296. Paper Prepared in the Department of Defense0
COOPERATION WITH CANADA IN DEFENSE
PURPOSE
To review U.S.-Canadian relationships with respect to cost and production sharing and atomic energy
Introduction
Canada’s strategic position as the only land mass separating the two major protagonists gives them a special position of importance to the United States on defense matters. Early warning and intercept of enemy forces depend heavily on equipment based on Canadian soil and to a large extent maintained and operated by Canadians. U.S. military aircraft fly over their sovereign soil regularly in training missions and test exercises against the NORAD defense system. Storage on Canadian soil and overflight of atomic weapons create the need for special concessions to the U.S. In defending the North American continent, we act on a fully cooperative and unified basis and continued cooperation from an economically strong and willing partner is essential to our defense.
The Canadian government is faced with a dilemma in its desire to make a maximum contribution to our common defense with a limited budget, to promote the growth of Canada’s defense industry and to improve the Canadian balance of trade with the U.S. Canada’s greatest contribution to our mutual defense may be to use U.S. developed weapons already in production and integrated into NORAD instead of developing and producing independently. Unless Canada can share in the production of such equipment, however, her defense industry and balance of trade will suffer. Canada is sensitive toward production arrangements which create the impression that her industry will produce only minor components for joint defense projects.
It has been recognized from the outset of the production sharing effort that Canada has two major problems and objectives. From the short term point of view, Canada is interested in filling the gap in the [Page 748] aircraft and electronics industries caused by recent program cutbacks, with primary attention directed to “crash” action on the Bomarc, Sage, and Radar Improvement Programs. The long range objective is to achieve better integration of her resources by sharing in development and production programs of mutual interest in all three of the U.S. military services.
Historically, Canadian pride in maintaining her independence and sovereignty has been a key factor in refusing grant aid. The Canadian public is sensitive to any actions by their government or by the U.S. which indicate loss of sovereignty.
Cost Sharing and Production Sharing
Background Discussion
This interdependence and need for cooperation were recognized in 1941 in the Hyde Park Agreement which stated—“That each country should provide the other with defense articles which it is best able to produce—and that production programs should be coordinated to that end.” The significant purchases made by the U.S. from Canada during World War II of some $1–1/4 billion was within the framework of this broad statement of understanding.
The Statement of Principles for Economic Cooperation1 approved by the President in 1950 further strengthened previous ties. Aims were to: use production and resources for best combined results; develop a coordinated program of requirements, procurement and production; remove as far as possible barriers which impede the flow between Canada and the United States of goods essential for the common defense.
These broad principles have been implemented in a large body of actions which properly reflect the spirit and intent of top level policy statements. Canada is given special treatment in a wide area of defense matters including: The Buy American Act, the exchange of programming information and standardization program between the military services of the two countries, industrial security, control of defense materials, agreements regarding the production in Canada of equipment to be installed in Canada and the exchange of research and development technical data.
In turn, the U.S. enjoys the fullest cooperation from Canada in defense matters.
During the Korean emergency when U.S. electronic production facilities were operating near capacity, heavy purchases were made from Canada in radar and other electronic equipment connected with air [Page 749] defense, particularly the Pinetree systems. Under the terms of the bilateral agreements covering these installations, the U.S. agreed “when practicable” to purchase in Canada equipment to be installed in Canada. Practicability has been defined over a period of time as the determination of Canadian technical competence on a given item, plus the ability to produce at a reasonable cost and at the time required. A significant part of the radar defense equipment was purchased in Canada under this general criteria, thereby establishing a precedent for production sharing. The precedent for cost sharing was also established when the Pinetree cost was divided on the basis of one-third Canada, two-thirds U.S.
The Canadian electronics industry was given a tremendous impetus at that time, although it is still modest in terms of United States capability. The major part of that industry today is made up of subsidiaries and affiliates of United States corporations.
The impact of defense decisions on the balance of trade between the two countries is of great concern to the Canadians. This balance has been unfavorable to them, amounting to a $1.1 billion deficit for 1957 based on exports to the United States of $2.9 billion and imports of $4.0 billion. A comparison of direct military purchases between the two governments, however, shows a 50% higher level by the United States than by Canada over the past four years—$205 million vs. $131 million. (See Table at end.)2 It is of significance that from the peak of $250 million United States purchases in Canada during 1952 and 1953 when heavy orders for radar defense systems were placed, the level has dropped to less then $50 million average for the last five years.
