Foreign Relations of the United States, 1948, General; the United Nations, Volume I, Part 2

560.AL/6–2348: Telegram

The Secretary of State to the Embassy in the United Kingdom

secret   us urgent

Washington, June 24, 1948—9:35 p. m.

2393. For Douglas from Thorp—to be delivered before 9 a.m. June 25. Following refers inclusion Japan and southern Korea in exchange of notes for m-f-n treatment occupied areas (urtel 2768, June 23).¹

A. Background

1. During negotiation General Agreement on Tariffs and Trade last year at Geneva question arose as to whether occupied areas of western Germany, Japan and southern Korea should be brought within terms of GATT. Question was left unresolved and referred for further consideration to ITO Conference which was to open at Habana. Final note to GATT was adopted at Geneva indicating that applicability of GATT to trade of occupied areas had not been dealt with and was reserved for further study at an early date.

2. At Habana U.S. Delegation made determined efforts to bring occupied areas within terms of ITO Charter but these efforts failed, principally because of opposition of UK, France, Czechoslovakia, Poland and China. This opposition seemed to be based in part on political considerations and in part on economic ones, including fear of German and Japanese economic penetration and of possibility of heavy influx of imports from these areas in future. Legal status of occupied areas and competence of Habana Conference to consider problem of their relation to Charter were also brought into question. As result of this opposition, all that U.S. Delegation was able to get at Habana was provision in Charter whereby ITO would, on application by competent authorities, determine conditions on which rights and obligations of Charter would apply to occupied areas.

3. In connection with Habana negotiations US tried concurrently in Washington and at Tripartite discussions London to persuade UK and France to agree bring occupied areas within ITO Charter and extend m-f-n treatment to such areas. These efforts also failed but US did put UK and France as well as other countries concerned on notice that in connection with European and Chinese bilateral aid agreements we would insist on commitment providing m-f-n treatment to commerce of occupied areas on reciprocal basis.

4. In negotiation at Paris of multilateral Convention for European Economic Cooperation U.S. suggested that agreement include m-f-n provisions applicable to commerce of parties to agreement. Such provisions, had they been included, would have applied to British and American Zones of Germany since they were parties to agreement, but would not have covered Japan or Korea since neither they nor US (which might have acted on their behalf if it were signatory) were parties to agreement, Participating countries would not accept m-f-n commitment in Convention itself, however, although they did include note in minutes of their deliberations indicating they would seek to achieve as soon as possible among themselves and with other countries multilateral system of trade on m-f-n basis consistent with Habana Charter.

5. In current bilateral aid negotiations UK supported by Fr has strongly opposed m-f-n commitment for occupied areas. China also strongly opposing. Other aid countries willing to accept such commitment and some, such as Norway, even welcome the provision. Only UK and China have made any issue re inclusion Jap and southern Korea.

6. In connection this matter you will recall Clayton’s strong view as expressed to you last spring upon his return from Habana that US must insist on obtaining m-f-n treatment for occupied areas from countries receiving aid from U.S. You may also recall Royall’s very strong views this matter.

7. Check of available State and Army officials who attended relevant Congressional hearings indicates no discussion took place therein of m-f-n question.

B. Reason for inclusion Jap and southern Korea in exchange of notes—

1. As indicated May 18 analysis of agreements (ECA/3),² support of economies of occupied areas represents economic burden on US. If these areas are to become self-sustaining and economic burden on US reduced, it is essential that their exports be developed and that, therefore, unwarranted discrimination against such exports be eliminated so far as possible.

2. In this connection economies of Jap and southern Korea are no different from those of occupied areas in Europe for which US is responsible. This country is giving direct financial and other economic support to Jap and southern Korea. Discrimination against exports of these areas makes it more difficult for economies of these areas to stand on their own feet and increases financial and other assistance which this country must supply. Moreover, since this assistance in part is incorporated directly and indirectly in the manufacture of exports from Japan and southern Korea, discrimination against these exports represents, in a sense, discrimination against US. From this viewpoint our interest in occupied areas is similar to our interest in our own dependencies.

C. Nature and effect of m-f-n commitment in exchange of notes—

1. Under exchange of notes UK required to grant m-f-n treatment to Jap and southern Korea as well as other occupied areas only if it receives such treatment from these areas in return.

2. The notes do not themselves impose any legal obligation on Jap or southern Korea to extend m-f-n treatment. Hence, notes do not in any way affect any legal responsibilities FEC may have in matter. It notes are accepted, it would still be up to US to ensure, through such means (including FEC) as are available to it, that Jap and southern Korea do grant m-f-n treatment to UK and other countries so that they may receive m-f-n treatment in return.

3. Although UK required to give Jap and southern Korea m-f-n treatment if it receives such treatment from these areas, it will still have ample opportunity to discriminate, if necessary, in accordance with exceptions from m-f-n treatment recognized in GATT. Most importantly in this connection, UK would still have right discriminate against dollar exports from Jap so long as UK is in balance-of-payments difficulties. Same right is available to British colonies. Since British likely to be in balance-of-payments difficulties for next several years, commitment in exchange of notes would still leave British Govt relatively free during this period to discriminate against dollar exports from Jap as well as other occupied areas.

4. Exchange of notes requires only that British Govt not impose discriminatory regulations (except such as are in accord with GATT exceptions) against Jap and other occupied areas. It would still leave British nationals free to purchase from whatever sources they wish, and if they do not want to buy from Japan, there is nothing in exchange of notes requiring them to do so.

5. Commitments in exchange of notes remain in force only until Jan 1, 1951, and are terminable on that date or at any time thereafter upon six months notice. During next 21/2 years when commitment is in force, British would still retain, as indicated para C–3 above, wide latitude with respect to their trade policy because of likelihood continuing balance-of-payment difficulties. Also, during this period it does not seem likely that any great flood of exports will come forth from Japan to swamp British markets. General shortages, not surpluses, are likely to be problem during next several years. If Jap exports should become serious threat to British after this period, then they would be in position to terminate exchange of notes if they wished. Also, if British argue they need to protect their cotton textile industry against Jap competition, it may be pointed out that Jap cotton textiles intended for export will be largely low-grade type and therefore to considerable degree non-competitive with bulk British cotton textiles.

6. Exchange of notes commits only UK; it in no way imposes any commitment on Australia and New Zealand and leaves those countries free to direct their trade policy with respect to Japan and southern Korea in any manner they wish.

7. All issues in connection with bilateral agreements themselves were resolved at today’s session, subject to Franks’³ referral with affirmative recommendation of solution Article II, para l–C described to you today, namely, omitting first sixteen words. Only two outstanding issues are suggested reduction of m-f-n treatment Germany to two years from two years six months, and elimination Japan. Please advise us soonest your judgment concerning these points.

Marshall

1. Telegram 2768 from London, June 23, 1948, reported on the difficulties involved in negotiating the U.S.–U.K. bilateral aid agreement in conjunction with the European Recovery Program. Ambassador Douglas reported that “Brit cannot accept inclusion Japan and Korea in exchange of notes accompanying Agreement …” (840.50 Recovery 6–2348) For complete text of telegram, see vol. iii, p. 1109.
2. Summary and Analysis of Master Economic Cooperation Agreement Draft, not printed.
3. Sir Oliver Franks, the British Ambassador.