Foreign Relations of the United States, 1952–1954, Africa and South Asia, Volume XI, Part 1

NAC files, lot 60 D 137, Documents

Memorandum by the National Advisory Council Staff Committee to the National Advisory Council

confidential
No. 1310

[Washington,] May 8, 1952.

Subject:

• U.S. Position on South African Import Restrictions

Problem

The Government of the Union of South Africa has requested comments from the U.S. Government on a memorandum (attached as Appendix A)¹ which it proposes to send to the contracting parties to the General Agreement on Tariffs and Trade, describing an intensification of import restrictions. The U.S. must decide whether it wishes to comment at this time on the South African memorandum, and if so, what the nature of its comments should be.

Discussion

1951 Import Control System

Since the beginning of 1951 the South Africans have maintained an import control system which was generally non-discriminatory for imports financed from the proceeds of South African gold production and current export proceeds, but did discriminate against the dollar area to the extent that capital inflow from soft currency countries exceeded capital inflow from hard currency countries.

Just prior to the institution of this system the IMF described the proposals as “a welcome and substantial relaxation of discrimination” and added that “a judgment cannot be made respecting the need for the discrimination which will continue in effect until the new system can be evaluated in the light of its functioning under the conditions prevailing after it comes into operation.” There has been no subsequent IMF statement with respect to the South African system.

The U.S. did not object to the conclusions drawn by the IMF. On October 13, 1950, the NAC stated that “The Council still considers that there is no adequate basis on financial grounds for the maintenance of discriminatory import restrictions by the Union.”² Nevertheless, the NAC action advised the U.S. Executive Director in the Fund not to ask the Fund at that time to propose the complete elimination of discrimination in view of the major improvement in this respect contemplated by the new plan. The NAC Staff also noted the delicate background of the problem.

Current Proposals

The South African Government now proposes to reduce the value of import licenses to be awarded on a non-discriminatory basis to a level below the level of export earnings, plus gold production. This will mean either that South Africa will increase its holding of gold and foreign exchange or that the value of imports allocated on a discriminatory basis will be in excess of the inflow of capital from soft currency countries. Presumably the South African Government has the second of these alternatives in mind.

The South Africans propose to take this action because “not only as a member of the sterling area, but also on account of its close commerical, financial, and strategic connections with the United Kingdom, South Africa is vitally interested in assisting the sterling area.” The South African memorandum indicates some deterioration in South Africa’s balance of payments from which South Africa might argue that an increase in the level of restrictions is justified; the memorandum does not contend that the balance of payments position of South Africa itself requires the imposition of additional discriminatory measures.

South Africa proposes to reimburse the United Kingdom in gold or dollars to the full extent that any deficits with the European Payments Union by the Union of South Africa have the effect of requiring gold or dollar payments by the United Kingdom to EPU, or of reducing the amount of gold or dollars received by the U.K. from EPU. (It is not clear what the position has been heretofore.) In addition, the Union of South Africa will continue to finance its own deficits with the dollar area and will guarantee to the United Kingdom a minimum of 150 million in gold during 1952.

The South African memorandum suggests that the proposal is a temporary measure resulting from exceptional circumstances unforeseen when the General Agreement on Tariffs and Trade was drafted.

The memorandum also indicates the expectation of the South African Government that under the contemplated procedures, the “proportion of hard currency imports which already increased from 24 percent in 1950 to 28 percent in 1951 would show a further increase in 1952.” The memorandum explicitly indicates that the share of the US in the South African market would not be reduced as the result of discrimination restrictions below the percentage it obtained in 1951. In this connection the South African Government stresses that, rather than intensify discrimination against hard currency countries further, it is prepared to reduce its dollar reserves by $28 million.

Issues Raised by the South African Proposal

The South African memorandum raises several issues on which the U.S. Government must take a position:

(1) Should sterling area countries be required to justify their actions on the basis of the balance of payments position of each individual country, or should the balance of payments position of the sterling area as a whole be the determining factor?

(2) Is discrimination justified as a means of maintaining or encouraging a flow of capital?

