Cablegram ITO79 GENEVA, 14 May 1947, 12.20 p.m.
SECRET
1. Wilson’s telegram T.17 Issues raised in this telegram have been under discussion in Delegation since our arrival in London and it was my intention to telegraph results our discussions soon as possible. We are agreed that principle involved in Article 14 [1] and related Articles in fundamental and that our attitude towards it is major consideration in determining our attitude towards Charter as a whole. It is not involved in ‘experimental’ negotiations [2] which we have just commenced but it is important that our attitude should be determined before we embark on Charter discussions this month.
The following issues are involved.
(I) The effects on Australia of acceptance of Article 14 and related Articles (a) in relation to commercial policy generally, (b) in relation to preference in particular.
(II) Alternatives open to us.
(III) Whe[ther] we are committed in our attitude towards this question in anyway and if so how far by our acceptance of Article VII of Mutual Aid Agreement.
(IV) Attitude of other countries (a) foreign countries, (b) British countries, and [3]
IA. Effect on Australian Commercial Policy generally
Article 14(1) maybe generally described as ‘the rule of equal treatment’ or ‘the rule of non-discrimination’. Scope of rule clearly extends beyond tariff and import charges and assessment of effects of its acceptance require detailed examination of Australian protective trade administration and fiscal practices.
Charter already provides particular exceptions to rule (e.g.
Article 28 in relation to discrimination in quantitative restrictions) and they may be capable of extension but these specified exceptions should not in our opinion prevent careful examination of general application of the rule.
[I]n following analysis of what appear to be important implications of rule we have given weight not only to limitations on freedom of Australia to discriminate in favour of others and of others discriminate in favour of us but also the limits to the freedom of other countries to discriminate against us.
It has been suggested that Article 14(1) and particularly its reference to Article 15 would make difficult the continuance of Australian two price systems. [4] It is clear such systems are dependent upon complete exclusion of imports. It seems to us that no serious difficulty arises in connection with such schemes as the butter and wheat marketing plans since there are no imports of products concerned and this situation can effectively be continued under existing articles of the Charter. The sugar two price system appears at present to be dependent upon embargo on imports which would be proscribed by the Charter. The embargo could, however, be rapidly replaced by a tariff which would be prohibitive [5] effects. Generally we are satisfied that the two price systems can be maintained on commodities in which Australia is at present interested.
In our view application of the rule would be of greatest importance apart from its effect on preference in relation to (a) quantitative restriction of imports, (b) tariff changes.
In relation to former we would no longer be able, if we find it necessary to impose such restrictions for the protection of balance of payments, to discriminate in favour of the strong[6] area as whole United Kingdom, New Zealand, Pacific Islands as we have done to varying degrees. Similarly, from point of view of our exports we will find other British countries unable maintain discrimination in our favour which they have permitted in past. We are experiencing first effects of this in present limitation of imports of Australian books in United Kingdom. We understand that there are other instances of loss of export sales to United Kingdom for same reason. In view of the probability that United Kingdom and New Zealand are likely to maintain quantitative restrictions [7] on imports for considerable time these examples may well multiply affecting particularly new and developing export manufacturing industries. Major exports are unlikely to be affected while our exports to other countries have in past suffered considerably from imposition of quantitative restrictions discrimination against them has not been significant. It would appear therefore that application of rule of non-discrimination would, if past experience is a guidance, [be] a greater departure from customary practices by British countries than others.
Most we can expect under Charter in future is that quantitative discrimination might be permitted in special circumstances for balance payments reasons but that discrimination based upon political or traditional associations would be debarred.
