Canberra, 9 February 1961
Secret
The Possible Association of the United Kingdom with the
European Economic Community
The last report to Cabinet on developments relating to the possible association of the United Kingdom with the European Economic Community (EEC) was submitted in September, 1959.1
2. This is a subject which can have most important implications for our trade with the United Kingdom. Excluding wool and metals it might be said that if the United Kingdom achieved some form of association with the EEC some £150 million or 60% of our total exports to the United Kingdom could be affected, according to the nature of the arrangement.
3. In December, 1958, the United Kingdom reached a point of open failure in her efforts to negotiate an industrial free trade area which would have associated the United Kingdom and other European countries with the Six on the basis of the total exclusion of agricultural trade. The break-down in the negotiations seemed pretty clearly attributable to the attitude of the French.
4. The United Kingdom then looked to the European Free Trade Association (the ‘Outer Seven’) as a method of working toward an association with the EEC, but without success.
5. In particular, the French remained quite uninterested by the United Kingdom’s efforts to bridge the gap between herself and the Six.
6. In the first half of 1959 the United Kingdom Government seemed more or less resigned to allowing the situation to develop quietly for some time but their attitude changed abruptly in August. In the Macmillan/Adenauer talks at that time they were encouraged by the German attitude to believe that a political climate could be established which would favour negotiations for some kind of association. They thereupon engaged in a round of Ministerial talks in the various capitals. This renewed activity at the political level is still going on, the latest move being the Macmillan/de Gaulle talks at the end of January.
7. The attached paper describes the United Kingdom’s efforts to find a basis on which to negotiate with the EEC. It indicates the problems posed for Australia. From the United Kingdom’s exposition of the issues at the Commonwealth Finance Ministers’ Meeting last September there seems no doubt that she regards changes in her preferential arrangements for Commonwealth goods as almost inevitable if she is to achieve her policy aims, and does not rule out the possible need for some curtailment of Commonwealth free entry to the United Kingdom market.2 We do not know how far the United Kingdom would go in these directions; or how far she would be able to keep agriculture out of any arrangements that might be arrived at.
8. The paper refers briefly to some possible courses of policy for Australia but no attempt is made at this stage to reach conclusions about what our policy should be. The position remains complex and fluid. It could, however, develop quite quickly into the sort of situation in which major Australian trade interests would be very much involved and we might need to make prompt decisions on what to do to preserve and if possible advance those trade interests.
9. The attached paper is circulated for information.
Attachment
Secret
THE POSSIBLE ASSOCIATION OF THE UNITED KINGDOM
WITH THE EUROPEAN ECONOMIC COMMUNITY
Background
1. The United Kingdom refused to take part in the negotiations which led to the formation of the European Economic Community (EEC). However, she soon saw that ‘the Six’ were in earnest in their intention to establish the EEC and that its establishment would introduce trade discrimination against British products in the markets of ‘the Six’.
2. She therefore proposed in 1957 the formation of an industrial European Free Trade Area whereby she, and any of the other countries of Western Europe who cared to join, would enjoy the benefits of free trade with ‘the Six’ without having to join the EEC. From the United Kingdom’s point of view a very important feature in this European Free Trade Area proposal was that it would apply only to industrial products, thus leaving the United Kingdom free to protect its home agriculture—and to protect it in its own way—and leaving much the greater part of the Commonwealth preferential system unaffected. Other important advantages she saw in the European Free Trade Area idea were that its members would not have to impose a common external tariff or adopt common commercial policies towards the outside world and would not have to join in common institutions of a supra-national character.
3. Australia supported the then proposed European Free Trade Area on both political and economic grounds. We endorsed the United Kingdom’s policy of trying to prevent the division of Europe into two economic groups; from the trade point of view, since the arrangement was to exclude agriculture, our major preferences in the United Kingdom market would not have been threatened. We did, however, have doubts that in the long-term the exclusion of agriculture could be maintained. We agreed to make some marginal concessions to help the United Kingdom achieve the proposed European Free Trade Area and these were taken into account when we negotiated the United Kingdom/Australia Trade Agreement in 1956.
4. After some years of negotiation this proposal for a European Free Trade Area in industrial products failed to gain acceptance. The negotiations were abandoned at the end of 1958 when the French rejected the British proposal.
5. The United Kingdom has said explicitly that she could not accept the full obligations of membership of the EEC in its present form. If the United Kingdom had accepted these obligations in full, this would have meant not only the end of the Commonwealth preferences against the EEC countries in the United Kingdom market, but also the establishment of a preference in the United Kingdom in favour of the EEC countries against the Commonwealth. (This would heavily involve the United Kingdom’s own export preferences in Commonwealth countries.) Moreover, the United Kingdom would have been obliged to accept common policies with ‘the Six’ in many important fields, including agriculture where the EEC envisage a highly regulated and managed market. If the United Kingdom was to join the EEC common market for agriculture we would face the prospect of considerable losses in our trade with the United Kingdom in a number of our major agricultural exports including wheat, dairy products, fruit and wine. Together, these products and others which could be affected account for some 60% of our exports to the United Kingdom.
