The third meeting of the Joint Committee took place in Washington under the chairmanship of Mr. Dulles, the U.S. Secretary of State.²¹⁴ A copy of the Agenda is attached as Annex "A".?

OCTOBER 7 - MORNING SESSION
ITEM I - OPENING STATEMENTS

2. In opening the meeting Secretary Dulles welcomed the Canadian Ministers. He spoke of the President's interest in the meeting of the Committee and of the need to take a fresh view of our problems in a world which was in a state of flux. He emphasized the great political importance of cooperation between the United States and Canada in economic affairs as in other fields. He referred to the fact that no two countries had more intimate or significant relations. He thought this was true even though in some matters Canada's relationship to the United Kingdom might be closer than its connection with the United States. He observed that, far from deploring the close bonds between Canada and the United Kingdom, his Government welcomed the existence of these links. The United States and the United Kingdom were not competing for position in relation to Canada. It was not inconsistent for Canada to maintain and develop traditional association with the United Kingdom while at the same time continuing to expand relations with the United States.

3. Mr. Fleming transmitted the greetings of the Prime Minister and expressed the pleasure of the Canadian Ministers at being able to have this meeting with their U.S. opposite numbers. He commended the terms of reference and the purpose of the Committee. He noted that the Committee had not met for some time and that added point was given to the present meeting not only by the fact that there had been a change of government in Canada but also because the lengthy interval since the last meeting had produced a considerable accumulation of issues. He agreed with Secretary Dulles that no two countries had as close relations as Canada and the United States. He referred particularly to the cooperation which had been achieved in defence matters as reflected in the recent creation of the integrated Air Defence Command. It would, however, be less than frank not to recognize the existence of a number of substantial problems between the two countries. There were elements in Canada-U.S. economic relations which were causing concern in Canada; there was anxiety as to what may be impending. The new Canadian Government had a mandate to interpret what it considers is the will of the Canadian people on certain matters which had emerged as issues in the last elections. He observed that the difficulties in dealing with these problems were increased by the fact that in the United States the Executive and Legislative branches were separate and acted much more independently than in the Canadian system. Mr. Fleming said that he regarded Canada-U.S. relations in terms of a member of a team and he instanced the integrated Air Defence Command. Some Canadians were asking why this sort of cooperation was not carried into other fields - e.g., economic measures. He assured the U.S. members that the Canadian side would express their views in a spirit of understanding and complete good will.

4. Secretary Dulles picked up Mr. Fleming's remark about integrated defence and said that what had been achieved here was highly appreciated. He stressed the general need for joint defence - not necessarily always with the U.S. - without which countries would be courting bankruptcy. The Canada-U.S. example should be followed more widely throughout the free world. Only in this way would it be possible for the free countries to secure adequate defence at bearable cost.

ITEM IV - GENERAL REVIEW OF TRADE POLICIES

10. Mr. Dulles said that the U.S. side had no general statements to make under this agenda item.

11. Mr. Fleming began the discussion by referring to the great difference in size between the United States and Canadian economies. He noted, that even though moved by the best of good intentions, the United States could by adverse or inconsiderate policies hurt Canada much more than Canada could injure the United States. He referred to the action of the previous Canadian Government concerning the valuation of strawberry imports and concerning restrictions on imports of cheddar cheese. He mentioned also the restrictive actions of the new Canadian Government with respect to imports of powdered milk and turkeys and fowl.²¹⁵ He thought that these actions could be regarded as little more than "flea bites." He referred to the Notes which had been delivered by the U.S. and asked the Administration to consider the (slight) proportionate effect of Canadian actions on the U.S. The necessity for such measures arose from the existence of price supports and from the tremendous seasonal advantage possessed by U.S. producers of many agricultural commodities. Mr. Fleming thought there was a general recognition in Canada of the great improvement which had taken place in United States trading policies since the war. It was important for the United States authorities to realize, however, that whenever they deviated even in a minor way this received a good deal of attention abroad. Any measures which had harmful effects inevitably produced recollections of the unfortunate manner in which the United States had behaved previously when it had introduced the Fordney-McCumber and Smoot-Hawley tariffs. Because of these earlier experiences injurious actions by the United States evoked more serious concern despite the generally good post-war record. Moreover actions which might be considered by the U.S. to be almost negligible in relation to their total trade receive much more attention in the press of a country such as Canada whose trade with the United States looms so large and whose international trade generally represents such a high percentage of the National Product.

12. Mr. Fleming then referred more specifically to some of the worries which were widespread in Canada. He said there were two fundamental weaknesses in Canada's external economic relations: the concentration of our trade in the U.S. and the imbalance in this trade. On many sides there was an inclination to question the wisdom of concentrating so much of Canada's trade in one channel. This meant among other things that any change in U.S. policies was of major importance and concern to Canada. In addition, there was uneasiness about the degree of imbalance in trade between the United States and Canada. No one thought that a precise balancing of merchandise trade with each country was desirable, or was consistent with the existence of free economies. The capital investment/import aspect of our trade balance was recognized. It was widely felt in Canada, however, that the present lack of balance was more than should be accepted. We were running into record figures. Many Canadians were saying that they were not prepared to be "hewers of wood and drawers of water." The tendency of the U.S. tariff largely to exclude finished products accentuated the general imbalance and increased apprehension that Canada was regarded solely as a supplier of raw materials. The Canadian authorities could not accept this situation. This did not, however, mean that we would wish the U.S. market for raw materials restricted but we would like to see a larger quantity processed in Canada even while exports in the raw form continued as well. Mr. Fleming referred to the action of the United States in restricting agricultural imports or at least securing waivers to permit the imposition of such restrictions. Canadians found such measures difficult to understand, especially in the light of the large surplus which the United States had in its trade with Canada.

