The memoranda enclosed herewith of my conversations with the British
Ambassador9 will give you the
general tenor of our thoughts and will place you in a position to
open preliminary conversations. The somewhat lengthy document which
I also enclose is a technical survey of the entire subject and may
be used by you whenever you feel that it should be presented. A copy
of it will, in due course, be handed to the British Ambassador.
My thought is that it would be best for you to seek an interview with
Mr. Eden and endeavor to obtain his interest and support without,
however, burdening him with the technical details. You might say
that I have learned with a great deal of pleasure and satisfaction
of Mr. Eden’s cordiality to Mr. Phillips10 and of the desire
which he expressed with regard to the relations of our two
countries. You might then point out that we have been for some time
considerably disturbed by what appears to us to be a trend in the
policy of the British Government which, in view of its tendency to
force trade into closely controlled bilateral balancing, may check
all efforts to revive world trade on a general scale and that our
misgivings on this score were greatly increased by the conclusion,
on January 6, 1936, of a clearing agreement between the United
Kingdom and Spain.11
Further, we are somewhat fearful lest, for reasons given in the
memorandum, this nascent British policy may thwart our own effort
under the Trade Agreements Act and cause troubling divergences of
policy contrary to Mr. Eden’s hope and mine with regard to our
mutual relations. I know Mr. Eden will fully agree with my judgment
that the most promising way to soften at least some of the present
discontents would be to bring depressed peoples into active trading
relations with one another.
I do not think it desirable at the present stage to address a note on
this subject to His Majesty’s Government. It would seem to me
preferable to ascertain first whether Mr. Eden and Mr. Runciman were
aware of the divergent trend of policies of the two Governments and,
if so, whether they could not find some means to lessen our
apprehension so that the two leading commercial nations of the world
could go forward on a liberal and farsighted commercial policy in an
effort to restore international trade throughout the world.
[Enclosure]
Memorandum
[Washington,] February 11,
1936.
For more than six years the world has suffered from an economic
depression of unparalleled severity among the major
characteristics of which have been the collapse of international
trade and the protracted inability of Governments to re-create
the conditions in which it can recover. The shrinkage of foreign
trade has deprived of their means of livelihood millions of
workers who, despite the efforts of their Governments to create
domestic prosperity in the midst of international stagnation,
are still for the most part the objects of public assistance.
Increasingly Governments are tempted to find relief from
pressure and distress at home by recourse to military adventures
abroad.
Deeply impressed by the seriousness of these conditions, the
United States inaugurated in the summer of 1934, and has since
then energetically pursued, a policy designed to restore
international trade by a reduction of the barriers that hamper
its natural flow and by its liberation insofar as possible from
the many extraordinary restrictions and handicaps which have
been placed upon it in recent years. The United States attaches
the greatest importance to this effort in the belief that the
economic rehabilitation of the world, on which the hope of
durable peace depends, is impossible without a substantially
larger flow of international trade than is taking place
today.
[Page 637]
The success of this effort depends in large measure upon the
adherence and support given by the major commercial nations to
certain fundamental principles. A full restoration and
substantial future development of international trade require
not only a reduction of trade barriers, but also the replacement
of the existing network of discriminatory practices by a régime
of equality of treatment in international commercial relations.
Hence, while negotiating mutual customs concessions, the
Government of the United States has steadfastly held to the
principle of equality of treatment in connection with the trade
agreements into which it has entered. Not only do these
agreements provide for reciprocal unconditional
most-favored-nation treatment, but the United States extends the
concessions granted in them to all countries which do not, in
fact, discriminate against its commerce.
