London, 12 June 1961
Secret
The Implications of Signing the Treaty of Rome: Commonwealth Free Entry
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The Lord Privy Seal told the Council of Western European Union in Paris in February that, if the Six could meet our Commonwealth and agricultural difficulties, we could then consider a system based on a common or harmonised tariff on raw materials and manufactured goods imported from countries other than the Seven or the Commonwealth.
3. This was an important, but strictly limited, move forward on our part. It was important because it not only accepted the principle of a common tariff, but also implied acceptances—at any rate to some extent—of a common commercial policy (of which the common tariff is an essential element) and participation in the institutions necessary to supervise the working of the common tariff. It was a strictly limited move because it assumed the maintenance of Commonwealth free entry in full for all commodities and for all time. This paper considers how far this assumption is realistic in the context of our applying for membership of the Community, i.e. how far we could hope to retain Commonwealth free entry and how far we should have to restrict it and apply the common tariff against imports from Commonwealth countries.
What losing free entry would mean to the Commonwealth
4. The significant factors for the Commonwealth of any breach of Commonwealth duty-free entry would be
(a) the loss of equality of competition with United Kingdom manufacturers in the United Kingdom market. In the field of agriculture they do not have the equality of competition owing to our subsidies.
(b) the creation of reverse preferences against the Commonwealth in favour of Europe in place of the Commonwealth preferential position, and
(c) the loss of preference against the rest of the world.
Here it should be noted that the Commonwealth expected to lose their preferences against Europe for industrial goods only under the old free trade area proposals and the new factor under (c) is the loss of preferences against the outside world. (a) and (b) are, of course, completely new factors.
Our contractual commitments to the Commonwealth
5. Under the Ottawa Agreements we have an obligation to maintain free entry on most goods from some independent Commonwealth countries, and we gave a special assurance to the Colonies at the time of the Import Duties Act, 1958, to maintain free entry for them. We also have Ottawa commitments in regard to most-favoured-Commonwealth nation treatment which preclude us from imposing duties on imports from some parts of the Commonwealth (including the Colonies) and not others. And for some specific goods we have guaranteed margins of preference against imports from all foreign countries. Although we were able to obtain the necessary waivers from these guaranteed margins in connection with the setting up of EFTA, the abandonment of Commonwealth free entry, and the change from preferences for the Commonwealth to reverse preferences against the Commonwealth, would clearly involve replacing all the Ottawa Agreements with other arrangements.
General attitude of the Six
6. In the informal talks over the last few months both the French and the Germans have taken the line that a country enjoying a wide measure of free entry would have the advantage of lower costs throughout its economy and that this would give it an unfair competitive advantage, both within the Community and in third country markets. Though this argument can be challenged, it is clear that they will not allow us to join the Community and at the same time retain Commonwealth free entry in full. On the other hand, they have recognised that we cannot sign the Treaty of Rome as it stands and that special arrangements will have to be negotiated to provide for essential Commonwealth interests. The general sense of the informal talks is plain. In terms of the objectives of the Treaty, the obligation will be on us to accept the common tariff to the maximum possible extent, not on the Six to allow us to retain a wide measure of Commonwealth free entry. The implication of this is that we must concentrate on securing special arrangements for the items which are really vital to Commonwealth interests, recognising that some less important Commonwealth exports will inevitably be damaged, because exceptional treatment on too wide a scale would not be negotiable with the Six.
7. We do not consider in this paper the implications of any loss of Commonwealth free entry into the United Kingdom for our own preferences in Commonwealth markets. This was discussed in detail in the long answer to one of the Prime Minister’s list of questions last summer.1
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(A) Manufactured Goods
The actual Commonwealth interest
16. Imports into the United Kingdom in 1959 of manufactured goods from the Commonwealth amounted to £186 million out of total imports from the Commonwealth of £1,746 million, i.e. about 11%. (The corresponding figures for 1956 were £131 million out of £ 1,830 million (7%). The present importance of this field to particular Commonwealth countries varies.
