After a decade or more of heavy American direct investment Canada’s freedom of action has been progressively restricted to the point where a question arises whether it can ever be regained.

The erosion of Canada’s sovereignty is now the subject of daily public comment. Claude Ryan of the influential Montreal “Le Devoir” is noted for the moderate nod measured tone of his statements. His observation following the return of Finance Minister Sharp from a recent mendicant mission to Washington is representative of Canadian editorial opinion:

“Far from diminishing, our dependence on the United States increases with each crisis that comes along. We like to believe that we have all the powers of a politically sovereign state. But how long can our political sovereignty remain a reality if we permit the erosion of out powers over economic affairs to proceed.”

The loss of sovereignty is most evident in the matter of “extra-territoriality”. When the metropolitan government insists on the primacy of its law over subsidiaries located in hinterland countries there is a direct conflict of jurisdiction. In the words of the Watkins report:

“The successful intrusion of foreign law constitutes a direct erosion of the sovereignty of the host country insofar as the legal capacity of the latter to make decisions is challenged or suspended. Insofar as subsidiaries become instruments of the home country rather than the host country, the capacity of the latter to effect decisions, i.e. its political independence is directly reduced.”

The subsidiary is faced by the question: which law is to be respected: the law of the land in which the firm is located, or the law of the country in which the owners reside? “Confronted witl1 two peaks of sovereignty it is likely to defer to the higher peak on which its foreign owners reside”.

In Canada the extra-territoriality issue has arisen in three areas of conflicting jurisdiction: export policy, anti-trust legislation and measures taken by U.S authorities to protect their balance of payments. In each case, Canadian subsidiaries of U.S. corporations have been obliged, by American law or administrative pressures, to follow practices which are in conflict with Canadian government policy; indeed, in some instances, in conflict with Canadian law.

Of these three, public attention has fastened on the export policies of American subsidiaries. The U.S. Trading with the Enemy Act prohibits affiliates and subsidiaries, in which 50 per cent of the stock is American-owned, from engaging in trade with China, North Korea and North Vietnam. Violation of the law invited criminal action against all Americans who are stockholders or directors of the parent company. The law applies even where subsidiaries do not use American materials, components or technology. For this reason, Saskatchewan potash producers could not sell fertilizer to Chinn. Because all three producers are American subsidiaries, Canada was prevented from exporting potash lo China. Although similar legislation with respect to Cuba is slightly less stringent, American authorities have called for voluntary compliance which, in effect, places pressure on foreign subsidiaries not to engage in any trade with Cuba.

These practices are in direct conflict with Canadian trade policies which is very much more liberal. In fact, China is becoming an increasingly important customer for Canada. Although the volume of business lost is not known it is obvious that Canada is losing both dignity and cash by permitting U.S. legislation to govern the export policy of a substantial part of Canadian industry.

In all these situations, of course, there are the usual exemptions and special deals. Concessions are made by the U.S. authorities on a case by case basis, when Ottawa can prove that a particular order is of importance to the Canadian economy, or that it cannot be filled by a comparable American-owned company. Such an exemption was eventually made in the case of Saskatchewan potash. Once again, we have the pattern of begging favours from the metropolitan power to lift restrictions which violate Canadian sovereignty in the first place.

In commenting on the legal and administrative apparatus set up by the Ameri­ can government to implement their legislation abroad, the Watkins report concluded that:

“The general picture which emerges from our study is one of a tight legal and administrative network capable of being turned to my objective in foreign policy or to meet any stringency such as n further deterioration of the American balance of payments position. This poses for Canada a basic political problem, namely that for an uncertain future the “elbow room” or decision making power of the Canadian government has been reduced in regard to economic relations involving American subsidiaries. The essence of the extra-territorial issue is not the economic costs – . . . but rather the potential loss of control over an important segment of Canadian Economic Life”.