As we interpret the United Kingdom - United States and United Kingdom Canadian Loan Agreements our main purchaser has already contracted until end of 1951 not to discriminate against those countries in our favour. Whether rule of nondiscrimination (as distinct from general limitation of use of quantitative restrictions) is likely be serious and unjustifiable handicap to policy in British countries thereafter seems to depend upon whether need for import restrictions to meet balance of payments deficiencies arises from general collapse of markets or from failure of demand in particular, key countries. In former case discrimination among British countries alone would distribute burden of necessary reductions of imports among non-British many of whom may be equally blameless and it is not surprising that they should wish to prevent this. Where however, quantitative restrictions become necessary because of shortage of particular currencies there are articles of the IMF and in draft ITO charter (for example 28 35 and 66/3) which provide possibility of identification of cause of exchange deficiencies and introduction of discriminations to meet them (subject approval of one or both these organisations). The provisions in ITO charter are in our opinion inadequate and even if main principle of Article 14 were accepted we would intend work to have them strengthened. In this connection reference has been made here to growing support from economists for view we have advocated that restrictions and[8] to be discriminatory if effect on world trade is not to be greater than is necessary to restore equilibrium in balance of payments.
Apart from this, in view contractual or implied United Kingdom commitments to U.S., the practical possibility of Australian trade gaining advantages from let-outs to non-discrimination principle are probably limited. In relation to tariff changes outstanding point is that objective of application of rule of non- discrimination may well conflict in some instances with general purpose of reducing trade barriers. It is clear however that United States in particular regards objectives as separate and that in some cases at least they give prior importance to non- discrimination. This illustrated by explanatory note to their requests which indicated that their request for elimination of particular preferences would be met by either a reduction in MFN rate or an increase in BPT rate. Practical application of rule to tariff formulation may result in higher duties being imposed as between British countries than would be so if discrimination were permitted.
Perhaps most important illustration of this in relation to our own tariff making arises in connection with our desire maintain higher effective duties against lower cost producers and countries whose export policies make them severe competitors. In past Tariff Board has recommended BPT and MFN rates designed effectively to protect relevant Australian industry and at same time (in accordance with undertaking in Ottawa Agreement) to give United Kingdom suppliers opportunity of reasonable competition on Australia market. Board has carried out this dual task ordinarily by assessing first rate necessary to protect Australian industry against United Kingdom producer (with due regard to Ottawa undertaking) then adding a sufficient margin to give protection against foreign producers where their costs are lower while ensuring that margin added was not less than minimum provided for in Ottawa Agreement. If Article 14 accepted it may become impossible [for] Ottawa undertaking to be observed and at same time effective protection to be granted to Australian industry. For example, if Board considers MFN rate required for effective protection is higher than that current it would be necessary (to avoid widening preferential margin) to increase also BPT rate even though this was inconsistent with Ottawa undertaking that BPT rate would be such as to place United Kingdom suppliers on a reasonably competitive basis with Australian manufacturers.
Generally Australian protective rates are high and problem will most frequently arise therefore in course of goods which it may be desired to protect and in respect of which protective rates of duty have not previously been provided. It should therefore be made clear to United Kingdom that acceptance of Article 14 will require a review of undertaking given in Ottawa Agreement.
I have discussed this question generally with members of United Kingdom delegation who argue that problem can generally be overcome by use of alternative specific rates aimed at low cost producers.
However, fact that United Kingdom is featuring possibility of tariffs on empire goods which are now free of duty may be evidence of their awareness that Article 14 may require higher intra- Commonwealth tariffs. My own opinion is however that primarily they are concerned to establish value of binding of free entry as a bargaining counter to reduction on BPT rates which they seek.
1B. Effect on preference
Effect of Article 14 would be to prohibit new preferences and also increases in preferences remaining after reductions negotiated at Geneva have been implemented.
Importance of this to Australia depends upon the probability of Australia being able in future to obtain new benefits if right to establish new and increased preferences is retained.
In relation to preferences enjoyed by Australia we have at no time since Ottawa sought extensions of any importance. It is true that meat quota provides for Australia obtaining ‘an expanding share’ of British market. This provision is not a new preference and we would regard ourselves as entitled to require a higher price for modification of quota than if it did not include this provision.