The treaties and agreements negotiated by the British Government
during the past three years also contain reciprocal pledges of
most-favored-nation treatment, and the concessions granted in
these treaties and agreements are freely generalized by the
United Kingdom to other countries. The policy of the British
Government in this respect was stated as follows by the
Parliamentary Secretary to the Board of Trade, speaking in the
name of his Government, before the Second Committee of the
Assembly of the League of Nations on September 23, 1935:12
“… The imperative necessity of bringing about a freer
flow of trade throughout the world has always been
recognized by His Majesty’s Government. Our markets,
freed as they are from purely internal restrictions,
operated under conditions which permit of prompt payment
without exchange control, are of supreme importance to
the traders of other countries, and His Majesty’s
Government in the United Kingdom have been able to make
a number of agreements resulting in some breaking down
of the barriers opposed to ourselves. We cannot in this
way break down the barriers against the trade between
other countries, barriers which impoverish them and
render them less able to purchase our goods. But what we
have done is, by adherence to the most-favoured-nation
principle, to secure that so far as other exporting
countries are interested in those categories of goods
for which we may accord concessions in our trade
agreements, those concessions are shared by such of them
as are entitled to most-favoured-nation treatment. At
this point I should perhaps utter a note of warning; I
think it must be remembered that if the
most-favoured-nation principle is to have its full
usefulness no country can sit back and hope eternally to
receive its benefits without itself actively
contributing. The principle must be based on fair
treatment. We believe that the principle of the
most-favoured-nation clause, so practised, is of the
greatest value to international trade as a whole
[Page 638]
because it
tends to make every agreement for the reduction of trade
barriers redound to the benefit of trade generally and
not merely of the parties to the agreement, although
naturally they benefit most directly since the agreement
is designed with that object. Above all do we consider
this principle of importance in a period during which we
hope and trust that there will be a lowering of trade
barriers in many countries.”
The establishment of an effective régime of equality of
treatment, however, requires not only that nations refuse to
grant preferences in their own markets, but also that they
refrain from seeking a preferred position in the markets of
other countries. The pursuit of exclusive advantages tends to
render it difficult and, in certain cases, impossible for the
country which grants them to extend equally favorable, and hence
non-discriminatory, treatment to the commerce of all other
nations. In this respect, the practice followed in recent years
by the Government of the United Kingdom appears to have
diverged, in several important instances, from essential
adherence to the principle of equality of treatment.
An examination of a number of the agreements into which it has
entered reveals that, while the British Government has refrained
in general from measures which would discriminate in the British
market between countries not members of the British Commonwealth
of Nations, it has obtained for the commerce of the United
Kingdom in foreign markets advantages which, by their very
nature, could not be extended to all third countries.
For instance, in agreements with several North European
countries, the balance of trade between them and the United
Kingdom is referred to and made to serve as the basis for
undertakings on their part to encourage imports of British
goods. Such commitments manifestly constitute especially
advantageous treatment which cannot be extended to all third
countries. In fact, if these undertakings are implemented, some,
if not all, third countries, and particularly those with which
the nation in question has a passive balance, must inevitably
suffer through the resulting diversion of trade. This tendency
toward bilaterally balanced trade or payments which is
manifesting itself so strongly at present is highly unfavorable
for the recovery of international trade, and for this reason,
should not be encouraged, particularly by countries with
world-wide commercial and financial interests.
Of even more serious nature, from the standpoint of their
divergence from the principle of equality of treatment, than
these commercial agreements, are the agreements concluded by the
British Government relating to exchange and payments on
international accounts. The
[Page 639]
United Kingdom has entered into agreements
on this subject with the following countries:
-
Argentine Republic
- Convention relating to Trade and Commerce,
signed May 1, 1933;13
-
Germany
- Payments Agreement, signed November 1,
1934;14
-
Italy
- Exchanges of Notes of March 18 and April 27,
1935, regarding Trade and Payments;15
-
Turkey
- Agreement respecting Trade and Payments,
signed June 4, 1935;16
-
Uruguay
- Agreement regarding Trade and Payments, signed
June 26, 1935;17
-
Rumania
- Payments Agreement, signed August 3,
1935;18
-
Spain
- Payments Agreement, signed January 6,
1936.
With reference to arrangements relating to clearing and exchange,
Dr. Burgin said, in his statement at Geneva mentioned above:
“To turn to clearing arrangements, His Majesty’s
Government are in general agreement with the report of
the Joint Committee. These clearing agreements are no
doubt designed with the intention of bringing about a
balance of payments but they appear in practice to have
the effect of forcing trade into purely bilateral
channels and they inevitably tend to mate the desired
balance at a low level. Equilibrium of itself is
obviously not the end in view: one may reach equilibrium
with nothing passing either way but that is clearly not
the end desired. His Majesty’s Government obtained from
Parliament some time ago authority to impose a clearing
in those cases where exchange restrictions in foreign
countries might render such a course necessary but they
have been reluctant to exercise that power and hitherto
have not found it necessary to do so, although they have
in the case of certain countries entered into agreements
designed to secure the liquidation of outstanding
commercial debts and at the same time provide better
conditions for the conduct of current trade.”
