Sir:

I have the honour to enclose four copies of a memorandum prepared by Mr. IR. Murray of the Embassy staff on the question of trade relations between the United States and Canada. The memorandum is divided into two sections. The first section deals with the extent to which the Canadian exports to Western Europe are currently dependent on financing by the Economic Recovery Administration and outlines the principal reasons looking to a marked decline in the financing of "off shore purchases" in Canada because (a) of probable reductions in the appropriation for E.C.A., (b) of the greater availability of domestic supplies, especially of agricultural products, (c) of the expected decline in European demand due to increased European production, and (d) of the improvement in the Canadian dollar position. The second section deals with the probable effects on Canadian exports of the agricultural price support program which was adopted at the last session of Congress, together with the possible application of import restrictions by the President under Section 22 of the Agricultural Adjustment Act in order to protect the program.

2. The conclusion is that there is a distinct possibility of a rapid decline in the volume of Canadian exports both directly to the United States and to Western Europe financed by the United States, for the three principal reasons of a sharp reduction in off-shore purchasing in Canada by E.C.A., of increased domestic supplies of agricultural products for export and domestic consumption, and of the possible application to Canadian agricultural products of special import restrictions. The conclusion points to the advisability of seeking to negotiate a new trade agreement with the United States on a broad basis.

I have, etc.
H.H. WRONG

[PIECE JOINTE/ENCLOSURE]

Note du deuxième secrétaire pour l'ambassadeur aux États-Unis Memorandum from Second Secretary to Ambassador in United States

CONFIDENTIAL

[Washington], December 20, 1948

US-CANADIAN TRADE RELATIONS

Now that over one year has passed since the Canadian import restrictions were imposed and we have had eight months experience with ECA, it is interesting to consider the extent to which our international trade now relies on the U.S. market as well as the extent to which actions of the U.S. Government have assisted our position. It would be still more interesting, of course, to be able to predict with some degree of accuracy how much longer the actions of the United States will continue to be as favourable to Canada as they are at the present time. The following subjects seem to be of principal concern:

(1) Canadian Exports and ECA.

(2) U.S. Farm Policy. Canadian Exports and ECA

The extent of the increasing dependence of our exports on the United States market has been expressed often enough since the end of the war. It is rather vividly illustrated in our Balance of Payments forecast for the first ECA fiscal year (July 1st, '48 to June 30th, '49). The following figures on Canadian exports are either taken from or based on the September Balance of Payments forecast:

Exports to all areas - $3,045,000,000

Exports to the United States - $1,440,000,000

Exports to ERP countries - $1,085,000,000 Exports to ERP countries requiring

United States financing - $ 649,000,000 Total exports to United States plus exports

financed by the United States (ECA) - $2,089,000,000

The United States are therefore counted upon either to take directly or to underwrite over $2,000,000,000 dollars of our total exports of roughly $3,000,000,000 dollars. Admittedly, it is not known for certain that the ECA will finance the full $649,000,000 dollar ERP deficit with Canada. However, the prospects of ECA doing so, based on their actions to date, seem very good. As of December 15th ECA have authorized procurement in Canada in the amount of $566,000,000 dollars. During ECA's first eight months, every time the European countries have been allotted six dollars to spend in the United States and abroad they have been given one dollar to spend in Canada. Naturally, arguments are produced on our side to suggest that if the volume of off-shore purchases was sharply reduced we could divert our ECA-financed exports elsewhere. For many of our major agricultural exports, this point is debatable. Its realization would certainly be painful. When we think, from our own point of view of the possibility of diverting our exports, it should be remembered that U.S. officials have already warned us of the inevitability of the diversion of their off-shore dollars away from Canada.

We certainly cannot assume that Canadian exports to Europe will continue to be subsidized by the United States at anything like the present rate. In the first place it is probable that the second ECA appropriation will be at least 25 per cent less than the present one. On the mathematical side alone, therefore, there should be considerably less money available for expenditure in Canada. Latin-American countries are also pressing hard to get an increased share of whatever off-shore dollars are available. There are some U.S. officials who believe that the Argentine problem in particular cannot continue to be ignored by the United States much longer.

Secondly, it seems highly probable that next year the United States will be able to take care of a larger share of European requirements than they are at present, particularly in the agricultural field. Owing to the policy which European countries are now energetically pursuing of cutting down their requirements from dollar areas and increasing their requirements from other areas, there should be, in the second ECA year, a noticeable falling off of European demands for North American supplies. When it comes to deciding who will take the reduction in the commodities which will hurt most, there is no need to have a Gallup poll to tell who will lose the contest. The U.S. will have a campaign fund of a little over $4,000,000,000, most of it available as a free grant. Ours looks as though it will be perhaps $120,000,000, all in the form of loans, not grants.

In the third place, if our reserve position continues to improve at anything like the present rate, the United States can be expected to adopt the attitude that we are in a position to provide financing for a much increased amount of our exports. Last week, Mr. Southard, Special Assistant to the Secretary of the Treasury, stated this point in the following terms: the problem in his mind was that if our dollar position becomes increasingly tolerable at the same time as there are less offshore purchases in Canada, would not that raise more insistently than ever the question of Canada's extending increased financial assistance to Europe?

