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

560.AL/11–1049

Confidential Report by the Chairman of the United States Delegation (Willoughby) to the Secretary of State

confidential

[Washington,] November 10, 1949.

The purpose of this report is to discuss certain aspects of the Third Session of the Contracting Parties which are of particular importance and interest to the Department, but which are not suitable for inclusion in the report prepared for publication.

The Significance of GATT and the Development of the Procedures of the Contracting Parties

The consistent policy of the United States since the inception of the General Agreement has been to avoid in any way giving the impression that the Contracting Parties constitute an international organization. It has been our position that the executive branch of the United States should not foster and participate in such an organization until Congress has acted upon the proposed Charter for an International Trade Organization. In consequence of this policy, the United States insisted that the Contracting Parties should not have their own secretariat, but should be furnished secretariat services on an interim, reimbursable basis by the Secretariat of the Interim Commission for an International Trade Organization.

While this position was consistently maintained at the Third Session, it was clear that the absence of a continuing organization was a handicap to the effective functioning of the General Agreement. This was particularly true with respect to the consultation provisions of Article XII, and the economic development article (XVIII). The absence of any method of beginning the examination of cases arising under these two articles between sessions of the Contracting Parties resulted in much more lengthy considerations in working parties and plenary meetings of the Third Session than would otherwise have been necessary. With a view to alleviating this, situation, the United States Delegation supported proposals, which were ultimately adopted, establishing inter-session committee procedures for initiating action and thereby reducing the burden on the subsequent meetings of the Contracting Parties.

However, there was also a general feeling among the Contracting Parties that this inter-session machinery, particularly the consultation procedure, should be used only in exceptionally urgent cases. It is furthermore clear that such interim procedures cannot take the place of a permanent, well-organized and efficiently staffed organization. All this points to the conclusion that until the International Trade Organization is established, the sessions of the Contracting Parties will of necessity be lengthy and difficult and will require the participation of a sizeable number of experts on delegations of the United States.

The experience of the United States Delegation in connection with the operation of the consultation procedures of Article XII (in the South African import restriction case) also indicated the need for good coordination within our own government in connection with the operation of the General Agreement, The efficient operation of many articles of the agreement, particularly Article XII, depends on close cooperation between the Contracting Parties and the International Monetary-Fund, and the decisions taken by the Fund in related aspects of cases which are at the same time the concern of the Contracting Parties obviously are of great importance to them. For instance, in approving the exchange restrictions imposed by South Africa in November 1948, the International Monetary Fund had given some consideration to the justification for discrimination against the dollar area. This problem became of greater importance, and indeed was the fundamental issue, when the consultation between South Africa and the Contracting Parties took place at the Third Session. It was obviously of the utmost importance that the positions of the United States with respect to both the exchange and import restriction imposed by South Africa, i.e., the positions taken in the Fund and in the Contracting Parties, should be completely consistent, and that the influence of the United States in the International Monetary Fund should be used with a view to ensuring that the information supplied to the Contracting Parties by the Fund in accordance with the provisions of the General Agreement should be adequate for the purposes of maintaining the position of the United States in cases before the Contracting Parties.

At least prior to the current reorganization of the Department, it is doubtful that there was adequate coordination for these purposes between the financial side of the Department and the National Advisory Council structure, on the one hand, and the commercial policy side and the trade-agreements organization, on the other. It is strongly urged that the Department give continuing consideration to this problem.