13. Mr. Fleming then commented on the manner in which the press had represented a statement of Mr. Diefenbaker's as involving a definite proposal to divert imports from U.S. to U.K. sources.²¹⁶ He explained that what Mr. Diefenbaker had in mind was mainly the fact that if a shift of the order of 15% were to take place among the sources of Canadian imports, without injury to Canadian producers, this would largely remove the problem of imbalance which was worrying so many Canadians. Mr. Diefenbaker was not suggesting that it would be possible or desirable to carry out a transfer of this kind overnight. A quick transfer was not possible. Clearly also any shift would be expected to proceed in a way which would not injure Canadian producers. Reverting to Canada's trade imbalance, Mr. Fleming said he recognized that U.S. investments in Canada were financing large imports. But this was not a reason to shut our eyes to the perils of our trading position - a position which could not be expected to go on much longer.

14. Concerning the European Common Market and Free Trade Area, Mr. Fleming described the importance to Canada of its trade with the United Kingdom and Europe. Wheat exports were important. As a consequence, Canada was greatly interested in the manner in which these projects might develop. He thought that it might be desirable in particular to keep agricultural products outside such arrangements. So far we had been successful in keeping trade in agriculture out of the FTA. Whatever misgivings there might be in Canada concerning these European ventures, it was generally appreciated that the economic strength of Western Europe was of great political and military importance. Mr. Fleming also suggested that United States trading policies might have had and might continue to have a considerable measure of responsibility in connection with these European developments.

15. Regarding Commonwealth trade, Mr. Fleming acknowledged that the interest of Commonwealth countries in expanding trade with one another was not entirely attributable to defects in U.S. commercial policies but he thought that U.S. policies might fairly be regarded as a large factor. He assured the U.S. side that at Mont-Tremblant and in the subsequent Ottawa talks²¹⁷ there was no inclination to resort to new preferences or to erect new trade barriers around the Commonwealth, or around Canada and the United Kingdom. The Commonwealth was different today than it had been in 1932.

16. In conclusion Mr. Fleming stated some of the basic questions concerning U.S. commercial policies which were prominent in the minds of Canadians. He asked whether the United States, as the greatest of creditor countries, was going to take the leadership in commercial policy to increase the flow of trade and particularly of imports into the United States. There had been some incidents which had given rise to the impression that the leadership which the United States had been displaying during the past few years and which had led to GATT might have spent its force. If the U.S. failed to provide leadership and the required impetus then the movement towards freer trade was bound to slow down and as a consequence, be reversed. Mr. Fleming also enquired what was likely to be the fate of U.S. trade agreements legislation between now and next June and what use the Executive would propose to make of such powers as it might secure. This was of crucial importance to Canada. He wanted to know more about the intentions of the United States Administration with respect to various escape clauses and particularly those affecting agricultural products. He expressed an interest in knowing what role the United States planned to play in the GATT tariff negotiations later this year. He noted that there were some bound items in the Canadian tariff which were causing us concern and which might have to be reexamined and renegotiated in due course. He referred particularly to the problems which were being experienced in connection with textiles where there seemed to be a tendency for U.S. exporters to regard the Canadian market as a "happy dumping ground." In taking whatever action might become necessary, the Canadian authorities would not wish to give comfort to protectionist forces in the United States. Mr. Fleming noted that the existence of the U.S. waiver of obligations regarding agricultural imports was bound to figure in the autumn negotiations. So long as the power existed to restrict imports of agricultural products, the Canadian Government would have to proceed in formulating its own policies on the assumption that it is the settled policy of the United States Administration to retain freedom to act on agricultural trade. The forbearance on the part of the U.S. in not using quantitative import restrictions to Canada's detriment was recognized. Mr. Fleming referred to the O.T.C. which had been proposed by the U.S. The failure to approve it had caused the world to wonder. Finally, Mr.  Fleming expressed the hope that in the forthcoming negotiations the United States would not insist on exacting precisely equal counter concessions from a country such as Canada where differences in size were so great and where the trade imbalance was so substantial. Mr. Smith emphasized that the Canadian Ministers had not come to Washington to "scold." They thought the United States should share their interest in resolving the problems which had been encountered and in avoiding misunderstandings over actions that might be taken in the future. Canada and the United States were joined in defence arrangements and were better neighbours than any other countries. Canada wished to play its full part in the defence of the Western World but it could only pull its weight effectively if the major economic problems could be solved; the U.S. had a direct role in recognizing that its Canadian partner must be strong. Mr. Smith suggested that the discussions should proceed as frankly and informally as possible. He was sure that neither side would wish to adopt a didactic approach.

17. Secretary Dulles appreciated the sincerity and frankness with which the Canadian Ministers had expressed their views. He thought it well to have any difficulties brought out into the open since bad feelings when concealed tend to fester and grow worse. Concerning Mr. Fleming's remarks about the imbalance in trade between Canada and the United States, Mr. Dulles recalled that by definition the total balance of payments (visible and invisible) had to balance automatically. If an attempt were made to reach an exact balance on merchandise trade alone, this would mean that a balance would also have to be achieved on invisibles as well in order to bring the totals out even. In Mr. Dulles' view it would be disastrous for the United States to aim at a strict balance on invisibles since this would involve a reduction or cessation of foreign aid and of military expenditures abroad. He noted that the dollar balances of foreign countries (including private persons) had increased by $12 billion since 1950. If this "imbalance" on invisibles were now to be terminated the United States would scarcely be capable of exerting the influence or exercising the leadership which Mr. Fleming had advocated. Secretary Dulles acknowledged that there had been defects on the part of the United States, but he thought there had also been some shortcoming on the part of Canada. Neither country was entirely above reproach. Unfortunately, however, the misdemeanours of the United States were more conspicuous and were felt more keenly than those of most other countries. Inevitably the normally good behaviour of the United States tended to pass unnoticed. Mr. Dulles doubted that the ratio of bad actions to good actions was higher for the United States than for other countries. The very fact that the Canadian economy had progressed in the way that it had over the past several years was surely in itself evidence that the United States had not used whatever capacity it possessed to hurt Canada. He was sure that the United States had no desire to damage Canadian interests.

