560.AL/9–2347: Telegram
The Ambassador in the United Kingdom (Douglas) to the Secretary of State
5126. From Douglas and Clayton for Lovett and Nitze. Accompanied by Hawkins, Brown and Beal, we conferred on Friday for an hour and a half with Sir Stafford Cripps, Harold Wilson and several of their advisers regarding negotiations at Geneva between the US on one side and the UK and Dominions on the other.1
We said that the question of reciprocal tariff reductions apparently presented no serious problem but that we were encountering serious difficulty in reaching agreement on the elimination of preferences which the UK enjoys in the Dominions. We pointed out that the latest offer of the UK covered elimination of preferences on a total volume of prewar trade with the Dominions of only 32 million dollars—one-third of which is anthracite coal to Canada, and that the UK trade in the same commodities totals only 12 million dollars, and that we considered this offer totally inadequate to meet the commitment which the UK took in connection with the Anglo-US financial agreement to negotiate for the reduction of tariffs and the elimination of preferences.
Sir Stafford had already been furnished with a copy of Wilcox’s statement2 at a meeting in Geneva about 10 days ago with the negotiating [Page 994] teams of the UK and the Dominions and was thus familiar with our arguments on the subject.
We then presented Sir Stafford with a memorandum3 proposing that the UK grant elimination of preferences on one-third of the US prewar trade with the Dominions, such elimination to start three years from the signing of an agreement and to take place at the rate of 10% annual reduction in the margin of preference so that at the end of 13 years from the signing of the agreement the preferences of such trade would be completely eliminated.
Sir Stafford stated that he had carefully read Wilcox’s arguments but that he had also carefully studied the entire matter and that he had reached the conclusion that the offers of reciprocal tariff reductions had struck a balance as such and that any reduction or elimination of preferences by the UK would have to be compensated for by further tariff reductions by the US. However, they had agreed to make certain reductions and eliminations which he considered a generous offer on their side.
In this connection, Sir Stafford made quite a point of the fact that prewar UK exports to the US totalled only about 150 million dollars whereas prewar US exports to the UK totalled nearly 400 million dollars. Hence, equal tariff reductions were much more valuable to the US than the UK.
We strongly protested against this concept, referring specifically to the language of the agreement between the US and the UK regarding the proposals for expansion of world trade and employment and to the statement of the Prime Minister in Parliament4 at about the time of the publication of that agreement. Both documents in our opinion make it clear that reduction of trade barriers in general, such as are being brought about at Geneva, was to be considered as being adequate compensation for elimination of preferences. We pointed out that the benefits which will flow to the UK from such general reduction must be regarded globally and multilaterally and are thus far greater than any benefits accruing merely from reductions in tariffs on prewar trade between the UK and US; that we in US recognize that the existing unbalance in our international trade cannot continue and that its correction in our interest involves a heavy increase in US imports which will obviously greatly increase the global supply of dollars and that the UK will have the same opportunity to compete for these dollars as other countries.
We particularly denied the validity of the concept that elimination of preferences had to be specifically compensated for by reductions in our tariffs in addition to reciprocal tariff reductions; that a literal [Page 995] interpretation of the concept held by Sir Stafford would necessitate the adoption by the US of free trade on the commodities which the UK exports to us before we would obtain limitation of Empire preferences as contemplated in the Anglo-US financial agreement.
Cripps said that he would present our proposal to the Cabinet with a recommendation that it be not accepted.
We said to Cripps that failure to reach agreement or even the signing of an agreement on the basis of the UK proposal would be interpreted in the US as virtually a repudiation of the UK commitment regarding preferences.
Following the meeting, Douglas and Clayton felt that the whole matter was so serious and fraught with such grave [danger?] that we should have a talk with Bevin. Douglas so advised Cripps and an arrangement was made for Cripps, Douglas and Clayton to meet with Bevin on Sunday morning.
This meeting was held and the matter was discussed for an hour and twenty minutes. The arguments on both sides were presented to Bevin. Cripps said that he considered their offer more generous than the considerations accruing to them would warrant, but that he thought an agreement should now be made on that basis and a further look could be taken at the end of three years to see if further preference eliminations could be made. We asked if he would expect at that time further reductions in our tariff as compensation for such additional eliminations and he answered “certainly.”
We made it clear that in our opinion this position was tantamount to repudiation of the UK commitment on the elimination of preferences in connection with the Anglo-US financial agreement.
Clayton said that there were three conditions in connection with that agreement which won support of the agreement for [from?] the American business interests and thus was largely responsible for the adoption of the agreement by Congress. These conditions were convertibility of sterling, non-discrimination in UK purchases abroad and elimination of Empire preferences. Clayton said that the British had suspended compliance with the first two of these conditions for reasons apparently beyond their control and that under the circumstances he personally felt that he could defend this action before any tribunal but if the third one relating to the elimination of preferences should now be repudiated in view of the proposal which we had made, he would not be able to defend the British action in that matter. He added that he would be compelled to say to the Secretary of State that in his judgment the British proposal did not constitute a proper basis for agreement and that he would further be compelled to carefully and seriously consider whether he should not recommend to the Secretary of State that no agreement be entered into on that basis. He added [Page 996] in that case whether an agreement was entered into on the basis of the British proposal or not, the whole matter would certainly come out in Congressional hearings on the Marshall Plan and would undoubtedly seriously prejudice public opinion and Congressional action with reference to British participation in that plan.
Douglas sketched the passage of the Smoot-Hawley tariff bill and the influence of that act on the creation of the Empire preference scheme in Ottawa in 1932. He pointed out that trade agreements heretofore entered into and now in course of execution at Geneva had not only wiped out the tariff increases brought about by Smoot-Hawley, but would give us the lowest tariff in 50 years so that the conditions which gave rise to the preference system no longer existed. He also pointed out that the matter under discussion had serious political as well as economic aspects which was the reason we had troubled Mr. Bevin with it.
Bevin said that there were a great many people in the UK who thought that the best course for the UK to pursue in the present world situation was a policy of autarchy but that he had always believed that it was in their interest to return to multilateral trade as quickly as possible and, in any case, they wanted to keep whatever commitment they had with us if it were at all possible to do so.
A decision was promised for Thursday. [Douglas and Clayton.]