The Trading With the Enemy Act and the
Controlled Canadian Corporation
James Irvine Whitcomb Corcoran *
The purpose of this paper is to study the Trading with the
Enemy Act’ and the Foreign Assets Control Regulations2 issued
thereunder in the limited area in which they apply to prevent Canadian
corporations controlled by persons subject to the jurisdiction of the
United States from exporting goods or engaging in commerce with
“designated foreign countries”.3 We shall be especially concerned
with trade with China, a designated foreign country, as we consider
the effect which the statute and regulations have on exports of
United States controlled Canadian corporations. 4 Canada trades freely
with China subject to the Consultative Committee (COCOM)
list
of strategic goods.5 The United States embargoes trade with China,
including trade by United States controlled Canadian corporations;
it effectuates this embargo on domestic United States corporations
under the provisions of the Export Control Act.6 The embargo is
enforced against United States controlled foreign corporations by
means of the Trading with the Enemy Act and the Foreign Assets
Control Regulations. In fact, the Foreign Assets Control Regulations
expressly exclude domestic United States corporations from the
Of the Bars of the State of Ohio and the Commonwealth of Massachusetts.
(1967).
1 50 USC App. 1-44 (1964).
231 CFR 500.101-.808
3 China, North Korea, North Vietnam: 31 CFR Part 500.201 (d). In June,
1966, the “National Liberation Front of South Vietnam”, the Viet Cong, and
the “Liberation Red Cross” were determined to be “specially designated nationals”
of North Vietnam, and as such, subject to all the restrictions imposed by the act
and regulations on trade and transfer of goods and currency to North Vietnam.
(31 Fed. Reg. 8586) (1966).
4 The Trading with the Enemy Act has also disturbed Canadian-United States
relations in a series of incidents involving United States citizens who have
attempted to send medical supplies for war relief to civilians in North Vietnam,
and have sought to circumvent the act by transporting goods and money to
Canada for transmission to North Vietnam. See e.g., New York Times, December
29, 1967, p. 1.
5 The Consultative Committee, with headquarters in Paris, is comprised of
the members of NATO minus Iceland, and plus Japan; it regulates trade with
communist countries on a multilateral basis.
6 50 USC App. 2021.
No. 2] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION 175
purview of the regulations provided that, for any transaction, the
applicable terms and conditions of the Export Control Act are
complied with.7
I
The Statutory Framework
An examination of the statute and regulations in their present
form may help in understanding the nature of the conflict between
Canada’s national interest and the asserted statutory interest of
the United States. Since its first enactment in 1917, the Trading
with the Enemy Act has, in succeeding statutory incarnations,
delegated broad powers to the President to issue regulations and
enforce the act. It is understood that the broad delegation of au-
thority by Congress is legitimated by and referable to the war power
and the foreign affairs power. The precincts of war and foreign
affairs are areas in which the United States Supreme Court has
upheld broad grants of power by Congress to the Executive.8 It
therefore seems unlikely that the delegation of power by Congress
to the President in section 5 of the act will be successfully attacked
in the courts as an excessive, and therefore, unconstitutional dele-
gation of legislative power. However, in view of the fact that section
5 of the act not only authorizes the President to embargo and regulate
all foreign trade during a declared war or during a “national
emergency”, but also gives the President the power to declare a
national emergency, it may be that if the doctrine of unconstitutional
delegation of legislative power is not completely moribund, it might
be employed to strike down executive action under the statute.
The most recent enactment of the statute, that of 1941, reads
in pertinent part, as subsequently amended, as follows :
During time of war or during any other period of national emergency
declared by the President, the President may, through any agency that he
may designate, or otherwise, and under such rules and regulations as he
may prescribe, by means of instructions, licenses, or otherwise … investigate,
regulate, direct, and compel, nullify, void, prevent or prohibit, any acqui-
sition, holding, withholding, use, transfer, withdrawal, transportation, impor-
tation or exportation of, or dealing in, or exercising any right, power, or
privilege with respect to, or transactions involving, any property in which
any foreign country or a national thereof has any interest, by any person,
7 31 CFR 500.533.
8 United States v. Curtiss-Wright Export Corp., (1936), 299 U.S. 304; Zemel v.
Rusk, (1966), 381 U.S. 1.
McGILL LAW JOURNALV
[Vol. 14
or with respect to any property, subject to the jurisdiction of the United
States;… 9
By Presidential Proclamation on the 16th of December, 1950,10
a declaration of national emergency was made in response to the
entrance of Chinese forces into the Korean conflict. The President
thus set in motion the administrative machinery necessary to enforce
the act. This declaration of national emergency remains in effect
at present.”1
The administrative mechanism by which control is exercised is
somewhat intricate. Because the Trading with the Enemy Act in-
cludes restrictions on a variety of transactions other than export
trade, and because many of these transactions are related to cur-
rency controls and the freezing of foreign assets in the United
States, the President has delegated the administration of the act
to the Secretary of the Treasury. 12 The Secretary has promulgated
the Foreign Assets Control Regulations, the relevant part of which
reads as follows:
All of the following transactions are prohibited, except as specifically
authorized by the Secretary of the Treasury (or any person, agency, or
instrumentality designated by him) by means of regulations, rulings, in-
structions, licenses or otherwise, if such transactions
involve property in
which any designated foreign country, or any national thereof, has at any
time on or since the effective date of this section had any interest of
any nature whatsoever, direct or indirect;
(1) All dealings in, including, without limitation, transfers, withdrawals,
or exportations of, any property or evidences of indebtedness or evidences
of ownership of property by any person subject to the jurisdiction of the
United States; ….1
The term “designated foreign country” means a foreign country in the
following schedule and the term “effective date of this section” means with
respect to any designated foreign country or national thereof, 12:01 a.m.,
eastern standard time, of the date specified in the following schedule:
1. China: December 17, 1950.
2. North Korea, i.e., Korea north of the 38th parallel of north latitude:
December 17, 1950.
950 USC App. 5(b) (1).
10 Presidential Proclamation #2914, 3 CFR, p. 100 (1950).
11 It is interesting to note that the new regulations concerning foreign direct
investment by United States persons (15 CFR 100.101-804), issued on January
1, 1968, which severely limit United States direct investment abroad, were issued
under the presidential powers which exist pursuant to the same Presidential
Proclamation of a state of emergency in 1950. On March 22, 1968, direct invest-
ment in Canada was excepted from these regulations.
12 Exec. Order #9193, 7 Fed. Reg. 5205 (1942).
13 31 CFR 500.201 (b).
No. 2] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION
177
3. North Viet-Nam, i.e., Viet-Nam north of the 17th parallel of north
latitude: May 5, 1964.. 14
The term “person subject to the jurisdiction of the United
States” includes:
(1) Any person, wheresoever located who is a citizen or resident of the
United States;
(2) Any person actually within the United States;
(3) Any corporation organized under the laws of the United States
or of any state, territory, possession, or district of the United States;
and
(4) Any partnership, association, corporation, or other organization where-
soever organized or doing business, which is owned or controlled by
persons specified in (1),
(2), or (3).15
If the regulations generally serve to limit the global scope of
statutory language as in defining “designated foreign country”,
they do not so operate in defining the “person subject to the juris-
diction of the United State”. It is in this area that the conflict of
jurisdiction between Canada and the United States arises, for the
regulations assert jurisdiction over Canadian corporations on the
basis of United States ownership or control, regardless of whether
the Canadian corporation is present or doing business in the United
States. Although controlled foreign partnerships, associations, or
(4) of the above quoted
corporations, as defined in paragraph
regulations are subject to the jurisdiction of the United States,
they are frequently not amenable to process by United States courts.
In order to avoid direct jurisdictional challenge and public conflict
with Canada, and in spite of the fact that the act asserts juris-
diction over Canadian subsidiaries, the United States proceeds by
way of enforcement only against the United States person or per-
sons who control the Canadian corporation. The Treasury Depart-
ment notifies the United States shareholders who control the Ca-
nadian corporation that a prohibited export transaction by the
liable to sanctions for
subsidiary will render the shareholders
violation of the act. Likewise, it appears that the procedure for
securing a license-exception to engage in otherwise prohibited trans-
actions is for the United States person who controls a Canadian
corporation to apply to the Treasury Department on behalf of the
Canadian corporation. In this way the act is applied to United States
controlled Canadian corporations and has an impact in Canada,
but enforcement is threatened only against United States citizens,
residents or corporations, persons clearly subject to the process of
14 31 CFR 500.201 (d).
15 31 CFR 500.329 (a).
McGILL LAW JOURNAL
[Vol. 14
the United States federal courts; no Canadian corporation is placed
in the position of a petitioner to the United States Treasury De-
partment. This technique seems to avoid, at least on a formal level,
invasion of Canadian sovereignty over Canadian corporations. But
history has shown that even though the principles of sovereignty
and jurisdiction remain inviolate, the United States has secured
compliance with the act and regulations.
Some Problems of Construction. The failure of the regulations
to provide a satisfactory definition of “owned or controlled” foreign
corporations, partnerships, or associations raises a number of ques-
tions. The first problem is the construction which we are to put
on these conspicuously undefined terms “owned or controlled” in-
sofar as they purport to determine the scope of United States
jurisdiction over foreign corporations and other foreign entities.