18. Secretary Dulles referred to Mr. Fleming's remarks about the excessive dependence of Canada on the United States and questioned whether this was all that bad from Canada's point of view. Even very heavy dependence on a country which was basically sound and strong might not be disadvantageous. In his own experience, it was not always wise to diversify insurance merely for the sake of diversification without very much consideration of the relative dependability of the insurance companies. Such a diversification involved certain risks. Mr. Dulles noted that currency instability was probably a greater impediment to trade than were tariffs and other administrative restrictions. The U.S. dollar had kept remarkably stable in recent years. Other countries had been prepared to hold it for its own value. Moreover, the U.S. dollar had been used widely to support other currencies (an operation which incidentally could not, in Mr. Dulles' view, have been carried out if the emphasis had been on a straight balancing of visible trade). Mr. Dulles wondered whether Canada would really be strengthened by moves to diversify its economic relations in the direction of less stable areas and currencies.

19. Concerning the Administration's plans for trade legislation, Mr. Dulles remarked that those in the United States who considered themselves hurt by imports were much more vocal and influential than those benefiting from exports. He noted that the degree of support in the United States for liberal trade measures had been affected by the changes which were taking place in the economy of the Southern States. That part of the country no longer thought mainly in terms of keeping open foreign markets for its raw cotton but was thinking much more of the attractions of protectionism for the industries which were developing there. There was no doubt that the renewal of the Reciprocal Trade Agreements Act and other measures to promote international trade would run into serious difficulties in Congress next year. He was confident that the battle would be won. The Administration's programme was being prepared and would be pressed with vigour.

20. Secretary Dulles stated that the U.S. is an advocate of the Common Market in Europe as an indispensable precursor to integration in other fields which was required to strengthen Europe. He commented on the importance of avoiding past divisions within the Western World which had robbed it of its prestige and moral strength. The Soviet Union had challenged us. Therefore unity must be supported even though there will be economic disadvantages. These disadvantages would not however be serious or lasting. The differences over economic matters could create or accentuate divisive tendencies. Mr. Dulles thought the whole free world had a great interest in steps that were being taken to reduce economic barriers on the European continent. Concerning the European Free Trade Area, Mr. Dulles remarked that this was not an effort to create political unity between nations which should have been united long ago, but rather the FTA represented straight economic/commercial arrangements. He added that the FTA raises questions for the U.S. to the extent that it was contrary to GATT.

21. Secretary Dulles remarked that in applying the spirit of GATT and the Trade Agreements Act, the West had to rely on broadly sound economic conditions. There had been great advances in Canada and in other countries. The standard of living had been raised. He added that in working out our GATT problems, it was necessary to do this in terms of general economic movements and atmosphere. Among other things, we must think of the needs of underdeveloped countries and our policies must be such as to hold these countries.

22. With respect to the problems of the economically underdeveloped countries, Secretary Dulles thought it most important that these countries should be assisted to move forward without employing coercion or compulsion over the use of labour or resources. He reflected that some massive monuments (and possibly more recently the sputnik) had been created by systems which relied on compulsion. He thought it preferable for the underdeveloped countries to avoid such methods if there appeared to be a reasonable chance that they would be able to get similar results by other means even though they might achieve those results more slowly. He thought this would be the wish of the underdeveloped countries themselves. The United States was anxious to assist them to pursue this alternative. He did not think that the underdeveloped countries would want to develop so fast that they would abandon their freedom. He remarked again that the United States would be less able to help if it looked only at the visibles in its balance of payments and attempted to keep them in line.

23. Secretary Anderson referred to recent developments in the United States balance of payments and observed that not many countries could conscientiously represent that the United States was a "bad creditor" when it was putting out gold and dollars at the rate which had applied during the past seven years.

24. Mr. Fleming supplemented his earlier statement by a tribute to the role which the United States had played in Europe and elsewhere since the war and in particular to the great achievements of the Marshall Plan. In his judgment this Plan had saved Europe.

25. Secretary Weeks thought that if the elements which accounted for the difference between the level of Canada's imports and exports were to be examined, the imbalance might appear in a rather different light. He thought that about $1 billion of the deficit of some $1 1/4 billion represented machinery which Canada did not itself produce and which it had traditionally and almost inevitably procured from the United States. Apart from this major and rather special element, the categories of goods which were produced in both countries were pretty close to a balance. According to Mr. Week's figures Canada had accumulated $500 million last year as central reserves or as private balances. He thought the level of the Canadian exchange rate was an indication that the trend of economic relations between the two countries had been fairly favourable to Canada. He did not think it was true to say that Canadians were hewers of wood and drawers of water since it was evident that the economy was becoming industrialized and Canadian manufactured goods were being exported to the United States. Secretary Weeks also argued that the average rate of duty in the U.S. tariff was considerably lower than the average in the Canadian tariff.

26. Secretary Dulles intervened to observe that while the general Canadian payments position might appear satisfactory, he could understand the worries which had been expressed over the state of the visible balance if Canadians felt that the invisibles completing the balance were not dependable. He could appreciate uneasiness which might be felt about the possibility that, for some reason or even quite arbitrarily, U.S. investors might suddenly curtail or terminate the flow of investment funds into Canada.

27. Secretary Week's rejoinder was that if invisibles fell off equipment imports would fall off as well and the general position would not really be worsened.