Bilateralism vs. Multilateralism: Fundamental Conflicts of Policy

The South African import restriction consultation, referred to in the previous section, was the agenda item of the Third Session on which the fundamental issue of bilateralism vs. multilateralism emerged most clearly. The issue is an old friend (or enemy) of the drafters of the General Agreement and the ITO Charter. Its reappearance was no surprise. The matter was fully reported to the Department in the course of the session, and it does not seem necessary to discuss it in detail in this report. The principal point at issue in the South African case was whether or not discrimination by South Africa against the dollar area was justified. In the opinion of the United States Delegation the facts regarding South Africa’s balance-of-payments position and her reserve position indicated discrimination was not justified. Nevertheless strong pressure for such discrimination was put on South Africa by the United Kingdom and to a lesser extent by the Western European countries. The arguments used were purely bilateralistic: if South Africa did not buy from the United Kingdom, the United Kingdom would cut its imports from South Africa and curtail the flow of capital to South Africa (the United Kingdom argument ran). The Western European countries similarly stated that if South Africa did not continue to buy their goods, they would further reduce their imports from South Africa.

In the opinion of the United States Delegation, the United Kingdom and to a lesser extent the other Western European countries in this case demonstrated a callous disregard for the multilateral, nondiscriminatory trade objectives of the General Agreement, as well as a disregard of the interests of South Africa, Canada, the United States, and even of their own long-term interests. The fact that the attitude does exist, and has been demonstrated once more so clearly, emphasizes the need for continual vigilance in combatting such attitudes.

Alignment of “Blocs” in the Contracting Parties

The South African case demonstrated another problem which must be taken into account in considering matters before the Contracting Parties. This was the policy of the British sterling area countries to align themselves on the same side of most important issues and to give firm support to each other’s position. The situation applied particularly to the United Kingdom, Australia, New Zealand, and Southern Rhodesia, and to a slightly lesser degree to South Africa. Canada, of course, was not generally on the same side, and indeed was almost always consistently on the side of the United States.

It is perhaps inevitable that blocs of this sort should exist, though it has unfortunate effects in a body such as the Contracting Parties. It may be remedied to some extent as more governments accede to the General Agreement.

Most-Favored-Nation Treatment for Japan

Immediately after the opening of the Conference at Annecy the United Kingdom informed the American Embassy in London that it could not consider an M-F-N agreement for Japan until after the establishment of an exchange rate and sufficient time to show the effect of the new rate. Conversations in The Hague and Brussels indicated that the Benelux countries would oppose such an agrement at Annecy and conversations in Annecy indicated that other countries, including the key trading countries were also opposed. It became apparent that any working party which might be set up to consider such an agreement would be opposed to the proposal. For this reason and because of the pressure of time the item was withdrawn from the agenda.

Relations with Cuba

Developments at the Third Session with respect to Cuba are covered fully in the Department of State’s files, in copies of notes exchanged between Cuba and the United States, in the communications from the Delegation, and in the comprehensive memoranda on the principal problems which the Delegation forwarded to the Department. The issues raised by Cuba fell in four principal categories, namely, reductions in the margins of preference extended by the United States to Cuba, the “crisis” in the Cuban textile industry, the renegotiation of six items in Schedule IX (Cuba) of GATT, and renegotiation of Cuban duties on colored woven goods.

With respect to the preference question—which was the most important of the issues—the Cubans maintained that the United States should negotiate with them and obtain their approval before reducing or eliminating any margins of preference by reductions in the most-favored-nation rates. The United States Delegation maintained that the United States had an obligation to consult with Cuba and extended an invitation to the Cuban Delegation to consult on any product in which it was interested, an invitation that was not acted upon except in the case of the raw sugar offer which had been made to the Dominican Republic. The United States Delegation did not agree that we were required by GATT or the exclusive agreement with Cuba to obtain Cuba’s consent in order to reduce or eliminate any margins of preference. Cuba raised this question in WP/1 during the drafting of the terms of accession to GATT and was overruled. She was also overruled when the report of WP/1 (CP 3/37) was approved by the Contracting Parties. At both times, however, the Cuban Delegation reserved its position.