It would seem reasonable to construe this language to require that
a majority of the voting stock or a majority of the outstand-
ing stock of all classes be held by United States persons in order
to assert jurisdiction over a foreign corporation. The regulations
do not deal specifically with the problem of widely held share-
holder control by United States persons, although in other contexts,
including sub-chapter F of the United States Internal Revenue Code
(ss. 951 et seq.) dealing with income of controlled foreign corpora-
tions, it is usual to set a threshold limit of 5 or 10% control by
a United States person in order to have his shares count in deter-
mining United States control or ownership. In the absence of such
a threshold, it would appear that the regulations authorize a strictly
arithmetical control test, and that 51% ownership of the voting
stock is control. One may quarrel with the wisdom of an approach
which asserts jurisdiction over a foreign corporation on the basis
of simple arithmetic control of that corporation by United States
persons, but the regulations can be most reasonably construed to
authorize such an assertion of jurisdiction.
A more serious problem arises as the result of the policy of
the United States Treasury in seeking compliance with the act and
regulations by asserting that they apply to United States controlling
persons by virtue of their share ownership alone. The initial ques-
tion is whether criminal penalties 16 under a statute requiring “wil-
ful” violation can ever attach to shareholders qua shareholders for
acts engaged in by their corporation. It would seem a novelty in
1’We should not forget that the Trading with the Enemy Act is a criminal
statute, a violation of which might lead to fines of up to $10,000 and prison
sentences of up to 10 years. Furthermore, the statute and regulations specify
that a violation must be “wilful”. 50 USC App. 5(b); 31 CFR 500.701.
No. 2] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION 179
the criminal law, and indeed a derogation from the biblical injunc-
tion, if the punishment for the sins of the children were visited
on their parents. Yet it is this strained and curious policy which
the Treasury has adopted to hold United States corporate parents
(or United States shareholders) liable for the acts of their corpo-
rate children. It is a novel use of the doctrine of “piercing the
corporate veil” which permits us to ascribe to shareholders criminal
liability for the acts of the corporations in which they own shares.
Although there do not appear to be any litigated cases on this
point, it seems clear that the Treasury does assert the responsibility
of the United States shareholder for the action of a foreign corpo-
ration in which he holds shares, and the responsibility of the United
States shareholder to apply for license-exceptions to the act and
regulations on behalf of the foreign corporation.
If it is ever permissible to transfer criminal responsibility for
an act from a corporation to its shareholders, such a transfer is
only acceptable under narrowly drawn limitations which effectively
establish that the act of the corporation is in fact the act, the
wilful act, of a shareholder. In view of the failure of the regula-
tions to provide specifically that the act applies to United States
persons in their capacity as shareholders, it does not seem permis-
sible to construe the regulations to apply to United States persons
holding shares on the basis of such share ownership. On the contrary
it seems proper to interpret them to require that the person subject
to the jurisdiction be the one who engages in the prohibited dealing,
and that the person subject to the jurisdiction (in this case the
controlled foreign corporation) be the one who ultimately incurs
the penalties provided for in the act.
This assertion of shareholder liability for corporate action is
made more dubious by the failure of the regulations to define ade-
quately the terms “owned or controlled”, because in the absence
of definition, it seems consistent to assert that United States per-
sons owing 1% or less of the shares of a controlled foreign corpo-
ration could be subject to criminal sanctions or expected to apply
for a license on behalf of a controlled foreign corporation in which
he held shares. The failure to distinguish between the case in which
the United States control is exercised by 100% ownership of the
stock of a foreign corporation by a United States parent corporation
and the situation in which United States control is by widely held
shareholding seems fatal to the Treasury interpretation of the
regulations and a conclusive indication that the Treasury approach
was not contemplated by or authorized in the regulations. Nor is
it immediately clear that in the absence of other compelling factors
McGILL LAW JOURNAL
[Vol. 14
a threshold percentage approach to this problem with a threshold
below 51% ownership by one United States person ( and his affili-
ates) can justify this rather novel extension of criminal liability.
It seems inappropriate to transfer the percentage threshold ap-
proach from the area of taxation, which the average investor can
be expected to consider and appraise prior to investing, to an area
of criminal law where future contingencies including the possibility
that a corporation not now controlled will become so, and that it
may subsequently engage in isolated sales transactions in violation
of the act, cannot be assessed. Even if a controlled corporation
were to engage in prohibited transactions, it would seem that some-
thing more than a minority percentage control of shares should
be required to permit a finding of “wilful” violation.
Mr. Kingman Brewster posed the case of the controlled foreign
corporation with shares widely held in the United States as a hypo-
thetical in Law and United States Business in Canada.17 Mr. Brews-
ter’s hypothetical was all too real a problem for Canada at the time
his pamphlet went to press, and one must suspect that he was
aware of the fact. As early as January, 1959, there is mention in
Hansard’s of the refusal of a million dollar Chinese order by the
Aluminium Company of Canada Limited
(“Alcan”), a Canadian
corporation owned and controlled in the United States by widely
held individual shareholdings.19 Alcan was the sole aluminium re-
duction and milling entity in Canada. The refusal had come in 1958,
in a period of economic recession in Canada and unemployment in
the aluminium industry. Mr. Brewster appears to confirm our doubts
about the applicability of the act and regulations to United States
shareholders in an Alcan situation.20 In general, however, he does
not seem to doubt the wisdom and propriety of making the United
States shareholder (presumably a corporate parent) liable for the
subsidiary’s actions. He says that “the hypothetical is the limiting
17(Montreal, 1960).
18 House of Commons Debates, Speech of Mr. Hazen Argue, 30 January 1959,
I, p. 544.
191966 Annual Report, Aluminium Company of Canada Limited, p. 3: Per-
centage of Common Shares held by residents of Canada (Dec. 31): 1966, Can.
Res. 36.0%; 1965, 31.1%; 1966, U.S. Res. 60.1%; 1965, 65.0%; 1966, Other
3.9%; 1965, 3.9%. Number of common shareholders according to share register
(Dec. 31): 1966, Res. Can. 29,308; 1965, 25,610; 1966, Res. USA 25,416; 1965,
24,762; 1966, Res. Other 1,965; 1965, 2,037.
20 op. cit., p. 11: “Clearly the easiest thing is to find some pretext for turning
down the order even though U.S. law probably does not apply, given the absence
of ownership in U.S. hands sufficiently concentrated to constitute ‘control’ within
the meaning of the regulations.”
No. 2] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION 181
extreme, since most U.S. corporate interests
doubt the legal responsibility of the U.S. corporate parents”. 21
in Canada cannot
It
It would appear that the Treasury interpretation is an unwar-
ranted and unauthorized gloss on the regulatory language developed
when it became apparent that for reasons of jurisdiction and politics
the regulations could not, as promulgated, meet the problem of the
controlled foreign corporation. It seems clear that the regulations
authorize the imposition of criminal penalties on the controlled
foreign corporation if it violates the act and require that corpo-
ration to apply for license-exceptions.
is doubtful that they
authorize more than this. Whether or not the regulations should
be read to apply only to the controlled foreign corporation, or
whether they can be read to apply directly to United States persons
owning shares in such corporations, and in what circumstances this
broader reading is proper, will probably never be judicially decided;
the United States Treasury has been singularly successful in obtain-
ing compliance by casting a wide net, and it has not found it neces-
sary to haul in the nets in a judicial enforcement proceeding.
Informal pressure on United States parent companies, including
the threat of adverse publicity, and possible problems in securing
government contracts are available to secure silent compliance and
to deny the Canadian corporation a day in court. It
is clear too
that this sort of informal pressure can be effective even in the
absence of control by a United States parent company. In the Alcan
case, that corporation did accept the prohibition of the statute
because of possible adverse effects on the United States market.22
It seems apparent that Alcan, faced with possible problems in the
United States market if it accepted the order, and possible prob-
lems in Canada if it applied to the United States Treasury for a
license-exception to make a sale to China, chose the line of least
resistance. Although Alcan is probably amenable to process of United
States federal courts by reason of doing business within the United
States, one must seriously question whether a criminal prosecution
would have been brought against Alcan had it accepted the Chinese
order. But the possibility of such a suit, however remote, must have
been a substantial deterrent.
Some Problems of Enforcement. Another problem of construction,
and one which Mr. Brewster injected into his “hypothetical” was
the fact that a majority of the directors of the controlled Canadian
corporation were United States citizens. At present, only four of
21 Ibid.
22 House of Commons Debates, Speech of Mr. Hazen Argue, 30 January 1959, I,
p. 544.
McGILL LAW JOURNAL
[Vol. 14
Alcan’s fourteen directors are United states citizens ;23 but regard-
less of this, further questions must be asked before we can conclude
that criminal penalties will attach for violation of the act.
If we assume that a majority of the directors are United States
citizens, it is not apparent that they would be individually liable
were-the controlled Canadian corporation to engage in transactions
in violation of the act, since most sales in the ordinary course of
business are not matters for consideration of the board of directors.
Mere inaction, with or without knowledge of a prohibited sale,
would seem a rather slim ground on which to establish wilful
violation. Whether or not the directors are obliged to take affirm-
ative action in advance to establish a policy forbidding sales which
would violate the act is not clear. In a situation in which United
States citizens comprise less than a majority of the board, it is
difficult to find any ground for individual prosecutions under the
act. Further, it would seem, a fortiori, that if the directors who
are United States citizens cannot be prosecuted for corporate action,
then it is not permissible to prosecute United States shareholders
whose legal relationship to the corporation and attendant responsi-
bility for its acts are even more remote than those of the directors.
As far as can be determined, no prosecutions of individual
directors have been brought by the Treasury Department in their
efforts to enforce the act, although such individuals are presumably
more clearly subject to prosecution than United States shareholders.
One reason for this is the fact that such an enforcement technique
can easily be frustrated, either by conscious action of all the share-
holders of a controlled Canadian corporation, or by enactment of
a statutory requirement by the Canadian federal or provincial
legislature requiring that a majority of the board of directors of
a corporation be other than United States citizens or residents.2
1
Another technique is suggested by a case which arose in France
23 Aluminium Company of Canada Ltd., 1966 Annual Report.
24 The Ontario Provincial legislature showed itself ready to adopt legislation
to frustrate United States anti-trust policy as it involved Canadian corporations.
