London, 13 April 1962
Confidential
Britain, Australia and the European Economic Community
Possible Future of Commonwealth Preferences
The meeting began with a discussion of the possible future for Commonwealth preferences. Mr McEwen and Dr Westerman explained that what they were hoping for was a preferential reduction of the external tariff in favour of Commonwealth countries, for fixed quantities of Commonwealth goods. The object would be to maintain the level of preference against third country suppliers. The quantities would be based on present levels of trade plus a growth factor which might include an allowance for expansion in the young Australian economy, or for expansion in European consumption. The growth factor might vary from product to product to take account of such peculiarities as the expanded production to be expected from fruit trees already planted. They thought that a proposal of this kind would not be contrary to GATT nor would it be unjustified in relation to the United States’ position on preferences. This would be an open-ended commitment which, like the present Commonwealth preferences, could be eroded but only in exchange for some corresponding benefit. Its disappearance would not be automatic but a matter for negotiation. Dr Westerman said that the response they had had to these ideas in Europe had been not unfavourable. Mr McEwen emphasised that the time had come to be articulate in defence of the Commonwealth preferential position against the American position.
2. Mr Heath pointed out that Britain had indeed been very articulate on this subject. He described how, in November, 1961, we had argued that the preferential position which existed for Commonwealth industrial goods should go on into the Common Market period. The Six had asked us to justify this. They had referred to the higher standards of living in Australia, Canada and New Zealand, and had asked what would be the ill effects ‘of the progressive application of the common tariffs. We had pointed out the smallness of the gap in the tariff wall on manufactures which would be left by allowing the preference for Commonwealth goods to continue. However in January the Six had made quite clear that they would not accept a continuation of preferences in the Common Market period. Mr McEwen and Dr Westerman agreed that during the discussions on the continuance of quota preferences during the Common Market period, they had taken examples from agricultural products. The case there was better than that on manufactures which the Six had rejected in discussion with the British.
3. Dr Westerman again invoked Article 234 of the Treaty of Rome as justification for the continuation of preferences.1 He did not think preference quotas would be incompatible with the Treaty even in the Common Market stage. Mr Heath pointed out that the Six’s thoughts had run on narrower lines. They now said that they were fundamentally opposed to quota arrangements, and prepared to tolerate them only in the transitional period.
4. Mr McEwen said that the Australian Government were in favour of preference quotas for fixed quantities over the whole field of Australian exports to the United Kingdom. But if this was unattainable, he very much hoped it would be available for processed foodstuffs, since he knew of no other solution which would fit Australia’s problems on these commodities.
5. In reply to Mr Soames, Mr McEwen confirmed that he hoped for quota preferences without a terminal date, not with the idea that they would continue indefinitely, but that they would give a solid right which, at the appropriate time, could be negotiated away for some equivalent advantage. It was pointed out that these preferences would inevitably be more rigidly fixed than Commonwealth preferences are at the moment, and that in negotiating them we should be up against the difficulty that the reality of the arrangements between Australia and Britain greatly exceeded the legal obligations. […]
Agricultural Products
6. It had been agreed by the Six that processed foodstuffs should be considered separately from other industrial goods.
7. Mr Bishop2 said that there had been discussion between officials as to which items they would seek special tariff arrangements for. It was clear in any case that the Six would not agree to the continuance of special arrangements into the Common Market period. It was for this reason we had devised our formula which provided for a review towards the end of the transitional period and laid down the principle of comparable outlets as a basis for the review.
8. Mr Sandys said that the crux of the matter was that there was a certain measure of confidence between Commonwealth countries which lent both sides a degree of security as to further policy. This confidence did not yet exist between the Commonwealth countries and the Six and the Commonwealth countries would not feel they had the same security as at present unless something could be devised on paper.
9. Mr McEwen said that the Australian Government saw its best advantage in achieving the kind of arrangement he had described, but would regard adequate transitional arrangements combined with a protocol providing for a review as a ‘second line’. Mr McEwen agreed with a suggestion of Mr Heath’s that on certain items a nil tariff could assist Australia in selling to Europe when a preference quota could not. On some of these items however we could be sure the Six would not accept a nil tariff and it was better not to adopt this device for the remainder because of the better presentational value of proposing the same solution across the board.