Throughout the session the United States Delegation sought a solution which, while maintaining intact our legal right to cut preferences, would prevent a serious loss of face for the Cuban Delegation and avoid strained relations with Cuba. Prior to the discussion by the Contracting Parties of this issue the Delegation was informed that the Cuban Ambassador in Washington had again urged withdrawal of our sugar offer to the Dominican Republic and suggested that if this would be done Cuba would withdraw its statement on the preference issue and would cease to object to preference reductions in favor of Haiti. Before the Contracting Parties took a decision on the legal issue the Chairman and Vice-Chairman of the United States Delegation made one further effort to reach settlement with the Cubans-based on the Department’s conversation with the Cuban Ambassador. They asked whether Cuba would withdraw its paper and cease to press objections to other cuts should the United States withdraw its offer on sugar. The Head of the Cuban Delegation denied knowledge of any such proposal by the Cuban Ambassador in Washington and later, upon instructions, rejected the proposal. Subsequently Mr. Evans speaking for the United States announced to the Contracting Parties our decision to withdraw the sugar offer and indicated that we would be willing to see the withdrawal of the resolution settling the legal issues involved provided that it would be fully understood that we were going to maintain our other offers affecting preferences and that no other delegation should object to the legality of this move except Cuba, which would reserve its position. The United States and Cuba could then enter bilateral negotiations in an attempt to reach a satisfactory solution. The Cuban Delegation, although pleased with the withdrawal of the sugar offer refused to accept this proposal. They also said that they would press their case unless the United States withdrew all of its preference offers or reduced the preferential rates so as to avoid any reductions in the margins.

When the Contracting Parties voted 14 to 1 in favor of the resolution that clearly settled the legal issues involved the Cuban Delegation withdrew from the Third Session. It should be noted that before the resolution came to a vote the Delegates of Norway, United Kingdom, United States and Canada met to decide upon the exact wording of the resolution that would be acceptable to the Empire countries as well as to us. At this meeting the position of the United Kingdom and Australian Delegates was that while agreeing that Cuba had no legal right to veto, language should be avoided that might imply that compensation in negotiations need not be given to the country suffering from a reduction of preference. The resolution as finally adopted by the Contracting Parties was acceptable to all of the above.

Throughout the discussion of the preference issue it was apparent that the majority of the Contracting Parties were opposed to Cuba’s contentions and although this fact was obvious to the Cuban Delegation they refused to withdraw their statement or accept a compromise on other than their own terms. The Brazilian and Indian representatives were the principal supporters of the Cuban position. The former, although opposed in principal to preferences, continued to advocate that the United States should offer compensation to the Cubans should any margins of preference be reduced. Although there was no support for the legal position, there was a certain amount of sympathy evidenced by the contracting parties for Cuba’s economic position and a feeling that the United States should offer assistance to Cuba should the Cuban economy be adversely affected by any reduction in the United States margins of preference through reductions in the most-favored-nation rates.

The next most pressing problem that had to be dealt with was the so-called “crisis” in the Cuban textile industry. When Cuba presented its statement on this crisis a long discussion ensued concerning the terms of reference of a Working Party to handle this matter. The Cuban Delegation demanded a Working Party with wide terms of reference and was definitely opposed to referring the matter to Working Party II on Article XVIII. At length the Contracting Parties agreed to the formation of a new Working Party. Throughout the discussion of the terms of reference and formation of a new Working Party Cuba was supported by Chile and Brazil and other undeveloped economies, which regarded Working Party II with suspicion in view of its strict interpretation of the provisions of Article XVIII and the careful analysis given to all applications referred to it.

The Cubans at first demanded release and later a waiver on virtually all textile items in their Schedule. When it was suggested that an investigating commission be sent to Cuba the Cubans would not agree unless an advance waiver would be granted them. When no solution was forthcoming the United States and Cuba entered into bilateral negotiations. During these negotiations Cuba, in response to our request, presented a minimum list of tariff items on which waivers were sought. Our estimates showed these items comprised over 80% of United States textile exports to Cuba. At no subsequent time did Cuba recede from these demands. The list of items on which Cuba would consider offering compensatory concessions to the United States was totally unsatisfactory from the point of view of the United States Delegation since the list did not include any of those items which the Delegation felt would be of any particular interest to the United States.

