Facing a Winter of Discontent

By Russ Hoyle

Trudeau looks to the U.S. as his economic problems deepen

The trip was U.S. Secretary of State George Shultz's first formal visit abroad, and also a chance for a college reunion. For six hours Shultz closeted himself in Ottawa's Lester B. Pearson Building with a fellow student from the Massachusetts Institute of Technology, Canadian External Affairs Minister Allan MacEachen. When they emerged from their meeting, the atmosphere was almost chummy. The two men agreed that they would henceforth consult four times a year, and they tried to make some progress in resolving the deadlocked cross-border dispute over "acid rain," industrial pollution that destroys life in lakes and forests across vast reaches of both Canada and the northern U.S.

The Secretary of State's meeting with MacEachen and a subsequent talk with Canadian Prime Minister Pierre Elliott Trudeau were signs of a small thaw in a U.S.-Canadian relationship that has grown increasingly frosty. Washington is concerned by what it sees as the nationalistic and discriminatory investment policies of Trudeau's Liberal government. Those worries have been expressed vocally in the U.S. Congress. Last week Congressman John Dingell, chairman of the House Subcommittee on Oversight and Investigations, attacked Canada for "unfair and confiscatory policies in the energy and investment areas." According to a report issued by the subcommittee, those policies are "having a strongly adverse impact on the Canadian subsidiaries of U.S. corporations." Indeed, so strong is the feeling in Congress that, according to Canadian Ambassador to the U.S. Allan Gotlieb, there are 53 pieces of legislation pending in Washington that would curtail U.S.-Canada trade in areas ranging from trucking to electronic technology to automobile manufacture.

Ottawa is now trying hard to correct its image. The reason: foreign, and particularly U.S., investment is central to Trudeau's new strategy for reversing Canada's worst economic decline since the Depression. As Trudeau put it in a televised national address, "A difficult winter lies ahead. We face a challenge unlike any our generation has faced. We must keep our markets open to others in order to secure access to their markets. We must meet the competition at home and abroad."

Canada's economic problems are substantial. Unemployment is at a record 12.2%. The inflation rate is also double digit: 10.6%. Between January and September, 8,074 Canadian businesses went bankrupt, the worst rate since the 1930s. The gross domestic product dropped 7.8% from June 1981 to July 1982. Foreign debt soared from $23.1 billion in 1970 to $73.3 billion last year. Of that, $54.6 billion is owed to the U.S.

The economic difficulties, worse than those of the U.S., are having their political consequences. A recent Gallup poll showed that the Prime Minister, now in his 14th year in office, and his Liberal Party would be soundly defeated by the opposition Progressive Conservatives if elections were held today. Three weeks ago, the Liberals suffered humiliating defeats in three parliamentary by-elections in Ontario, leaving Trudeau with a mere ten-seat majority (146 to 136) in the House of Commons.

Foreign investors have blamed much of Canada's trouble on two policies initiated by Trudeau. In 1973 his government created the Foreign Investment Review Agency (FIRA) to screen foreign takeovers and, more recently, to approve new foreign investment in Canada. U.S. businessmen have complained about government arm twisting to extract additional economic concessions in exchange for investment approvals. Lengthy FIRA delays in considering their investment applications have also caused many businessmen to send their money elsewhere. In 1980 Ottawa launched the National Energy Program (NEP), which was designed to increase Canadian oil and natural gas production. In addition, the NEP was charged with raising Canadian ownership of the U.S.-dominated Canadian energy industry to 50% by 1990, up from 20% in 1980.

While American investors fumed, Canadian companies rushed in to buy the assets of U.S. firms in Canada, helped by generous financing from Canadian banks. In one of the biggest transactions, Canada's Dome Petroleum spent $3.2 billion acquiring Hudson's Bay Oil & Gas, a subsidiary of Connecticut-based Conoco Inc. In the nationalistic climate of 1980-81, Canadian companies spent more than $7.3 billion on the purchase of foreign-held assets, creating a massive drain on the economy. Severely compounding the problem, Canadians invested at least $19 billion in the U.S. during roughly the same period.

The NEP concept began to backfire in mid-1981, when high interest rates in the U.S. and the international oil glut helped to cause the near collapse of Dome. The company, one of Canada's largest, had amassed debts of $7.4 billion, more than one-quarter of that due to the Hudson's Bay deal. Interest rates on the debt grew to a nightmarish 22%. Last month Dome was saved from bankruptcy by a government-backed emergency bailout handled through a consortium of four Canadian banks.

Trudeau has responded to Canada's economic crisis with a program of public-sector wage restraints, holding pay hikes to 6% in 1983 and 5% in 1984. But the glaring problem, says Laurent Thibault, vice president of the Canadian Manufacturers' Association, is that "the government is so overburdened by debt that it can't afford to stimulate the country. Business isn't going to do it. That leaves exports."

Prior to Shultz's visit, Trudeau had made a number of conciliatory moves to begin restoring foreign and domestic confidence in his government's management of the country. One was to order the shake-up of 18 of 36 Cabinet portfolios. Among those shifted were a number of ministers identified with efforts to "Canadianize" ownership of industry. The Prime Minister had an unusual private chat with 21 top U.S. businessmen who were invited to Ottawa to discuss the local investment climate. The meeting was cordial, and, said First National Bank of Boston Chairman Richard Hill afterward, "we had a good explanation of why we are the way we are. We learned a lot."

During his visit, Shultz summed up the sticky state of U.S.-Canada relations well. Said he: "We have to put these issues on the table and confront them and work at them and argue about them, and eventually resolve them."

--By Russ Hoyle

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