Foreign Relations of the United States, 1958–1960, Western European Integration and Security, Canada, Volume VII, Part 1

113. Memorandum of Conversation⁰

March 28, 1960.

SUBJECT

• Sixes and Sevens

PARTICIPANTS

• Prime Minister Macmillan¹
• Sir Frederick Hoyer-Millar, Permanent Under Secretary, Foreign Office
• Sir Harold Caccia, British Ambassador
• The Viscount Hood, Minister, British Embassy
• The Earl of Cromer, Economic Minister, British Embassy
• Mr. Philip de Zulueta, Private Secretary to the Prime Minister
• Secretary of State Herter
• Under Secretary Dillon
• Foy D. Kohler, Assistant Secretary for European Affairs
• Edwin M. Martin, Deputy Assistant Secretary for Economic Affairs

The Prime Minister led off by commenting that he understood the trade meeting which was starting the next day² was at an official level and could only report to ministers, not take decisions on matters of importance. This was agreed.

The Prime Minister continued with an indication of his dismay at reading that portion of the Adenauer–Eisenhower communiqué³ which appeared to give strong support to the Hallstein acceleration-reduction formula. This was the latest in a series of developments which had alarmed him more and more. The current situation could not be understood without going back into its origins which was a long story but he thought it worthwhile to make a few comments.

The political advantages of the Six may outweigh its other disadvantages in U.S. eyes. However, from the start of the European movement, in which he had played some part, he had hoped that Europe would be organized on a wider basis than this. He felt there were clear political disadvantages as well as advantages in an organization limited to the Six. France may be strong for the moment but it is difficult to tell what will come next. Germany is cooperative in its postwar-defeat mood but these moods don’t always last. Moreover, if the Six succeeds one will have a political organization of Europe of the sort he had spent years to prevent. [2 lines of source text not declassified]

There were also economic dangers for the UK in recent common market developments. The UK people have skill and courage and intelligence but few natural resources. They are trying their best to modernize their colonial empire but this inevitably means less economic strength than in the past. If the economic program of the Six is accelerated it cannot help but have a bad effect on UK trade. 14% of UK exports are to the Six and amount in total to about $1,250,000,000. 70% of this is to Germany and the Benelux countries. 80% of exports to Western Germany are manufactures. There is now a 10% discrimination on about $560 million of these exports. The 10% cut in the E.E.C. tariffs on July 1st will increase the discrimination to 20% on this $560 million and add 10% over most of a further $280 million. Acceleration would increase duties by 3 to 5 percentage points on a further $280 million of trade with Germany. If all the Hallstein proposals were accepted for July 1,⁴ the internal tariff cut would be 20%, combined with immediate tariff increases against outsiders, the amount of which would depend on whether any temporary reduction was made of the Common Tariff. The result would be that, according to the UK estimates, 94% of its trade with the Six would be affected adversely; for 20% of the UK trade, discrimination would be around 20%; for 50% of it, it would be in the neighborhood of 30%, and for the final 30%, the discrimination would exceed 30%.

If this is what the Six decides to do, the UK will not whine but face the problem and see what can be done. Membership in the Seven has some trade advantages. Last year was a good year for the UK. The prospects for this year are less favorable as inventories are rising more rapidly than production or exports. A difference of £100,000,000 or so in the amount of UK exports can be the difference between success or failure of its economic program. The UK has had none of the advantages of a defeated power in terms of assistance in reconstructing its industries and reestablishing its economic position.

If exports fall, there will be pressure on sterling of a sort which inexorably demands countering measures such as deliberalization and other backward steps. The British people would not be prepared under these circumstances to continue to spend across the exchanges, year after year, 50 or 60 million pounds to keep troops in Germany, as they would feel their economic distress was caused by German discrimination and would see no justification for continuing to help defend Germany.

