Foreign Relations of the United States: Diplomatic Papers, 1945, The British Commonwealth, The Far East, Volume VI

London Embassy Files: 850–Artiele VII–Commercial Policy

Memorandum of Conversation, by Mr. John M. Leddy, Assistant Adviser in the Division of Commercial Policy

[Ottawa, undated.]

Informal Discussions on Commercial Policy Between Officials of the Canadian Government and Officers of the Department of State

The following persons participated in these discussions:

Canada	United States
Mr. Norman Robertson, Undersecretary of State for External Affairs	Mr. Stinebower, ITP
Mr. Hector McKinnon, Chairman of the Tariff Board	Mr. Marks, A–A29
Mr. William A. Mackintosh, Acting Deputy Minister of Finance	Mr. Leddy, CP
Mr. John Deutsch, Department of External Affairs	Mr. Homer S. Fox,30 American Embassy at Ottawa
Mr. Hubert Kemp, Wartime Prices and Trade Board

These discussions took place at the hotel Chateau Laurier, in Ottawa, on July 14 and 15, 1945. They were held for the purpose of exploring further the various methods of implementing tariff reductions in connection with the proposed multilateral agreement on commercial policy. The discussions were arranged at an earlier meeting between Canadian and American officials which took place in Washington on July 9 (see memorandum of July 9, 1945 summarizing the results of this meeting).

Mr. Robertson opened the discussion. He said that before going into the details of the various methods of selective tariff reduction he wished to make clear the Canadian view regarding the proposal for the horizontal reduction of all duties by a uniform percentage. He said that the Canadians were deeply disappointed and dismayed by the change in the American position which, prior to the passage of the Trade Agreements Act, had seemed tentatively to favor the proposal for horizontal tariff reduction. He recognized that difficulties had been created by the Trade Agreements Act but felt that they might not be insuperable. With regard to selective methods of tariff reduction he expressed the view that any selective method would be “hopelessly inadequate” to the needs. He thought that failure to go forward with the horizontal cut would mean the loss of three great advantages:

1. Timing. Of all times the present offers the best chance of effecting substantial trade-barrier reduction in all the major trading countries. Because of economic dislocation in Europe and reconversion in other areas, production and trade are in a state of flux. This would be the psychological moment, here and elsewhere, for bold action. If the selective method is adopted this opportunity would be lost.

2. Preferences. Horizontal tariff reduction would have substantially solved the problem of preferences, which is certain to be the most difficult problem from the viewpoint of the United States. There is no hope for any really substantial action on preferences under the selective method of tariff reduction. Moreover, under the selective method, the United States would have to pay more for what it gets. Finally, preferences cannot be handled at all by a purely bilateral approach. Since the protection afforded under a preferential system extends to foreign as well as home industries they must be attacked by dealing with several countries at once. Selective tariff negotiations involving several countries are complicated and slow.

3. Compulsion of outsiders. Under the plan for horizontal tariff reduction it would have been possible to compel reluctant countries to participate in the plan by threatening to withhold the tariff benefits if they did not participate. This would have been politically feasible internationally because the requirements under the plan for a horizontal tariff cut would be equitable, simple, and easily understandable. Any selective method of tariff reduction would be complicated and to some extent inequitable vis-à-vis outsiders and could not well be used as a weapon to force them in.

Because of the great advantages of, and need for, tariff reduction by the horizontal method, Mr. Robertson said that the Canadians had been wondering whether there was not some way to overcome the obstacles to the adoption of that method which had been created by the Trade Agreements Act. What appeared to be needed was an opportunity to take the matter up with Congress. Such an opportunity might be created, he thought, if other countries would take the lead and come out with the plan for horizontal tariff reduction. Or perhaps an opportunity would exist if the United States and Canada should endeavor to negotiate a trade agreement and if, because of the great difficulty Canada would have in granting us certain key concessions involving preferential protection to third countries (e.g. raisins, coal, tinplate, and fruits), the negotiations should fail. With regard to the question of other countries taking the lead, Mr. Robertson remarked that Mr. Clayton had appeared to think there were possibilities in this suggestion when it was originally put forward at the July 9 meeting in Washington.

