Healthier Neighbor

The state of business and the uncertainty of politics in Canada have perplexed investors for some time. One year ago, a balance-of-payments crisis forced the Diefenbaker government to clamp on a dollar-devaluing austerity program, and less than one month ago, some far-out budget proposals (TIME, June 21) shook the new Pearson government. But as a whole the Canadian economy looks healthier than in half a dozen years.

Unemployment, although still a discomfort at 5.2%, has dropped from more than 7% in 1961. Retailing, oil and chemicals appear to be heading for bumper years. Steel's future gleams so brightly that Hamilton's Steel Co. of Canada launched a $118 million expansion program last week, and Dominion Foundries & Steel has announced a $20 million expansion. The outlook for farm machinery is "excellent, first-class," says George Vincent, president of Cockshutt Farm Equipment. Automakers expect a 24% production increase this year to a record 530,000 cars. "My crystal ball reads five years of real good times," says American Motors (Canada) President Earl K. Brownridge.

Branch-Plant Economy. One reason Canada is doing well is that its neighbor is too. Much as it rankles, Canadians still have a branch-plant economy that is largely dependent upon the U.S. But Canada is growing even faster than the U.S.--its gross national product jumped 8% last year to $40.4 billion, is expected to rise 5% or more this year--because the devaluation of its dollar (to 9210 of the U.S. dollar) has given Canadian goods a price advantage in world markets. Exports are surging while imports remain steady, and last year's trade surplus of $150 million is expected to rise to $400 million this year. Most pleasing to Canadians, whose world trade depends mainly on the sale of raw materials and farm products, including $147,400,000 in wheat to Red China last year, is the fact that exports of manufactured goods have almost doubled since 1956 and now account for 15% of foreign trade.

Canada's trade balance may have received some help from the "Buy Canada" program, with billboards urging Canadians to curb their appetite for imports. "It's just good business to keep your own customers employed," says Brownridge. His American Motors (100% U.S.-owned) won Ontario's "A for Achievement" by increasing its Canadian purchases 500% since 1961. White Motor Co. of Canada is testing a Canadian-designed combination battery box and gasoline tank that the U.S. parent company may adopt for all White trucks. But on many manufactured items, Canadian productivity and pricing simply cannot compete. "Several firms have been to see us about buying their hydraulic systems," says Cockshutt's George Vincent. "When we tell them what we're buying at in the States, they shake their heads and say they can't touch it."

Discriminating Proposals. The question mark for the future is the contro versial budget crafted by Lester Pearson's Finance Minister Walter Gordon. Business is reacting bearishly to a proposal to eliminate the 11% manufacturing sales-tax exemption that has been enjoyed by building materials and industrial machinery. Calgary's Keith Construction Co. has suspended sales of all houses now abuilding, and R. L. Grain, Ltd., a business-forms producer, has temporarily halted a plant it was planning for Toronto. Oilmen estimate that the proposal would cost them $20 million a year.

Also controversial in method are Gordon's plans to reduce the 55% U.S. ownership of Canadian business by raising taxes on foreign-controlled companies and lowering taxes on any such company that disposes of one-quarter of its shares to Canadians. To purchase 25% of all foreign-owned industry would cost Canadians an estimated $2 billion, and there is serious doubt that so much money could be raised in the country's thin capital market.

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