No exception can be taken to the objectives described by Dr.
Burgin provided they are sought without prejudice to the
position and interests of other nations and without impairment
of the principle of
[Page 640]
equality of treatment. It appears, however, that in each of the
abovenamed agreements, the United Kingdom has sought to secure
for its own purposes a large proportion, and in some instances
almost all, of the exchange created by its purchases of that
country’s goods. This action has necessarily reduced the share
of that country’s current receipts of foreign exchange available
for payments to nations which are not in a position to take
similar action or which are unwilling in principle to do so. The
result is inequality of treatment: preferential for the United
Kingdom and discriminatory against some, if not all, other
nations, in that the foreign exchange receipts of the country in
question are not divided among its creditors on current account
in proportion to the size of their claims, but according to an
arbitrary plan.
In the Report of the Joint Committee for the Study of Clearing
Agreements,19 with
which Dr. Burgin states the British Government is in general
agreement, the disadvantages of the clearing system are stressed
and the recommendation is made not only that the system “should
not be extended” but also that “it should … be abolished as soon
as possible”. Yet of the arrangements which the British
Government has made with the above-mentioned seven countries
regarding exchange, three have the character of clearing
agreements and have been concluded since the date of the
above-mentioned report. As defined by the Joint Committee, a
clearing agreement may be said to exist when payments for
exports are received, and for imports are made, in domestic
currency through local agencies in both countries, the
out-payments of these agencies being offset and only the balance
requiring transfer or other disposal. The agreements between the
United Kingdom and Italy, Turkey, and Spain are of this
nature.
The manner in which current payments are dealt with in these
three agreements and in those with the other four countries
(Argentina, Germany, Uruguay, and Rumania) is materially
different, even though the term “payments agreement” or some
similar expression containing the word “payments” has been
applied equally to the three which embody the clearing mechanism
and to those with Germany, Uruguay, and Rumania which do not.
Furthermore, the manner of handling current payments in the
agreement with Argentina seems similar to that employed with
Germany, Uruguay, and Rumania, despite the fact that the latter
are termed payments agreements while the former bears a
different title. The essential difference between the two groups
of agreements appears to be that in those with Italy, Turkey,
and Spain, the clearing mechanism is present, whereas under
those with the Argentine, Germany, Uruguay, and Rumania,
payments
[Page 641]
from the
United Kingdom are remitted in the usual manner to these
countries which then dispose of their receipts of sterling
exchange according to a prescribed plan.
Despite the fact that a distinction has been drawn by the British
Government between exchange agreements based on the clearing
mechanism and those that are not (which latter, for the purposes
of this note, may be termed payments agreements although this
name has been applied to agreements of both sorts), several of
the characteristics which are widely regarded as undesirable in
the former are also present in the latter.
Payments, like clearing, agreements tend to place the weaker
participant in a position where it is unable to grant equal
treatment to all third countries. The object of one, as much as
of the other, appears to be the securing of treatment which is
by its nature preferential.
Payments agreements, it is true, may leave to the weaker
participant a freer hand than do clearing arrangements in the
disposal of the net balance of exchange, so that this balance
may be employed for payments due to other countries. However,
even this distinction does not always hold good. The payments
agreement entered into between the United Kingdom and Rumania on
August 3, 1935, provides that almost the entire balance of
[Rumania’s current receipts in sterling above the amount
allocated for payment of imports shall be applied to divers
other payments due in the United Kingdom. Thus tacit support is
given to the tendency now widely manifest for nations to deal
with their foreign trade or with their total external financial
transactions on a bilateral basis.
Another feature which payments agreements have in common with
clearing agreements is the tendency to divert trade from
existing channels. Importers in a weak currency country are
prompted, either by the exchange control authorities or simply
by the greater facility which they know they will have in
obtaining exchange, to direct their purchases to the country
with which a payments agreement is in force since the current
receipts of that country’s exchange are of limited availability
for purchases from other countries.
For these reasons primarily, although not alone because of them,
it is difficult to make an important distinction between
payments and clearing agreements other than in their technical
aspects. The pursuit of special advantage by the one method as
by the other creates fresh obstacles to the development of world
commerce and, by restricting the opportunities of other nations,
contributes to preventing a relaxation of the present
international tension.