He continued that it was important to come directly to grips with this issue and be frank. He thought the idealists on both sides had done harm. The proposal for free trade throughout Europe was too far ahead of the times, though some day he hoped it would be possible. As the first club in the field, the Six had earned a preferential position and should benefit from some discrimination. We should understand, however, that officially the UK still supported the Free Trade Area of the Seventeen and believed this is a correct position, but perhaps it did not make enough concessions to the current status of human nature. If the discrimination by the Six is not too large, one can forgive it and trade can be adjusted to it, but 30–40% discrimination is more than the UK people will accept. They would refuse to defend Germany if faced with this kind of treatment. On the other hand, if discrimination is on the order of 3 or 4 or 5%, Britain would be able to export more and would be in a position to do more for less developed parts of the free world in the form of aid.

He continued by making a plea to delay any steps toward acceleration. He thought a great deal could happen in the course of eighteen months. There was always the possibility of a détente with the Soviets which would affect many things. The return of the army from Algeria could affect French attitudes. Moreover, while most French may think they have the Germans under firm control, what about the younger generation? He thought some French were getting a little nervous about this. There was a strange situation with a repetition of the inner ring of countries which the Germans had had as occupiers during both World Wars, with the UK leading the outer ring. What we must get away from is dramatic differences between the two groups. Therefore he would plea for no acceleration on July 1. He felt sure that the political aspects of the problem would become more favorable if we could get a little time.

Secretary Herter thanked the Prime Minister for his full and frank statement and requested Secretary Dillon to reply.

Secretary Dillon repeated his appreciation of this frank exposé of British views. He also thought it useful to go back a bit on this very complex problem. We had supported the Six primarily on political grounds as the best way we knew to tie Germany irrevocably to the West. [6-1/2 lines of source text not declassified] He thought that by the economic tie-in created by the Six it would be possible to make actions by one member of the Six against the interests of the whole inconceivable. [2 lines of source text not declassified]

Secretary Dillon continued by indicating that, as he thought he had said while in Europe last fall, we agree that it would be bad to let the Six develop a strong independent political line without being tied into and related to larger interests, including those of the UK, and we are glad to help the UK to prevent this. U.S. participation with the UK in the proposed new OECAD was designed to help in the economic field to achieve just this result.

He also said that he had received the impression from talks during the Lloyd visit to Paris last fall that the UK no longer opposed the Common Market and accepted it now, even if it had not in the past. He recalled that Lloyd had given as one of the reasons for this the importance of tying Germany more closely with Western countries. Mr. Dillon also pointed out this meant not just France but also Benelux and Italy—they all had a role to play.

It seemed to us that we must face the question of whether or not we accept the Common Market. If we do, the task is to try to mitigate its trade effects by securing a largely unilateral tariff reduction. The arithmetical average method used to compute the common external tariff might not be wholly a fair one, since problems caused by increases in low tariffs had a tendency to more than counterbalance decreases in high tariffs, and some unilateral tariff reduction by the Six therefore was appropriate. It was also desirable that there be efforts to reduce the harmful effects of the new common external tariff with respect to particular commodities where there are special difficulties.

We saw no alternative to the above approach except to decide that the Common Market idea was wrong and try to find a new system. He suggested that some of the UK partners in the Outer Seven had made clear to us that they preferred this solution and are not interested in having a Common Market succeed. [3 lines of source text not declassified] He felt this clearly was the position of Switzerland and Sweden and perhaps even to some extent of Norway.

Secretary Dillon then commented that at the end of the Prime Minister’s statement he had spoken of the need to seek a pragmatic solution, which led us to believe there is not too much difference between us on what is to be done next. The main issue seems to be to reduce the degree of discrimination rather than the principle of any discrimination. In this connection it was important that the Six feel sure they are really under way toward their ultimate objective. In our view they are not yet sure of this.

The Prime Minister interjected that his suggestion that the main issue was not to remove but to reduce discrimination was a personal view and not the accepted position of the Outer Seven, who all favor the wider free trade area. Mr. Dillon replied that he understood this though he hoped if it became absolutely clear that this was impossible that they might be willing to adjust their approach to the current factual situation.