(3) Is the Union of South Africa justified in discriminating in favor of members of the European Payments Union, as against the dollar area, when it is meeting a substantial percentage (at present 80 percent) of that deficit in gold or dollars.

The Sterling Area Issue.—The question of whether the Union of South Africa was justified in discriminating against dollar imports was reviewed in the report of a Working Party at the Third Session of the Contracting Parties to the GATT in June 1949. The British Government argued that discrimination by South Africa was important to the financial position of the United Kingdom and the sterling area. The U.S. took the position that these considerations did not provide a justification for discrimination. Appendix B³ is an excerpt from the final report of the Working Party which contains the statements of both the British and the U.S. representative.

The issue arose again in the IMF end Torquay discussions in 1950. Once again the United States insisted that sterling area countries which held independent memberships in the International Monetary Fund and the GATT be treated as separate individual members and required to justify their policies on the basis of the economic and financial position of each individual country. In an effort to avoid a serious disagreement with the United Kingdom at that time, the United States was prepared to see documents drafted in a manner which would not completely foreclose the possibility of treating the sterling area as a unit. The U.S. insisted, however, that there be no attempt to draft the documents in such a way as forever to foreclose the treatment of sterling area countries on an individual basis. A rather serious disagreement between the U.K. and the U.S. did develop in the discussions within both the IMF and the GATT. Both countries made their positions quite clear, and neither attempted to compromise. Over British protests the IMF approved studies, the conclusions of which recommended different treatment for different countries within the sterling area. The GATT Working Parties simply filed reports stating the position taken by each country.

At the time of these discussions in 1950, the international financial position of the United Kingdom and of most of the sterling area countries was relatively good and the U.S. was pressing for relaxation of discrimination by the U.K. itself, although this pressure was tempered by the anticipation of a worsening in that position associated with an increase in defense efforts.

In the nine months ending March 31, 1952, however, sterling area reserves declined nearly $2.2 billion. Both over-all and dollar balance of payments deficits were being experienced by the United Kingdom and by all of the larger independent sterling area countries, except the Union of South Africa. So far as can be ascertained, the Union of South Africa also experienced a deficit in its over-all balance of payments in 1951 which was not quite fully covered by the inward movement of capital but the South African deficit with the dollar area was not by any means as great as current gold production. While South Africa’s gold and foreign exchange holdings (including sterling) fell during most of 1951, its holdings in the first ten weeks of 1952 for which data are available remained virtually unchanged, indicating that any overall balance of payments deficit incurred during this latter period was being covered by inward capital movement. Thus it is exceedingly doubtful that the balance of payments position of the Union of South Africa itself could be adjusted to justify intensification of discriminatory restrictions.

Although South Africa does not participate in the sterling area dollar pool, acceptance of an intensification of discrimination against the dollar area in this case would imply acceptance of the theory that all countries in the sterling area are entitled to pursue a uniform policy to be justified on the balance of payments position of the area as a whole. The US has not found this theory acceptable in general and has objected particularly to its application to South Africa as a non-participant in the dollar pool.

Discrimination as a Means of Encouraging Capital Inflow.—The flow of sterling capital to South Africa has been quite irregular since the war, and at times has contained large components of flight capital. Although further study of the situation is required it seems probable that the capital flow of recent months has been associated with long-range investments for the most part.

There has always been a question as to the propriety of the U.K. permitting unrestricted movements of capital to other sterling area countries at a time when it is receiving financial aid from the United States. The U.S. has previously contended that South Africa should obtain its legitimate capital requirements in the dollar area, and has felt that the necessary financing could be secured in New York, although, admittedly, the terms might be less advantageous.

The acceptance of the South African-United Kingdom argument would represent the acceptance of a principle which might have far-reaching results in U.S. trade and financial policy. If countries are able to discriminate by their control of capital movements we have a wide-open door to discriminatory methods having no necessary connection with balance of payments considerations.

