INTELLIGENCE MEMORANDUM THE CANADIAN ECONOMY ON THE EVE OF THE NIXON-TRUDEAU MEETING

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700030054-7
• Release Decision: RIPPUB
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• Document Page Count: 10
• Document Creation Date: December 21, 2016
• Document Release Date: August 23, 2002
• Sequence Number: 54
• Publication Date: May 5, 1998
• Content Type: IM

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Con i ential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The Canadian Economy
on the Eve of the Nixon-Trudeau Meeting
Confidential
ER IM 72-54
April 1972
r; Copy No. "
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by iaw.
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
April 1972
INTELLIGENCE MEMORANDUM
THE CANADIAN ECONOMY ON THE EVE
OF THE NIXON-TRUDEAU MEETING
Summa
1. Canada's economy grew rapidly in 1971 as inflationary pressures
abated, but unemployment remained at a high level. Although its bilateral
trade and basic balance with the United States declined somewhat from
1970, both accounts remained in substantial surplus.
2. In what will probably be an election year, Ottawa faces continuing
larger-than-normal unemployment, which it fears will be aggravated by US
action to reduce its balance-of-payments deficit. In addition, pressure is
mounting for control over foreign investment, despite a continuing need
for additional funds to further Canadian development.
Discussion
The Economy in 1971
3. Canada's economy in 1971 recovered rapidly from its recent
recession. Gross national product (GNP) increased 9.1%, in current prices,
compared to a 7.4% increase in the United States. The price level rose
only 3.4%, almost 1 percentage point less than in 1970, and 1.2 percentage
points less than in the C Inited States. Canadian real GNP increased 5.4%
(see the table), more V n in any other OECD country except Japan. This
was a sharp improvement over the 1970 rate of 3.3% and the largest annual
gain since 1966.
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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Canada: Selected Data
1971
Gross national product (GNP)
US $)
(Billion
91.2
GNP per capita (US $)
4,200
GNP real growth (Percent)
5.4
Population (Million)
21.7
Exports (Million US $)
Total
17,569
To the United States
11,883
Imports (Million US $ )
Total
15,396
From the United States
10,794
4. An almost 16% increase in consumer spending on automobiles
and other durable goods was a major factor in the recovery. New housing
outlays also showed marked strength, increasing almost 23%, compared to
an 8% decline in 1970. But because of unused capacity and investor
uncertainties, gross fixed capital formation by business increased only 2.3%.
Rising.consumer demand boosted corporate profits 16% and labor income
10%.
5. Canadian monetary and fiscal policies were aimed at stimulating
demand. Credit conditions remained easy in 1971: long- and short-term
interesi rates were well below levels reached a year earlier, and central bank
policy permitted the banking system's assets to rise rapidly. Ottawa cut
taxes on low and moderate incomes, and total government spending
increased about 24%.
6. Despite We economic improvement, unemployment remained a
persistent problem (see the chart). The unemployment rate remained in
excess of 6% throughout the year, and exceeded 7% in September. Although
the number of persons employed grew 2.5 /o during 1971, this was
insufficient to absorb the 3.1% increase in the labor force.
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CANADA: Selected, Economic Indicators
Index 1969-100
110 r-
Percentage
Rate
GNP
(1961 Prices Seasonally Adjusted)
UNEMPLOYMENT
(Seasonally Adjusted)
9 6
I I I I I I I I I
Iv I 11 III IV I II III IV
1969 1970 1971
Index 1961=100
180 WAGES
F (Weekly Rates In Manufacturing)
J 2
120 I 1 I I I I I I I I
IV I II III IV I II III . IV
1969 1970 1971
TRADE BALANCE
Million US $ (Seasonally Adjusted)
1000
800
600
400
200
0
1969 1970 1971 6306-1 6
JUhib
II I
II IV
IV
1969
I I I I I I 1
II III IV I II 111 IV
1970 1971
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Balance of Payments
7. Canada's trade and payments position remained strong in 1971.
Although Canada's trade surplus fell by nearly $1 billion from the record
1970 level, the $2.2 billion 1971 surplus still is the second largest ever
recorded. The decline in the surplus largely resulted from increased imports
reflecting the country's rapid economic growth. The Canadian dollar's
appreciation of 8.5% since May 1970 appears to have had little impact
on Canada's foreign trade in 1971, and the effects of the US New Economic
Policy after August 1971 appears to have been limited to temporary
uncertainty and delays in contract signings. Canada continued to be favored
by a net inflow of long-term capital of $475 million, and the 1971 basic
balance showed a substantial surplus - $700 million.
8. The bilateral trade surplus with the United States declined
moderately - by $100 million - to $1.1 billion in 1971. Because of
increased payments for services and transfers, the bilateral current account
deficit rose from $13 million in 1970 to $364 million in 1971. Nonetheless,
the bilateral basic balance continued in surplus - $340 million - as Canada
obtained most of its long-term capital needs from the United States.
9. Canada had a net short-term capital inflow for the first time since
1965, and international reserves rose $1 billion to $5.5 billion at yeErend.
A 46% increase in reserves sirce the beginning of the float in May 137n
contradicts Ottawa's claim of a "clean" float. About 70% of Canada's
reserves are held in US dollars; many of these recent purchases were an
attempt to slow the appreciation of Canada's floating dollar.
Economic Problem Areas
Unemployment
10. The greatest economic problem facing Ottawa during the 1970s
will be the creation of enough. new jobs for those seeking employment.
Canada has the fastest growing labor force of any industrialized country,
and the Economic Council of Canada estimates that the economy 'must
grow at least 6% annually in real terms if unemployment is to be reduced.
