Canberra, 8 July 1961
Secret
The United Kingdom and European Economic Community Consultations
1. Mr Sandys opened the discussion by addressing himself to the economic aspect of the question of the United Kingdom entering the European Economic Community. He outlined the United Kingdom’s view in accordance with paragraph 43 to 81 of the statement, which is the appendix to the Minutes of the first meeting.1
2. Concerning Mr Sandys’ point that there is a need for a wider base for United Kingdom manufacturing industry, Mr McEwen said that Australian experience suggested that expanding industry into other Commonwealth countries could result in a greater volume of imports from the United Kingdom. He suggested that not only was the share of United Kingdom exports taken by Commonwealth countries important, but the absolute volume must also be considered. The Commonwealth countries might afford the necessary base for substantial industrial expansion.
3. To this Mr Sandys replied that the relative position was also important. The United Kingdom realised that in deciding to enter the European Economic Community, it would be faced with risks as well as opportunities. It was not possible to produce any balance sheet showing advantages and disadvantages, but the United Kingdom felt certain that if it stayed outside the Community the prospects of competing with European and other manufacturing countries would worsen. There could be no assurances that some United Kingdom manufacturers would not go to the wall. Some would fall, labour would be forced to move, and there would be other dislocations. But there would be expansion as well. The fact that the United Kingdom was willing to consider entry into the Community was evidence of its faith in the capacity of British industry to adapt itself to the changed circumstances. There was a growing conviction in British industrial circles that there was advantage in going into the Common Market despite the risks. Many United Kingdom manufacturers were already setting up branch factories in Europe. If these can compete successfully via branch organisations, they must be able to compete still better with their main works inside the tariff wall. Moreover, British industry needed to be concerned not only with trade in Europe but also in the other markets of the world. Competition in manufactured products would be likely to become more intense as the European Economic Community developed.
4. The Prime Minister suggested that one of the assumptions made in the British assessment of the possibilities was that it would be possible to develop the volume of sales at speed within the tariff barriers of the Community. He put the view that the tariffs between the individual members could disappear before British industry had adjusted itself sufficiently. This might well lead to the result that the present Six and not the United Kingdom got the first advantages within the United Kingdom and in outside markets, and would consolidate them.
5. Mr Sandys acknowledged that this was one of the risks. To some extent, if the United Kingdom proceeded it would be as an act of faith. Nevertheless, he did not feel that it would work out in the way the Prime Minister postulated. On the other hand, he had little doubt that industry would be damaged in other ways if the United Kingdom did not enter the Common Market. If, within the Market and therefore on equal terms, it could not compete with Europe, it would have little prospect of competing from outside on less than equal terms. Trade with Europe was already increasing notwithstanding present tariffs, and the United Kingdom felt that with a reduction in tariff barriers, there should be increased opportunity.
6. Mr Hasluck asked whether, in the negotiations with the European Economic Community countries, the object would not be to obtain a larger internal market for manufactured products, against which would be offered increased access to the United Kingdom market for agricultural products.
7. Mr Sandys replied that this was not so. The United Kingdom market for industrial goods was large and there would be advantages to be gained by both the United Kingdom and the European Community countries by way of a higher volume of trade in industrial goods.
8. Commenting on the arrangements for consultation envisaged by Mr Sandys (paras. 77–79 of his statement)2 and, in particular, the views that it would not seem to be possible for Australia to be a direct participant in the discussions between the United Kingdom and the Community, the Prime Minister said that the strange consequence of this would be that the Australian case could not be directly put to the Community. Mr Sandys said that that may be something which could be discussed. But as he saw it, there appeared to be no practical possibility of a large number of Commonwealth and European Free Trade Association countries affected directly participating in the negotiations.
9. The Prime Minister next sought to know whether, if the United Kingdom joined the Common Market and, as a consequence, Australia lost its preferences in the United Kingdom market, the United Kingdom would expect to retain its tariff preferences in the Australian market.
10. Sir Garfield Barwick asked also whether, in weighing up the advantages and disadvantages of entering the Community, the United Kingdom had assumed that in consequence of special arrangements to meet the requirements of Commonwealth trade being achieved, it would be in a position to retain its tariff preferences in Commonwealth markets.
11. Mr McMahon asked whether the Australian Ministers might be informed in terms, of the kinds of arrangements envisaged by Mr Sandys (see paragraph 59 of the statement)3 which would ensure that Commonwealth products would have in Britain and in Europe an outlet comparable with that which they now have.