When it became clear that an agreement could not be reached, the Working Party prepared a non-controversial report; however when the report was presented to the Contracting Parties, after the Cuban Delegation had withdrawn from the Conference, the Indian Delegate unexpectedly presented a paper prepared by the Cuban Delegation which was read but not distributed. It presented a prejudiced account of the entire matter. The United States representative found it necessary to reply orally and give the principal facts concerning the Cuban claims and the efforts of the United States Delegation to meet them half way.

The renegotiation of 6 items in Schedule IX, authorized at the Second Session of the Contracting Parties, was delayed for several months because of the delay in settling several important points at issue between the United States and Cuba. They finally were undertaken at Havana. After the Annecy Conference had begun, however, the Cubans requested that the renegotiation be shifted from Havana to Annecy. The United States Delegation was opposed to this transfer because of the inherent delays in such a move and because of the press of other business. In May, however, we agreed to their transfer to Annecy. Although agreement was reached on some of the items involved, it was not possible to conclude the renegotiation at Annecy since no agreement was possible on nylons and tires and tubes. After Cuba withdrew from the Third Session the Indian Delegate read a Cuban statement which implied that the renegotiation had failed. The statement contained a biased and inaccurate account of what had occurred. Its presentation was contrary to the normal practice under which both parties to a negotiation present a joint report.

The United States Delegation feels strongly that the offers made to Cuba during the renegotiation were generous and ample that further increases in the duty could not be defended or justified.

At Cuba’s request the renegotiation of the Schedule IX rates of duty on colored woven goods was undertaken at Annecy. No agreement was reached, however, in this matter before Cuba’s withdrawal from the Third Session.

[Here follows discussion of events relating to a request by the Director General of UNESCO to the Contracting Parties that they consider the lowering of tariff barriers on a long list of items of an educational, scientific and cultural nature. “The entire project at Annecy received only hasty and preliminary consideration.”]

Special Exchange Agreements

At the Third Session the Contracting Parties unanimously approved the draft for the special exchange agreements, the execution of which by Contracting Parties not members of the Fund is called for in the GATT. The United States representative on the Committee on Special Exchange Agreements, who was the Committee’s Chairman, has covered so adequately the work of the Committee in his report to the National Advisory Council Staff Committee that it is felt to be unnecessary to go into great detail concerning its work in this report.

As he pointed out in his report (NAC Staff Doc. No. 356)¹ the Annecy sessions of the Committee were primarily sessions on the “New Zealand Problem”. Although New Zealand’s personnel had changed, that country’s desire to filibuster to prevent the adoption of a Special Exchange Agreement had not. During a committee recess New Zealand promoted support for a move to postpone the whole question of an agreement until the Fourth Session and had marshalled promises of support from a majority of the Committee members. The question would have been postponed had not the United States representative threatened to oppose the majority of the Committee in the full meeting of the Contracting Parties, and had not the Fund representative brought forth the substance of a final compromise. Once New Zealand agreed to settle for a special dispensation, the whole matter was cleared up very quickly on the basis of a text which had been redrafted on the suggestion of Belgium.

New Zealand was determined to avoid the Special Exchange Agreement until after its elections scheduled for late in 1949. To accomplish this the New Zealand representative raised many issues. It is felt by the United States representative, however, that the real change that New Zealand wants in the Agreeemnt is some qualification of the requirement of prior approval for exchange restrictions after the transitional period, and would have given up every other point if it could have gotten somewhere on this point. The United Kingdom was put in the embarrassing position of desiring to support New Zealand and also avoid being drawn into a position of trying to undermine Fund obligations. Ceylon seemed to side with New Zealand at Annecy. Belgium and Pakistan firmly supported the United States, Burma avoided taking positions and the Burmese Delegation left Annecy during the recess so that Burma was not represented in the later meetings of the Committee. France made strenuous efforts to be on both sides of the most controversial issues.