OCTOBER 7 - AFTERNOON SESSION
ITEM IV - (CONCLUDED)

28. Mr. Fleming gave a brief account of the Mt. Tremblant meetings of Commonwealth Finance Ministers. He described these meetings as happy and successful. He stressed that there had been no suggestion of attempting to set up a new system of Empire preferences. He explained that the Commonwealth was much different than it had been in 1932: there were now many more members with different kinds of interests. Furthermore the situation today was not one of contraction but rather of economic expansion. Concerning the Commonwealth Trade and Economic Conference, Mr. Fleming said that the decision to hold it had been unanimous. It was expected that it would be held in Canada in mid-1958 or thereabouts. It would not be a conference against the United States and it would deal with technical and capital assistance to underdeveloped countries, fields in which other Commonwealth countries looked to Canada. A good deal of preparatory work would be required and it was expected that Commonwealth officials would first meet in London early in 1958.

ITEM V - AGRICULTURAL POLICIES AND SURPLUS DISPOSAL²¹⁸

29. Mr. Churchill referred to the importance of wheat in the Canadian economy, the existing wheat situation in Canada, and the place of Canadian wheat in the world wheat trade. He referred in particular to the large exports of the U.S. during the past year and the decline in Canadian exports. He also referred to the injury which Canada had suffered under the former barter regulations and the high subsidy on U.S. flour. He showed that Canadian wheat usually represented in past years about 30% of the world trade in this commodity, but last year it was only 22%, while the U.S. exports were 46% of world trade. He said that the Canadian share of the world trade in wheat should not be less than 30% and he asked that U.S. keep this in mind in their wheat disposal programme. In concluding his remarks he said there were five things he would like to have the U.S. consider:

1. That the U.S. would be more restrained in their disposal of wheat for local currencies.
2. That the barter transactions in wheat would be discontinued.
3. That Canada is prepared to compete with the United States on flour on a quality basis and that Canada does not want a price war on either wheat or flour. What Canada wanted was a reduction in the U.S. flour subsidies.
4. That "tied" sales in P.L. 480 agreements would be discontinued.
5. The need for frequent consultation between Canada and the U.S. on international trade in wheat. In concluding Mr. Churchill said that Canada did not object to gifts of wheat to needy countries such as, India, Pakistan and Ceylon; the Canadian Government had made such gifts and would be making more.

30. Mr. Dulles remarked that the U.S. realizes the problems that Canada faces. He said that the U.S. also had difficulties in working out their wheat problems. He asked if there has not been enough consultation. Mr. Churchill invited Mr. Sharp to reply. Mr. Sharp said that he did not think consultations had been as successful as Canadian officials had hoped they would be, although U.S. officials had probably gone as far as they could. There had been some useful results from consultations, such as the discontinuation of bid sales of wheat; the growing belief on the part of United States officials that "tied" sales of U.S. wheat were now less necessary under P.L. 480 agreements; good behaviour in the field of price. However, he thought that consultations had not been effective in slowing down the rate of disposal of U.S. wheat which has resulted in preventing Canada making sales to a number of markets. There has been too much anxiety in the United States to dispose of wheat, at a very high rate he said and hence the U.S. had not met our main point in these consultations i.e. on the rate of disposal. This is where we required a greater measure of assurance from the Administration. By the totality of its efforts the U.S. has done grave injury to Canada's commercial sales of wheat.

31. Mr. Benson remarked that he had a great interest in Canada. He said the U.S. has no desire to enter into a price war. "What we want," he said, "is stability in wheat prices." He then read a statement copy of which is attached as Annex "F".?

32. Mr. Churchill then remarked that it is important to Canada to export 300 million bushels annually and if the U.S. had exported 46 million bushels less and Canada had increased her exports last year by this quantity, it would have made a great difference in the Canadian criticism of U.S. export sales. Mr.  Benson remarked that there were a number of reasons why the U.S. was able to export such a large quantity of wheat last year. He cited the Suez situation and short crops in Europe. He said that he thought expansion of wheat exports in the future will depend to a large extent on the use of wheat by non-commercial importers and he hoped that sales of this kind could be made in such a way as not to injure other wheat exporters.

33. Mr. Marvin McLain, Assistant Secretary of Agriculture remarked that the U.S. Government has received many complaints from U.S. flour exporters because of loss of markets to other exporters. "If we were to reduce subsidies on flour to the same level as those on wheat the U.S. would lose her flour markets" he said.

34. Mr. Churchill remarked that United Kingdom buyers had informed him that they have purchased U.S. barley at 20¢ a bushel below the price of Canadian barley. Canadian sales of barley to export markets had been seriously injured by U.S. export barley sales.

35. Mr. Sharp remarked that the Canadian Government is contemplating a contribution of wheat to India, Pakistan and Ceylon under the Colombo Plan, but how large these contributions will be had not been decided. "We would like to cooperate with the U.S. on this programme and Canada would like to start this programme soon," he said. The quantities which Canada will export are likely to be small, he said, and he hoped that shipments from Canada could be so arranged that they would not be disturbed by the large shipments of wheat from the U.S. Mr. Benson said that they would be prepared to co-operate.

36. Mr. Dillon remarked that Japan needs more wheat than the U.S. can supply. He also said that U.S. would be glad to have Canada supply wheat to India. He added that the U.S. had supplied some wheat to Pakistan and that they would be glad if Canada could help this country as well. Mr. Dillon also referred to the 86 million bushels of wheat which had been disposed of under barter arrangements. He said that of this total, 71 million bushels had gone to Western Europe and that the discontinuation (he no doubt meant modification) of barter operations should go a long way to help Canada's sales to Europe.

37. Mr. Churchill remarked that wheat acreage in Canada has declined from 28 million to 21  million acres and he hoped that as a long term programme, it would be possible to maintain the area in wheat at about 20 million acres. He mentioned briefly the effects of the storage and handling situation in St. Lawrence ports on the ability of the Canadian Government to maintain wheat prices, and said that if the congestion continued we might have to make some reduction in our wheat prices. He stated again the hope of the Canadian Government that the Administration would do everything possible to protect Canada's export objective of 300 million bushels. Mr. Benson said that to control production by reducing wheat acreage had not in their experience been successful because the acreage taken out of production had been put into other crops. Part of the local currencies derived from disposal programmes, Mr. Benson added, had been used to develop export markets for the future.