He then went on to say that against this background the French had first proposed the idea of acceleration and we had opposed it. When they seemed determined to press ahead along this line, we had said that the only acceptable basis would be a substantial reduction in the common external tariff, perhaps something like 20%. We thought and still think that this would be a valuable concession.

Secretary Dillon said there seemed to be one difference between the UK and ourselves which should be straightened out. From a letter he had received from Chancellor Amory⁵ he gathered there was some feeling in London that a 20% reduction by the Six could be negotiated in GATT. We definitely do not think this possible. In GATT there would have to be full compensation because of the nature of GATT tariff actions, and we think this is not something other GATT members would be prepared to concede. We rather anticipate that if the Six make a 20% reduction, it would be largely unrequited, even though they talk about reciprocity. They know the U.S. can’t make any reduction of this size in GATT and we doubt if they can reverse themselves on a 20% cut once it has been put into effect.

It is this 20% reduction which the U.S. has really favored. We have not taken a position for any particular plan but have held that any acceleration must be accompanied by a real reduction. We understand that the proposal Hallstein has made must be modified to secure Six approval and probably any deal to be agreed by the Six will have to take account of the 25% reduction in German statutory tariffs. We think some compromise on this point is likely to be reached.

Secretary Dillon said that we have noticed that extremists on both sides are reacting rather emotionally to the acceleration-reduction proposal in the absence of any extensive agreement on what the facts are. For example, the facts you have just given do not correspond with some the EEC has developed. They say that 65% of German tariffs now in force would be above the common external tariff if it is adjusted downward by 20%. If this were true the over-all impact of the Hallstein proposal should not be too great. There will still be preferences to partners within the Six, and their plants will take away some business from us and others outside, but there should be no violent reaction. He said we are studying the matter ourselves, especially in the chemical field where our exports are about the size of those of the Outer Seven and we suspect quite sensitive to tariff adjustments. Our very preliminary conclusion is that there would be some diversion under the common external tariff but that its amount would be substantially reduced by the 20% reduction in the common external tariff.

The Prime Minister commented that the 20% reduction takes place over many years into the future while acceleration starts July 1. Mr. Dillon wondered whether any of us would feel any different about the move toward the common external tariff if it took place 18 months from now rather than on July 1. The Prime Minister thought that perhaps in the meantime something could be negotiated. He also pointed out that the UK exports to Germany were about 450 million pounds and essentially all manufactured goods. 200 million pounds plus or minus in the UK trade balance would determine whether they could go forward or backwards in their economic policies. If they lost anything like this amount of business, the first question the British public would ask would be why they should spend 60 million pounds across the exchanges for their forces in Germany when the Germans do this to them. He did not think it was to the U.S. advantage to have the UK ruined economically.

Mr. Dillon pointed out that the Six didn’t want to accelerate if there were no reciprocal gesture by the Outer Seven, so as a practical matter there may be little chance of acceleration since it seems unlikely that the Seven would reciprocate. The Prime Minister thought they might well go ahead anyway but Mr. Dillon repeated that we had heard there could be no acceleration without compensation from the Seven. The Prime Minister said that on the whole this was the best thing that could happen, namely, to take just the steps provided for in the respective treaties.

Hoyer–Millar wondered when the 20% tariff reduction would apply. He assumed it would become effective by steps over a considerable number of years. Mr. Dillon said the original target was to reach the common external tariff in 12 years, but under acceleration proposals this might perhaps be reduced to eight.

The Prime Minister resumed by pointing out that if a crisis comes because of a fall in exports it will be an economic one, creating a factual situation which must be dealt with by specific actions and not a political one of attitudes which could be talked away. The UK would have to examine what it could do to change the facts, looking at import controls, dollar controls, saving 60 million pounds by pulling troops back from Europe, reducing the cost of their contribution to SEATO, and the volume of their defense expenditures. In no case could they starve. They live by their balance of trade and they must live. These kinds of situations can develop with great suddenness as they have done since the war in his own experience. The UK was still on a tightrope and a very small puff of wind could blow her off.