The Trudeau government looks to the expansion of manufacturing to
pro?; ide many of the required jobs. Growth in manufacturing will provide
more jobs than will expansion of resource-based industries, which are
relatively capital-intensive. Having exhausted the easiest opportunities for
import-substitution in the 1950s, Canadian manufacturing development has
become increasingly export-oriented. The country's population - only 22
million - is insufficient to permit both product diversity and efficient
manufacturing runs in most technically sophisticated industries. The major
market for these exports has to be the United States.
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Foreign Investment
11. Foreign investment plays a greater role in Canada than in any
other industrialized nation. The more that $45 billion in Canadian assets
owned by foreigners includes over 50% of the assets in Canadian
manufacturing, oil and gas, and mining and smelting, and virtually 100%
in industries such as automobiles and rubber. The United States is Canada's
principal source of foreign investment, accounting for about 80% of the
total.
12. Foreign investment in Canada is a contentious domestic issue.
Many Canadians feel that the large degree of foreign control is a threat
to their country's independence, and fear that economic decisions affecting
the national well-being are formulated by corporate directors outside
Canada. A recent Gallup poll indicated that 69% of Canadians believe there
is presently enough US investment in Canada. ? This compares to 62% who
held this view in 1970, and only 46% in 1964.
13. On the other hand, many provincial leaders favor obtaining
additional foreign investment to combat unemployment. They feel that
there is not adequate domestic investment to alleviate the employment
problem and develop key resources, such as hydroelectric power. Many
provinces grant lucrative incentives to promote foreign investment - for
example, a combination of federal and provincial grants, low-interest loans,
and tariff concessions induced Michelin to build two plants for the
production of radial tires in Nova Scotia. About 80% of Michelin's output
will be exported to the United States.
14. The Trudeau government is now in the process of formulating
a foreign investment policy. This policy will probably provide for the
establishment of an agency to screen future foreign investments in Canada.
But whatever institutional change is made, the government faces a dilemma.
Although Ottawa would like to increase Canadian ownership, future
development - particularly in the capital-intensive resource industries -
requires vast infusions of foreign capital. If investment inflows are limited
severely, the problem of creating new jobs will be exacerbated and this
will have serious political repercussions in many provinces. Thus, while
foreign investment will probably receive increased scrutiny - and may be
constrained where domestic funds are available - the new investment policy
is unlikely to be applied in such a way as to significantly hamper the
investment inflow.
Bilateral Balance of Trade
15. The US-Canadian trade balance has changed drastically in recent
years. In 1966 the United States had a $0.7 billion surplus which, by 1971,
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had turned into a deficit of $1.1 billion. This basic change in US-Canadian
trade relations has come about largely because Canada has increased its
exports of manufactured goods ?- particularly automotive products - while
continuing to expand exports of raw materials, US resources of which are
becoming increasingly scarce.
16. To improve its trade position, the United States has asked for
Canadian action in three areas: to increase the duty-free allowances for
Canadian tourists to make them more comparable with US allowances; to
honor its commitments under the Defense Production Sharing Arrangement;
and to recognize that the transitional safeguards in the aut3 motive
agreement are no longer required. Thus far, Ottawa has shown little desire
to meet US demands, being particularly resistant to any meaningful
modification of the auto pact. The issue, furthermore, has taken on
considerable political coloration. This will probably be an election year in
Canada, and Trudeau does not want to be. accused of selling out to
Washington, or of taking actions that might result in the loss of Canadian
jobs.
Dc1lar Float and Its Impact
17. Canada's dollar has been floating almost two years. Since it was
freed from its pea, of $1 Canadian = $0.925 US in May 1970, it has
appreciated to about parity w?-4h the US dollar. This float has created a
dilemma for the Canadians. Needed foreign capital inflows and growing raw
material exports tend to force the Canadian exchange rate up. But this,
in turn, makes it more difficult to expo .d manufacturing output, as
Canadian manufactures are less competitive in foreign markets while foreign
manufactures are more competitive in Canada. The float has had little
impact so far, however, because most Canadian exports are either sold under
long-term contracts or are produced by subsidaries of US companies which
continue to use their existing capacity in Canada.
18. Moreover, the December agreement on new international parities
eased Canada's situation. At that time, Canada's currency was devalued
relative to the currencies of all of its major trading partners, and the
exchange rate vis-a-vis the United States did not change. Canadian export
sales to Europe and Japan will consequently be given a boost while European
and Japanese products will be less competitive in Canadian markets.
Prospects for 1972
19. For 1972 the most important determinant of Canadian trade will
be the rates of economic growth in Canada and the United Statess - by
comparison the impact of the exchange rate changes will be small. Canada's
economic growth will probably accelerate, in 1972. According to most
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Canadian forecasts, GNP, in current prices, will probably grow about 10%,
surpassing $100 billion. Real GNP should increase about 6%, with prices
probably increasing about 4%. At this real growth rate, unemployment will
be reduced somewhat, but will still be in the 5.5%-6% range through most
of the year. Consumer and government spending will lead Canada's growth
in 1972 as they did in 1971, probably rising 10% and 15%, respectively.
Business investment probably will still be sluggish, rising by only 4%, because
unused plant capacity still exists.
20. Canada's balance of payments will probably remain favorable in
1972. Imports will rise along with the country's rapid economic expansion,
but exports are also expected to climb because of the US economic recovery
and economic recoveries in Japan and Western Europe. Altogether, Canada's
global trade and basic balance surplus is expected to improve somewhat,
and its surplus with the United States will remain essentially unchanged.
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