12. To these questions Mr Sandys said that the matter of preferences in Commonwealth countries was, in the first place, an ‘asset’ belonging to the country concerned and that how they were dealt with was a matter that could be discussed between the United Kingdom and the individual countries. As to the kinds of arrangement for ensuring trade outlets, he felt that these were best left for commodity by commodity examination as they did not lend themselves to any general formulation.
13. Mr McEwen stated that he was not convinced of the advantage of the United Kingdom entering into an argument with the Community which is bound to affect the whole of the Commonwealth tariff preference system. The United Kingdom’s trade with the Community was only about one-third of its trade with Commonwealth countries, and the effect on Commonwealth trade of abandoning the Commonwealth preferential system in the hope of obtaining access to the European Economic Community’s markets was quite unpredictable. Within the United Kingdom it would seem that there would be a problem of a worsened competitive position resulting from the dearer food policy which was likely to be adopted. Moreover, conditions of employment for labour in the United Kingdom could not be improved until such time as conditions of employment elsewhere in the Community were raised to the United Kingdom level. The full extent of the political consequences of this were not for him to assess, but he felt sure that there were such consequences. And taking the whole picture, and looking at it as best he could from the United Kingdom’s point of view, his conclusion was that he was by no means persuaded that the balance of economic advantage would be in favour of entry into the Community. He thought that the opportunities for increased trade with the developing Commonwealth countries were great and assured, whereas the prospects for increasing trade with Europe were doubtful.
14. As to the direct effects on Australia, these could be very serious indeed. The United Kingdom was a substantial source of export earnings which Australia enters by contractual right. To contemplate putting this at risk for a possible equivalent outlet in the Community generally was not something that Australia could do with equanimity. Mr McEwen pointed out that the French were particularly protectionist-minded in agriculture and he could not feel optimistic regarding the United Kingdom’s ability to negotiate safeguards and an assured equivalent outlet. He instanced some of the problems that are likely to arise in connection with Australian exports of wheat, dairy products, meat, sugar and dried fruits. He referred to the time-table laid down in the Rome Treaty for the adoption of a common agricultural policy and said that he could have no confidence in the outlook until a commodity survey had been undertaken. In the trade sense, it appeared that the United Kingdom was moving away from an assured position to one less assured. From Australia’s point of view he had to say that he was disappointed that Australia had not as yet been given any indication of how its important interests in individual commodities could be protected, and until he could be certain that these interests would be protected he would have to be regarded as an opponent of any proposal that the United Kingdom should negotiate with the Community.
15. Mr Holt questioned whether the United Kingdom had made a full investigation of the market potentials of the Commonwealth. He believed there was reason to question the thesis of a continuous growth of the Economic Community. He felt that the United Kingdom might be over-impressed by the current rate of development and it could well be that the growth prospects of the Commonwealth are such that the United Kingdom may, in fact, have better opportunity there than in the European Economic Community. He agreed with Mr McEwen that the case had not been made out that there was, on balance, economic advantage for the United Kingdom in entry into the Community.
16. Mr Holt said that he felt that an examination should be made not only of the trade effects but also the financial. He was concerned about some trends that were already in evidence and quoted the effect of the operation of the European Monetary Agreement which put Australia’s sterling reserves on the footing of ‘second class’ sterling. He felt that already there was a lessened degree of consultation with Commonwealth countries in favour of European countries—for example, in the recent Basle Agreement negotiations. If this trend was discernible now, it would be worse in future should the United Kingdom become a member of the Community. A time could come where changes in the value of sterling were made without consultation with sterling area countries.4
17. The Prime Minister asked what would happen to the political advantage of entry into the Community if the economic advantages envisaged failed to materialize, or materialized only to a minor degree. Would not political advantage depend on economic result?
18. Replying to the Australian Ministers, Mr Sandys began by questioning the notion that the United Kingdom would, by entering the Community, be giving up an assured position for an uncertain one. He might be willing to concede the uncertain, but he did not accept that the present position was ‘assured’. As things stood, the United Kingdom faced a decline in its future competitive position. He felt that some of the points made had been based on the assumption that a decision to go into Europe meant an abandonment of Commonwealth trading. This was not in mind. The matter did not present itself to him as a choice between trade with the Commonwealth and trade with Europe. It was a question of developing both. Uncertainties and difficulties were admitted, but the United Kingdom could not afford to sit back and lose ground while Europe developed. Its advantages in Commonwealth markets could not be such as to outweigh the advantages which a broad-based home market would give to British industry. If the British Government negotiated, it would attempt to do so without loss of the economic connections with the Commonwealth, and to safeguard Commonwealth interests.
