On May 22 Cabinet had before it a memorandum from the Minister of Finance dealing with Government Purchasing Policy. Among other things this memorandum drew attention to the fact that in the communiqué⁶⁵ issued after the U.K.-Canada economic talks in October, 1957 Canadian Ministers had undertaken to call for a review of the purchasing arrangements of Crown Corporations and other Government agencies with a view to encouraging purchases from the United Kingdom whenever this is practical and economical of goods imported from non- Commonwealth sources. After considering this memorandum Cabinet agreed that the Department of Finance be directed:

1. to prepare, as quickly as possible, in consultation with other departments concerned, a redraft of the directive of 1950 on Government Purchasing Policy with recommendations as to its effective implementation; and

2. to advise, with respect to Crown corporations, on ways and means of giving emphasis, short of direction, to the desirability of purchasing goods produced in Canada, the United Kingdom and other Commonwealth countries.

2. Pursuant to these instructions, meetings were held on May 27 and June 25 , attended by officials of the Departments of Public Works, Defence Production, Trade and Commerce, Transport, External Affairs, Finance, and the Privy Council Office, to discuss the question of redrafting the 1950 directive. The attached draft was prepared in the light of these discussions. Copy of the 1950 directive is also attached.

3. The revisions which have been made to the previous directive are designed to:

   1. make the intent of the directive as clear and precise as possible;

   2. classify countries as Commonwealth and non-Commonwealth rather than soft currency and hard currency;

   3. establish a clear preference in favour of Commonwealth as against non-Commonwealth countries;

   4. reduce, as much as possible, the disadvantages in matters related to tendering which areexperienced by overseas Commonwealth suppliers because of the fact that they are not as conveniently located as their competitors in North America;

   5. include Crown Corporations within the terms of the directive, with the exception of thoseengaged in competitive activities;

   6. recognize that with respect to purchases made for the defence programme other directives based on strategic considerations may take precedence over this directive;

   7. include Korean war veterans within the terms of the standard clause applicable to government contracts.

4. Under the terms of the 1950 directive (see Appendix I) Canadian suppliers were given a 10 percent preference over suppliers from hard currency countries, e.g., United States, but were put on a basis of equality with suppliers from soft currency, countries, e.g., United Kingdom, European countries and Japan. In redrafting the directive it was generally agreed that the soft currency, hard currency classification which had been introduced as a means of helping to alleviate the serious exchange crisis which had arisen in 1949 was now more or less obsolete. It seemed appropriate, therefore, in view of the Government's policy of encouraging the expansion of trade within the Commonwealth to have the preference apply in favour of Commonwealth countries rather than soft currency countries and against non-Commonwealth countries rather than hard currency countries.

5. In short, the directive has been redrafted so as to put Canadian and Commonwealth suppliers on a basis of equality; all others would be at a 10 percent discount. As compared with the intent of the 1950 directive this would improve the position of Canadian and Commonwealth suppliers vis-à-vis the soft currency countries outside the Commonwealth and demote the latter into a position of equality with the United States. It leaves Canada-U.K.-U.S. relationships unchanged. The draft new directive appears as Appendix II.

6. During the discussions which preceded the redrafting of the directive it has been apparent that, in addition to the percentage preference, there are a number of other factors which exert an influence on government purchasing policy. For example, delivery problems, specification differences, etc. affect adversely the ability of U.K. suppliers to tender successfully in competition with American. Other circumstances, such as Canadian-U.S. joint defence strategy, the general convenience of doing business in North America rather than overseas, and domestic unemployment problems also affect purchasing policies and often produce a situation in which U.K. suppliers although formally on an equal footing with Canadian (and with a 10 percent preference over American) are in reality at a substantial disadvantage. While it was recognized that many of these factors are outside the range of influence of a government directive it was felt that in some respects, particularly on matters related to tendering, the position of U.K. suppliers might be improved. A paragraph to this effect has, therefore, been included in the draft of the new directive.

7. It does not appear that the 1950 directive was intended to apply to Crown Corporations. With a few exceptions, however, there would seem to be no good reason for not having the terms of a government directive on purchasing policy encompass the operations of these corporations. Even in the case of such proprietary corporations as C.N.R., T.C.A., Polymer and possibly one or two others it would be appropriate for the Ministers concerned to point out to them that the directive represents government policy with respect to purchasing and that in so far as it is commercially practicable they should take it into consideration in making purchases.

8. In connection with purchases for the defence programme it is apparent that in certain cases there must be taken into account strategic considerations which do not come within the scope of this directive. The concept of continental defence has, for example, necessitated the adoption of many United States type weapons for the Canadian armed forces and as a result almost three-quarters of all defence procurement abroad since April 1, 1951 some $600million has been in the United States. It is, of course, not the intention of the revised directive to interfere with a pattern of government defence purchasing based upon strategic considerations. This fact is made clear by the last sentence of the directive which recognizes the priority of these factors.