Mr. Dillon said that it seemed to him that all these things could be just as bad when the move toward the common external tariff is made 18 months from now, but he gathered the UK hoped something could be worked out in the meantime which would radically change the basic character of the Common Market in order to prevent this. The Prime Minister replied by expressing the hope that both sides in this dispute, given time, would recoil from recreating the post-Austerlitz, World War I and World War II situation, and not repeat that kind of a division of Europe. If extremists could be shoved into the background, perhaps the pragmatic solution could be found with 5 or 10 or 15% discrimination but not a 40 to 50% differential. Mr. Dillon said he felt that this was not accepting the Common Market. The Prime Minister thought they were but hoped it would be outward looking with a really low tariff. Mr. Dillon thought this was what was happening but there must be no tariff inside the Six and some tariff wall for the outside world. The Prime Minister agreed but said they are raising the height of their outside walls and doing it against those markets which sell them the most. The 20% reduction over 12 or 14 years won’t help much. Mr. Dillon thought the over-all German average would be less than what it is today though probably not true on manufactured products alone. The Prime Minister pointed out that on their island they have no raw materials and therefore low tariffs are no help to them. Mr. Dillon then indicated that at the Trade Committee meeting starting the next day the U.S. would not favor any special solution. We are, he said, trying to work out an accommodation to remove heat and bring light. We think a helpful outcome to this meeting might be agreement to compare facts. It would help to reach agreement, we thought, on solutions if there was agreement on what various actions will mean factually; then a further meeting might be held in May to discuss what is done July 1. In any case we do not expect the Six will have proposals to present at this time.

The Prime Minister said their hope was time to negotiate. In political negotiations there can always be some give and take but money is a reality and there is nothing one can do. He had always thought the Six was a reasonable arrangement politically but with others grouped around it in close association. There should be some modest special benefits for the Six, but if more than modest then even though one secures a great political advantage it is too high a price as it would lead to a political break up of Europe. To take this position was, he thought, not bad manners but a recognition of the facts of trade. Mr. Dillon agreed we must face the facts but first we must get them. He was not as pessimistic as the Prime Minister on what they would show. The Prime Minister emphasized that facts must deal with particular items as there was no comfort to be found in being able to sell over low tariffs something one didn’t make. Mr. Dillon thought the Common Market people were willing to adjust specific tariffs where specific damages would otherwise result. He agreed that problems must be faced and met, as we are as concerned as the UK to avoid a division in Europe.

[1 paragraph (6-1/2 lines of source text) not declassified]

Hoyer–Millar raised again the desirability of not taking any important decisions at this meeting of the Trade Committee, which Mr. Dillon concurred in as quite impossible. There was also an exchange between Messrs. Cromer and Dillon, both agreeing on the need to get facts and avoid dramatizing 1 July.

Mr. Dillon pointed out that if the Six and Seven each go ahead July 1 in accordance with their treaties, the tariff differentials will be larger in the case of the Outer Seven than in the case of Inner Six because the latter had generalized their first 10% reduction on an m-f-n basis for those tariffs which were above the common external tariff.

Cromer replied that that was understood and the EFTA was studying what they should do.

The Prime Minister then went back to emphasize that the problem was really fundamentally a political one which experts like Hallstein were running away with. [5-1/2 lines of source text not declassified]

0. Source: Eisenhower Library, Staff Secretary Records, International Series. Confidential. Drafted by Martin on April 5 and approved in U on April 13 and in S on April 15.
1. Macmillan visited Washington March 26–29 for talks on disarmament and the forthcoming May summit meeting. See Part 2, Documents 368 ff.
2. Not further identified.
3. For text of this statement, see Department of State Bulletin, April 4, 1960, pp. 517–518.
4. See footnote 2, Document 70.
5. Dated March 17. (Department of State, Central Files, 375.42/3–1760)