Furthermore, United Kingdom prepared (and committed) accept binding of preferences as is Canada also. It is improbable therefore that even if we sought increased preferences we would be able obtain them on any significant scale, and on other hand preferences between ourselves and India have the possibility, abandonment of which would represent a real sacrifice. In London we began by seeking to retain right to extend area of existing preferences but apart from India herself found no support from other Commonwealth countries. Furthermore we understand from United Kingdom delegation that they have been advised that India for political reasons proposes abolish all existing empire preferences next year. If this correct it would appear to rule out possibility of our gaining significant benefits in other markets from extension to us of new preferences. Sacrifice involved in prohibiting granting of new or increased preferences by Australia falls upon country potentially enjoying the preference and would be of importance to Australia only as a limitation in our bargaining power i.e., by depriving us of the benefits we might buy from other countries by offer of preferential treatment in our tariff. As we state above now India can be excluded it is unlikely that there is anybody from whom we can purchase significant benefits by offer of preference at least while preference retains its essentially political basis.
It must be remembered also that Article 14 not unilateral prohibition affecting only Commonwealth countries but prohibits other countries from forming new preferential systems and increasing margins within existing systems. Existing systems are not of great interest to Australia except perhaps that between U.S.A. and Philippines but it was apparent at first session that number of other countries were interested in possible future preferential arrangements on a regional or political basis e.g., India, Lebanon, China and several South American countries.
Similarly proposals for low tariff areas short of customs unions were frequently advanced in inter-war period of various groups of European countries, these may well be revived. Another possibility which has to be borne in mind is emergence of new tariff areas from breaking up of existing colonial empires e.g.; Dutch and French. It would not be surprising development if as territories sought tariff autonomy they were willing to grant preferential treatment to countries of whose tariff area they have previously been part. While I am by no means certain that developments would on whole be harmful it is clear that superficially at least they would be detrimental to British Commonwealth interest and abandonment of right to establish them can reasonably be regarded as concession by other countries at least to some extent offsetting our own general undertaking. In inter-war period United Kingdom strongly opposed establishment of several such systems.
Apart from these general considerations it is clear that rigid interpretation of rule might prove administratively inconvenient.
For instance, we allow import under bylaw at concessional rates with narrow preferential margins of goods normally classified under protective items with wider margins. When circumstances justifying by-law admission no longer exist and by-law is withdrawn goods automatically become liable to protective rates already provided with tariff. This may be regarded as increasing an existing preference. There are other examples with which we and/or other Commonwealth countries are concerned. It was agreed in London recently that in any case Commonwealth countries would press for adequate exceptions to cover these cases.
II The alternatives open to us
Immediate issue is to determine basis upon which Delegation will enter discussions of Article 14 and related parts of Charter in forthcoming discussions. It seems that following possibilities exist- (1) To oppose Article 14 and related articles in their present form and seek to replace them by Articles which would allow (a) any group of countries, (b) a group of countries associated politically or geographically or, (c) British countries to discriminate in tariff and other commercial policy in favour of other countries within group.
(2) Not to make a stand on general principle embodied in Article 14 but (a) to seek to retain as large proportion of existing and operating discriminations and preferences favourable to us and to obtain as large a measure of concessions as possible for reductions we grant, (b) to claim that acceptance of Article 14 is a greater concession by British countries than by others and therefore to extract the maximum concessions both in individual agreements and in Charter itself as price of our acceptance, (c) to work for inclusion of provision for ‘administrative’ type exceptions also on lines agreed with other Commonwealth countries.
[III.] Are we committed [9] by Article VII of Mutual Aid Agreement
There can be no doubt that Article 7 was aimed among other things at discriminations practised between Commonwealth countries and particularly at preference and that we undertook to provide for agreed action by United States and ourselves directed inter alia to elimination of all forms of discriminatory treatment in international commerce. In telegram 130 of 12th February, 1942, to Dominions Office following War Cabinet decision of February 10th we stated ‘General relaxation of trade barriers would seem to be possible if positive aims of collaboration referred to in Article 7 are achieved’ and further that ‘consequently British countries should be prepared to accept general commitments involved in Article 7 even if this involved some modification in existing preference scheme’.