9. Finally, it is proposed that the new directive, as did the former one, carry a confidential classification and be given a very limited circulation. The chief reason for this is the fact that the policy involves discrimination against the United States, and publication of it might involve undesirable reactions in Washington. It is probable that the United States authorities are aware that some discrimination exists; but it seems undesirable to give the matter unnecessary publicity.

10. In conclusion, Irecommend

    1. that the new directive (Appendix II) be accepted in place of the earlier one (AppendixI);

    2. that Ministers chiefly concerned should bring the new directive to the attention of senior officials in the departments and Crown Corporations for which they are responsible.

DONALD M.FLEMING

[PIÈCE JOINTE 1/ENCLOSURE 1]

Appendice I/Appendix I

CIRCULAR NO.16 [Ottawa] May 20, 1950
CONFIDENTIAL

CABINET DIRECTICE CANADIAN GOVERNMENT CONTRACTS; CONDITIONS REQUIRING THE USE OF CANADIAN MATERIALS

The Cabinet on May 18th, 1950 agreed that the following be adopted as a standard clause in general conditions applicable to government contracts and specifications issued in future:

Canadian Labour and Materials. To the full extent to which the same are procurable, consistent with proper economy and the expeditious carrying out of this contract, Canadian labour, parts and materials shall be used in the work. In the execution of the work, the Contractor shall employ reasonable proportions of men who have been demobilized or honourably discharged from the fighting services (Navy, Army and Air Force) of the war of 1914-1918 and the second world war, where such men are available and competent;

In interpreting this clause the Cabinet agreed that, at present, it was not deemed to be consistent with proper economy for government departments or agencies:

1. to pay for Canadian goods any premium whatsoever over the laid-down, duty-paid cost of similar goods imported from the United Kingdom or other soft currency country;

2. to pay for goods produced in Canada a premium exceeding 10 percent of the laid-down duty-paid cost of similar goods imported from the United States or other hard-currency country (in making a choice between items of which one or both has Canadian content and United States dollar content, preference should be given to the one with higher Canadian content, but any premium which is paid should not exceed 10 percent of the difference in United States dollar content).

N.A. ROBERTSON
Secretary to Cabinet

[PIÈCE JOINTE 2/ENCLOSURE 2]

Appendice II/Appendix II

CONFIDENTIAL Ottawa, August 1, 1958

CABINET DIRECTIVE CANADIAN GOVERNMENT CONTRACTS; CONDITIONS REGARDING THE USE OF CANADIAN MATERIALS

Cabinet has agreed that the standard clause applicable to government contracts and specifications should be modified so as to include Korean war veterans within its terms as well as veterans from the war of 1914-1918 and the Second World War. The standard clause, therefore, should read as follows:

Canadian Labour and Materials. To the full extent to which the same are procurable, consistent with proper economy and the expeditious carrying out of this contract, Canadian labour, parts and materials shall be used in the work. In the execution of the work, the Contractor shall employ reasonable proportions of men who have been demobilized or honourably discharged from the fighting services (Navy, Army and Air Force) of the war of 1914-1918, the second world war and the Korean theatre of operations, where such men are available and competent;

It is the general intent of government purchasing policy to encourage departments and agencies to purchase goods produced in Canada and other Commonwealth countries rather than elsewhere. At the same time, regard for proper economy requires that government purchasing should be guided by the following conditions relating to price.

1. The price paid for Canadian produced goods should include no premium whatsoever over the laid down, duty paid cost in Canada of similar goods produced in other Commonwealth countries.

2. The price paid for Canadian produced goods should include no more than a 10 percent premium over the laid down, duty paid cost in Canada of similar goods produced in countries outside of the Commonwealth.

3. In the event that paragraphs 1 and 2 above are not applicable because Canadian produced goods are not available, the price paid for goods produced in other Commonwealth countries should include no more than a 10 percent premium over goods produced in countries outside the Commonwealth.
   
   Government departments and agencies are requested to render every assistance to United Kingdom and other Commonwealth suppliers on matters related to tendering with a view to removing where possible the disadvantages in this respect which overseas suppliers may experience in competition with those who are more conveniently located.
   
   This directive shall apply to all government departments and agencies, including Crown Corporations with the exception of those proprietary corporations having a commercial character and operating under competitive conditions, e.g., C.N.R., T.C.A., and Polymer. Furthermore, in connection with goods for the defence programme, Ministerial directions issued from time to time affecting their purchase and relating to strategic considerations shall take precedence over the requirements of this directive.

⁶⁵ Voir/See Document 361.