A United States Federal Grand Jury issued subpoenas duces tecum to more than
fifty Canadian companies in connection with United States anti-trust violations.
See e.g. In re Grand Jury Subpoenas Duces Tecum Addressed to Canadian Inter-
national Paper Company, (1947), 72 Fed. Supp. 1013. In 1947, the Ontario
Legislature passed an act which prevented the improper removal of business
records from Ontario, subject to certain limited exceptions, and set out contempt
sanctions to enforce the statutory requirement, The Business Records Pro-
tection Act, R.S.O. 1960, c. 44, s. 2(1).
No. 2] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION 183
in 1965 25 when a French corporation owned 2/3 by Freuhauf Cor-
poration of the United States and 1/3 by French interests was
ordered by the United States parent company, which had appar-
ently been notified by the Treasury Department, to cancel a con-
tract for 60 Freuhauf trailers to be manufactured by the French
company and sold to another French company for export to China.
The French court stepped in at the request of the French minority
shareholders, and appointed a receiver who was instructed to com-
plete the contract. The court spoke of public policy considerations
including employment levels in deciding upon this course of action.
There is no evidence that any attempt was made in the United
States to prosecute the parent company or any of its officers or
shareholders, although the controlled foreign corporation clearly
engaged in a prohibited transaction. This case suggests that at
least in the case where Canadian persons hold a minority interest
in controlled Canadian corporations it might be possible for them
to block action by United States parent companies seeking to can-
cel prohibited orders once they have been accepted by a Canadian
corporation. A bona fide Canadian stockholder may well have a
sufficient economic interest to enable him to seek judicial inter-
vention in such a situation; a Canadian court might well find that
public policy considerations as well as the Canadian shareholder’s
interest would require
intervention to secure performance of a
contract. Canada has already taken legislative measures to secure
Canadian participation in Canadian corporate enterprise. It might
be possible to require in certain instances that controlled foreign
corporations have at least a significant minority percentage of their
shares held by Canadians who might act as watchdogs in situations
involving prohibited transactions. There are two practical diffi-
culties with such an approach, however. First, it is not clear that
Canadian shareholders would have the necessary information, or
the interest to acquire such information about corporate sales or-
ders; secondly, as we shall examine in detail later, there are means
of structuring corporate organization to assure with a high degree
of certainty that orders from outside Canada never reach a con-
trolled Canadian corporation for acceptance.
An analogous problem arises under the Foreign Direct Invest-
ment Regulations, promulgated on January 1st, 1968 by the United
States Secretary of Commerce, 26 which also involve extra-territorial
impact of United States legislation. The regulations require repa-
25 Massardy v. Socit6 Fruehauf-France, Paris, 22 mai 1965, Gaz. Pal. 1965.2.86.
26 See note 11, 8upra.
McGILL LAW JOURNAL
[Vol. 14
triation of earnings from certain controlled foreign corporations. To
the extent that these repatriation requirements conflict with policies
of foreign countries in which controlled foreign corporations are
established,
these foreign countries are free to take legislative
action to limit or prohibit repatriation of funds as required under
the Foreign Direct Investment Regulations. That such legislative
action may be in the interest of the controlled foreign corporation
as well as the foreign host country’s economic policies suggests
that this problem may well be encountered under these new regu-
lations.
While the Treasury Department does not seem to know whom to
prosecute for violations of the act, they have, by informal enforce-
ment procedures, including the implied threat of adverse publicity
and the carrot of government contracts, secured substantial com-
pliance with the act although the global jurisdiction asserted therein
has never been tested. The Treasury Department has been careful
to keep its enforcement and license application procedures within
the borders of the United States even though the regulations au-
thorize a broader and different approach to the problem. Despite
the undoubted wisdom of this approach as a means of avoiding
conflict with foreign countries and leaving them relatively unaware
of the impact of the act and regulations on their domestic economy,
this informal procedure prevents judicial constructions and inter-
pretation of the statute and regulations by effectively avoiding
resort to a judicial forum. Whatever the means employed, com-
pliance is secured without resort to the courts. In this situation,
it is uncertain how effective any legislative effort by a foreign
country can be in establishing the primacy of its own public poli-
cies, when these contravene the policy interest of the United States
as set out in the act. Informal pressure and methods of corporate
organization designed by a United States parent to secure com-
pliance with the act are peculiarly unamenable to legislative redress
by foreign countries.
II
The Policy Considerations Behind the Act
As Mr. Brewster suggests, 2 7 there seem to be two major policy
considerations behind the Trading with the Enemy Act: one is to
deprive the designated countries of goods and services as completely
27 Op. cit., p. 23.
No.2] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION 185
as possible, and the other is to preserve equity between United States
persons and corporations and controlled foreign corporations and
to give no trade advantage to a foreign establishment. The former
policy consideration seems to border on the fatuous in view of the
fact that the United States alone among major western industrial
nations imposes a trade embargo on China. To the extent that the
Trading with the Enemy Act attempts to limit the access of China
or any other designated foreign country to goods not covered by
export prohibitions of COCOM, 2 such a prohibition is nearly cer-
tain to prove ineffective. The United States deprives itself of a
potential market but does not substantially reduce the likelihood
that designated foreign countries will be unable to supply their
wants elsewhere in the world market. Indeed, this blanket export
prohibition may work a greater hardship on United States business
land agriculture than on any designated foreign country. In addition
to the economic cost of maintaining this policy, there is the incre-
mental cost in dollars and goodwill resulting from conflicts arising
with foreign countries as a result of the extra-national application
of the act. Further, if the initial policy consideration is unsound,
then the second consideration, that of maintaining equity between
domestic United States and foreign establishments likewise falls,
premised as it is on the validity of the first consideration.
Taken on its own ground, the second policy consideration does
make sense as between domestic United States corporations and
controlled foreign corporations. It fails to take into account, how-
ever, the public policy of the foreign country in which the controlled
foreign corporation is located, and poses an inevitable problem for
the controlled foreign corporation which is incorporated under the
laws of its foreign host country and subject to its jurisdiction. The
relative importance the United States government places on this
second consideration can be seen from the fact that in imposing
its trade embargo on Cuba under the Trading with the Enemy
Act,2 9 controlled foreign corporations were excluded from the appli-
cation of the regulations, in large measure in response to Canadian
discontent with the existing Foreign Assets Control Regulations.
While it might be -reprehensible conduct to establish a controlled
foreign corporation for the principal purpose of circumventing the
act, there is no indication that United States persons would find
it profitable to establish a corporation for such a purpose. Not only
is it possible for most of the needs of designated foreign countries
to be supplied by existing producers in foreign countries, but it
28 See note 5, supra.
29 Cuban Assets Control Regulations, 31 CFR 515.101-808
(1967).
186
McGILL LAW JOURNAL
[Vol. 14
seems unlikely, in view of the Canadian experience in trading with
China, that any one company is likely to secure a principal part
of its business from designated foreign countries.
In supporting this “equity” consideration, Mr. Brewster suggests,
however, that license-exceptions should be granted in those cases
in which it can be demonstrated that the order is significant in its
impact on the economy of the foreign country and when there are
no alternative sources of supply in the country. It seems that these
suggested exceptions fly in the face of the policy of equal treatment.
Such an exception encourages conscious planning and solicitation
of orders of considerable magnitude, and encourages the location
of a foreign corporation in a country where it will be the sole
producer of some product. Should an IBM plant in a Latin Ameri-
can country be permitted to engage in prohibited transactions? The
fact that large orders are to be preferred over small also cuts across
the deprivation theory. The exceptions may well make sense from
the Canadian point of view; they are hardly consistent with the
United States policy of “equal treatment” and discouraging avoid-
ance of the Export Control Act.
While it is true that the Trading with the Enemy Act is global,
and not designed solely for Canada, much of its impact is neces-
sarily in Canada where a substantial proportion of United States
foreign investment has been placed. The feasibility of making
Canada a special exception from the act and regulations is slim;8O
such an exception would bring protests from other foreign govern-
ments and from United States business engaged in foreign corpo-
rate operations elsewhere. It would be such a substantial vitiation
of the underlying policy of preventing the flow of goods to China,
and of preserving equal treatment among Americans, that it seems
doubtful whether an exception for Canada would not emasculate
the entire act.
Canadian experience with the act, from the Ford case in 1957
to the present, and continued Canadian concern, when coupled with
the United States decision to limit the Cuba embargo to domestic
United States corporations, suggests that the high water mark of
this act may have been reached and passed; the expanding scope
of United States business abroad will doubtless result in further
pressures, private and governmental, for the relaxation or repeal
30 While it is true that the United States granted Canada a belated exemption
from the application of the Foreign Direct Investment Regulations (see note 11,
supra), the considerations of international monetary stability seem sufficiently
compelling to justify an exception in that case but not in the case of the Trading
with the Enemy Act.
No.2] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION
187
of this act. In the meantime, the policy of enforcing the act against
the United States parent works to minimize the discontent which
this act must inevitably expect to encounter from foreign countries.
III
The Canadian Experience: An Historical Survey
Having examined the statute and regulations, and discussed
briefly the policy behind them, it is now proposed to turn to the
historical arena, and to learn how the statute and regulations are
applied to United States owned or controlled Canadian corporations.
We shall also examine the inevitable conflict between Canada and
the United States on this issue, examining the historical and econo-
mic factors in which the conflict is grounded.