Discrimination in favor of EPU.—It is not clear from the South African memorandum quite how imports from European countries will be handled. Presumably, countries in the European Payments Union will be allowed to bid both for the general and universal permits, and for the restricted permits on which dollar area suppliers may not bid. If this is true and if the South Africans are prepared to meet deficits with EPU countries in gold and dollars to the extent gold and dollars are required in British settlements with EPU, a further element of discrimination arises. If the United Kingdom should have a deficit with EPU in April of the same size that it incurred in March, the full quota would be reached and thereafter, until the position were reversed, deficits would have to be settled on a 100 percent gold basis. In this situation there could be no financial advantage to the Union of South Africa in buying goods from the European Continent which it would not buy from the dollar area. Even with sterling-area EPU settlement in the 60 percent or 80 percent brackets, the advantage to be gained is hardly sufficient to justify the same degree of discrimination as exists in the transactions in trade with the U.K.

Conclusions

The measures proposed in the South African memorandum involve a continuation of an unsatisfactory import policy amended to favor the sterling area on a more discriminatory basis than that which prevailed in 1951. The discriminatory element in the 1951 system had as its purpose the maintenance of an inflow of sterling capital. The additional discriminatory element now proposed has placed special emphasis on assistance to the United Kingdom. Viewing the proposals in these terms, the US could come to the conclusion that it should object to the South African proposals.

On the other hand it is noted that South Africa has shown some recognition of its responsibility, as a member of the Fund and a Contracting Party to the GATT, not to formulate trade policies in disregard of the interests of the US and other hard currency countries. It has made that plain by underlining its expectations that the new measures will operate to allow hard currency countries a percentage share of the South African market at least as favorable as that in 1951, that if necessary to achieve these expectations it will reduce its monetary reserves by $28 million, and that the added elements of discrimination in its import control system will be temporary. Consequently, it is not possible to predict how much of an intensification of discrimination will actually result therefrom. Moreover, these measures are put forward at a time when the currency balance-of-payments position of the U.K. and the level of gold and dollar reserves in London are significantly less favorable than they were in 1950 when the previous South African measures were considered.

Since it is anticipated that the sterling area issue⁴ will come to the fore in connection with the forthcoming IMF consultations as well as in the GATT forum, it would seem most appropriate for the U.S. not to take a firm position at the present time but to reserve its freedom of action to the greatest extent possible.

Accordingly, the answer to the South African aide-mémoire might include the following major points:

(a) The U.S. appreciates the opportunity which has been given it to examine the proposed submission to the Contracting Parties to the GATT.

(b) The measures which South Africa proposes to take raise serious questions of principle for the U.S., particularly in terms of their consistency with the Fund and GATT, although the U.S. has noted particularly both the effort South Africa has made to mitigate the impact of the measures on hard currency countries and the fact that these measures are to be of a temporary, emergency character.

(c) The United States wishes to make a thorough examination of the problem and cannot comment further at this time. The United States notes that the matter will be considered in the Fund and the GATT some months hence and must reserve its rights in the matter. In its examination of the problem the United States will give careful consideration to the points raised by South Africa.⁵

1. Not printed. The document was delivered to the Department on Apr. 14, 1952. On Apr. 18, the Department conveyed to the Embassy in Capetown its preliminary position: “to tell SoAfr we will not object proposed action but suggest deletion from memo of references action as aid to UK and emphasis necessity restrictions as result decreased fon exchange receipts.” (Telegram 231 to Capetown, Apr. 18, 1952; 394.31/4–1752) In response, Ambassador Gallman informed the Department that the Embassy had learned that the Union Government placed “great store in basing proposals on aid to UK as part Union contribution sterling convertibility” and that the Union might, therefore, resist any attempt to delete this justification. (Telegram 74 from Capetown, Apr. 21, 1952; 394.31/4–2152)
2. See NAC files, lot 60 D 137, document 88.
3. Not printed.
4. For additional documentation on this subject, see volume i.
5. On May 9, 1952, the Assistant Secretary for Economic Affairs, Willard L. Thorp, handed Ambassador Jooste a note containing the above-mentioned points. Jooste said that his government would be disappointed over U.S. failure to indicate what position it would take on this subject. (Telegram 239 to Capetown, May 9, 1952; 394.31/4–2152)