japan and cause material injury, fixed values should be applied in individual cases as necessary in accordance with the provisions of Section 40A (7)(c) of the Customs Act. If the Japanese adjust their volume of exports of a particular product, fixed values should be withdrawn.
(d) If Hong Kong cannot apply export restraints and imports from Hong Kong threaten disruption of the Canadian market for certain products, fixed values should be adopted as necessary. These values need not be applied on the same products from Japan if Japan is controlling exports of these products at an acceptable level. The matter should now be raised formally with the United Kingdom authorities.
(e) Consideration should be given to the possibility of establishing an interdepartmental group to receive and consider representations concerning low-cost import competition and to report thereon to the Minister of Finance and, when the question of fixed values arises, to the Minister of National Revenue, who would report to Cabinet.
31Voir vol. 20, chapitre VII, 2e partie (b); Recueil des traitÚs du Canada 1954, no 3.
See Vol. 20, Chapter VII, Part 2 (b); Canada Treaty Series 1954, No. 3.