Admittedly we can only speculate on what the year 1949-50 would hold for us in the way of assistance from the United States in financing a large portion of our exports. One great spectre on the horizon is the possibility of another huge U.S. wheat crop. The first forecast of the U.S. winter wheat crop, released December 20th, indicates that this possibility is a very real one. 61,370,000 acres have been seeded for winter wheat. This total, which is roughly 10 per cent more than that set by the Department of Agriculture's Goals Committee, is 5 per cent greater than the largest previous acreage. On the basis of the present forecast of 15.7 bushels an acre (which is two bushels lower than the average yield of the last two years) the U.S. winter wheat crop should be 965,000,000 bushels. With an average spring wheat crop, the total U.S. crop may be more than 1,250,000,000 bushels. Of the $600,000,000 dollars which had been authorized by ECA at the end of November for wheat and wheat flour $345,000,000 were for expenditure in the United States and $255,000,000 for Canada. If the world's wheat supply position improves as much next year, owing to another bumper U.S. crop, as it did during the past year, there would not appear to be any prospect whatever of substantial ECA spending for wheat in Canada.

The statement which we heard last week at ECA that the off-shore purchase policy next year "will have to be determined exclusively in the interest of the United States" is, I think, the first of the signs that the honeymoon of heavy ECA spending in Canada is shortly to come to an end.

U.S. Farm Policy

Some U.S. officials who are deeply interested in encouraging measures designed to bring about the greatest volume of international trade are becoming more concerned about the dangers to international agricultural trade which are inherent in the expanding U.S. farm support programme than they are with any other feature of United States economic policy. If responsible U.S. officials are concerned with this aspect of U.S. farm policy, it is only natural in Canada we should be more deeply concerned. At Geneva and again at Havana, our officials have already experienced some trying times in negotiating with the United States on the trade charter provisions dealing with the subsidization of agricultural exports. The Canadian Government, several months ago, were very loath to compromise with the Americans on this point. Nevertheless, they reluctantly did so on the ground that the charter would not have a ghost of a chance of getting through Congress unless the U.S. point of view was substantially met.

Since these negotiations took place Congress has enacted the most far-reaching farm support legislation, which is designed to make permanent the policy of supporting United States farm prices. The new legislation (Agricultural Adjustment Act of 1948 - Public Law 897) goes far beyond anything which the United States had before the war in its provisions for supporting farm prices. This legislation, when considered in the light of the most surprising political fact of the last election, - the extraordinary and crucial farm support which the Democrats received - poses beyond any doubt very serious problems for Canadian agricultural exports both to this country and to the rest of the world. The twin threats of exclusion of exports to the United States, such as potatoes, in order to protect an extravagant U.S. price support programme, and the dumping of U.S. surpluses in our traditional export markets, seem now to be potentially far greater than ever before.

Before the war, U.S. support programmes applied to six "basic" commodities: cotton, wheat, corn, tobacco, rice, and peanuts. Now it is mandatory to support the prices of these commodities at 90 per cent of parity throughout 1949, and from 60 to 90 per cent of parity thereafter, depending upon the determination made by the Secretary of Agriculture on the basis of the supply position. Price support is now also mandatory for two of the non-basic products (Irish potatoes and wool).

After 1949 price support is permissive for all other non-basic commodities, e.g. eggs, poultry, milk, flaxseed, to name only a few in which Canada might be interested.

Whatever slight amount of cheer can be taken from the fact that the maximum level of price support will soon become 90 per cent is diminished by a provision that this maximum may be exceeded in any particular commodity whenever it is administratively determined after public hearing and finding that an increased level of support is necessary in order to increase or maintain production of the commodity in the interest of national security.

The infamous Section 22 of the Agricultural Adjustment Act was amended during the last session of Congress to give, for the first time, protection to price support programmes. The President now has the authority, which he did not have under any of the previous versions of Section 22, to impose import quotas or fees on any commodity which is interfering with the operation of any price support programme. This authority, which was used to prod us into our recent potato agreement, might quite possibly be used in a few years' time against livestock or any other important Canadian agricultural export to the United States. It is true that if the United States imposed Section 22 restrictions on any of our exports we would be entitled to impose some retaliatory restrictions. However, this sort of action would not do either of us much good.

The United States are not only equipped to protect their own market from the invasion of foreign products if the import of these products in the words of Section 22 "materially interferes with" any U.S. agricultural support programme, they are also very handsomely equipped to get their surplus agricultural products into foreign markets. AI the moment their greatest instrument for this purpose is the European Recovery Program. All the powerful farm lobbies gave their wholehearted support to the Program. What international trade charter or ethics, written or implied, can prevent one country from giving away for nothing hundreds of millions of dollars worth of its products? If you dump on a small scale you are a mean fellow and get penalized - if you do it on a grandiose scale you are a grand fellow and win plaudits. The stage has not yet been reached at which the agricultural sur plus provisions of the Foreign Assistance Act are materially interfering with any of our major agricultural exports. Today we are receiving strong financial support from the United States for some agricultural exports: tomorrow the very strength which makes it possible to subsidize Canadian products may be switched further to subsidize new United States surpluses, surpluses created in part by price support and other programmes. It has been estimated that United States grain exports may reach 700 million bushels in this crop year. If they do, that would be 14 times the average pre-war U.S. grain exports. These huge shipments are, of course, largely sustained by United States foreign aid dollars.

The length of the transition from having our exports handsomely supported by the United States to one of having them "materially interfered with" may be uncomfortably short. The last time we were faced with comparable competition from the United States the currencies in all our principal overseas markets were convertible. Now, as far as the ERP countries are concerned, 60 per cent of their deficit with Canada is being "converted" directly by the United States through the ECA.

If, as seems certain, this handsome percentage declines sharply what steps are we to take? There seems to be real and pressing merit in the Winnipeg Free Press's insistent editorial demand that every effort should be made to negotiate a new and much broader Trade Agreement between our two countries.

[J.R MURRAY]