Canada: Dependent & Discontented

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Canada owes its prosperity in great part to its close economic ties with the U.S. This relationship, which has helped give the country the world's second-highest living standard (after the U.S.), is also a source of resentment. Now, Canada is engaged in a national debate over what, if anything, should be done about it. And last week the problem took the form of a hassle between the U.S. and Canada about banking.

Biting a Bank. The present phase of the conflict started two months ago over a book by former Finance Minister Walter Gordon, who remains an influential leader of Canada's governing Liberal Party. In A Choice for Canada, Gordon argued that the country must act soon to "regain control of our economy." The alternative, he wrote, is to "acquiesce in becoming a colonial dependency of the U.S., with no future except the hope of eventual absorption."

Two weeks ago, Gordon's successor as Finance Minister, Mitchell Sharp, added bite to that bark by introducing a bill in Parliament that would have the effect of prohibiting any Canadian bank with more than 25% foreign ownership from having more than $200 million in assets. If it is passed, which is far from certain, the bill would immediately apply to only one institution: the Mercantile Bank of Canada (assets: $222 million), which is wholly owned by New York's First National City Bank. For the future, another provision of the legislation would also effectively bar any other foreign-controlled bank from operating in Canada.

Because of its punitive tone, the bill provoked a strong protest in Washington. Approving an otherwise routine merger between the California Canadian Bank of San Francisco, owned by Toronto's Canadian Imperial Bank of Commerce, and the Northern California National Bank of San Mateo, of which Singer Bing Crosby is chairman, the Federal Deposit Insurance Corp. deplored "the apparent lack of reciprocal treatment" accorded U.S. banks in Canada.

Politics lie behind Sharp's restrictive bank proposal. With Canadian Prime Minister Lester Pearson expected to retire in a year or two, Sharp's hopes of succeeding him as Liberal Party leader partly hinge on his winning support among Gordon's followers. It was Gordon who originally proposed the bill against foreign banks. By carrying on with it, Sharp stands to build his party strength. Still, he has misgivings that the bill's retroactive provisions, which could force First National City Bank to sell 75% of its stock in its Canadian subsidiary, might damage Canada's high standing with the U.S. financial community.

Canada relies heavily on that standing to live beyond its means. Only the $1 billion a year that foreign investors put into the Canadian economy, mostly from the U.S., prevents Canada's persistent balance-of-payments deficit from undermining its currency. Even so, the figures can seem understandably alarming to a Canadian nationalist. At last count, Americans had more than $25 billion invested in Canada, a third of all U.S. private investment abroad. U.S. firms not only operate some 1,500 major subsidiaries in Canada, but control 46% of the country's manufacturing, 52% of its mining and smelting, 62% of its petroleum and gas industries.