It is possible that taking ‘agreed action directed towards [eli]mination of discriminatory treatment’ does not necessarily preclude retention of freedom to extend and increase discriminatory treatment in some parts of the field of its operation but it may be argued that it would be precluded by spirit of undertaking. In this connection you will recall that in telegram referred to we also stated ‘It is of supreme importance for British countries to assure the United States Government and the world that our declarations are intended to be carried out in spirit as well as in letter’. It is not unlikely that an attempt to retain right to impose new and increased preferences would be regarded by the United States as a breach of at least the spirit of Article VII. Of course any commitment in relation to preference and other discriminations assumes that effective action is being taken by the United States to implement remaining commitments of Article VII. However, assessment of commitment under Article 7 is judgment largely of a political character in which it is suggested that due weight must be given to spirit as well as letter of Article 7. [10]
[IV.] Attitude of Other Countries
A. Foreign At outset of London talks it quickly became clear that United States and indeed a number of other foreign countries regarded discrimination by Commonwealth countries as a genuine grievance and that inclusion of Article 14 in substantially its present form was fundamental to their acceptance of Charter. On other hand interest of number of smaller countries in regional preferential arrangements has been referred to above.
B. British It is clear that the United Kingdom and Canada are prepared to accept Article 14 as it stands (except for administrative exceptions). At London talks last year we, New Zealand and India argued for the right to extend existing preferences within recognised preferential area, e.g. Australia to India. The United Kingdom, while unwilling to take any action in this matter might, I think, welcome continued resistance on our part on this point. I have discussed the question personally with Mr. Nash and he states New Zealand’s view is that a claim to retain this right is untenable. Similarly in view of information about Indian attitude towards preference it seems unlikely that they will sustain their stand.
In other words on indications up to date we are unlikely to obtain significant support even from British countries. This is confirmed by discussions in current Commonwealth talks. if there were serious dissatisfaction among British countries at results of tariff negotiations they might be more inclined to oppose Article 14 but see no reason at present for any change in United Kingdom attitude.
CONCLUSIONS
Following conclusions seem to emerge:-
1. It is almost certainly useless to seek a fundamental change in Article 14, benefit of which is confined to British countries. We would obtain no significant support for such an attempt. Amendment to permit discriminatory practices more generally might open the way for development inimical to British interests. However, it is clear that the United States and foreign countries regard substantially present form as essential to their acceptance of Charter. We are, therefore, likely to be faced with a choice between acceptance of Charter, including Article 14, in substantially its present form and complete rejection.
2. It would be better, therefore, to bargain for maximum price in concessions both in Charter and in specific agreements for acceptance of Article 14 In this connection- (a) Price we can extract, however, must be limited by fact it imposes limitations on other nations also. This is less true of United States for whom its acceptance has become matter of political importance and who may, therefore, be prepared to pay.
(b) It may well prove advantageous to resist incorporation of Article 14 in Interim Tariff Agreement and to make its acceptance conditional upon general adoption of Charter. It cannot very well be argued that it is necessary to prevent nullification but if we obtain benefits on individual items in return for acceptance it will be difficult not to agree to its inclusion. The United States is likely to argue that their concessions have been made in part against general grant of MFN treatment.
3. In discussions we should seek to establish that adoption of Article 14 means for Commonwealth countries a major change of policy and that- (a) Acceptance of Charter incorporating it depends upon a conviction that alternative multilateral system offers not less advantageous conditions as a whole when a long-term view is taken than preferential system which we now operate, and (b) A judgment cannot be made on this question until the outcome of Charter and tariff negotiations as a whole is known.
4. We recommend, therefore, that we be authorised to proceed in accordance with conclusions 2 and 3 above.
_1 For Article 14 (1) and (2) see Documents 87, note 2, and 91, note 1 respectively.
2 ‘Experimental’ negotiations were undertaken in respect of Article 24. See Document 92, paragraph 6.
3 Words apparently missing here.
4 The system in which the domestic consumption price of a product was higher than the export price in order to compensate for possible losses in the export market.
5 A symbol here indicates ‘word omitted’.
6 Presumably the word ‘strong’ should read ‘sterling’.
7 A correcting cablegram dispatched 15 May directed deletion of words from ‘on imports for considerable time’ to ‘imposition of quantitative restrictions’.
8 Possibly the word ‘and’ should read ‘need’.
9 Text reads ‘are permitted’.
10 A sign here indicates ‘mutilated’.
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[AA : A1068, ER47/1/28,i]