Foreign Relations of the United States, 1949, National Security Affairs, Foreign Economic Policy, Volume I

International Trade Files, Lot 57D284, Box 159

Memorandum by Mr. Leonard Weiss of the Division of Commercial Policy¹

secret

[Washington, July 29, 1949.]

GATT Implications of British Import Restrictions

problem

In connection with its current economic and financial crisis the United Kingdom has proposed two types of measures affecting trade both of which have the effect of increasing the degree of discrimination against the dollar area. One type envisages an intensification of existing restrictions against dollar imports without any comparable intensification of restrictions against imports from non-dollar areas. The other type contemplates a relaxation of restrictions against imports from European and sterling area countries (and possibly other non-European soft currency countries) without any comparable relaxation of restrictions against imports from hard currency areas.

With regard to the first category of measures, the United Kingdom has already put into effect a suspension of all dollar purchases on government account except those provided for under existing contracts or commitments or otherwise required in the “urgent national interest”. In addition, Sir Stafford Cripps announced in the House of Commons on July 14 that the United Kingdom intended to reduce imports from the dollar area in the period 1949–50 by $400,000,000, a cut of about 25 percent from the 1948 level. These restrictions are not expected to be placed into effect until about September. The Finance Ministers of the British Commonwealth sterling countries at their recently concluded conference in London “agreed to recommend to their governments action comparable in its results to that already decided upon by the United Kingdom”. Presumably, therefore, these sterling countries will place into effect 25 percent cuts on dollar imports similar to those contemplated by the United Kingdom.

As regards the second category of measures, the British have proposed a relaxation of restrictions with respect to imports from the OEEC countries exclusive of Switzerland (with Belgium being subject to special conditions), from the sterling area, and possibly from other non-OEEC soft currency areas. Under this plan the United Kingdom would establish open general licenses for the import from these countries of a large range of commodities traded on private account. Although the British would be prepared to take the lead and put into effect their relaxations vis-à-vis imports from the other countries concerned without simultaneous, comparable relaxation of import restrictions by such countries, the British would expect these countries to follow their initiative and ultimately institute comparable relaxations on restrictions against imports from each other and the United Kingdom.

The purpose of this paper is to appraise these various measures in the light of the provisions of the General Agreement on Tariffs and Trade (GATT) with a view to formulating for the forthcoming Tripartite talks the United States position on these measures in relation to the GATT.

In this connection it should be observed that the GATT provisions of relevance in appraising these measures are practically identical with corresponding provisions in the ITO Charter. For the sake of simplicity of exposition and in view of the fact that the GATT already is in effect and constitutes an obligation on the United Kingdom and other British Commonwealth countries whereas the Charter is not yet in force, the subsequent discussion runs exclusively in terms of the GATT. It may be assumed, however, that the comments made respecting the GATT provisions in relation to the measures in question apply also to the Charter provisions.

conclusions and recommendations

1. The GATT would appear to offer sufficient latitude for such discriminatory measures as may be required by the United Kingdom to meet its balance-of-payments problem but the United Kingdom would not be free to resort to the basic GATT provision applicable to it for the purpose of discrimination for balance-of-payments reasons, namely the so-called Geneva option, until it is relieved of the obligations of Section 9 of the Anglo-American Financial Agreement.

2. The Geneva option² contains some highly useful limitations on the degree of discrimination, such as those relating to the avoidance of price disparities and export diversion. On the assumption that the United Kingdom is relieved of its Section 9 obligations,³ the United States should insist that the United Kingdom confine its discrimination for balance-of-payments reasons within the limitations of the Geneva option. Similarly, the United States should insist that the other Commonwealth countries bound by the Geneva option in GATT, namely Ceylon, South Africa and Southern Rhodesia, should confine their balance-of-payments discrimination within the same limits. As for the other Commonwealth countries in GATT (Australia, New Zealand, India and Pakistan) which are not bound by the Geneva option and are free to discriminate under the less rigorous conditions of the Havana option, the United States should seek in the Tripartite talks the support of the United Kingdom and Canada in urging these other countries, as a matter of policy, to confine their discrimination for balance-of-payments reasons to the conditions of the Geneva option, particularly those relating to price disparities and export diversion.

3. In connection with the application of the provision of the Geneva option relating to price disparities, the United States should seek particularly to prevent discrimination which might stimulate the development of an excessively high-cost industry incorporating a high ratio of capital as compared with other factors of production.

4. The price disparity provision of the Geneva option should be invoked to urge on the United Kingdom measures designed to reduce progressively over a reasonable period such excess, resulting from discriminatory policies, in the price of its imports as compared with the price of comparable products available elsewhere. In this connection devaluation should be urged on the British as the single, most important measure which it might take to keep to a minimum price-cost disparities between the dollar area and its discriminatory soft currency area.

5. The United States should urge, on general policy grounds, that discrimination for balance-of-payments reasons among the United Kingdom and its territories with which it maintains a common quota in the Fund conform to the various conditions of the Geneva option even though there is no legal obligation to do so.

6. With the Geneva option available as a basis for discrimination, it would appear neither necessary nor desirable for the United Kingdom to rely generally on the war-disrupted economy provision of the GATT to justify its discrimination.