6. After the United Kingdom’s attempt to negotiate the European Free Trade Area had failed she turned her energies towards establishing the European Free Trade Association (EFTA) which groups together ‘the Seven’ (Denmark, Sweden, Norway, Austria, Portugal, Switzerland and the United Kingdom) into an industrial free trade area. She saw in this grouping not only the advantages of industrial free trade within a group of 90 million relatively prosperous Europeans but also the prospect of a stronger bargaining position with the EEC for the eventual merger of the two groups into the wider free trade area which remained her goal.
7. The EFTA, which was negotiated in 1959, nominally excludes all agricultural trade, but the Danes concluded several bilateral agreements which gave them some agricultural concessions in the markets of other EFTA members including the United Kingdom. The United Kingdom’s membership does not affect our major preferences in her market. We did not endorse the United Kingdom’s participation with enthusiasm, nor did we accept without question the United Kingdom’s belief that the formation of the EFTA would lead to early negotiations with the EEC for the merger of the two groups.
8. It soon became apparent to the United Kingdom that the formation of the EFTA was not going to force the EEC into quick negotiations for any wider grouping and that, unless she was prepared to offer a new basis for negotiations involving some sacrifice of United Kingdom interests, there would be no negotiations for the association of the two groups. She therefore decided to concentrate on building up the EFTA, whilst keeping alive the idea of an eventual association with the EEC and working to improve the will of the EEC to negotiate.
9. This was United Kingdom policy until Dr Adenauer in August last year showed some concern at the effects on the political cohesion of Europe of the economic split between ‘the Six’ and ‘the Seven’. He agreed with Mr Macmillan that the Germans and the British should examine the problems preventing the United Kingdom from joining the EEC and see if a solution was not possible.
Present United Kingdom Policy:
10. The German attitude and some pressure at home encouraged the United Kingdom to try again to come to an arrangement with the EEC. They have since August been actively seeking through discussions at the political level with member Governments of the Six to find a basis on which negotiations could proceed.
11. At the meeting of the Commonwealth Economic Consultative Council last September the issues were set out at length by the United Kingdom.3 They saw an intensified need for European unity and considered that political stability and economic strength in Europe would be threatened unless some means could be found of bringing the EEC and the EFTA together. The United Kingdom was anxious that the strong urge in Western Europe towards greater unity should develop on lines which would permit her to take her part in it. There had, the United Kingdom believed, been general agreement throughout all the discussions which had taken place with the Commonwealth, that for the United Kingdom to become isolated economically from the Continent would be against Commonwealth interests. If the United Kingdom could achieve a satisfactory form of association she would hope to be able to see that proper attention was paid to the Commonwealth interests.
12. United Kingdom Ministers asserted that the case for finding an accommodation with the EEC was strong, and that every effort had to be made to achieve it.
13. They did not foresee a free trade area being acceptable, and considered that the only alternative compatible with GATT would be a customs union with a common external tariff. If there were to be any question of close association between the United Kingdom and Europe in the form of a customs union with the EEC, the most important question, they said, would be whether Commonwealth free entry could be retained in full, and what modifications in Commonwealth preference would have to be made.
14. In relation to their further exploratory discussions with the EEC countries the United Kingdom sought an indication of how much departure from the principle of free entry into the United Kingdom market would be acceptable to Commonwealth countries if the United Kingdom had to consider a form of customs union arrangement with the EEC.
15. The United Kingdom recognised that, to the extent that Commonwealth free entry could not be retained in an eventual settlement on goods which were dutiable under a common tariff, that would result in the creation of reverse preferences in favour of Europe and against Commonwealth goods. The United Kingdom also recognised that over part of the field the free entry which she gave to the Commonwealth, and the preferences for Commonwealth goods which she guaranteed, were part of a bargain under which she also enjoyed benefits in Commonwealth markets.
16. None of the Commonwealth countries were prepared to give detailed answers to hypothetical questions or to give the United Kingdom a free hand in any European negotiations which could affect Commonwealth interests. In particular, Canada and New Zealand showed strong opposition to the United Kingdom’s association with the EEC in any way that might include agriculture.4 Canada (and India) also showed concern at the prospect of any changes which could affect their trade in manufactured goods. For Australia, the Treasurer was non-committal on the United Kingdom’s particular questions, but undertook that we would examine quickly and sympathetically the practical alternatives which the United Kingdom might face when these could be defined more precisely.