These figures, however, do not give the complete picture, since the substantial subcontracting from government prime contractors is not shown. As an example, for Dewline alone, since 1955 Western Electric has subcontracted $230 million to Canada, more than is reported for the same period in direct contracts from the three military services. Another factor of great significance not now measurable is the United States content of Canadian produced technical items purchased both by the United States and by Canada. It is estimated that an average of at least 20% of the cost of technical military items returns to the United States in the form of component manufacture.
In addition, there is a large defense expenditure in Canada other than the direct purchases by the three military services shown in the Table at end. This total was estimated to be $344 million in FY ‘58, including military pay, construction, local purchase and other items not [Page 750] included in the comparative figures reported by the Department of Defense.
Current Situation
The present strong interest of Canada in production sharing is the result of the decision made by the Canadian government in September to curtail drastically the CF 105 supersonic interceptor aircraft program, and to introduce into the Canadian air defense system the U.S. produced BOMARC missile and SAGE control equipment. This decision recognized the rapid strides being made in missiles by both the U.S. and Russia and the high cost of the CF 105 in relation to its potential contribution to North American defense.
The specially developed Astra fire control and Sparrow missile systems for the CF 105 were terminated in September, with the subsequent cancellation of the complete program 20 February. Reaction to this decision from the press and the opposition has been most unfavorable, and will greatly increase the strong pressures which have existed on production sharing.
With over $300 million already expended in the development of this system and a potential production program of another $1.25 billion for 100 aircraft, this was a heavy blow to Canadian industry and the pride of their people. The implications on the Canadian economy can be measured in terms of their defense budget, which is in the order of $1 billion annually.
The decision to terminate the CF 105 was predicated in part on the agreements to provide Canada with better chances to share in production of defense items of mutual interest. The Deputy Minister of Defense Production has stated in effect that if production sharing does not work, Canada has no alternative but to use her limited defense budget for whatever items she is able to produce, whether or not it makes a maximum contribution to North American defense.
Since September negotiations have been underway on the basis of Canada paying one-third of the cost of two 30 missile BOMARC sites, one SAGE super combat center and a radar improvement program. The Canadian share of $125 million would be associated with site construction and unit equipment, with the United States share of about $250 million applied to the procurement of BOMARC and SAGE technical equipment. It has been agreed that this is the only practical way to make the split, however, the Canadians fear it will not give them any assurance of sharing in the production of the electronic and missile hardware. Since construction on Canadian soil is normally done by Canadian contract, Canadians are assured that substantially all of their $125 million will be spent in Canada in any event. However, they do not want to become a “brick and mortar” economy.
[Page 751]The Air Force has consistently opposed any agreement to assure Canada a given share of the production, based on the conviction that technical competence, cost and delivery considerations must be the deciding criteria. If Canadian competence can be demonstrated and reasonable decisions agreed to on individual items, it is our position that the end result will be a reasonable share for the Canadians.
From the recent statement by the Prime Minister to Parliament it is assumed that the Canadians have accepted the U.S. position on this matter.
A major problem is that the BOMARC, SAGE and radar programs are well along in development as well as in production and extraordinary effort is required to provide opportunity even approaching equality. There are significant roadblocks operating to the disadvantage of a Canadian source; security clearances, release of classified information, licensing agreements, lack of confidence in the knowledge of Canadian capability, qualification problems, inadequate liaison with United States’ laboratories, lack of aggressiveness, and frustration on the part of Canadian industry, and many others. The net result is that considerable effort and attention will be required from top policy level right down the line to the procurement officer if significant results are to be realized. A permissive policy will not result in any significant increase in the Canadian participation in United States production programs simply because there are too many other problems and pressures of greater impact on the procurement officer.
While in recent discussions we have continually emphasized a strictly competitive approach to production sharing, exceptions are still in order where Dewline and Pinetree agreements apply. Moreover, on the SAGE program it may be necessary to consider sole source negotiations on a limited number of development items where Canadian capability exists. Such cases will be approved at Secretarial level.