Canada’s high level of industrial development and economic
well-being has only been achieved by permitting the inflow of
massive amounts of foreign investment capital to develop resources
and industry. We are especially concerned, in our examination of
the Trading with the Enemy Act, with manufacturing and proces-
sing branches of the Canadian economy. A substantial part, often
a majority, of the stock of Canadian corporations in these branches
of the economy is owned by foreigners. Of these foreign holdings,
about 75% are held by United States persons. In a very real way,
then, United States investors can be said to own and control the
Canadian economy.
Foreign investment does benefit Canada by providing more jobs,
higher tax revenues, and indeed all the gains of economic growth.
Yet it is inevitable that capital controlled outside Canada may not
conduct itself in Canada as Canadian capital would. It can be argued
that so long as Canadians benefit substantially from the foreign
investment, the fact that they do not benefit to the highest possible
degree should not be a great concern; yet, the spectre of control,
and the realization that foreign ownership does result in different
behavior patterns, have produced considerable anxiety among Ca-
nadians and has been for a decade now a continuing domestic
political issue.
In addition to Canadian anxiety about foreign control of domestic
industry, there is another significant factor in the equation. Canada
has a small population, about 20 million people, which is only one-
tenth that of the United States. It is, of itself, often inadequate
as a market area for mass-produced industrial goods. The pressure
McGILL LAW JOURNAL
[Vol. 14
to develop Canadian industry, to realize the economies of scale
and mass production has directly increased the pressure to seek and
expand export markets. It is an important fact that Canada, despite
her relatively small population, has the fourth largest trading volume
in the world ;31 that one in five Canadian workers is employed in
a trade or industry directly in connection with export;32 that this
allocation of labor is reflected in the fact that about 20% of the
gross national product is realized from exports.33 Comparable figures
for the United States indicate that exports comprise about 5%1o of
the gross national product.3 4 Thus, exports are vitally important
to Canadian economic well-being.
Although the Trading with the Enemy Act embargo on China
began in 1950, it was not until much later in the decade, in 1957
and 1958, that the implications of the act for Canada were recog-
nized and discussed as part of the question of foreign control. In-
deed, conformity by Canadian corporations to the Trading with the
Enemy Act and regulations is only one form of business behavior
that differs from what could be expected of a corporation owned
and controlled by Canadians; but because this issue ties together
concern about foreign control with the economically significant
export trade, and because this difference in corporate behavior is
a result not of individual choice of the United States investor but
of a United States statute which poses a real challenge to Canadian
sovereignty over Canadian corporations, it is not surprising that
the Trading with the Enemy Act moved to center stage in the
discussion and debate about foreign control of Canadian industry –
foreign control taken to mean, as is generally the case in Canada,
control by United States interests.
The first rumblings of concern about foreign control began in
1953, in the wake of the Korean War, which brought an economic
recession to both Canada and the United States. Recession engen-
dered discontent and a Royal Commission was established to report
on Canada’s economic prospects; also at this time, during a visit
by President Eisenhower in 1953, the Joint United States – Cana-
dian Committee on Trade and Economic Affairs was established,
with cabinet ministers from both sides of the border agreeing to
p. 2668.
31 House of Commons Debates, Speech of Mr. E. J. Broome, 14 April 1959, III,
32 Canadian-American Committee, A New Trade Strategy for Canada and the
United States, (Washington, 1966), p. 9.
33 R. V. Anderson, The Future of Canada’s Export Trade, (Royal Commission
on Canada’s Economic Prospects), (Ottawa, 1957).
34 Canadian-American Committee, op. cit., p. 9.
No. 2] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION 189
consult about common problems and further potential for trade
and development. The committee first met on March 16, 1954, and
again on September 26, 1955.
Foreign control became a full-fledged
issue in the Canadian
political campaign of 1957. Appeals to nationalist sentiment were
made and received with enthusiasm but the Trading with the Enemy
Act had not yet become an issue.
The circumstances of the late fifties and early sixties were conducive to
questions about the impact of foreign-owned companies. On the one hand
the decline in the rate of economic growth and the persistence of substantial
deficits in foreign trade in goods and services became linked with the capital
inflow and the overvalued exchange rate. Foreign ownership and control,
and the capital inflows, bore some of the brunt of criticisms of this state
of affairs, even though much of it could more logically be ascribed to
inappropriate federal fiscal and monetary policies.35
By 1957, several of the Royal Commission “blue books” had
appeared, including volumes dealing with United States-Canadian
relations, The Future of Canada’s Export Trade and Canada-United
States Economic Relations. These reports, based on careful analysis
and documentation, provided some real evidence of the different
behavior patterns of foreign controlled Canadian corporations. Six
major areas of concern about subsidiary operation were discussed;36
there was, however, no specific mention of the Trading with the
Enemy Act restriction in either of these volumes. The authors indi-
cated, albeit in a general way, that foreign control resulted in
different behavior, and they suggested how it might be possible
to make the foreign corporations more responsive to the Canadian
environment and more involved in it. There was also an indication
that legitimate business purposes accounted for much of the be-
havior to which Canadians objected.
The fact that there was no general Canadian awareness of the
applicability of the Trading with the Enemy Act and the regulations
in regard to
to United States-controlled Canadian corporations
exports to China deserves some comment. It is not easy to believe
that in the seven year period from 1950 until 1957 that the appli-
53 A. E. Safarian, Foreign Ownership of Canadian Industry, (Toronto, 1966),
p. 22.
30 These areas were as follows: 1) issuance of equity securities by subsidiaries
to Canadians; 2) personnel policies (including “outside directors”); 3) publica-
tion of annual financial report; 4) commercial policies –
development of export
potentials, use of domestic supplies; 5) research activities; 6) contributions to
charity and education. Source: Irving Brecher and S. S. Reisman, Canadian-
United States Economic Relations, (Royal Commission on Canada’s Economic
Prospects), (Ottawa, 1957), ch. 8 passim.
McGILL LAW JOURNAL
[Vol. 14
cability of the act and regulations, and the implications thereof
were unknown. It appears, nonetheless, that this was substantially
the case, at least insofar as Canadian government officials are con-
cerned.
In parliamentary debate on the matter in July 1958, Mr. Pearson,
then the Leader of the Opposition, asked:
Mr. Chairman, perhaps my hon. friend will tell me the date on which the
law in question [the Trading with the Enemy Act] was passed in Washington.
Mr. Churchill, Minister of Trade and Commerce, replied: “Cer-
tainly before June 10, 1957. ‘ ’36a Mr. Pearson answered:
Indeed it was, Mr. Chairman, but not very long before June 10, 1957, and
on no occasion while we were in power was the law in any way, shape or
form used against any Canadian exporter to any country of the world and
we had no reason to complain at all. 37
It would be possible to credit these two political leaders with
incredible ineptitude or failure to do their homework; yet, con-
sidering that each was very anxious to lay the blame for the
imposition of the Trading with the Enemy Act on the doorstep of
the other, it is hard to believe that, if Mr. Pearson had known of
incidents (or indeed the date of passage of the act), he would have
asked the question. It is equally hard to credit Mr. Churchill, who
delights in the thrust and parry debate, with failure to raise inci-
dents which occurred during the Pearson ministry. Faith in the
competence of the participants and in the adversary system leads
to a strong inference that little or nothing was known about the
Trading with the Enemy Act and its impact on Canada until the
Ford case, which came to public attention in early 1958.
This failure to recognize the existence and impact of the problem
in Canada is not so much a criticism of Canadian politicians as it
is a tribute to the success of the United States’ tactic of exacting
compliance by application of the act and regulations to United
States parents. That it is not the result of lack of enforcement of
the act in
these first seven years is attested to by Mr. Harold
Winch in a speech in the House of Commons on June 25, 1959, in
which Mr. Winch presented detailed evidence of enforcement of
the act during the preceding eight years.3 8 His documentation reveals
SNaThe date on which Mr. Diefenbaker’s Progressive Conservative Party
replaced Mr. Pearson’s Liberal Party to form the government in power.
37 House of Commons Debates, 18 July 1958, III, p. 2392.
3s”… You will remember, Mr. Chairman, that when the aluminum company
declined to make an export to the mainland of China I took up the matter in
this house and the newspapers of our country were kind enough to make some
mention of that fact. As a result of that I received a letter from this export-
import company in which they told me of their experience of some 21A or 3
No. 2] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION 191
not only the application of the Trading with the Enemy Act to United
States-controlled corporations prior to 10 June 1957 but also another
reason why discovery of the imposition, and the impact which this
discovery made, were so long in coming: in almost all the letters cited,
years ago. In this letter, which I have here, they give excerpts from the replies
received from some of these companies. In order to illustrate how far-reaching
this control is, I should like to give the committee a number of the excerpts
from this letter. There is an excerpt from a letter from Canadian Sandpapers
Limited, Preston, Ontario, which reads as follows:
At the moment it would be impossible for us to ship any goods to China,
for we are affiliated with a U.S.A. concern, and with the current U.S.A.
state department policy, this precludes our shipping any goods to the iron
curtain (sic) countries.
Here is an excerpt from a letter from Chain-Belt (Canada) Ltd., Willowdale,
Ontario, dated February 27, 1956:
All the export business of Chain-Belt Company and Chain-Belt (Canada)
Limited is carried on through our export department in Chain-Belt Company,
Milwaukee, Wisconsin.
The third excerpt is from Garlock Packing Company, Pallmyra, New York,
dated March 12, 1956:
This refers to your letter of March 5, addressed to our Canadian subsidiary,
Toronto. As the latter does not engage in any export operation at present
business is necessarily restricted to Hong Kong and Taiwan.
This excerpt is from a letter from Canadian Allis-Chalmers Limited, Lachine,
Quebec, dated March 12, 1956:
Your offer to represent our company in China has been noted with interest.