19. Mr Roll5 added that on the political side the advantages were decisive. On the economic side, the nexus of the common agricultural policy and Commonwealth trade created a considerable problem. However, one could not assume both that the effects of the common agricultural policy will all be disadvantageous and at the same time that, if the United Kingdom remains outside Europe, the British market for both its own and Commonwealth agriculture would remain unchanged. The present situation could not be looked at unchanged and compared with the worst possible position under United Kingdom membership of the Community. As to Mr McEwen’s point that the United Kingdom would be exchanging cheap food for dear food, Mr Roll stressed that the present policy is cheap food plus agricultural subsidies, based on efficient agriculture. Moreover, the cheap food policy was not universal as, for instance, in the case of milk the price in the United Kingdom was some 25 per cent above that in Europe, or in the case of sugar, where the Commonwealth Sugar Agreement and the guarantee to the home producer means that the consumer paid a higher price than the world. While the change from subsidies to levies would result in higher prices, this was not regarded by the United Kingdom as a decisive factor. The change would involve risk for the United Kingdom farmers, which is not liked. But farmers would also have to face risks in the future if the United Kingdom does not join the European Economic Community. Already the United Kingdom system is under strain as surpluses tend to gravitate to the British market, bringing down prices, raising the cost of subsidies to the British taxpayer, and causing the United Kingdom farmers difficulty in disposing of their products. One of the objects of the United Kingdom’s entry into negotiations with the Community at this stage would be to ensure that the common agricultural policy does not aggravate the present situation. It would be too great a gamble to allow that policy to be developed without an attempt to influence it.
20. Regarding Mr McEwen’s point that the common agricultural policy is likely to result in excess production, the attitudes of the different European countries will be important. The French were on record that they wished prices to remain low and were not aiming at self-sufficiency. German agriculture was the least efficient and most highly protected, but, at the same time, Germany was aware of the need to permit imports so that exports of manufactured products could be expanded. While the United Kingdom could not be confident that it could work out special arrangements to protect completely Commonwealth interests, it at least would have the opportunity to influence policy if it should join. The danger was that the French were under pressure to establish the common agricultural policy, and if the Germans were unwilling to move, the French may need to agree to a compromise which was against Commonwealth interests. The presence of the United Kingdom in the negotiations for the establishment of the policy could result in a policy much more satisfactory to us.
At this point the Prime Minister suggested that there should be a detailed discussion on individual commodities next day when Mr Sandys and his delegation would meet Mr McEwen, Mr Adermann,6 and Australian officials. Mr Sandys agreed, and the meeting was arranged for 2.30 pm on Sunday, 9th July, 1961.
The meeting concluded at 5.15 pm.
1 See note in Document 144.
2 See note in Document 144.
3 See note in Document 144.
4 The European Monetary Agreement was not an organ of the EEC but an arrangement among OECD countries to secure convertibility for the settlement of balance of payments accounts between member countries. It was established in 1958 and terminated in 1972 in the light of the balance of payments assistance provided for in the International Monetary Fund. Britain’s proposed membership of the EEC therefore had no bearing on the effects of the EMA. In the event, financial and monetary issues did not play a major role in Macmillan’s bid for EEC membership. The Australian Treasury initially viewed the financial aspects of British entry as a potentially serious problem, particularly if British membership of the Community gave rise to discrimination against the Commonwealth in the London capital market, thereby restricting the flow of capital from Britain to Australia. But these issues never came to the fore of the Common Market problem, because the British themselves did not wish to discuss them. The British considered financial matters less important than commercial ones, and argued that the best way to ensure that Sterling Area arrangements remained unaffected was simply to refrain from discussing the matter with the Six. Treasury officials were somewhat uneasy with this position, but could see some merit in the British approach. NAA: A571, 61/1966 part 1, Treasury paper, ‘Possible United Kingdom Entry into the European Economic Community: Implications for the Flow of Capital from the United Kingdom to Australia’, 6 July 1961; Treasury paper, ‘Implications for Sterling Area Arrangements’, 6.6.1961; R.J. Whitelaw (Treasury Representative, Australia House, London) to Maurice O’Donnell (First Assistant Secretary, Treasury) 10 October 1961.
5 Eric Roll, Deputy Permanent Under-Secretary, Ministry of Agriculture, Fisheries and Food.
6 Charles Frederick Adermann, Minister for Primary Industries.
[NAA: A1838, 727/4/2 PART 1]