As a result of the high level discussion between the two governments last summer, the military department Matériel Assistant Secretaries were asked to work with Canadian officials to “consider the problems of allocation of development and production tasks, and to reach agreed solutions where possible.” Beginning in October, there have been three meetings of that group with appropriate members of the Canadian Government, and considerable effort has been applied to production sharing.3
Working groups have been formed in specific areas, policy directives have been issued, officials of government and industry at various levels have been briefed, visits have been made by teams to Canadian [Page 752] industry, and action has been taken on problems encountered. Recently, approximately $6.7 million in BOMARC subcontracts has resulted from this effort. In addition a large number of requests-for-bid are flowing to Canadian industry from both U.S. prime and subcontractors. Most of the potential is in the large number of comparatively small procurements on a competitive basis. Several large items for SAGE or the Radar Improvement Program are under negotiation with Canada for possible award under the “practicability” criteria. These are complex items with considerable previous development, however, and Canadian capability of meeting the criteria appears marginal.
In the most recent meeting in Ottawa, the Canadians expressed dissatisfaction with progress to date, on the basis that the short term objective of filling the gap created by the CF 105 terminations has not and probably will not be fully satisfied. The Canadians have been hoping for a few large items which would satisfy national pride and be significant enough to prove to the public that production sharing will work.
In light of the heavy expenditures by the U.S. services in communications and electronics, and the modest size of the Canadian electronics industry, it is believed that the present course of action—greater competitive opportunity—will provide reasonably for the Canadian electronic industry and satisfy the long term objectives of economic cooperation.
The problem in the Canadian aircraft industry is more difficult. The recent BOMARC award to Canadair is the only production sharing now in sight for the aircraft industry. From a United States point of view, considerable political repercussions can be expected even on this comparatively small item. From the Canadian point of view, while they realize it is a major concession on our part, it does very little to fill the gap in the aircraft industry.
An important factor in relation to the long term objective of economic cooperation is the effect of the Buy American Act. This provides that the head of an executive department may approve the purchase of materials of foreign origin when the purchase of like materials of domestic origin is “inconsistent with the public interest.” In consideration of the large number of items of mutual interest and the bi-lateral agreements on Pinetree and Dewline, the Secretary of the Air Force granted a waiver to the Act under this authority in 1950. This has given Canada the opportunity of competing without duty or price differential for any USAF item, except food and clothing specifically prohibited by law. The other two services have granted waivers on specific items on a more restrictive basis.
In the interest of uniformity a recent Defense policy directive will result in each service listing items or programs of “mutual interest” to be exempted. While this may result in decreasing somewhat the very favorable [Page 753] position afforded Canada under previous USAF policy, it will increase Canadian opportunities to bid on Army and Navy items. If we are to succeed in effecting a net improvement in the Canadian production sharing position, there must be a liberal interpretation of “mutual interest” in applying the revised Buy American policy.
Conclusion
In spite of favorable policies, and directives, it has been very difficult for Canadian industry to compete with United States industry on an equal basis. While considerable potential exists in the electronics area, it will require a substantial effort on the part of all three military services to effect any significant increase in production going to Canada.
In the aircraft industry progress will be even more difficult. On a strictly competitive basis, and without high level “guidance”, the chances of Canadian industry winning out on major air frame programs is remote.
It is generally agreed that production sharing must be made to work. This can only be done, however, if the Administration expresses the clear intention of getting results and is prepared to face up to the inevitable political repercussions.
- Source: Eisenhower Library, Cabinet Secretariat Records. Secret; Privileged. Attached to a cover sheet that indicated the paper had been prepared as background for the March 6 Cabinet meeting. During that meeting, Deputy Secretary of Defense Quarles reviewed the paper, noted that the Defense Department would prepare lists of materials open for competitive bidding by Canada, and stressed the importance that both Canada and the United States attached to the problem. (Ibid., Whitman File, Cabinet Series) The President supported the plans as set forth in the paper. (Record of Action 59–128, March 12; ibid.)↩
- For text of the Statement of Principles for Economic Cooperation, see Department of State Bulletin, November 6, 1950, p. 743.↩
- Not printed.↩
- No records of these meetings have been found in Department of State files.↩