Canadian Allis-Chalmers is a wholly owned subsidiary of Allis-Chalmers
Manufacturing Company, Milwaukee, Wisconsin. All of our export negotia-
tions are handled through Mr. P. Diatz, manager, export department, indus-
tries group, Allis-Chalmers Manufacturing Company, Milwaukee, Wisconsin.
The next letter is from United States Rubber, International, Rockefeller Centre,
New York City, dated March 14, 1956:
Your letter of March 6 to Dominion Rubber Company Limited, Montreal,
has been referred to me. As Dominion Rubber Company is one of our sub-
sidiaries, we handle any export business that might be developed through
Canadian organizations.
Then there is a letter from Jones & Laughlin Steel Corporation, New York City,
dated March 22, 1956:
Your letter of March 13 addressed to our company in Toronto has been
referred to this office for acknowledgment and reply, since all matters
pertaining to export are handled here.
I shall give just one more example, although I have plenty more. This letter is*
from Johns-Manville International, New York City, dated March 29, 1956:
Your letter of March 6 addressed to Canadian Johns-Manville Company
Limited has been referred to this division, since all overseas matters are
our responsibility. We thank you for your offering to assist us in sales
in the Chinese market but regret that we cannot accept your kind offer,
House of Commons Debates, Speech of Mr. Harold Winch, June 25, 1959, V,
pp. 5188-89.
McGILL LAW JOURNAL
[Vol. 14
the control of the export operations of Canadian subsidiaries was in
the hands of the United States parent. Whether this is generally
the case, and if it is, why it is, remain matters for speculations;
legitimate business purposes may well be served by having a United
States-based export operation. 39 One must suppose, though, that one
of the factors entering into corporate decisions in this area is the
applicability of the Trading with the Enemy Act and an unwillingness
on the part of the corporation to arouse popular disapproval in Canada
of corporate activity there. In some sense, the use of a United States
export corporation is dictated by the United States Treasury inter-
pretation of the act and regulations which imposes liability on the
United States parent and, like the Treasury policy, the use of the
United States export corporation is an exercise in the art of avoiding
a confrontation with Canada on this issue.
It was in 1958, after the Canadian election, that the implications
of the Trading with the Enemy Act first became a subject of political
debate in Canada.
The American corporation, the Ford Motor Company, refused to let its
Canadian manufacturing subsidiary consider the sale of 1,000 vehicles to
Communist China… because the Foreign Assets Control Regulations were
ruled applicable to the transaction by the United States Treasury au-
thorities.40
Canada trades freely with China, subject to the Consultative Com-
mittee COCOM list; in fact, in late 1957, a government sponsored
trade mission to China had just returned. 41 Thus, one may conclude
that it was a matter of Canadian government policy to encourage
39A.E. Safarian’s recently published study, Foreign Ownership of Canadian
Industry, supra, footnote 35, offers some tentative conclusions. The study indi-
cates that of 227 United States controlled firms, 32 export through their own
organizations, 40 through parent organizations, 15 use both organizations, 4
have pooling arrangements in Canada, 75 have no export sales organization and
61 did not answer the question (p. 129). Safarian also suggests one sound reason
for using the United States parent or a United States affiliate for export, the
widened marketing contacts and knowledge, and the pooling of export resources.
He concludes, somewhat optimistically:
It does not appear that those exporting solely via the parent export organi-
zation show a worse performance than those exporting solely via the export
sales organization of the Canadian subsidiary
(p. 132).
Such a conclusion would appear to ignore both the corporations who hsve no
export facilities available to their Canadian subsidiary and the 61 who did not
reply, a group which amounts to more than 50% of his sample.
4OHouse of Commons Debates, Speech of* Mr. Hazen Argue, 23 May 1958, I,
p. 403.
41Ibid., Speech of Mr. Gordon Churchill, 6 December 1957, I, p. 1963; Speech
of Mr. Gordon Churchill, 17 July 1958, III, p. 2324.
No. 2] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION 193
trade with China and despite this fact, a Canadian corporation was
apparently prevented from accepting a substantial order because of
laws and regulations of the United States. Canada was outraged,
and the reverberations of the Ford incident have not ceased to echo
in the halls of Parliament or, indeed, throughout Canada.
It is difficult to learn what actually happened in the Ford case,
just as it was difficult to understand why no Foreign Assets Control
problems had come to the attention of the Canadian government
between 1950 and 1957. The problem in both instances is that the
very nature of the regulations and the means by which they are
applied against the United States parent results in techniques of
avoiding the Canadian subsidiary’s confrontations with the regu-
lations and the American parent’s maintaining silence. In any event,
one of the problems in any historical attempt to deal with the Foreign
Assets Control Regulations, as applied to exports of controlled Can-
adian corporations, is the great difficulty in discovering not only
initial export opportunities, but also determining whether the regu-
lations were the operative factor in any decision not to accept the
order. Corporate behavior in the United States seems to be directed
toward avoidance of the issue, even to the point of preventing the
presentation of orders to Canadian subsidiaries. This approach may
prevent many disputes, but it is inevitable that a policy of secrecy
cannot be entirely successful, and in those instances, from the Ford
situation onward, in which Parliament learned of a case in which an
order had apparently been refused because of the Foreign Assets
Controls, the reaction was strong. It is hardly surprising, for Can-
adians feel that the regulations amount to an invasion of Canadian
sovereignty over the behavior of her own corporate creatures, and
strong national feelings had already been aroused by the imposition
of the Sherman Act on Canadian corporations. 42 A mitigating con-
sideration may be found as regards the applicability of the Sherman
Act in that, although there may be some challenge to Canadian
sovereignty and jurisdiction, enforcement of the Sherman Act anti-
trust provisions may well be beneficial to Canadian and United States
industrial development. In the Foreign Assets Control area, not only
is there invasion of Canadian jurisdiction, but injury to Canadian
economic interest in export trade as well. It is not hard, consequently,
to see why Ford and subsequent cases have aroused so much Canadian
discontent.
Despite the paucity of information about these cases and the
possibility that the Chinese orders were rejected for bona fide business
42 See note 24, supra.
McGILL LAW JOURNAL
[Vol. 14
reasons or were merely inquiries intended to inflame relations between
Canada and the United States, the fact remains that the act and
regulations do exist and that they do pose a potential, if not an actual,
threat to export potential of the United States controlled corporations.
Although the dollar value of the trade actually prevented so far may
be small, the magnitude of the Canadian reaction and concern is
great –
no doubt partly because the Trading with the Enemy Act
became a focus for much discontent about all aspects of foreign
ownership discontent based on economic and non-economic consider-
ations alike. Canadians desire not only that foreign-owned Canadian
corporations “act like Canadian corporations” in regard to marketing
and export policies but also, despite the present apparent impossibility
of fulfillment, that these corporations be owned and controlled by
Canadian capital. Mere foreign control is frightening enough, but
control linked with the implication of corporate policies which work
against the economic interests of Canada is very serious.
The Ford Incident in Parliamentary Debate. One source of
information about the Ford incident is Parliamentary debate on
the matter. While these debates may not provide all the factual
detail about the incident which one might desire, they provide
important evidence of the depth of Canadian concern with the impact
of the Trading with the Enemy Act on Canadian politics and the
response of Parliament to this challenge to Canadian sovereignty.
On May 23, 1958, the following question was asked by Mr.
Hazen Argue :
Mr. Speaker, I wonder if I might direct a question to the Minister of
Trade and Commerce. Can the minister say whether the inquiry which the
government was to make into the United States law requiring Canadian
subsidiaries of American companies to obtain a license to export automobiles
has yet been made, and whether the shipment of a thousand automobiles
by the Ford Motor Company has been prevented? Can the minister assure
the house that in the future Canadian firms will need to comply only with
Canadian law ?43
The Minister replied that the matter was under study.
The following speech, delivered in Parliament by Mr. Harold
Winch, suggests the general tenor of Canadian response.
I believe that certain incidents of the past few days, and indeed, throughout
the past year make it almost mandatory on the government to make its
position clear with regard to Canadian control of our own policies and
our own economy. To put the matter in blunt language, I think the govern-
ment must now make it explicitly and implicitly clear that it is not going
to be prone to deference to the United States. Deference to our powerful
43 House of Commons Debates, Speech of Mr. Argue, 23 May 1958, I, p. 403.
No. 2] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION 195
neighbour to the south must not give way to subservience either in the
international field or with regard to our own economic policies.
I think it is important to our country that there be policy statements
and, if required, legislation so
it may be made clear to the people of
Canada in particular and of the United States that Canada controls its
own destiny, its own international and economic policies. It must be made
clear to the people of Canada particularly that there is no longer going
to be subservience to United States companies that may own or control
subsidiary companies in Canada from the point of view of their directing
whether or not we can produce and sell to other countries.
I refer, of course, in particular to the reported incident in which Canada
was not permitted to sell automobiles to China because of a United States
law. I say sir, that this is our country and no matter where companies are
owned which are operating in our country, on our natural resources and
on the wealth produced by our people, it must be made clear, by legislation
if necessary, that we in Canada sell where we desire to sell.44
On June 24, 1958, in response to a further inquiry about the Ford
case, Mr. Gordon Churchill, then Minister of Trade and Commerce
said :
I cannot say that there is any direct proof that the order was placed or
that it was cancelled by action of another government. There is a law in
the United States supported by regulations which prohibit subsidiary
companies trading with communist China, and that law and the regulations
have apparently acted as a restraint to trade on the part of Canadian
subsidiaries.