10. Dr Westerman said that, if preference quotas could not be secured for industrial products, we should request them for ‘agricultural products’, employing those words which were defined in the Treaty of Rome and would allow the inclusion of some items (e.g. leather and tallow) which could not be covered by the term ‘processed foodstuffs’.
11. Dr Westerman said that, whilst the Australians would hope that the trade in certain items (like canned deciduous fruits, canned pineapple and leather) was large enough to merit special arrangements for each, there was also a multiplicity of small items, on which they would hope to obtain a ‘basket quota’. Tallow, sausage casings and seeds could be included in the basket. The preference on these items varied and for the purpose of the new arrangements a ‘Commonwealth weighted average’ could be employed.
12. Mr Heath said we would certainly argue this with the Six, but had grave doubts whether it would be accepted, since the Six had a marked aversion to the basket quota idea.
Metals
13. Mr McEwen explained that the metals in which Australia was particularly interested were lead, zinc, cadmium and aluminium (and alumina). If Britain could obtain zero tariffs on these items, nothing would please Australia better. Failing that, they would like to see the tariff as low as possible and fixed quantities of Commonwealth produce allowed in at reduced rates of duty. These arrangements would apply for export to the Community as a whole. They understood the Six’s reluctance to allow raw materials to enter into one part of the Common Market at cheaper rates than into others. On aluminium and alumina, Mr McEwen explained that two very large deposits of bauxite had been found in Australia. British, American and Australian capital had been sunk in projects for exploiting these deposits to the extent of some million, New Zealand was also involved since it was proposed that some of the ore should be sent there for smelting. Here they were faced with the problem that they had as yet no fixed trade to argue from: their trade had still to be developed. Nevertheless, if all opportunity for exporting this aluminium to Europe was to be cut off, that would be a body blow to Australia and New Zealand. He would be very pleased if the British Government were able to obtain a zero tariff but did not think the Six would accept this. He would therefore like to see, as a second best, a cut in the common tariff with a preference duty quota into the United Kingdom divided between Commonwealth and non-Commonwealth sources. The Ger man quota for lead and zinc constituted a precedent. As a last resort, if both the above courses failed, some arrangement might be made to fix a price for supplies of aluminium from the Commonwealth.
14. Mr Heath explained that aluminium might be difficult, not because of the French (whose production was low cost, and who supported a high tariff merely to keep their industry at full stretch) but because of the Italians, whose production was inefficient and who might suffer from too much competition.
15. Mr McEwen emphasised the importance Australia attached to lead, and particularly to exports of refined lead. They had the biggest smelter in the world and did not want to be limited to concentrates. He was encouraged by the British Government’s support to hope for a lower rate of duty than he had expected. Failing a zero tariff he felt that, although the Commonwealth had not previously enjoyed preferences on lead, there was a case for a concessional duty based on the previous pattern of trade, with a ceiling on the amount.
Wheat
16. Mr McEwen began the discussion by summarising the United Kingdom proposals, and saying that the main Australian anxiety was that these proposals might not produce a tolerable price level. The Australian Government wished to obtain three things:
- an assurance of access to European markets; though their trade was traditionally with Britain they would not mind if this assurance related to trade with the whole Community;
- the assurance to cover a reasonable tonnage. They thought this ought to be based, at least as an opening bid, on the 750,000 tons mentioned in the Anglo-Australian Trade Agreement, plus what they were at present selling to Europe, namely some 200,000 tons;
- an assurance of a tolerable price; they feared that the levy system would operate so as to drive down the price of wheat from all non-Community sources to an intolerable level; what they hoped for was an agreement that they might get the European price, less a fixed amount to be negotiated.
17. Mr Sandys emphasised the importance of clearing up this matter, particularly the suggestion that Britain should argue for an Australian right of access up to 750,000 tons (because that was the quantity provided for in the Trade Agreement although it had never been achieved) and in addition for the 200,000 tons which had been the actual trade—without a written right of access—in Europe. Surely there was an inconsistency here.