In response to the foregoing it was stated on the American side that, as Mr. Clayton had indicated, the door was not completely closed to consideration or discussion of the horizontal tariff formula in the event other methods should fail. Nevertheless, both Mr. Acheson and Mr. Clayton were firmly convinced that, even apart from considerations growing out of the increased trade-agreements authority, legislative approval of the plan for horizontal tariff reduction could not be obtained and that it would be virtually useless to make the attempt. It was stated also that although other countries would of course be free to take the lead if they desired to do so, an initial approach by other countries might do more harm than good since Congress might feel that an effort was being made to put something over on the United States. If there was to be any approach to Congress at all, it would seem preferable as a first step for the Administration to talk directly and frankly with the Congressional leaders. As to the possibility of creating an opportunity through an arranged failure of trade-agreement negotiations, this seemed clearly out of the question. In short, the obstacles in the United States to adoption of the horizontal plan were very formidable and the chances of its ultimate acceptance by our Congress were remote. On the other hand the United States was fully prepared to make substantial tariff reductions on a selective basis and had the ability to make such reductions effective under the increased authority in the Trade Agreements Act. It would be extremely unfortunate if we should neglect to grasp this opportunity to make substantial progress in the trade-barrier field in a vain effort to obtain an ideal solution.

Mr. Robertson then said that although the United States might be able to deliver selective tariff reductions, this did not mean much since the selective method was clearly inadequate to meet the requirements. It would be better to take even a long chance on an adequate plan, such as the horizontal approach. Trial of the horizontal approach would be desirable in any event, since even its failure would have good results in stimulating countries to carry through a selective approach more vigorously.

In response to a question, Mr. Robertson expressed the view that failure of the United States to sponsor the plan for horizontal tariff reduction from the beginning would not be fatal to its success provided that the United States finally came along. He admitted, however, that the absence of vigorous initial support by the United States would weaken the effort vis-à-vis other countries.

The foregoing discussion occupied Saturday morning, July 14. Saturday afternoon and Sunday afternoon were devoted primarily to an examination of the various selective methods of tariff reduction:

1. Reduction of the over-all ad valorem equivalent of the tariff. It was explained by the American group that under this proposal each country would, in addition to accepting provisions regarding non-tariff trade barriers (e.g. abolition of quotas), agree to make such selective tariff reductions as would bring down the over-all ad valorem equivalent of its tariff by an agreed percentage, low duties (say rates of 10%) being disregarded for this purpose. Under this proposal the United States procedure would be a) to issue a unilateral statement, or “White Paper”, outlining the whole plan and calling for an international trade conference to discuss it, and b) simultaneously with the issuance of the unilateral statement, to hold public hearings under the Trade Agreements Act on approximately 500–800 tariff items on which the United States would consider granting concessions to the other participating countries, as a group. After the hearings had been held, the United States would be in a position to state, at the international trade conference, the particular percentage of over-all tariff reduction which it would be prepared to support. In effecting the over-all reduction of its tariff each country would be free to decide what individual tariff reductions should be made, that is, particular tariff reductions would not be subjected to the bargaining process.

The advantages of the foregoing proposal, it was stated by the American group, were: a) it would effect tariff reductions rapidly, and b) since it would provide certainty as to the general extent of tariff reduction, it might make it possible to obtain firm commitments for the abolition of quotas and the removal or relaxation of other non-tariff trade barriers.

In presenting the foregoing proposal, the American group stated that although no final decision had been reached on the point, Mr. Acheson had expressed serious doubt that the plan could be effected under the Trade Agreements Act.

Apart from the doubt raised as to whether the United States could carry through on the plan for reduction of the over-all ad valorem equivalent of the tariff, the Canadian group felt that there were several objections to it:

a) If each participating country were free to select the items for tariff reductions, other participating countries would have no assurance that individual items important in their export trade would be benefited. The only way to provide such assurance would be to negotiate the reductions. It would be extremely difficult, and probably impossible, to carry on such negotiations multilaterally.

b) The plan would have some of the drawbacks of unilateral tariff reduction, i.e. each government would have to bear the whole responsibility for determining the individual reductions in its tariff and could not defend any particular reduction on the ground that it was essential to a bargain with foreign countries.

c) The application of the tariff formula would be full of technical problems. The existence in the tariffs of several nations of seasonal rates of duty, tariff quotas, and other devices would make it difficult to determine how to weight statistically the contribution to the general lowering of the tariff or reductions on items affected by such devices.