With regard to what can be done about it, we are looking into the
matter very carefully and we hope by negotiation to have some relaxation
of this restraint insofar as Canadian companies are concerned. 45
It would be a mistake not to recognize the partisan note in the
questions and debate concerning the Ford Motor incident; the
Opposition, under Mr. Pearson, was quick to raise and discuss the
issue and the Diefenbaker government was generally evasive, despite
the strongly nationalist appeal which the Prime Minister had sounded
on the hustings.
Legislative Response. One of the important things to note is
the concern of Mr. Winch to find, if necessary, a legislative solu-
tion. Since the release of the Royal Commission “blue books”, a
variety of legislative solutions had been proposed
to deal with
aspects of the problem of foreign control and its effect on the
behavior of the Canadian corporation. One of these would have
required that, if the parent-company were to be classified as a public
company under the Canada Corporations Act,45a then the Canadian
subsidiary, even if wholly owned, would be obliged to publish annual
44 Ibid., Speech of Mr. Winch, 19 May 1958, I, p. 196.
45 Ibid., Mr. Churchill, 24 June 1958, II, p. 1559.
45a R.S.C. 1952, c. 53, as amended by 13-14 Eliz. II, S.C. 1964-65, c. 52.
McGILL LAW JOURNAL
[‘Vol. 14
financial reports open to public inspection. 46 (A private company,
with less than fifty shareholders, was and is exempt under the Canada
Corporations Act from such filing.) 46a Subsequently, a Member pre-
sented a bill concerning directors’ qualifications, which would have
required that the majority of a company’s directors be residents
of Canada and that a majority of this majority be “outside” direc-
tors.47 Another, later wrinkle was the 1963 proposal to raise the
dividend withholding tax on corporations to 15%, and then to grant
a 5% reduction for companies with at least 25% beneficial owner-
ship by Canadians; this proposal was included in the law of 1963.48
However, no legislative proposal intended to directly meet the chal-
lenge of the Trading with the Enemy Act has ever been introduced
in the House; indeed, it is difficult to imagine what form such
legislation would take for it
is doubtful that corporations could
be required to trade with China. A variety of legitimate business
considerations can militate against such trade. The magnitude of
the statutory drafting problem
is attested to by the fact that,
although a number of other legislative proposals have been made,
and despite the fact that the Trading with the Enemy Act continues
to operate and cause parliamentary concern, no legislation directed
specifically to this problem has been introduced.
Some part of the difficulty in securing a legislative solution is
based on the fact that the administration of the Foreign Assets
Control Regulations has been limited to the United States side of
the border; no Canadian company was required to file for a license-
exception and no sanctions were visited against Canadian corpo-
rations. Application of the regulations to the parent was sufficient
to induce subsidiary compliance. In the absence of a possible legis-
lative solution, parliamentary pressure was brought to bear to
secure discussions at the ministerial level with the United States
to obtain relief from the regulations and their impact on Canadian
corporations. There was no statement by the government in response
to the inquiries posed in May of 1958 until the period of and the
period subsequent to the visit of President Eisenhower to Ottawa
in July, 1958. During that visit, the Ford case was one of the issues
on the agenda for discussion between the Prime Minister and the
President. The text of President Eisenhower’s speech touched ob-
liquely on the matter. He said, on July 9, 1958:
46 Ibid., Speech of Mr. Broome, 10 February 1961, II, p. 1959.
46a This was so under the Companies Act, R.S.C. 1952, c. 53, s. 116(4) and
in the Canada Corporations Act, as amended by
remains so under s. 116(4)
13-14 Eliz. II, S.C. 1964-65, c. 52, s. 89.
47 House of Commons Debates, Speech of Mr. Broome, 12 May 1961, V, p. 4744.
48 Safarian, op. cit., p. 26.
X’o. 2] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION 197
Next, the flow of investment funds from the United States into Canada
has led to expressions of concern on your part. These funds have been
attracted to your country by the business opportunities Canada has offered.
Though they may raise questions on specific cases respecting control of
an industry by United States citizens, these industries are, of course, subject
to Canadian law.. 49
The joint communiqu6 issued by the two chiefs-of-state containea
the following assurance:
The Canadian and United States governments have given consideration to
situations where the export policies and laws of the two countries may
not be in complete harmony. It has been agreed that in these cases there
will be full consultation between the governments with a view to finding
through appropriate procedures a satisfactory solution to concrete problems
as they arise.50
On July 11, Prime Minister Diefenbaker made the following
report to the House:
I raised with the President the question that some Canadian subsidiaries
of United States companies may have been prevented from accepting orders
from communist China, or from people of that country, by the application
of the United States Foreign Assets Control Regulations, even though accept-
ance of such orders would be permitted by the policy of the Canadian
government. The President expressed the view that the United States regu-
lations should not be applied in any way to the disadvantage of the Canadian
economy. If cases arise in the future where refusal of orders by companies
operating in Canada might have any effect on Canadian economic activity,
the United States government would consider favorably exempting the parent
company in the United States from the application of the Foreign Assets
Control Regulations with respect to such orders.51
The result of all this was, apparently, that consultation on a
case-by-case basis was agreed to. One member raised the practical
problem of to whom a Canadian export agent should apply for a
license before trying to obtain goods from United States controlled
Canadian corporations for export to China. In making this inquiry
on July 17, 1958, Mr. Broome also disclosed that attempts to make
a sale of bleached sulphite pulp to China had been frustrated because
of United States control of the industry in Canada. This appears
to be the Rayonier case to which Mr. Brewster refers, 52 although
the facts are somewhat differently stated in the Debates.
I have been told that within the past few weeks agents have tried to buy
quantities of bleached sulphite pulp for shipment to China but have not
been successful. This commodity is produced only out of mills on the coast
49 House of Commons Debates, Mr. Pearson, 10 July 1958, II, p. 2089.
50 Department of State Bulletin 39:209 (1958).
51 House of Commons Debates, Speech of Mr. Diefenbaker, 11 July 1958, II,
p. 2142.
52 Brewster, op. cit., p. 25.
McGILL LAW JOURNAL
[Vol. 1A
that are United States-owned. The question I have is this: To whom should
the agent go if he wished to get clearance to make a deal with Rayonier
or Crown Zellerbach subsidiaries or whatever company it might be, to get
that trade moving ? 53
It appears that the Rayonier license was quickly granted by the
United States after the Eisenhower visit; the sale was not, however,
completed. 54 Among his other concerns, Mr. Broome was worried
that Canadian corporations would have to apply directly to Wash-
ington for a license; he felt that it would be more appropriate to
have the application made to the Canadian government which would
then raise the issue with Washington. This is, in fact, what appears
to have resulted. The subsidiary notifies the parent, who may file
for a license; the subsidiary also notifies the Canadian government
of the order and, when the Canadian government determines that
the order is bona fide, and not a security threat, and that its
rejection would be liable to be harmful to the Canadian economy,
it then raises the issue in Washington. 55 The standard of economic
impact on the Canadian economy is a deliberately vague one; any
order would have some economic impact on the economy. Such a
procedure is not necessarily calculated to solve the problem, although
it may provide a solution for those cases which cannot be otherwise
,kept from public view. If the subsidiary does not desire to export,
however, no issue would be raised in Washington or in Ottawa;
those devices which United States parent corporations have em-
ployed to prevent the receipt of orders by controlled Canadian cor-
porations still operate.
One of the difficulties which the Rayonier case presents is the
role of the export agency corporation, engaged solely in trading with
foreigners. These corporations accept orders for a wide variety of
merchandise which they know can be obtained in Canada, and then
secure the merchandise from Canadian manufacturers and ship it
abroad. Although the institutional devices adopted by controlled
corporations may, to some extent, frustrate these attempts to in-
crease Canadian exports, these Canadian export corporations are more
likely to complain about failure of controlled Canadian corporations
to export than are the foreign purchasers who may send an occa-
sional order or inquiry direct to a controlled Canadian corporation.
These Canadian export corporations have a continuing Canadian
interest in the maximization of exports from Canada, and they are
53 House of Commons Debates, Speech of Mr. Broome, 17 July 1958, III, p. 2336.
54Ibid., Mr. Gordon Churchill, 30 July 1958, III, p. 2859; Brewster, op.
cit., p. 25.
55 New York Times, July 12, 1958, 3:3.
No. 2] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION
199
generally intimately familiar with the policies and the devices em-
ployed by United States controlled corporations in Canada. How-
ever, it is interesting to note that in one other incident involving a
Canadian export company, in 1963 and 1964, the Canadian government
refused to involve itself in aid of the exporter when United States
controlled Canadian corporations refused, for unspecified reasons,
to sell automobile parts to the exporters.5 6
Thus, the only situations in which the Canadian government is
clearly willing to involve itself are those in which the controlled
corporation is prepared to make the sale; unless the United States
parent is very careless, no orders will be accepted without some
sort of consultation between parent and subsidiary. And since the
parent must itself apply for the export license, it is difficult to see
how a license could be issued unless the parent consented. As the
Alcan case suggests, strong non-statutory pressures, whether from
United States government, United States industrial consumers, or
the United States public, make it unlikely that even substantial
orders will be accepted. And so long as there is no effective mecha-
nism of presenting each order to a Canadian corporation with
maximum publicity in Canada, there will be no strong counter-
vailing pressure to urge the acceptance of such orders.
Just as application of the Foreign Assets Control Regulations
only on the United States side of the border avoids direct jurisdic-
tional conflict with Canada, so this consultation procedure, linked
with corporate practices and corporate secrecy, avoids confronta-
tion of the issue in most cases while providing an official channel
of last resort for those cases in which avoidance techniques have
not been successful, and where there is some substantial desire on
the part of the corporation involved to complete the sale.