The current interest of the Commonwealth in this field is small, except for Canada, India, Pakistan, and Hong Kong. On the other hand, although the share of manufactured goods in their total exports may be small, for some countries these exports are important as a source of employment and as a factor in their balance of payments.
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Potential Commonwealth interest
19. But the 1959 figures take no account of the fact that the Commonwealth includes countries with considerable scope for further industrial development. The Commonwealth countries themselves are so conscious of this fact that they tend to attach what may seem to us disproportionate importance to it. Australia, in particular, frequently stresses it, and the guarantee of free entry for manufactured goods was an important element in the ‘Ottawa’ Agreements renegotiated with Pakistan in 1951 and with Australia in 1957. The Commonwealth clearly value the assurance that, when they do succeed in developing the manufacture of any particular goods at reasonable prices, there is an open export market free of duty for those goods in the United Kingdom.
The attitude of the Six on manufactured goods
20. The French feel that free entry would be particularly hard to contemplate in this field. They have quoted the example of their chemical industry. They do not see how they could justify to it a solution under which the United Kingdom chemical industry would be free to exploit the French market which was protected from Canadian competition by tariffs, while the French industry would have to compete on equal terms with the Canadians in the United Kingdom market. The Germans share this view, at any rate as regards manufactured goods from the developed members of the Commonwealth.
Our assessment
21. In our judgment, if we decide to apply for membership of the Community, the Six will require us to apply the common tariff to our imports of manufactured goods from the developed members of the Commonwealth […] This would be a serious matter for Canada, 25% of whose total exports to the United Kingdom consist of manufactures. It would be less serious for Australia in terms of her present exports, but she would have to develop new outlets for the products of her future industrial development. The ending of our commitments to give free entry to these Commonwealth countries would mean that the Ottawa Agreements would have to be replaced by other arrangements.
22. The extent of the damage to the Commonwealth would, of course, depend on the level of the common tariff. If we joined the Six the level at present proposed would come up for adjustment. Our joining would not affect it very much on the whole, but if Denmark and Norway—low tariff countries—joined as well, the common tariff would have to come down somewhat. If there were a further reduction on top of the 20% cut now under negotiation in Geneva,2 the adverse effects on the Commonwealth countries concerned would be correspondingly reduced.
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(B) Raw Materials
Materials duty-free in both Tariffs
27. A large number of raw materials, including most hides and skins, natural rubber, wool, cotton, jute, metallic ores, unwrought copper, nickel and tin, covering at least £323 million, or 58 per cent of our imports from the Commonwealth in this field, are duty-free from all sources in the United Kingdom tariff and in the common tariff. On these our adoption of the common tariff would create no problems.
Loss of Preference
28. Some further materials are duty-free in the common tariff, but are dutiable in the United Kingdom tariff when imported from foreign sources. These cover around £100 million of our imports from the Commonwealth, and include oil seeds, asbestos, goatskins, synthetic rubber, most softwood, temperate hardwoods and sisal. On these, the Commonwealth would lose their preference, not only against Europe, which would have occurred under the old free trade area proposals, but also against all other foreign countries, which in this field are usually more important producers than Europe. Commonwealth free entry into the United Kingdom would continue, but some Commonwealth countries would suffer damage from the loss of preference. […]
Materials dutiable under the common tariff
29. The remaining materials, covering over £100 million of our imports from the Commonwealth, are dutiable in the common tariff, so that its application against the Commonwealth would result in the loss of Commonwealth free entry, as well as a loss of preference against all foreign countries, and a reverse preference against the Commonwealth in favour of Europe. The most important items are aluminium (common tariff 10%), lead and zinc (5%/7%), wood pulp (6%) and news-print (7%).