2. Proposal for selective tariff reduction by a “substantial amount”. This proposal was presented by the American group as being substantially the same as proposal 1, above, with certain modifications designed to remove any question as to its feasibility under the Trade Agreements Act. Under this proposal, the tariff section of the “white paper” to be issued by the United States would merely call for tariff reduction by a “substantial amount”. The international conference would be called and agreement would be reached on the non-tariff provisions conditionally upon the completion of “substantial” tariff reduction. The United States would then hold hearings under the Trade Agreements Act, on the basis of which it would formulate a schedule of tariff concessions to be offered to all other countries as a group, conditional upon the offer by each of the other countries of a schedule containing equivalent tariff concessions. Such schedules would be considered equivalent if they reduced the over-all ad valorem equivalent of the tariff by the same percentage i.e. each country’s tariff by the same percentage, i.e. each country’s tariff would be uniformly reduced by say, 25 percent, on the average.

The Canadian view was that proposal 2 would be impracticable since the precise extent of tariff reduction would not be known at the time that conditional agreement was reached on the non-tariff provisions. Countries utilizing primarily non-tariff controls would be inclined to take the position that the extent of tariff reduction which finally emerged in the schedules, whatever that might be, was not “substantial” enough to justify carrying out the conditional agreement reached earlier on the non-tariff barriers. This would involve endless argument and negotiation and would probably require the holding of another conference.

3. Proposal for bilateral offers of tariff reductions by the United States precedent to a multilateral agreement on tariffs and non-tariff trade barriers. This proposal was presented by the American group as an approach which would be practicable under the Trade Agreements Act and which would assure other countries, at the time their agreement is sought on the abolition of quotas and the removal or relaxation of other non-tariff trade barriers, of the extent to which the United States would be willing to reduce its tariff. Under this proposal, the procedure for issuing a “white paper” and calling an international conference would be the same as in 2, above. However, at the time of issuance of the “white paper”, the United States would issue public notice of intention to negotiate bilateral tariff agreements with a number of foreign countries, including the major British countries. By the time the conference was ready to convene, the United States would have made definite offers of substantial tariff reductions to be incorporated in bilateral agreements with the countries for which public notice had been issued. This earnest of good faith on the part of the United States with regard to its tariff, might make it possible for the conference to agree on a multilateral agreement containing a) firm commitments on non-tariff trade barriers and b) a general undertaking to reduce tariffs by a “substantial amount” through bilateral agreements.

The Canadian group expressed the view that the machinery of proposal 3 was defective in that it did not provide for an earnest of good faith as to the extent of tariff reduction in agreements between third countries. In order to remedy the defect it would be necessary to have the conference preceded by bilateral tariff negotiations between such third countries as well. It seemed obvious that this could not be done if too many countries were involved, but it might be achieved among a relatively small nucleus of countries, say 8 to 12 of the major trading nations. The Canadian group was also of the opinion that in any event it would be undesirable to attempt to secure agreement by the method of holding a general international conference. They expressed the view that, judging from past experience, the presence at a general international conference of the less important, and for the most part protectionist-minded, countries, would inevitably result in a watering-down of the commitments which a smaller number of the major trading nations might find it possible to enter into. The Canadian group accordingly suggested the following modification of proposal 3:

A nuclear group of 8 to 12 countries would agree on the following procedure:

1) Each member of the nuclear group would immediately begin to negotiate bilateral agreements with each other member of the nuclear group^*, such agreements to incorporate substantial tariff reductions. In order to speed negotiations and assure the general extent of tariff reduction, an informal “working rule” might be adopted that the tariff reductions to be granted by each country should be such as to reduce the over-all ad valorem equivalent of the duties on imports from each other member of the nuclear group by not less than X percent. It might also be agreed that 10 percent duties need not be reduced and would not be counted for the purpose of determining the weighted average reductions.