7. The consultations called for under Article XII–4(b) of the GATT should be held as soon as possible after the conclusion of the Tripartite talks.

8. If these talks result in a high degree of consensus between the United States, United Kingdom and Canada on basic objectives and policies and in a program which might profitably be extended to other countries, then consultations under Article XII–5 of the GATT might be useful as a means of bringing other countries into the program. If such a consensus and program do not result from the Tripartite talks, then consultations under Article XII–5 should, if suggested, be opposed.

9. The new British import restrictions should be reviewed on a product-by-product basis to determine what commodities might appropriately be added to the existing United Kingdom token import list in order to prevent their complete or practically complete exclusion from the British market.

10. As to the future of the GATT program as affected by the present British crisis, it is believed that the GATT can sustain the impact of this crisis and contribute materially to its solution.

discussion

[Here follow the first three sections under the “Discussion” heading of the paper.]

Future of GATT Program

In conclusion, a few general comments may be in order on the effect of the British crisis and the measures taken to meet it on the future of the GATT program. In one sense, of course, the current crisis represents a stiff jolt to this program. Instead of moving toward freer trade on an expanding multilateral basis as envisaged by the GATT, the world economy appears headed as a result of the present disequilibrium toward increased restriction and intensified division of the international economy into exclusive trading areas.

From another, and perhaps more important, point of view, however, the present situation offers some elements of encouragement for the future of the GATT program. For one thing, as indicated above, the GATT appears to contain sufficient elements of flexibility to accommodate the measures which the current difficulties may require. Should it be necessary, for example, to increase the degree of discrimination against the dollar area, such action can be taken fully consistent with the GATT without impairment of its legal integrity.

Secondly, the GATT offers, as suggested above, standards and objectives for limiting and directing the measures to meeting the current crisis so as to provide an effective basis for moving back toward the multilateral system the GATT ultimately contemplates. The requirements of the Geneva option relating to price disparities and export diversion, for example, are useful conditions to insist upon in order to help prevent discriminatory trading arrangements from becoming permanent fixtures in the world economy. In this connection the point made above regarding the maintenance of the legal integrity of the GATT despite the emergency measures which may be required, becomes especially important. If the legal integrity of this instrument can be maintained, the basis is afforded whereby the limitations of the GATT can be invoked so as to prevent the complete disintegration of the international economy and the destruction of the possibility of achieving a new equilibrium on a freer, multilateral trading basis.

Thirdly, aside from these limiting standards and objectives, the GATT affords a mechanism for consultation and systematic review of the measures which are or ought to be taken to correct the present difficulties. Reference was made above to paragraphs 4 (a) and (b) of Article XII as affording two such channels for consultation and review. So long as such facilities are available, there is some hope that nations will not take action unilaterally regardless of the effect on others. Without such facilities, there is little or no hope for enlightened action considerate of the general interest.

Finally, though somewhat perversely, the present crisis may offer precisely the shock necessary to dramatize to this country the necessity for not increasing its own restrictions on trade, for, to the contrary, lowering the barriers to imports from abroad, and for, accordingly, supporting the GATT program for an expanding, multilateral trading system. This line of reasoning is not to argue that the solution to the present British crisis lies solely or even primarily in action to be taken by the United States to reduce its trade barriers; to the contrary, it is believed that though action by the United States may assist materially, the principal economic measures which must be taken, such as exchange rate and price-cost adjustments, lie primarily in the hands of the foreign countries concerned. It is only to argue that the current crisis should patently demonstrate to the American public and Congress that restrictive action on our part can only accentuate the problem. If this thought and its implications are grasped, the current crisis may, paradoxically, stimulate American support for the GATT program.

In the light of the foregoing, it is believed that the GATT can sustain the impact of the present crisis and contribute materially to its solution.

1. This paper was prepared by Weiss for the Working Group on Britain for the forthcoming United States-United Kingdom-Canadian financial conversations to be held in Washington in September (see vol. iv, pp. 822–830). It carried the serial number WGB D–4. A covering memorandum by Bradley Patterson, Jr., of the Executive Secretariat, described the paper as follows: “Problem” (pp. 1–3); “Conclusions and Recommendations” (pp. 3–6); and “Discussion”, in turn divided into these units—”Basis for Discrimination” (pp. 6–16), “Consultation Requirements” (pp. 16–20), “Token Imports” (pp. 20–21), and “The Future of the GATT Program” (pp. 21–24).

2. The General Agreement on Tariffs and Trade in its Article XIV provided two principal, alternative bases for discrimination for balance of payments reasons. One was the so-called “Havana” Option which appeared in the text of Article XIV proper. The other was the “Geneva” option which appeared in Annex J of Article XIV. The texts of these provisions are printed in Foreign Relations, 1948, vol. i, Part 2, pp. 905–909.

   Generally under the Havana option a country might apply discriminatory import restrictions equivalent in effect to restrictions on payments and transfers which that country was permitted to apply under Article XIV of the Articles of Agreement of the International Monetary Fund or under an analogous provision of a special exchange agreement entered into pursuant to the General Agreement. Under the Geneva option a country might apply discriminatory import restrictions for balance of payments reasons so long as certain conditions were met regarding price levels and gold and convertible currency receipts (Annex J).

3. See footnote 9, p. 656.