30. If we joined the Six, the common tariff on these five items would have to be re-negotiated and we would hope to secure substantial reductions since on all of them the United Kingdom tariff is zero. Moreover the common tariff on aluminium is mainly intended to protect the Community’s smelting interests against Norwegian, rather than against Canadian, competition. If Norway joined or associated with the Six, the main point of this tariff would disappear and we would aim at securing its reduction or even elimination. Similar considerations would apply to the tariffs on wood pulp and news-print if Sweden were associated with the Six, since the present common tariff is directed against their exports to the Community, rather than against Canada. As regards lead and zinc the marketing arrangements ensure that the import duties are fully reflected in the price which United Kingdom users pay for all their lead and zinc. Thus the price received by Commonwealth producers benefits by the full amount of the preference, and the United Kingdom user has no incentive to buy Commonwealth rather than foreign metal. To apply the common tariff to the Commonwealth would reduce the price received by the Commonwealth.
Our assessment
31. For these reasons we think that on the whole raw materials present a manageable problem and that we should be able to reach satisfactory arrangements with the Six, either by negotiating the tariff downwards, if not eliminating it, or by some resort to tariff quotas (which are already used by the Six in this field, e.g. the duty-free aluminium quota for Benelux).
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(D) Temperate Foodstuffs
34. The treatment of temperate foodstuffs from the Commonwealth (mainly Australia, New Zealand and Canada) has been considered in detail […] The conclusion which emerges is that for us to seek to retain anything like complete and permanent free entry for Commonwealth foodstuffs would be inconsistent with the common agricultural policy, and that the best we could hope to achieve in negotiation would be special arrangements for the products of main interest to the Commonwealth, which, while not avoiding all loss, would nevertheless serve to mitigate the damage which some Commonwealth countries are bound to suffer.
35. Exactly what special arrangements we should try to negotiate with the Six will have to be discussed in detail with the Commonwealth—particularly with Australia, New Zealand and Canada. For this purpose we envisage expert discussions in London at some appropriate point after Ministers have made their visits to Commonwealth countries. We shall also, of course, have to associate the Commonwealth very closely with any actual negotiations with the Six.
General
36. In the preceding paragraphs we have tried to assess how far we may be able to retain Commonwealth free entry and how far we think we shall have to accept the common tariff. At some points we may have been unduly pessimistic, at others unduly optimistic—we shall not know for sure until negotiations with the Six begin. We certainly shall not get all that we would like. We cannot say in advance where the breaking points might come. These will emerge during the negotiations; at the end of them we shall have to make a final assessment of the detailed terms on which we could join the Six, as they will by then have emerged, and reach a decision—looking at the ‘package’ as a whole—whether or not to sign the Treaty of Rome. We shall have to keep the Commonwealth in the closest touch at all stages—it will be very difficult for them to accept, or even acquiesce in, any abandonment of, or limitation on, the rights of free entry which they at present enjoy.
Summary of Conclusions
37. Our conclusions are as follows:–
(a) Any restriction on, or abandonment of, Commonwealth free entry would involve a fundamental change in our commercial policy and would mean replacing the Ottawa Agreements (and similar undertakings) by other arrangements.
Manufactured goods(b) If we decide to apply for membership of the Community, the Six will require us to apply the common tariff to our imports on manufactured goods from the developed members of the Commonwealth—Canada, Australia and New Zealand.
(c) The damage which these countries would suffer would be mitigated to the extent that the level of the common tariff was reduced but we must expect strong reactions from Canada and Australia.
(d) Our objective should be to safeguard the position of the underdeveloped Commonwealth in the United Kingdom market, and to obtain the best access we could for their exports to the rest of the Common Market, e.g. by duty-free quotas.
Raw materials(e) On the whole these present a manageable problem, although five of them would require special discussion with the Six.
Tropical products(f) If we can obtain AOT3 status for the Colonies and perhaps for the newly independent Commonwealth, the tariff problems would be solved. We hope to make satisfactory arrangements for the older independent Commonwealth.
Temperate foodstuffs(g) For us to seek to retain complete and permanent free entry for Commonwealth foodstuffs would be inconsistent with the common agricultural policy and we must seek special arrangements which would serve to mitigate the damage which some Commonwealth countries, notably Australia, New Zealand and Canada, are bound to suffer.
1 Document 123.
2 Refers to the Dillon Round in the GATT, 1960–62.
3 Associated Overseas Territories under article 133 of the Treaty of Rome.
[UKNA: CAB 134/1821]