The tariff reductions effected by the bilateral agreements would be required to be generalized to all members of the nuclear group. With regard to the treatment of tariff preferences, the following rules might be adopted:

a) Preference-receiving countries would agree to waive their contractual rights to bound margins, thus permitting the preference-granting countries to reduce or remove margins of preference in agreements with other countries. This rule would apply during the negotiations among the nuclear group but might be adopted permanently.

b) Reductions of most-favored-nation rates would automatically operate to reduce or remove margins of preference, i.e., they would not be accompanied or followed by reductions in preferential rates.

c) No margin of preference would be increased. Thus, if any preferential rate were reduced in a bilateral agreement between, say, Canada and Australia, the most-favored-nation rate would have to be reduced to the same extent.

2) The nuclear group of countries would also agree on provisions dealing with non-tariff trade barriers. These provisions would be the same for all members of the nuclear group and presumably would be negotiated through a multilateral committee of some kind.

3) When the negotiations under 1) and 2) had been completed, the resulting agreements would be concluded among the nuclear group, prior to the convening of a general international trade conference.

4) The purpose of the international trade conference would be to discuss: a) how other countries should be brought into the arrangement and b) what treatment countries participating in the arrangement should accord to the trade of countries refusing to participate. These questions would, of course, require the reexamination of existing most-favored-nation commitments.

The Canadian group was of the opinion that the nuclear proposal outlined above appeared to be the most promising of the various methods of selective tariff reduction which had been discussed. The American group was inclined to agree with this view, but had reservations as to a) the possibility, under the Trade Agreements Act, of adopting even informal “working rules” regarding the percentage of tariff reduction to be achieved, and b) the desirability of actually concluding the arrangements among the nuclear group prior to the holding of a general international trade conference at which the views of other countries would be obtained. In this connection, the Canadian group appeared to feel strongly that the arrangements among the nuclear group should not be kept open and thereby made subject to changes at the general conference.

With regard to the countries which would form the nucleus discussion between the American and Canadian groups resulted in the following tentative list: United States, United Kingdom, Canada, Australia, South Africa, New Zealand, France, Netherlands, Belgium, U.S.S.R., Czechoslovakia and India.

There was a brief discussion of the possible tariff requirements which might be made of new members under the nuclear approach. There appeared to be two main possibilities: a) the weighted average reduction of the tariffs of the nuclear group might be calculated and new members might then be required to make the same over-all percentage reduction in their tariffs, or b) new members might be required to negotiate their way in by entering into bilateral agreements with each of the countries making up the nuclear group. It was agreed by both the Canadian and American groups that new members would, of course, be required to adhere to the non-tariff provisions of the arrangement.

With regard to the withholding of tariff reductions from the trade of outsiders, it was generally agreed that the reductions should be generalized to all countries for a probational period. Whether or not it would be feasible to withdraw the benefits after the expiration of the probational period would largely depend upon the possibility of working out a basis of adherence by outsiders which would be accepted as reasonable and equitable.

Near the close of the discussion the Canadian group suggested that it might be possible, in connection with either a trade agreement between the United States and Canada or a more general arrangement to which both countries were parties, to provide for duty-free treatment on both sides of the border in respect of certain products traded in both directions. The Canadian group attached considerable importance to this possibility, stating that there were a number of cases (e.g. automotive items) where, although tariff reductions would not be of much help, free trade between the two countries would bring substantial reciprocal benefits. Since any such arrangement would require legislative approval in the United States, it might be provided for in a protocol which could be submitted separately to Congress. The American group agreed to report this suggestion and to urge that serious consideration be given to it in Washington.

In concluding the meeting the Canadian group emphasized again their strong preference for the plan for a horizontal tariff cut and expressed the hope that the United States would eventually see its way clear to attempting that approach.

29. Herbert S. Marks, Special Assistant to the Assistant Secretary of State (Acheson).
30. Commercial Attaché.
31. It was generally agreed in subsequent discussion that agreements between all the theoretically possible pairs of countries would not be necessary and that agreements might be dispensed with in cases where trade between a particular pair of countries was negligible. [Footnote in the original.]