Foreign Relations of the United States, 1961–1963, Volume XIII, Western Europe and Canada

16. Memorandum From the Under Secretary of State for Economic Affairs (Ball) to President Kennedy⁰

Washington, August 23, 1961.

SUBJECT

• U.K. Adherence to the European Common Market

I have received your memorandum of August 21, 1961,¹ inquiring as to what steps we should take to protect United States interests in connection with the proposed move by England to join the Common Market.

I should welcome the opportunity to discuss this question with you in some depth. Meanwhile, you can be assured that the situation is well in hand.

In the following few pages I shall outline the substantive situation, as we see it, together with the measures we are taking on a government-wide basis to protect American trading interests.

I. Economic Effect on the United States of Great Britain’s Joining the Common Market

Britain is already a member of the Free Trade Association, along with Norway, Sweden, Denmark, Switzerland, Austria and Portugal. If Britain does not join the Common Market, the full development of the Free Trade Association and the Common Market will result in two large areas within each of which trade will move without restriction. Whether or not Britain joins the Common Market, the full coming into being of these trade arrangements will have an impact on United States exports.

It is clear belief that even though these arrangements are by their nature discriminatory, the net impact on our trade will tend to be more favorable than unfavorable—although admittedly it will result in the need for some adjustments. It is our further belief that the adherence of Britain to the Common Market, while resulting in some additional discrimination, will also, on balance, be favorable for our exports.

A. A detailed State Department study has shown that the net effect of European economic integration will be to expand rather than diminish United States industrial exports.

These conclusions are borne out by a State Department study completed about six months ago. This study was directed at determining what effect the full achievement of the Common Market and the Free Trade Association would have on United States exports of industrial products.

This study showed that the coming into being of these two trading areas might be expected to have two separate and opposite effects on United States trade—an effect of trade diversion and an effect of trade creation.

1. Trade Diversion

Some trade diversion would be expected to result from changes in relative tariff levels. Our study estimated that the trade diversion resulting from the Common Market (the EEC) would have a gross effect on United States exports of about $390 million annually and that the trade diversion resulting from the Free Trade Association (EFTA) would have a gross effect of about $285 million annually. The effect of such diversion would not be fully felt until the complete free movement of goods within each area was finally achieved (1970 or sooner).

2. Trade Creation

The gross effect of trade diversion is, however, only part of the story. Our study showed that an increase in the incremental growth rate of as little as 1/4 of 1% in the Common Market or the EFTA would enlarge the demand for our industrial goods so as to more than compensate for the diversionary effects resulting from the establishment of these two trading areas. We have every reason to believe that economic integration may be expected to increase the rate of economic growth considerably in excess of 1/4 of 1%. Certainly this has been the case so far in the Common Market.

3. The Net Effect of British Adherence to the Common Market

The foregoing analysis would suggest that the net effect of British adherence to the Common Market should be favorable to our industrial trade. The British growth rate at the moment is well below that of the Common Market countries. There is every reason to believe that Britain’s joining the EEC would have a stimulating effect in Britain as it so dramatically did in France. (This is, of course, the compelling motive for Macmillan’s decision to apply for membership.)

Under these circumstances, I think we are justified in believing that the anticipated higher growth rate will more than compensate for whatever additional discrimination may result from Britain’s joining the EEC.

B. Agriculture poses essentially different problems.

The effect of the Common Market on agricultural exports is not as clear as on industrial products; in fact, it cannot yet be determined with any certainty. The problems for agriculture are essentially different than for industry. The Free Trade Association arrangements do not include agricultural products. While agricultural products are included under the Common Market Treaty, the level of protection accorded them will be effectively determined not by the common external tariff but by measures taken in pursuance of a common agricultural policy. This policy is just now being developed.

Until such a policy is finally established we shall not be able to assess the degree of discrimination against United States agricultural exports. We have however, been insisting that the Common Market authorities and governments assure reasonable access for our farm products. The Department of Agriculture has been fully cooperating with us in this effort. Secretary Freeman will be in Europe next month and will be further pressing the United States’ point of view.

The problem of assuring fair access to the Common Market for our agricultural goods would, of course, exist even if Britain did not succeed in joining. In fact, British adherence should tend to reduce the level of protection—and hence of discrimination—since Britain is committed to low food prices for its consumers. Thus, the effect on our own agricultural exports of Britain’s joining the Common Market is quite likely to be beneficial rather than harmful.

However, this is a problem which bears most careful watching.

C. United States Trade would be harmed if British Commonwealth preferences were extended to the Common Market.

The principal danger to United States trading interests involved in the British move to adhere to the Common Market lies in the possible extension of Commonwealth preferences to the Common Market countries.

In my memorandum to you of August 7, 1961, (Tab A)² I pointed out that if Britain attempted to work out a relationship with the Common Market that would result in extending Commonwealth preferences to the Common Market countries, United States trade would be adversely affected in two ways:

(1) To permit the Commonwealth to have either free or preferential access to the Common Market would be highly prejudicial to our own temperate agriculture as well as to both the tropical and temperate agriculture of Latin America; and

(2) To permit the Common Market countries to have free or preferential access to the markets of the Commonwealth would be highly prejudicial to our industry.