The subsequent history of the act in Canada gives further
evidence of the fact that the administrative solution proposed is
directed primarily at avoiding, rather than solving, the problem,
and there does not appear to have been a substantial increase in
licensed transactions. The Parliamentary Debates for the remainder
of 1958 contain additional inquiries about the statute or the adminis-
trative machinery; there is little of substantial importance. The
Joint United States – Canadian Committee
issued a statement in
January of 1959 which indicated that a routine review of the
56 House of Commons Debates, Mr. Mather, 17 June 1963, II, p. 1228.
McGILL LAW JOURNAL
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administrative machinery was being made.s However, in the same
month, Mr. Argue stated on the floor of the House that the possible
sale of rubber belting by a Canadian subsidiary of B. F. Goodrich
Corp. of Akron, Ohio had been prevented by the parent.5 It was
in the same statement that reference to the Alcan case made its
appearance in the Debates. Another incident, involving Fairbanks-
Morse, and the reconditioning for sale to China of used railway
engines owned by the Canadian National Railway, also resulted in
the grant of a license to the United States parent to permit the
Canadian subsidiary to recondition the engines; this sale, like the
Rayonier sale, was never consummated. 59 In view of the fact that
the Canadian government owned the engines, there was a unique
interest in obtaining the license in this case.
The problem continued. In 1961, Massey-Ferguson Ltd. refused
to supply China with 400 tractors, and it was alleged that the
Canadian corporation did not have sufficient manufacturing capa-
bilities in Canada to complete the order.60 There was also further
mention of the Alcan incident in 1961 with special attention to the
economic* impact which this refusal to sell must have had in the
recession year of 1958. Additional fuel was thrown on the fire in
1963 and 1964 by the refusal of United States controlled companies
to supply Canadian export corporations with automobile parts for
sale to China.60 Coupled with this, in 1964, Canadian subsidiaries
of United States heavy machinery manufacturers refused to permit
the export of Canadian manufactured heavy machinery to a trade
fair in Moscow; the Trading with the Enemy Act does not apply
to the Soviet Union, and the corporations were apparently toeing
the line prescribed for domestic United States corporations under
the Export Control Act. In 1965, further inquiry into the inability
of Canadian export corporations to secure automobile parts for
export to China was made. Canadian exporters were unable to
57 “Some aspects of the relations between Canadian subsidiaries and their
parent companies in the United States came under examination. The ministers
reviewed the arrangements made last summer under which the United States
undertook to consider licenses to parent companies in the United States on the
case-by-case basis which would relieve
the prohibition against
transactions with communist China insofar as their Canadian subsidiaries
were concerned.”
(State Department Bulletin 40:130 [1959]).
them from
5 8House of Commons Debates, Speech of Mr. Argue, 30 January 1959, I, p. 544.
59 Brewster, op. cit., p. 25.
60 House of Commons Debates, Hon. George Hees, 8 February 1961, II, p. 1852.
61 Ibid., Mr. Mather, 17 June 1963, II, p. 1228; Hon. Mitchell Sharp, 24 March
1964, II, p. 1398.
No. 2] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION 201
obtain the parts from two United States controlled Canadian cor-
porations.62 Appeals to the Canadian government by the exporter
were fruitless, for, as we have indicated, the Canadian government
refuses to intervene between suppliers, local dealers, and customers
in their business arrangements.
Despite the adoption of the administrative and consultative
machinery, both institutionally, as in the Joint Committee, and
on an ad hoc basis vis-A-vis individual export cases, Canada does
not consider the problem to be solved. Concern over United States
control in general, and over exports in particular still remains. The
letter and questionnaire sent out in March 1966 by the Minister
of Trade and Commerce attest to this fact.0 3 Speaking of the problem
in the House on March 31, 1966, Mr. Douglas said:
I hope the minister’s letter, and the questionnaire he is sending out, will
enable him to get information that will permit the government to formulate
a policy, but I want to point out that the real nub of the question is
contained in No. 3 of the guidelines, which says:
Maximum development of market opportunities in other countries
as well as in Canada.
… I believe it will have to be made clear to the United States government
that they had better get over the idea that the United States subsidiaries
in this country are subject to United States legislation, particularly having
regard to trading with the enemy legislation, which has been used in the
past to exercise control over United States subsidiaries in this country,
which control has often been exercised to the disadvantage of Canada.64
As the letter sent out by the Minister indicates, all of the prob-
lems arising from control are to be the subject of further study, and
they are all matters of continuing concern. However, Mr. Douglas’
remarks are particularly important because they narrow the focus
to the Trading with the Enemy Act and its impact. They stand
as proof that the current administrative and regulatory situation
is not a solution from the Canadian point of view; this does not,
of course, imply that, if the policy reasons which resulted in the
adoption of the act and regulations in the first instance are still
valid, that there is another, perhaps better, solution, in either the
administrative, diplomatic, or legislative field.
62 Ibid., Hon. Mitchell Sharp, 24 March 1964, II, p. 1398; Mr. T. C. Douglas,
22 March 1965, XII, p. 12630.
63 The text of the letter appears ibid., 1966, IV, pp. 3713-4.
64 Ibid., Mr. Douglas, 31 March 1966, IV, p. 3644.
McGILL LAW JOURNAL
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IV
The Cuban Situation
One other area must be considered as a part of the general
problem of United States Trading with the Enemy Act and its
impact on Canadian industry, for it also reflects the difficulties
which we have encountered in examining the Foreign Assets Con-
trol Regulations as they apply to Canadian business. On October
19, 1960,65 the United States placed a complete trade embargo on
exports of all but a few commodities to Cuba. The embargo action
was taken under the Export Control Act, which, as we have seen,
does not apply to foreign subsidiaries of United States corporations.
One can speculate that among the considerations militating against
the imposition of an embargo under the Trading with the Enemy
Act, was the unwillingness of the United States government to
further exacerbate the existing Canadian sensitivity in this area.
Canada had traded with Cuba prior to the United States embargo
and continued to do so afterwards; the Prime Minister expressed
Canada’s trade policy toward Cuba: “It
is, of course, not our
purpose to exploit the situation arising from the United States em-
bargo. ..-6 Canada agreed not to permit transshipment of United
States goods to Cuba on 16 December 1960. 67 The changes necessi-
tated in Canadian export licensing to prevent transshipment were
doubtless the result of inter-governmental negotiation; the fact that
negotiation occurred permits an inference that the United States
had considered the possibility of imposing the Trading with the
Enemy Act restrictions, and had chosen to pursue this less restric-
tive alternative. In February 1962, very shortly after the announ-
cement of the embargo, the Canadian-American Committee, a private
group of business leaders from both sides of the border, released
a report on Canada’s Trade with Cuba and Canadian American
Relations. This report indicated that, apart from prohibitions of
transshipment of goods from the United States to Cuba via Canada,
the area was not a source of problems. On February 6, 1962,
however, the Cuban Import Regulations, issued under the Trading
with the Enemy Act were promulgated in the Federal Register.
Although these regulations were to be short-lived, and although
they did not in any way affect the exports of controlled Canadian
65 State Department Bulletin 43:715 (1960).
66 House of Commons Debates, Mr. Diefenbaker, 12 December 1960, I, p. 701.
67 Canada’s Trade With Cuba and Canadian-American Relations, p. 10.
No. 2] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION 203
corporations, they did indicate a further concern about Cuba in
the United States. These regulations were superseded on July 9,
1963 by the Cuban Assets Control Regulations 6s which extended
the United States economic sanctions against Cuba beyond the
the United States border. These regulations provided a wholesale
exemption for controlled corporations abroad provided they en-
gaged in trade with Cuba in goods produced or manufactured out-
side the United States, did not use United States financing, and
did not employ United States bottoms. 9 These regulations remain
in effect at present.
Despite the fact that the Cuban embargo does not affect con-
trolled Canadian corporations, and despite the fact that the United
States has been careful in this instance to limit jurisdictional reach
to its own territorial grasp, misapprehensions and difficulties have
appeared.
A Presidential Proclamation issued in early 1962 70 extended the
scope of the Cuban embargo, this time utilizing the statutory frame-
work of the Foreign Assistance Act of 1961.71 The New York Times
incorrectly reported that the Cuban embargo had been placed
under the Trading with the Enemy Act; a retraction appeared on
January 27, 1962.72 Despite the fact that no regulatory attempt was
made to interfere with Canadian trade with Cuba, United States
parent corporations, reflecting domestic trade policy, have prevented
0s 31 CFR 515.101 – .808.
69 31 CFR 515, 541. This section specifically excludes from the application
of the act and regulations only the controlled foreign corporation itself; it
does not authorize any person subject to the jurisdiction of the United States
other than the controlled foreign corporation itself to engage in or participate
in or be involved in any transaction. It provides specifically that no person
shall be deemed to be engaged in or participating in or involved in a transaction
solely because of his financial interest in a foreign corporation. Despite the
clear words and plain intent of the regulations, however, the Treasury department
has sought, with considerable success, to prevent controlled foreign corporations
from engaging in trade with Cuba by threat of prosecution of United States
citizens who are directors or officers of controlled foreign corporations. Thus,
what the Treasury regulations appear to give with one hand, the Treasury
is attempting to withhold by brandishing in its other hand threats of prosecution
against United States persons who are officers or directors of controlled
foreign corporations. In view of the discussion in Part I of this article concerning
liability of directors and officers under the act, it is submitted that .this threat
of prosecution could not generally result in conviction. That the threats are
effective nonetheless is shown by the instances cited further on in this article.
70 Presidential Proclamation #3447, 27 Fed. Reg. 1085.
71 75 Stat. 445, 620 (a) as amended.
72New York Times, January 27, 1962, 3:7.