ITEM VI - CANADIAN-U.S. TRADE IN AGRICULTURAL PRODUCTS

38. Mr. Harkness remarked that Canada's inability to sell wheat had resulted in a large production of feed grains for livestock and poultry. The inability of Canada to sell wheat had had a significant effect on the economy of Canada as agriculture was so much more important in Canada than in the U.S. In Canada, Mr. Harkness continued, agriculture was a depressed industry and farmers were suffering from a cost-price squeeze. They were demanding relief and wanted a system of price supports. They pointed to the fact that supports had been granted in the U.S.

39. For the year 1958, Mr. Harkness said, exports of agriculture commodities from Canada to the U.S. had a value of $204 million, while Canadian imports of those commodities from the U.S. were valued at $362 million. Canadian farmers, he continued, wanted to correct this imbalance in trade. Furthermore there had been significant turn-abouts in Canada-U.S. trade in important commodities: Canada exported $1 million worth of eggs to the U.S. but imported $12 million worth; we also imported more potatoes and poultry than we exported; we exported $17 million worth of fruits and vegetables to the U.S. and imported these commodities to a value of $153 million.

40. Seasonal tariffs Mr. Harkness continued had not been effective. He referred to the indirect as opposed to the direct competition between U.S. and Canadian agricultural products: there were a number of "invisibles" which made the competitive position of Canadian producers difficult. He mentioned that while, for example, Canada did not grow citrus fruits, the imports from the U.S. (in fresh or tinned form or as juice) compete with such Canadian products as apple and tomato juice. Canadian fruit and vegetable growers wanted a reduction in imports when Canadian fruits and vegetables come on to the Canadian market. Furthermore U.S. exports of these commodities, particularly the abnormally low-priced, adversely affect prices in Canada. He emphasized that a very small quantity of imports could upset prices in the Canadian market with damaging results. Irrigation, Mr. Harkness said, had been an indirect subsidy to U.S. producers; the large increase in the irrigated acreage of strawberries in California for example had resulted in a very great increase in production of this fruit. U.S. agriculture he said is subsidized to a much greater extent than Canadian production. From 13 to 15% of the income of U.S. farmers comes from the government, but only 3% in Canada. This, Mr. Harkness remarked, makes competition difficult for Canadian producers. Moreover U.S. price supports had contributed to excess production of agriculture in the U.S. and to the greater use of mechanization: price supports represented incentive payments for increased technology, etc. Potatoes was an example he said of the use of labour saving machines in production which had made it difficult for Canadian potato producers to compete with U.S. potato growers. In moving to price supports, Canada would be initiating what the U.S. had been doing for some years past. Secretary Benson expressed the hope that Canada might profit from the unhappy experience of the United States in the field of price supports. Mr. Harkness concluded his statement by expressing his satisfaction at the tariff concessions which have been granted by the U.S. and at the moderate way that the U.S. Government had dealt with certain import controls such as rye.

41. Such developments, Mr. Harkness concluded, had led farmers in Canada to demand price supports and he intimated that the Canadian Government might be forced to grant such supports along with a pattern of protection which we had not hitherto gone into.

42. Secretary Benson said that he fully agreed with what Secretary Dulles had said during the morning meeting about adverse trade balances (see para. - above). He pointed out that the U.S. had an adverse balance of trade with Canada on a large number of commodities. The encouraging fact was that on the one hand, the U.S. was deficient in certain commodities and on the other hand Canada was consuming more. Canadian exports over-all were holding strong despite fall in exports to U.S. Furthermore, Canadian agricultural production had been increasing at a faster rate than U.S. production. Secretary Benson remarked that the U.S. Administration also received complaints from U.S. farmers about agricultural imports from Canada, e.g. grains and livestock products. He said that the U.S. would like to discuss Canadian restrictions with Canadian authorities. He remarked that Canada had not complied with GATT and had not informed the U.S. about some of the restrictions which had been applied. He hoped that there would be the required consultations since it was very vital, he thought, that GATT be continued among friendly countries of the free world. He said that the difficulties in maintaining U.S. support for the GATT and in getting a renewal of the Trade Agreements Act would be greatly increased if friendly countries which had problems did not attempt to deal with them in conformity with the procedures laid down in the GATT.

43. Secretary Benson emphasized that U.S. restrictions were imposed only after rigorous procedures, international and domestic, including critical examination by the Administration, public notices and hearings, etc., had been gone through and that the objective of the Administration was to keep such restrictions to the very minimum and to remove them as soon as might be permissible under the existing legislation. He said that quotas imposed by the U.S. were on the whole generous; both countries should "try to take action which will increase the trade between them." There was an urgent need, Mr.  Benson concluded for "mutual understanding of our production and marketing in farm products" and a "comprehensive programme of joint studies by the United States and Canada on agricultural production and marketing."

44. Mr. Harkness remarked that he too would like cooperation between our two countries and he pointed out some of the reasons for the import restrictions applied by the Canadian Government on turkeys, heavy fowl and dry skim milk. Secretary Benson said that he knew exactly what Canadian Ministers meant when they spoke of the need for import restrictions to safeguard price supports. He regarded the U.S. experience in this field as quite unhappy and considered that Governmental efforts to bolster prices were an impossibility. Hence, he said, it was the desire of the present U.S. Administration to move away from rather than towards price supports, especially those which were at levels at which the products would not move (into commercial markets). In expressing the hope that Canada would follow the same direction, he emphasized his firm conviction that this course would be of greatest benefit to the farmers themselves.