Implications for Australia:
17. Thus we are confronted—as we haven’t been since the earlier negotiations broke down at the end of 1958—by the prospect that our trade and other interests could sooner or later become very much involved as the United Kingdom continues her explorations with the Six. The United Kingdom is not likely to embark upon negotiations in earnest until she sees a reasonable prospect of success; but once embarked upon them she can be expected, in view of the 1958 breakdown, to go to considerable lengths to avoid a second failure.
18. We have made it clear to the United Kingdom that the support we expressed in 1956 for the industrial European Free Trade Area then proposed would not necessarily apply to any new proposal for an association between the United Kingdom and the EEC.5
19. There would appear to be three possible courses for Australia:
- To inform the United Kingdom that we are opposed to any changes in our trade arrangements with her.
- To continue our present ‘wait and see’ policy, reacting only if and when the United Kingdom had a proposal which would affect our existing trade arrangements
- To take an initiative by making a proposal based on our assessment of what kind of an arrangement between the United Kingdom and the EEC would suit us best.
20. The first course (a) would be inconsistent with our past attitudes to the extent that we have continued to indicate a willingness to find, a constructive solution. The United Kingdom will make her own decision regarding the. extent to which she will be prepared to modify Commonwealth trading arrangements in order to secure an association with the EEC, and opposition by Australia might be of doubtful effect as a deterrent. However, the attitudes of Canada and New Zealand could affect the position.
21. Course (b) would carry the danger that the United Kingdom would be engaging in discussions on the Continent without being aware of our own attitude on possible changes in our present trading arrangement. This could lead to miscalculation and recrimination if the United Kingdom was to go further than we would feel she was justified in doing. Moreover, if the United Kingdom was prepared to make concessions affecting the Commonwealth in order to achieve her policy aims in Europe—and if we are correct in our assessment that she is unlikely to be able to exclude all agriculture from the arrangements—then this would pose a very serious long-term threat to our agricultural exports to the United Kingdom. A passive policy means that we could suffer trade losses some of which might be avoided by a positive approach.
22. Course (c) would offer us at least some chance of influencing events in our favour. It would not rule out efforts to maintain the major part of our existing arrangements with the United Kingdom, though there might be nothing which we could do to avoid some losses no matter what policy we adopt. It would also give us the opportunity to see whether we could get some compensation in Europe for any unavoidable losses of trade advantages in the United Kingdom.
23. It would appear from the exploratory talks which have taken place between the British and the Germans that the latter may be prepared to contemplate an arrangement that did not include agriculture. However, other European countries—notably the Netherlands, France and Italy—could be expected to show greater interest than the Germans in securing a measure of preferential access to the United Kingdom market for their agricultural exports. In a wider European arrangement the Danes, and possibly others, could be expected to take a similar view.
24. It is not possible to be sure at present which policy it would be wise for Australia to adopt on trade and other grounds. There are a great many unknowns in the present European situation. Important elements in any decision would be the type of association which seemed in prospect between the United Kingdom and the EEC; the extent to which agriculture is to be included; our assessment of the likely gains and losses to Australia; and the attitudes of other Commonwealth countries, especially Canada and New Zealand. At the CECC6 meeting, and subsequently, Canadian Ministers have expressed a strong negative attitude towards the United Kingdom’s possible association with the EEC if this should involve reductions in Canadian preferences in the United Kingdom. The former New Zealand Finance Minister also expressed strong concern over the effect which an association of the United Kingdom with the EEC could have on preferences. Since then, however, the New Zealand Government has changed and the views of the new New Zealand Government are not yet known.7
1 NAA: A4940, Cl689, Cabinet submission No. 219 (McEwen), ‘European Trade Arrangements’, 8 June 1959.
2 The Commonwealth Finance Ministers’ meeting was held in London on 20–21 September 1960. Reactions from the Canadian and New Zealand governments to Britain’s explication of the European dilemma were particularly adverse. See Documents on Canadian foreign policy, Vol. 24, Ch. 4, Part 3, Document 394, ‘The United Kingdom, Europe, and the Commonwealth Discussion at the Commonwealth Economic Consultative Council’, 22 September 1960.
3 See previous footnote.
4 The Canadians were said to have voiced their concerns in trenchant terms, claiming that their capacity to retain an independent stance vis-a-vis the United States would be gravely undermined by a British accommodation with Europe that included agriculture.
5 See NAA: A4940, C1689, Cabinet submission No. 444 (McEwen), ‘European Free Trade Area’, 29 October 1956.
6 Commonwealth Economic Consultative Council.
7 Keith Holyoake’s National Party Government assumed office in New Zealand on 12 December 1960.
[NAA: A4940, C3368 PART 1]