McGILL LAW JOURNAL
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Canadian subsidiaries from engaging in that trade.73 The most
significant instance was the refusal of United States controlled
Canadian milling companies to mill wheat purchased by the Soviet
Union for transshipment to Cuba.74 This occurrence in the summer
of 1965 indicates again the complexity of the problem of corporate
behavior of foreign owned corporations. Even without applicable
United States regulation, some United States parent corporations
are unwilling, as a matter of policy, to permit their subsidiaries
to engage in activity which may be, in some way, contrary to
United States policy.
Mr. Douglas, speaking in Parliament on March 31, 1966 analyzed
the problem in the following manner:
The real problem,…
is that the decision-making power may be located
outside Canada. That decision-making power may not be used in the interests
of Canada but in the interests of some other country.75
At the conclusion of the tenth meeting of the Joint Canadian-
United States Committee on the 5th of March 1966, Mr. Martin,
then Minister of External Affairs, reported to the House:
There was also a thorough and useful discussion of United States foreign
assets controls which have on occasion created serious difficulty for Canadian
companies trading with such countries as communist China and Cuba (sic).
As the communiqu6 states:
The United States members reaffirmed their readiness to consult
promptly on any transactions of importance to Canada which are
affected by the United States foreign assets control.7 6
It seems clear from an article which appeared in the Montreal
Star on November 4, 1967, that there is a continuing misapprehen-
sion about the applicability of the Trading with the Enemy Act to
trade by controlled Canadian corporations with Cuba.77 This article
73 House of Commons Debates, Mr. Andr6 Bernier, 19 October 1962, I, p. 704.
There is mention here of denial of an export license to a Canadian Corporation
by the United States.
74Ibid., Mr. Douglas, 31 March 1966, IV, p. 3644.
75 Ibid.
76 Ibid., Mr. Paul Martin, 7 March 1966, III, p. 2259.
77Montreal Star, November 4, 1967, 7:1. That serious confusion exists about
the applicability of the Cuban Assets Control Regulations to trade by controlled
foreign corporations with Cuba can be seen from an article in the New York
Times entitled “Belgium Resents U.S. Order Barring Sale to Cuba.” A Belgian
subsidiary of Sperry Rand was forced to rescind a $1.2 million dollar order for
agricultural machinery from Cuba, allegedly because of failure
to secure a
license. Mention is also made in the article of possible criminal liability of
United States directors of the Belgian company. (New York Times, February
7, 1968, 3:2).
No. ?] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION 205
indicated that a relatively small export transaction involving agri-
cultural machinery parts by a controlled Canadian corporation with
Cuba had been approved subsequent to high level ministerial nego-
tiations between Canada and the United States. The article stated
that such transactions were prohibited by the Trading with the
Enemy Act. While it may be that the United States has not taken
particular care to make known the fact that Cuba is not a desig-
nated foreign country under the Foreign Assets Control Regula-
tions and that the Cuban Assets Control Regulations contain an
exception for controlled foreign corporations, it is clear that there
is no regulatory authority for preventing such export transactions
subject to the narrow conditions imposed by the Cuban Assets
Control Regulations.7s
If Canadians are angered by the imposition of United States
regulations upon Canadian corporations when those regulations pro-
hibit trade activity permitted by the Canadian government, they
experience both anger and frustration when United States owned
companies adopt such positions without being legally obligated to
do so, and when such actions have the apparent effect of deviating
from profit maximization (at least in the Canadian sector) and
thus result in an economic imposition on the Canadian economy.
When United States governmental regulations are involved, it is
possible to have recourse to inter-governmental negotiation in an
effort to resolve the difficulty; when United States corporations
act in a similar manner without being required to do so by United
States law, the method of resolving the difficulty is less clear. One
possibility might be to attempt a legislative solution. Yet, as we
have seen, refusal to export is not well suited to remedy by statute.
Given the refusal of the Canadian government to intervene between
Canadian export corporations and United States controlled Cana-
dian manufacturers of auto parts, it is difficult to believe that a
necessarily more rigid and inflexible legislative solution to the prob-
lem is likely, or indeed within the realm of possibility. The Cuban
situation is merely another indication of the complexity of the issue
involved in United States control of Canadian corporations, and
testamonial to the difficulty of achieving a solution.
7 8 See note 69, supra.
McGILL LAW JOURNAL
[Vol. 14
V
Conclusion
Canadian concern over the application of the Trading with the
Enemy Act and the Foreign Assets Control Regulations to Canadian
corporations controlled by United States interests is only one aspect
of the concern which Canadians feel about United States control.
The economic situation of the fifties fostered that concern, and
the Ford case, arising when it did, served to focus control anxieties
narrowly on the Trading with the Enemy Act; yet it is important
to realize that some part of the Canadian concern and anxiety about
the act is not directly attributable to the legislation, but to other,
wider problems of foreign control.
The control issue is central to the problem of the behavior and
decision-making process of controlled Canadian corporations. There
are two separate factors which can result in different behavior
patterns for United States controlled Canadian corporations. One
is the fact of parental corporate control and the resulting corporate
decisions made in terms of the entire corporate organization in such
areas as pricing, personnel,
research, charitable contributions,
purchases of supplies, and marketing in Canada and elsewhere.
Insofar as corporate policy in these areas runs counter to the interests
of the Canadian economy, and insofar as a Canadian owned corpora-
tion could be expected to behave differently, a problem exists, but
only on the corporate and economic plane. The other fact is the
imposition of government regulations by the government under
which the parent corporation is incorporated on the operations of
the controlled subsidiary. The Trading with the Enemy Act and the
regulations do effect a restriction on the activity of a United States
controlled Canadian corporation; the sphere of regulation is small –
it concerns only exports to China, North Korea, North Viet Nam,
and Cuba. Yet the legislation clearly operates in a manner adverse
to Canadian economic interest; thus the fact of economic impact is
heightened by the fact of an assertion of limited jurisdiction over
a Canadian corporation.
In applying the regulations, the United States has sought to avoid
the appearance of an invasion of Canadian jurisdictional sovereignty,
inducing Canadian compliance by pressure on United States parents.
No.2] ENEMY ACT AND CONTROLLED CANADIAN CORPORATION 207
However successful this technique is as a formal device, and as a
means of minimizing Canadian awareness and concern, it neces-
sarily results in a blurring of the distinction between business policy
effects on the controlled Canadian corporation and those effects
which can be characterized as governmental. The undoubted wisdom
of the United States technique brings with it the risk that when
Canadian attention focuses on the Trading with the Enemy Act,
the response will be one quite disproportionate to the amount of
injury caused by that act and measured in either terms of sover-
eignty or of dollars and cents; the form of enforcement through the
corporate parent encourages a fusion of Canadian dissatisfaction
resulting from the Trading with the Enemy Act with that from
all other areas of the control problem.
The very complexity and uncertainty about the wider variety
of problems which foreign control poses help to make the Foreign
Assets Control area a cause cglbre around which Canadians can
rally their concern about United States control; it is also an area
where immediate and inherently inflexible legislative solutions do
not appear to be available in Canada. Through negotiation and
discussion, it may be hoped that the problem in this area may
be eased; the administrative machinery and the Joint Committee
cannot completely resolve the conflict inherent in the application
of the Trading with the Enemy Act, but they serve as an escape
valve for pressure in this area.
For the United States, the question of the validity of the policy
considerations behind the Trading with the Enemy Act, especially
as it applies to trade with China, must remain in doubt. It can
further be questioned, even if the policy considerations behind the
act are sufficiently important to justify continuation of the act,
whether the act might not be restricted in application and impact
to the territorial limits of United States jurisdiction, as has been
done under the Export Control Act.
Of additional concern to the United States is the fact that this
act is one of many which allows the President and his delegates
to exercise vast powers –
powers usually exercised by Congress,
albeit in time of war or national emergency as declared by the
President. The act is part of a real evolution of the power equation
between the executive and legislative branches of the United States
government, which is placing the power to make vitally important
decisions about national policy in the hands of the Chief Executive.
Such an evolution is resulting in a situation factually similar to
the power of the Prime Minister and Cabinet, and the promulgated
regulations under the act can be likened to Orders in Council.
McGIEL LAW JOURNAL
[Vol. 14
For Canada, it seems clear that the Trading with the Enemy
Act is a convenient hook on which to hang discontent about a wider
variety of problems arising as a result of United States control of
Canadian business. The act is a challenge to Canadian sovereignty
over Canadian corporations, and it does have adverse economic im-
pact in Canada. It seems unlikely that the scope and constitution-
ality of the act will be tested in United States courts; the Treasury
clearly prefers to avoid judicial test of the regulations. Canada’s
best hope for improvement in this area is a continued effort on the
part of Canadian economists, business men, and politicians to dis-
cover incidents in which the act has had an adverse impact on
Canada, or incidents in which, if a controlled Canadian corporation
were free to accept export orders, it might have done so, although
the United States parent requires that all export orders pass through
its offices. It was, after all, in large measure the pressure of Ca-
nadian discontent with caused the United States to retrench in
imposing its embargo on Cuba. It seems likely that the best solu-
tion to this problem is continued pressure, political and diplomatic,
to secure withdrawal of the regulations as they apply to the con-
trolled foreign corporation’s export business. To remove the offend-
ing regulations would not, perhaps, correct matters completely, for
we have seen that in instances involving Cuba and even the Soviet
Union, United States parent companies, in what must appear an
embarras de zMle, have prohibited their controlled Canadian sub-
sidiaries from engaging in transactions which are legel under United
States and Canadian law; this solution would not meet the problems
of informal pressure for “voluntary” compliance exerted by the
Treasury against United States parent companies. But it would
remove an offensive piece of legislation from the United States
Code and should lead in time to a broadening of Canadian export
trade with designated foreign countries.