45. Mr. Fleming said that the Canadian Government expected shortly to receive the report of the Canadian Tariff Board on its investigation of the tariffs on fruits and vegetables. Any changes which the government would decide to make would be referred to GATT. Mr. Fleming said he recognized that the Canadian position in GATT might be debatable. However, he considered that our restrictions had not done any real harm and that we would be negotiating in GATT soon: the present Canadian Government was not responsible for setting the high price support for dry skim milk. Mr. Fleming expressed the appreciation of his Government for the President's decision on imports of petroleum. Mr.  Fleming said he would be glad to have studies made in Canada about the agricultural problems confronting the two countries. The U.S., he continued, takes the cream of the early market for strawberries and certain other commodities and these advantages to U.S. commodities seem to be getting greater. Mr. Benson remarked that an unusual situation had developed in the U.S. with respect to strawberries this year, but he did not think this situation would be repeated.

46. Secretary Dulles concluded the discussion by saying that in his view "there must be going on a revolutionary change in industry." It was difficult therefore to talk in terms of the past: for example the seasonal problems were passing because these (agricultural) products were available at all times. He said that the discussions had left three general impressions with him: the two countries should think about how they could work on parallel lines; about how they could help each other more; and about how world-wide solutions might be found (to agricultural problems?).

OCTOBER 8 - MORNING SESSION
ITEM VII - SOME SPECIFIC QUESTIONS OF SPECIAL INTEREST

(a) U.S. Policies Affecting Canadian Mineral Products.
Lead and Zinc²¹⁹

47. Mr. Churchill opened the discussion with an expression of Canada's great interest in U.S. import policy relating to base metals. Mr. Churchill stated that Canadian Ministers would wish to be reassured that no steps would be taken by the U.S. to interfere with Canadian exports of lead and zinc. This was a matter of great concern to the Canadian lead and zinc industry and any measures to increase barriers on these products would result in substantial damage to Canadian interests. Mr. Churchill explained that his purpose in raising the matter was to find out what the U.S. intentions were so that Canada might be given an opportunity to offer suggestions, or alternatively of determining what adjustments would be required in Canada.

48. In reply Mr. Dulles said that lead and zinc had given the Administration a great deal of concern. The problem, as he saw it, was one of excessive expansion in all producing countries since the war; this had resulted in a world surplus of lead and zinc. He explained that the U.S. Administration had been confronted with a similar problem in 1954; at that time the President decided against imposing higher tariffs.²²⁰ The solution adopted at that time was to keep the U.S. lead and zinc industry alive through a programme of government stock-piling. There had been no interference with imports except that foreign suppliers were advised not to take advantage of the stock-piling programme to expand their exports to the U.S. He went on to say that this approach worked reasonably well until recently when two new elements were introduced into the picture. Firstly, there had occurred a sharp decline in lead and zinc prices. Secondly, the government's funds for stock-piling were exhausted and because the stock-pile was now large enough no further funds could be allocated for this purpose. He explained that the U.S. had a difficult situation on its hands because there were a large number of communities spread through the western states which were entirely dependent on the production of these metals; the people engaged in this industry had no alternative skills, and there were no other opportunities for their employment. He pointed out that the legislation sponsored by the Administration had not been passed by Congress because of the pressure of other business; but that the President assured Congress that he would take steps under the R.T.A.A. to deal with the lead and zinc problem. The matter was now before the U.S. Tariff Commission. Mr. Dulles stated that it should be assumed that there will be additional protection granted to U.S. producers of lead and zinc; that it will probably take the form of a sliding-scale tariff rather than quota restrictions or voluntary restraints. As to timing Mr. Dulles expected that the report of the Tariff Commission would be available around the end of the year, and that the President would take action immediately on receipt of the report.

49. Mr. Dillon elaborated on Mr. Dulles' remarks. He explained that the U.S. was on a substantial import basis with respect to lead and zinc, importing some 55% of its total requirements. He stated that the U.S. was not trying to change the relationship between domestic production and imports. The problem was one of world surplus supply and there was need for some reduction in output. He felt that the U.S. should not be expected to bear a disproportionate burden of the downward adjustments. He referred to the sharp increase in lead imports this year and also to the steady increases in zinc imports since 1954. In his view an increase in the lead and zinc tariffs would leave room for substantial imports; and that increased tariffs would not adversely affect Canadian sales as compared with what they were, on the average, over the past few years. It was the U.S. intention to maintain the present relationship of domestic production to imports in the ratio of 40:60.

50. Mr. Fleming noted that the U.S. report on lead and zinc was disappointing to Canadian Ministers. This was particularly so since the Administration had taken certain initiatives in proposing tariff increases on these products. He appreciated the explanations given, but these did not reduce the Canadian concern.

51. Mr. Dulles explained that the President had proposed tariff changes in this field, not because his belief in freedom of trade has changed in any way, but rather because the President hoped that this would put him in a position to control the legislation and make it more moderate. For this reason he hoped that no erroneous inferences would be drawn from the fact that the Administration had sponsored new tariff legislation.

52. Mr. Fleming added that Canadian concern related not only to the importance of the commodities in question but also to the implications which such action had for the direction of U.S. trade policy. He referred to the fact that the U.S. was apparently not in a position to offer compensation to countries whose interests would be adversely affected.

53. Mr. Dillon admitted that there were very limited powers under the R.T.A.A. to provide compensation and indicated that the alternative open to other countries would be to withdraw tariff concessions from the U.S. Mr. Dillon added that there would likely be new R.T.A.A. legislation next June; he expressed the hope that this would enable the U.S. Administration to offer effective compensation if countries could postpone countermeasures until that time.

54. Mr. Fleming commented that it was his understanding that until new legislation was introduced with new powers to make tariff concessions the only way to restore the balance of the trade agreement was by the withdrawal of concessions. He emphasized that Canadian interests would be damaged and that some lead and zinc mines would have to close down.

55. Mr. Dillon added that there was a relationship between the lead and zinc action and the programme for the renewal of the R.T.A.A.; there had been a great deal of criticism to the effect that the escape clause was inadequate. The mining interests in the U.S. had a powerful voice and if nothing were done for them it would be much more difficult to get the R.T.A.A. legislation through without more or wider escape clauses.

