From Special Relationship to Third Option: Canada, the U.S., and the Nixon Shock

By Muirhead, Bruce | American Review of Canadian Studies, Autumn 2004 | Go to article overview
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From Special Relationship to Third Option: Canada, the U.S., and the Nixon Shock


Muirhead, Bruce, American Review of Canadian Studies


The articulation of the so-called Nixon Shock of August 15, 1971, more formally called the New Economic Program (NEP), was an epochal event in the history of Canada-United States relations, that stimulated Ottawa to consider a new world in which the U.S. did not bulk so large. (1) The Canadian assumption that the United States would always accord their country consideration when calculating the American interest as, for example, it had when it had exempted Canada from the Interest Equalization Tax in 1963, was shaken on that day. (2) Much to their surprise, Canadians found themselves no different in American eyes than Western Europeans and the Japanese.

The "special relationship" (3) that had existed between the two North Americans at least since the Second World War, was officially over as the various elements of the NEP took effect, among them the temporary ten percent import surcharge, the Domestic International Sales Corporation (DISC), which encouraged export activity by allowing tax deferral within the DISC while it was more or less exclusively engaged in export sales activity, a ten percent tax credit for investment in American-produced machinery, and a job development tax credit. It was an article of faith in Ottawa in the dog days of summer 1971 that these measures would hinder Canadian sales to the U.S. causing widespread economic dislocation.

The NEP was made necessary by the declining position of the United States in the global economy, or so its author, Secretary of the Treasury John Connally, believed. He was determined "to head off what the Administration believe[d] to be the most important non-military threat to U.S. national security: economic competition from Japan and Western Europe." (4) This had been made worse by the United States' involvement in a debilitating war in Vietnam that sapped the moral fiber of the country and took its gold to pay for bombing runs in the North and troops in the South. As well, American technology seemed to be second-rate when compared with that of Japan, as did U.S. business organization and practice. In short, on various levels decision-makers were forced to confront the reality that their nation seemed to be less powerful and less essential to global prosperity than it had been in the past. It also made Americans more defensive and less willing to adopt a policy of noblesse oblige when considering requests by smaller petitioners like Canada. It reflected "a certain self-doubt, ... a rather pervasive pessimism." (5) And the fact that the U.S. current account balance struggled to maintain itself in the black through most of the 1960s, and went from a small surplus in 1970 to a deficit of US$3 billion in 1971, did not help at all, especially as Canada seemed to be doing quite well, at least in terms of its trade surplus with the U.S.; that had increased from CDN$750 million in 1970 to CDN$1.1 billion the following year. (6)

The NEP was draconian and as the Canadian political scientist, Peter Dobell, has pointed out, "It [was] no exaggeration to suggest that the effect in Canada of these short-term measures and of the negotiations that followed their introduction produced a national catharsis." (7) They were also, as one critic later characterized them, the equivalent to "putting a gun to the head of the rest of the world." (8) The program vaulted the U.S. back into the center of Canadian calculations from whence it had strayed following the publication of Canadian Prime Minister Pierre Trudeau's vision of foreign policy contained in Foreign Policy for Canadians which had minimized comment on the United States. This article investigates the effects of Nixon's 1971 announcement on Canada, providing a lens onto relations between the North Americans as Ottawa sought to cope with its changed circumstances.

Why was the U.S. performing so poorly, relatively, in economic terms by the later 1960s? The assistant to the president for international economic affairs, Peter Peterson, had some ideas as well as some thoughts on how to address them.

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