The Ambassador in the United Kingdom ( Winant ) to the Secretary of State
[Received April 28—3:40 a.m.]
4319. ReEmbs 4118, April 21, and preceding messages in the series. In a further conversation which Penrose had yesterday with Liesching, Robbins and Shackle, methods of tariff reduction and the adjustment of duties to price level were discussed. Owing to the Commons discussion on the budget, Eady was prevented at the last moment from attending and discussion of exchange controls was deferred.
- We made it clear that our draft suggestions were intended to permit a specific duty to be replaced by an ad valorem duty not higher than the equivalent of the specific duty in 1939 values and that they provided that the International Trade Organization should assist countries in the administration of ad valorem duties by providing expert advice where requested in the determination of commercial values of imports. We also pointed out that it would be unsound to provide for raising specific duties because of rises in prices without lowering them because of price declines.
- Liesching considers that this question is the “most thorny of the technical questions that have to be faced”. He and his colleagues emphasize the great extent to which specific duties are used among nearly all countries except United States, United Kingdom and some Dominions. They imply that the subject should be approached primarily in terms of the probable effects of any given proposals on the willingness of the large number of countries using chiefly specific duties to join in a convention. In their view there is a danger that waverers may be put off if the United States and United Kingdom, as countries using chiefly ad valorem duties, appear to them to be bringing pressure on countries using specific duties either to accept heavier tariff cuts in real terms or to make a wholesale change in their systems of tariff administrations. Robbins said the convention should not be allowed to appear in effect to inflict special penalties on those countries which did not make the change to ad valorem duties earlier.
- As regards the assistance which the ITO could give under our suggested provisions they said there are two questions, (a) the determination of the 1939 values on which the shift to ad valorem duties is to be calculated, (b) the checking of declared values in the administration of ad valorem duties. They think it is in regard to (b) that the assistance of ITO would be needed but they fear that there will be difficulties in the early stages, when this assistance will be [Page 42] particularly needed if a large scale shift over is to be made, in staffing the ITO with an adequate number of experienced experts.
- We said that we do not exclude the possibility of making provision for the adjustment of rates in countries in which very large depreciation has taken place and questioned the United Kingdom officials closely on the form in which they consider that such adjustments could be made.
- The views of United Kingdom officials on methods of adjusting duties to price level changes appear to be extremely tentative. They divide the price rises into two parts (a) the rise in the “world” price level, (b) the rise in the price levels of particular countries. They suggest that the former might be measured by the rise in the United States price index which might be taken in two groups, the first covering foodstuffs and the second covering the remainder of the products in the index. Regarding (b) they suggest that the two groups of the United States price index should be taken as general bases and rises in the price levels in particular countries should be calculated in terms of these bases. Specific duties would be adjusted accordingly and the reduction provided for in the convention would be applied to the revised figures.
- We pointed out a number of difficulties regarding this method of adjustment including (a) the limitations, from the standpoint of the objectives in view, which are inherent in the use of weighted averages of considerable numbers of items: (b) the differences both in quality and coverage of the indexes of different countries: (c) the effect on the representative character of the indexes from a long term point of view, of the changes made by the war economy in the relative supply and demand conditions of different commodities, and the period of transition and instability in this respect which may continue for a time after the war.
- Robbins admitted some of these and other points which we raised but the officials tended to fall back on the suggestion that such “technical” difficulties might be resolved by statistical experts. They appear to overestimate the possibilities in this respect and to underestimate the conceptual limitations on the resort to index numbers for such an adjustment.
- We will explore the subject further with United Kingdom officials. While they favor a transition to ad valorem duties as an ultimate objective they consider it essential to find a working solution to the problem of adjusting specific duties in the case of countries unable or unwilling to change their administrative systems at the time of adoption of a convention.
- We have considered the possibilities of some form of adjustment that would avoid the difficulties involved in the use of index numbers. [Page 43] One possible approach in calculating the duty to which the cut is to be applied might be to allow in certain cases the conversion of a specific duty into ad valorem equivalent in the 1939 price and the reconversion of the latter into a specific duty in terms of the price at the same time when the convention comes into force. Of course this would not avoid all the difficulties involved and unless it were restricted to a limited number of cases it would result in the raising of duties because of special supply conditions of a particular commodity rather than monetary factors.
- If the matter is approached as the British appear to be approaching it, primarily as a political problem of how to secure the adherence of countries which use specific duties chiefly or entirely, it is of course possible that some manipulation of index numbers might serve the purpose. Whatever approach is made there is a difference between (a) allowing adjustments to be made of all specific duties of all countries and (b) confining adjustments to countries in which particularly extensive depreciation has taken place. Though the position of United Kingdom officials has not yet been defined precisely it seems to be nearer the first than the second.
- Regarding tariff reduction we pointed out that under our suggested draft the determination of ad valorem equivalents of specific duties would only arise in respect to duties in the neighborhood of the floor but that under the United Kingdom suggestion to add an ad valorem constant to the reduced duty it would arise in respect to every duty. We also pointed out that much more widespread adjustments between countries where valuation systems are based on f.o.b. values and those based on c.i.f. values would have to be made under the United Kingdom suggestions than under ours. Next we pointed out that under our proposals there was a progressive element in the reduction of duties up to 20%. Finally we strongly opposed any provision to allow duties to be increased to the floor.
- The United Kingdom officials agreed with the first three points and expressed appreciation of their importance. Liesching said that they were not at present putting forward their suggestion concerning the addition of an ad valorem constant as a counter proposal. But while they took an accommodating position on these points they expressed strong disagreement on the final point and after a prolonged discussion adhered tenaciously to their position.
- United Kingdom officials pressed strongly not only for allowing duties below the floor to be raised to the floor but also for allowing new duties below or up to the floor to be imposed where none previously existed. Their main arguments were (a) that freezing duties below the floor would penalize those who had been most virtuous in the past, since countries with high duties would still have considerable [Page 44] duties left after the reduction, (b) that such duties would help to reconcile countries relying largely on quotas to the dropping of quotas (they mentioned the United Kingdom quota without duty on bacon and mutton); (c) that such duties would sometimes serve infant industry purposes; (d) that countries would be asked to do many hard things by convention and that some leeway therefore should be given in respect to small duties.
- We strongly opposed these arguments mainly on the following general lines. In the case of products on which high duties were maintained in the past, vested interest and maldistribution of productive factors have grown up and a substantial cut in tariffs will require substantial readjustments which, however, will improve the distribution of productive factors. On the other hand, where there has been no duty in the past there is no such maladjustment to correct and therefore leaving aside infant industries no hardship in continuing with low or no duties. On the contrary the imposition of higher or new duties on such products creates new maldistribution of productive factors. As regards infant industries such duties were unsuitable since there would be no provision for tapering them off. Infant industries should be dealt with by other methods such as subsidies or if safeguards can be worked out tapering duties. We also explained the objectives [objections?] to the United Kingdom’s suggestions based on the position of raw material exporting countries.
- Robbins agreed with this economic reasoning but he and his colleagues fell back on political arguments and after long discussion Liesching said that “the United Kingdom will stand strictly for this viewpoint”. We urged reconsideration of the matter.
- In private conversation subsequently in strict confidence we learn that there is strong opposition in some official United Kingdom quarters to any provision against any new duties and the officials, who took part in the above discussion had no leeway regarding the position they took on that subject even in informal nor [non-] committal discussions such as these.
Another discussion will take place on Monday.92
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