In addition to the preferential treatment with respect to payment
for current commercial transactions secured by the United
Kingdom
[Page 642]
in the
agreements regarding exchange concluded with the seven countries
mentioned above, the British Government has obtained other
advantages of a nature such that their extension to all third
countries is impossible. In the agreement with Germany and the
earlier agreement with Rumania, signed on February 8, 1935,
arrangements were made for the liquidation of outstanding debts,
by the immediate provision of a lump sum followed by periodic
payments, that appear to disregard the relation between the
debtor nation’s total exchange assets and liabilities.
In the agreement with Germany, moreover, the British Government
dissociated itself from the position taken by the United States
Government in demanding equality of treatment of all holders of
the German Government seven per cent External Loan of 1924 and
the German Government international five and one-half per cent
loan of 1930 regardless of their nationality. Instead, the
British Government secured from the German Government the
undertaking that it would continue to provide sterling for the
purchase of the coupons of these two loans in the ownership of
British holders. The German Government in this agreement also
undertook as regards other medium and long-term obligations to
offer to British holders funding bonds in respect of interest,
dividends and other regularly recurrent payments of a similar
nature.
Policies directed toward the creation of exclusive bilateral
preferences, of the type embodied in the recent agreements
concluded by the British Government, cause injury to the
interests of nations other than those immediately concerned.
Moreover, they tend to strengthen those elements within
individual countries which seek a perpetuation and extension of
the existing narrow and short-sighted policies and measures—to
the inevitable long-range detriment of the countries applying
such policies and measures and of the world as a whole.
So far as the United States is concerned, the policies pursued by
the British Government are having precisely this effect.
American interests have suffered over the past three years
through the pursuit of these policies. The position of American
exporters to, and creditors of, a number of countries has been
prejudiced by the discrimination to which they have been
subjected by reason of the preferred treatment which the British
Government has obtained for similar British interests.
The policy of the British Government has added to a considerable
degree to the strength of those forces in the United States
which have opposed the policy of granting and of seeking only
equal treatment. The action of the British Government in
securing preferential treatment in the allocation of exchange,
first from the Argentine and later
[Page 643]
from other countries, has provoked
numerous and persistent demands in the United States that the
American Government take similar action with certain other
countries, in particular Brazil. Although it has been done only
with difficulty and although the cost has been considerable, the
Government of the United States has resisted these demands in
the belief that the fundamental long-range interests of the
United States, with which those of Great Britain are believed to
be in harmony, demand that no further obstacles, even though
they be of temporary self-interest, be placed before the
development of international commerce.
The particular features above alluded to of the commercial and
exchange agreements entered into by the British Government,
moreover, have rendered it more difficult for the Government of
the United States to carry out its trade agreements program. The
countries which have granted such special advantages to the
United Kingdom frequently find themselves unable to grant
treatment to American trade which is substantially
non-discriminatory. The prospect that the United States may be
able to negotiate trade agreements with such countries providing
for mutual reductions in trade barriers is thereby materially
impaired.
An illustration in point is provided by the Payments Agreement
recently concluded between the United Kingdom and Spain which
has rendered more difficult the conclusion of a trade agreement
between the United States and Spain, although prior to the
action of the British Government in securing from Spain
preferred treatment as regards exchange such an agreement was on
the point of being concluded. Checks such as this to the attempt
now being made to bring about a reduction in trade barriers and
a return to more liberal commercial principles throughout the
world may have most unfortunate consequences upon the future
course of world trade and hence upon international relations
generally. These consequences may be regarded as substantially
more serious than even the immediate injury to American national
interests.
As was pointed out at the beginning of this memorandum, the
policy of the United States is based on the belief that a
general return on the part of the major commercial nations to
the broad, liberal principle of seeking and of granting only
equal opportunity and treatment with the commerce of other
nations, combined with the gradual reduction or elimination of
the numerous restrictions now throttling trade, offers the
surest, if not the only way, of restoring international
commerce. Were the United States and the United Kingdom, the two
leading commercial nations of the world, to stand united on this
liberal, farsighted policy in all its essential respects, the
outlook for world peace and prosperity would be brighter by far
than it is today.