In the judgment of our representative the final text of the special exchange agreements and the final general arrangements for signature are entirely satisfactory from our point of view, and are entirely consistent with instructions given. The special exemption for New Zealand is theoretically difficult to defend, but is preferable to any watering down of the Agreement itself. It will be difficult for New Zealand to make a case for any different provisions, now that a definite text has been approved and will be signed by other countries.

Third Set of Tariff Negotiations

The Contracting Parties delayed consideration of plans for a third set of tariff negotiations until the last day of the Third Session largely because of the United States’ legislative difficulties. Some of the delay was due in part, however, to other delegations, e.g., the British did not appear to be too interested in a third round and the French indicated that a third set would be of little benefit to France. A Working Party under the chairmanship of the United States was appointed which met at Annecy after the conclusion of the Session and formulated plans for a third set with the exception of the questions whether to invite Western Germany, Japan and Korea. These questions were discussed in London at a short series of meetings which were convened there on September 26. (The Honorable Dana Wilgress chaired the London meetings). The United States was able to participate fully in all discussions, but could make no commitments until after the Reciprocal Trade Agreements Act had been extended and Presidential authority had been obtained for United States participation in a third set of negotiations.² At Annecy at the United States’ request, all reference by the Secretariat to the press to a third set of tariff negotiations was kept to a minimum.

The Secretariat prepared a memorandum on the rules of procedure for a third set of negotiations patterned after a similar document circulated prior to the Annecy negotiations. The Working Party, using this document and guided by the Contracting Parties’ oral comments, prepared a memorandum on the conduct of the third set for circulation among the Contracting Parties and acceding governments. The discussion in the meeting of the Contracting Parties and Working Party were centered largely upon the question as to what countries should be invited to participate in the third set. The United States advocated that Western Germany, Japan and Korea be extended invitations. In the Contracting Parties’ discussions only Brazil supported an invitation at this time to Western Germany and China indicated an interest in seeing one extended to Korea. The Netherlands representative proposed that invitations be extended in such a way as to prevent one being sent to Indonesia. Czechoslovakia was quite hostile to one being sent to Germany and indicated that should one be sent, it might be impossible for Czechoslovakia to attend the third set of negotiations. Australia was hestitant about Japan. After the Working Party reconvened in London agreement was reached to invite Western Germany and Korea. It was not possible to obtain agreement concerning an invitation to Japan and the United States filed a minority statement for inclusion in the Working Party report pointing out why it thought Japan should be invited. The early opposition concerning Germany stems from the latent fear of unfair competition such as was practiced prior to World War II. In addition to fear of unfair competition from Japan several other factors, such as antipathies resulting from the War and political and sociological reasons, are responsible for the hostility against inviting that country.³

The Persistent and Widespread Application of Import Restrictions

The provision of Article XII, paragraph 5, of the General Agreement requiring the Contracting Parties to initiate discussions, if there is a persistent and widespread application of import restrictions, indicating the existence of a general disequilibrium restricting international trade, was discussed only briefly at the Third Session, but its future importance is one to which the United States should give prompt attention. It is of course obvious that the “widespread disequilibrium” contemplated in the Article does in fact exist. Although the Delegation originally proposed, on instructions from the Department, that studies should be undertaken with a view to enabling the Contracting Parties to consider whether and what action should be taken under the provision, the Delegation subsequently in accordance with revised instructions from the Department urged postponement of any action along these lines, and action was deferred by the Contracting Parties.

Nevertheless, the Chairman of the Contracting Parties in his closing remarks, raised the question again in a context which cannot be ignored. He predicted that in the very near future perhaps half of the Contracting Parties, including the United Kingdom and all of the countries of the sterling area, would be obliged to intensify their import restrictions substantially and hence to consult with the Contracting Parties under Article XII (4) (b). This, he said, would be a situation which Article XII, paragraph 5, was clearly intended to cover. It is urged that full consideration be given by the Department and by Treasury as to the extent to which Article XII consultations can be useful under the circumstances mentioned by the Chairman, and as to the policy to be followed with respect to Article XII, paragraph 5.