For this reason, the United States Government has consistently made clear both to the Common Market countries and to the United Kingdom that we cannot accept any arrangement which contemplates the extension of Commonwealth preferences to the EEC. I have explained this on repeated occasions to the British and to EEC Governments. When I am in Europe next month for the International Bank and Fund meeting, I plan to re-emphasize this to Heath and Thorneycroft, as well as to the French Government and the Common Market Commission.

Meanwhile, we are preparing an aide-mémoire for the United Kingdom and the Six countries of the Common Market. In this aide-mémoire we are setting forth the basic requirements of American policy, including our opposition to any extension of Commonwealth preferences to the Common Market countries.

But, while taking a firm position against the extension of Commonwealth preferences we must recognize that we cannot reasonably expect the existing preferential system to be terminated over night. The longterm solution of this problem must rest, as I suggested in my earlier memorandum (Tab A), on a phasing out of present arrangements over a reasonable transition period.

We must be firm on this objective. At the same time—although I would not propose it as an initial negotiating position—we may realistically have to face the possibility that the ultimate agreement between the United Kingdom and the Common Market will require some special cushioning arrangements for individual members of the Commonwealth. I have in mind particularly New Zealand which is heavily dependent upon the United Kingdom market for the sale of dairy products.

II. Administrative Arrangements for Protecting United States Interests

A. We have established an interdepartmental group to follow the negotiations.

The negotiations between the United Kingdom and the Common Market will inevitably be complicated. In the course of these negotiations there will be substantial pressures to work out compromise solutions. We plan to follow those negotiations with the greatest care in order to prevent any compromises that might be prejudicial to United States commercial interests. At the same time, we must be prepared to play a constructive role. If necessary, we may have to put forward concrete proposals to insure that our interests are safeguarded and the objectives to which we are committed are attained.

In order that the United States Government may be fully prepared to deal with these problems, and to assure that we shall all speak with one voice, we have established an Interdepartmental Ad Hoc group under the chairmanship of the Department of State. This group includes representatives of the Departments of Commerce, Treasury, Labor, Agriculture, Interior and the Council of Economic Advisers.

In addition, the major policy questions raised by the negotiations as they develop will be under constant review by the Department of State with the assistance of the interdepartmental committee of Under Secretaries which has recently been created.

B. Comprehensive studies are in progress.

We have under way departmental and interdepartmental studies covering all phases of the problem. These studies will include elaborate statistical analyses of the trade implications of various alternative solutions that may be considered in the course of these negotiations.

III. Conclusion

The whole process of economic and political integration involves change and the construction of new patterns of relationship. The negotiations between the United Kingdom and the EEC will, if successful, inevitably bring about alterations, not only in Europe’s own economic order, but also in Europe’s traditional political and economic ties with the rest of the world. The anticipated benefits of European integration cannot be achieved without such a revolution.

Such a profound process of change will necessarily involve fundamental problems of adaptation and reorientation. In the course of these negotiations, we can anticipate, in addition to individual domestic relations, protests and importunings from the African, Commonwealth and Latin American nations whose relationships will be affected by the outcome. We must be prepared for this, and with imagination, perception, and resolution, do what is necessary to cushion the impact on ourselves and on our friends.

On the commercial plane, I think it clear that if the United States successfully resists efforts to extend Commonwealth preferences to an enlarged Common Market, we can be reasonably confident that the overall net effect of British adherence will be beneficial to our trading interests. At the same time, we must recognize that the whole process of the economic realignment of Europe is a step of major consequence which will result in inevitable shifts in trading patterns and commercial and other economic effects world-wide in scope.

These shifts in trade patterns will not affect all sectors of American production alike. Some American products will be benefited; others may suffer dislocations. Such a complex process cannot be completed without evoking cries of alarm as the negotiations progress and the implications become apparent to individual affected interests.

From the long-range point of view there is only one appropriate course for the United States to follow—that is to work toward bringing about a progressive reduction in the level of the common external tariff of the Common Market. But in this connection I should like to inject a cautionary note. During the course of the Common Market negotiations there will undoubtedly be proposals that this be brought about by the United States’ joining in a bilateral preferential arrangement with the Common Market and abandoning our traditional policy of most-favored-nation treatment.

Such proposals may have a certain seductive plausibility but I can think of nothing more corrosive to the maintenance of our world-wide responsibilities. We cannot be in a position of forming a cabal of the industrialized countries against the rest of the world or of attempting to negotiate a single preferential trading area which would include ourselves and our European friends but exclude not only the underdeveloped world but such powerful and growing nations as Japan.

The proper road to the defense—and, indeed, the advancement—of our trading interests is to pursue liberal trade policies ourselves and to insist that the Common Market do likewise. This means that we must be in a position to reduce our own tariffs on a reciprocal basis. This in turn will require that Congress adopt the most effective possible trade legislation next Spring.

George W. Ball³

0. Source: Department of State, NSAMs: Lot 72 D 316. Confidential.
1. Document 15.
2. Tab A was not attached to the source text; however, a copy of Ball’s August 7 memorandum is in Department of State, Central Files, 375.800/8–761.
3. Printed from a copy that bears this stamped signature.