18. Mr McEwen claimed that it could be argued that some at any rate of the 200,000 tons exported to the Continent was the subject of arrangements which might qualify under Article 234 of the Treaty of Rome. Moreover, the 750,000 tons was not merely a right of access to Britain; even when the figure was not reached it gave such an encouragement to Britain to buy from Australia that it served to prevent Australia from being driven out of the market by subsidized French wheat. Mr McEwen also quoted from a statement by Mr Heathcote Amory at the time of the conclusion of the 1957 Agreement to the effect that although the ‘best endeavours’ formula might seem to be a loose one it was intended as a firrn commitment. Did this assurance mean nothing? Mr Sandys said that of course it did. Australia and Britain were on the same side on this. The problem was to convince the Six. Mr Soames added that there could be no denying that the actual level of past exports was relevant to our negotiations with the Six.
19. Mr Soames exphasised [sic] that the main difficulty we must fear which might prevent Australian wheat coming into Britain or Europe was not the levy or a restricted right of access; but the price policy of the Six. If the price in this country rose to around ꌲ a ton (a possible compromise figure between the Gerrnan and the French), British farmers would produce so much wheat that we should not need to import any. For this reason he thought it would be essential for us to try to keep the price down to about ꌨ a ton.
20. Mr McEwen expressed great scepticism, having regard to the political influence of the farrn vote in countries all over the world, as to the practicability of keeping the price down. Even the British Government had only been able to nibble at the problem of reducing farrn production, and the Americans had failed to do so.
21. It was argued on the British side that there was a reasonable hope of keeping prices low because of influences operating on the Community which did not operate in the same way, for example, in the USA. The French had hinted that they expected to have to drive the price of wheat down, in collaboration with Britain, against the Gerrnans. If the price went up to ꌲ the levy system would break down and quantitative restrictions would have to be applied. A further factor was that a large quantity of wheat was used not for flour but as animal feed. The wheat price could not therefore get too much out of line with the price of other feeding stuffs which the US could produce very cheaply.
22. On the Australian side scepticism as to the possibility of keeping the Community price low remained unshaken. It was also argued that, if the price went up inside the Community and large quantities of wheat were produced, then Europe might export wheat all over the world. It could surely not be an act of statesmanship on Europe’s part to drive Australia out of Far Eastern markets by selling surplus European wheat there and thus cutting off Australia’s livelihood.
23. British Ministers said that of course this must not happen. The Common Market was intended to strengthen the free world, not to weaken it. It was one of their objectives in trying to get Britain into the Community, to liberalise its policy in this respect and to bring home the importance of preserving the trade of such countries.
24. Discussing tactics which might be used on quantities of wheat which Australia would have a right to send to Europe, Mr McEwen asked that quantities should not lightly be given away: for example, he hoped that we would make an opening bid of 750,000 saying that this was the quantity which Australia had a right to export. He assured British Ministers that Australia would not quote this against them, if the British negotiations fell through and the Anglo-Australian Trade Agreement had to be re-negotiated. They envisaged settling for about 80 per cent of the opening bid. He emphasised, however, that the Australian fear was that the levy system would operate to drive the price down to a level to be settled by desperate competition amongst third countries. Price had always been Australia’s worry. She was the world’s most economic producer and yet had to subsidize production and secure her outlet by securing quantitative rights with various countries. In this regard he feared that the Common Market might prove disastrous for Australia.
[ matter omitted ]
1 Article 234 states: ‘The rights and obligations arising from agreements concluded before the entry into force of this Treaty between one or more Member States on the one hand, and one or more third countries on the other, shall not be affected by the provisions of this Treaty. To the extent that such agreements are not compatible with this Treaty, the Member State or States concerned shall take all appropriate steps to eliminate the incompatibilities established.’ The disagreement lay in whether Australia’s preferences in the UK were incompatible with the Treaty. See Westerman’s full exposition of his case to the Six in Document 177.
2 F.A. Bishop, MAFF.
[UKNA: DO 159/58]