The Leadership of the United States and the Future of the GATT–ITO Program

The United States Delegation operated at Annecy under two very serious handicaps. The first was the situation created by the failure of Congress to act upon the Habana Charter.⁴ This situation has resulted in a definite impression which could not entirely be dispelled, that the United States is withdrawing from the position of leadership it has always maintained in the development of the General Agreement and the proposed International Trade Organization. This impression was inevitably strengthened, in spite of all the assurances which could be given to the contrary, by the insistence of the United States Delegation that no action be taken which might in any way be construed as an effort to put any aspect of the Charter into force prior to Congressional consideration of the Charter.⁵

The delayed Congressional action on the Reciprocal Trade-Agreements Act added to the doubts of the Contracting Parties, and was embarrassing to the Delegation in many ways. In particular it necessitated the extensive modification of time schedules and of technical details. Obtaining the agreement of the other Contracting Parties to these complicated and extensive changes was possible only because of the very cooperative attitude of the Chairman and the Secretariat. In spite of this, it required considerable effort by many members of the Delegation both in meetings and in out-of-meeting “lobbying”. The Delegation feels that in these circumstances we were fortunate that the United States position was not overruled on any issue brought to a vote in the Third Session of the Contracting Parties.⁶

1. Not printed. The NAC files of the Department of State are in Lot 60D137 (FRC Accession No. 71A6682, boxes 362–376).
2. The House of Representatives passed a trade agreements extension bill in February 1949 (H.R. 1211), but the Senate did not act favorably on this House bill until September. The new Trade Agreements Extension Act of 1949 became law with President Truman’s approval on September 26, 1949; it provided for a 2-year extension of the Presidential authority to negotiate reciprocal trade agreements (63 Stat. 697). An important change effected by the 1949 Act was to include a Commissioner of the United States Tariff Commission in the membership of the Interdepartmental Committee on Trade Agreements (TAC). On October 5, 1949 the President signed Executive Order 10082, providing for the administration of the reciprocal trade agreements program on the basis of the new legislation; for text see 14 Federal Register 6105, or Department of State Bulletin, October 17, 1949, pp. 593–595. See text of White House press release of October 5, 1949, infra.
3. There is considerable documentation in the file series 560.AL on the post-Annecy meeting at London and its discussion of the issues described here. The final views of the Department of State at this time on the Japanese question were cabled to London on September 26, as follows: “Although Dept believes we should go forward with a Japanese peace settlement we cannot assume the success of our efforts in that direction and should therefore not halt efforts through established channels secure our objectives for Japan. Also, although peace treaty might incorporate broad rights economic and commercial activities, negotiations to reduce tariffs possible only in GATT.” (telegram 3494, to London, September 26, 1949, 6 p. m., 560.AL/9–2649)
4. The Administration was laying plans at this time (November 1949) for the consideration of the international trade organization legislation by the second session of the 81st Congress immediately upon its reconvening in January 1950.
5. This refers to an effort by the British at Annecy to have the provisions of Chapter VI of the Habana Charter on commodity arrangements put into provisional effect either in an interim organization or under the aegis of the General Agreement The United States disapproved for reasons noted here and had to mount a strong diplomatic effort to forestall approval.
6. The references here are to the problem raised by the conference time-table for the tariff negotiations, in view of the tardiness of the U.S. Congress in acting on the trade agreements extension legislation. The projected closing date for the tariff negotiations was August 27, and the signing date for the various protocols was set for September 10. When by mid-August the Congress had not acted and the lapse of the Presidential authority continued, the Department of State and the U.S. Delegation at Annecy initiated a strenuous diplomatic effort to win a postponement of the signing date from September 10 to October 10 and thus to have the situs of the ceremonies transferred to Lake Success, New York. A very considerable documentation exists in file series 560.AL on this phase of the U.S. diplomatic effort at Annecy.