56. Mr. Fleming asked whether any consideration had been given to subsidizing U.S. lead and zinc producers rather than to tariff increases.

57. Mr. Dulles replied that this alternative had been considered and turned down. It was felt that subsidies would create many new difficulties; moreover they would be difficult to remove once introduced. In his view the real problem was that the demand for lead and zinc was declining.

58. Mr. Fleming remarked that if the blow was coming he hoped that the U.S. would soften it as far as they were able to.

59. Mr. Dulles expressed his regret that the U.S. felt compelled to take this action. He added that certain Latin American countries particularly Peru would be hit very hard.

(b) The Magazine Tax

85. Mr. Dulles stated that the magazine tax had been the subject of a number of complaints and was a matter of concern to the U.S. Government.²²¹ As he saw it, the magazine tax could be described as "tricky" domestic legislation which attempted to do by indirection what couldn't or wouldn't be done directly. In the United States view this tax had a discriminatory impact on certain U.S. magazines and was a device for evading the obligations of the GATT as well as other obligations. This tricky and complicated tax would, he feared, set a bad example for other countries and could have a damaging impact all over the world.

86. Mr. Dillon elaborated on Mr. Dulles' observations. He explained that the United States was more concerned with the principle of the matter than with the actual impact of the tax. It had had a bad effect on a number of magazines but there was a real question whether the tax had been effective in accomplishing its stated purpose. According to his information, the special edition of Reader's Digest in Canada had done even better after the tax was imposed. Mr. Dillon then restated the U.S. objections to the magazine tax along the lines of the last U.S. Note on the subject. His main emphasis again was that this tax would set a bad example to other countries and would have a severe impact on the free flow of information should other countries follow Canada and introduce similar discriminatory legislation.

87. Mr. Fleming referred to the active part he had taken in the debate in Parliament on the magazine tax. He said that the magazine tax dated back to the former Government and expressed the hope that his explanation of its background would not be interpreted as advocacy of this particular measure. He recalled that Canadian daily newspapers had, with few exceptions, opposed the magazine tax and that in the course of the Parliamentary debate he, drawing on the arguments of the dailies and adding to them, was also strongly critical of this measure.

88. Mr. Fleming recalled that the magazine tax was first referred to in the Budget Speech of March, 1956. Lines were drawn with present Ministers, then in opposition, opposing the tax. The Government of the day chose to reserve progress on this matter and there was no further reference to it until the last week of the Parliamentary session. The debate was brief, although not lacking in vigour. The view of the former Government was that the special editions involved a measure of unfair competition to Canadian magazines and that the purpose of the tax was to help equalize this element of unfair competition. Mr. Fleming referred to discussions on this subject which had taken place between the President and the former Prime Minister at Sulphur Springs and indicated that the Reader's Digest brief referred to by the President at that time had contained a number of statements which the then Canadian Government held to be inaccurate.

89. Mr. Fleming went on to say that Reader's Digest had taken the matter up in the courts and that litigation was now pending. Reader's Digest was questioning the constitutionality of the tax, presumably under the Property and Civil Rights Clause of the B.N.A. Act. Mr. Fleming expressed doubts as to whether their contention would be supported in the courts and explained that while the litigation was pending discussion would be held up in Parliament.

90. As to the effects of the tax, it would seem that there was no apparent adverse impact on Time and Reader's Digest. It had been his view that these two special editions were so solidly entrenched in Canada that Canadian advertisers would continue to use them even though it meant a higher advertising cost. The effect would be that Canadian advertisers would be left with less funds for advertising elsewhere; this prophecy of Mr. Fleming's appeared to have turned out right.

91. Representations recently submitted by the Periodical Press Association urged that the tax be retained. In their view, while Reader's Digest and Time Magazine had not been hurt, other U.S. magazines had been discouraged from introducing special editions in Canada. There was little more that Mr. Fleming could add at this time. He was certain that the measure could not be defended as a device to restrict the flow of information. He referred to the experience of the Bennett Government when twenty-five years ago it imposed a tariff on foreign magazines. The measure had been very unpopular and was soon withdrawn. Mr. Fleming was convinced that unless the magazine tax could be defended on the basis of the former Government's explanation - namely to remove an inequity - it could not be defended at all.

92. In conclusion, Mr. Fleming assured United States Secretaries that the Government would have a fresh look at the problem. He explained that there was a limit to what the Government could do in the coming session; but undertook that the Government would keep the matter under review.

(c) United States Investment in Canada

95. The Committee then turned to a discussion of United States investment in Canada. Mr. Fleming opened with the comment that while this subject was placed on the agenda by the United States side, Canadian Ministers welcomed it, because it gave them an opportunity to clarify the position of the Canadian Government on this important subject. There had apparently been, he said, a good deal of misunderstanding about the attitude of the Canadian Government to foreign investment. For this reason, he wanted to say clearly that the new Canadian Government welcomed foreign capital, and more specifically welcomed United States capital. The Canadian Government intended to maintain an atmosphere of hospitality to the inflow of capital from abroad. The Prime Minister, and others, had made public statements recognizing the important contributions which foreign capital had made to the development of Canadian resources and to the maintenance of the forward momentum of the whole economy. It was also recognized by the Canadian Government that capital inflow was not simply a matter of providing capital funds; along with the capital came new skills, know-how, technology, markets and many other important elements of economic growth. The Canadian economy had been among the freest in the world with respect to the inward and outward movement of capital. Mr. Fleming stated that it was intended to maintain this freedom for capital movement.

96. Mr. Fleming then went on to give a few facts and figures about the extent of foreign investment in Canada. There was at the present time, he said, some $16 billion of foreign long-term investment in Canada. About half of this total had come into Canada since the end of World War II. Total United States long-term investment in Canada amounted to $12 billion and a very large part of this total - close to $8 billion - was United States direct investment in Canadian industries. There had also been substantial imports of capital from Europe, especially from the United Kingdom and Germany, in recent years. Nevertheless, the United States was still supplying about 80% of the capital inflow.

97. One of the features of United States direct investment in Canada, continued Mr. Fleming, was the heavy concentration of this capital in certain industries. The petrochemical industry, for example, was about 100% owned and controlled in the United States. Others, such as the automobile industry, were also overwhelmingly dominated by United States subsidiary companies. Mr. Fleming explained that this concentration of United States direct investment has had certain broad political implications for Canada. He referred to the Preliminary Report of the Royal Commission on Canada's Economic Prospects. The Gordon Commission had drawn attention to certain harmful effects flowing from the concentration of United States investment and some of the corporate practices that accompanied this concentration.

98. Mr. Fleming went on to explain some of the criticisms which have been heard in Canada about the operations of Canadian subsidiaries of United States corporations. The main complaint related to the fact that most United States subsidiaries are entirely closed to equity investment by Canadians. This was something about which the United States Administration could not do anything. It was essentially a Canadian problem; but Mr. Fleming considered it useful to clarify the issue. The fact that Canadians were excluded from equity investment in United States subsidiaries operating in Canada has had a bad effect on Canadian public opinion. Mr. Fleming felt that it was an unwise public relations policy for such companies to remain closed to Canadian financial participation.

99. The second principal criticism heard in Canada was that many Canadian subsidiaries were operated as though they were branch plants located in the United States, with little recognition of Canadian conditions or Canadian requirements.

100. Thirdly, and related to the second point, there was a feeling in Canada that many subsidiary companies did not have sufficient regard for Canadian interests in such matters as export policy, purchasing, research, personnel and so on. These complaints were exceedingly difficult to deal with, said Mr. Fleming, and were certainly not the fault of the United States Government.

101. Mr. Fleming then referred to concern in Canada about recent attempts of non-residents to gain control of certain enterprises which were, by their nature, national institutions; for example, the Sun Life Insurance Company. In the last 18 months, Mr. Fleming said, 5 out of 27 life insurance companies have passed to United States control. He explained that life insurance companies, like banks, were something akin to national institutions and deserved special attention.

102. The Canadian Government, Mr. Fleming said, believed in free enterprise and would wish to avoid interfering with it. Whatever action would have to be taken would take the form of inducements rather than coercion. Mr. Fleming referred to recent changes in the taxation agreement with the United States which had the effect of removing certain disincentives to non-resident companies issuing equity stock in Canada.

103. Mr. Fleming explained that he had himself been actively engaged in company law work and knew intimately the advantages to be gained from United States capital investment. He hoped that his comments would remove all United States apprehension about his Government's attitude to United States investment.

104. Mr. Dulles in reply, expressed appreciation for Mr.  Fleming's statement. He was sure that this would help to allay apprehension in the United States. He could understand the concern felt in Canada about some of the by-products of large-scale control by United States companies. He referred to the earlier American experience with foreign investment which also carried with it substantial outside influence. Two world wars, he said, had changed all this. Speaking personally, Mr. Dulles commented that in his view some of the subsidiary companies did not behave wisely. He believed that it would be good and statesmanlike policy on their part to welcome Canadian participation. This would be the far-sighted and wise way for them to operate in Canada. There were, of course, exceptions to this generalization. These things, he said, tend to work themselves out and in time subsidiary companies would adjust themselves to Canadian views.

105. The experience of capital flows between Canada and the United States, commented Mr. Dulles, provided a dramatic example of how a country as it matured industrially, produced capital surpluses which were used to help develop a less advanced neighbouring country. This experience, he said, was a good thing for other countries to see and he had referred to it often in his discussions with countries in need of capital. In Mr. Dulles' view, there were many countries whose policies and practices relating to the treatment of foreign private capital left a great deal to be desired. Were it not for these difficulties, he thought that there would be a much larger flow of private foreign capital in the world.

106. Mr. Smith commented on his personal experience in fund-raising campaigns for hospitals and universities. In some instances, United States subsidiaries in Canada had referred such requests to head office in the United States and were never heard from again. On the other hand, some United States owned companies in Canada had an excellent record in this regard, often better than Canadian companies. The International Nickel Company was cited as a case in point.

107. An exchange took place in which Mr. Weeks, Mr. Benson and Mr. Anderson commented on the investment problem. They all welcomed the full and frank Canadian statement and indicated their agreement with Mr. Dulles. Moral suasion was far preferable to legislation as a means of influencing company behaviour. They were confident that management would eventually get the point and adjust their operations accordingly.

²¹⁴Pour une liste des ministres canadiens et américains présents à la réunion et un bref aperçu des principaux sujets traités, voir Canada, ministère des Affaires extérieures, Affaires Extérieures, vol 9, N^o 11, novembre 1957, pp. 323 à 25.
For a list of the Canadian and American ministers attending the meeting and a brief overview of the main topics discussed, see Canada, Department of External Affairs, External Affairs, Vol. 9, No. 11, November 1957, pp. 323-25.

²¹⁵Pour un compte rendu de la politique canadienne relative aux dindes et à la volaille, voir section E.
For an account of Canadian policy regarding turkeys and fowl, see Section E.

²¹⁶Voir volume 24, chapitre III, 2^e partie./See Volume 24, Chapter III, Part 2.

²¹⁷Voir volume 24, chapitre III, 2^epartie./See Volume 24, Chapter III, Part 2.

²¹⁸Voir section C./See Section C.

²¹⁹Voir section B, subdivision II./See Section B, Sub-Section II.

²²⁰Voir volume 20, chapitre III, 4^e partie, section C./See Volume 20, Chapter III, Part 4, Section C.

²²¹Voir volume 23, les documents 157 à 172./See Volume 23, Documents 157-172.