Foreign Relations of the United States, 1948, General; the United Nations, Volume I, Part 2

560.AL/12–3047

Memorandum of Conversation, by Mr. Leonard Weiss of the Division of Commercial Policy

confidential

[ Washington ,] December 30, 1947.

Participants:

• Canada
  • Mr. Hume Wrong, Canadian Ambassador
  • Mr. John Deutsch, Director of Economic Relations, Department of Finance, Canada
  • Mr. J. R. Murray, Second Secretary, Canadian Embassy
  • Mr. G. R. Paterson, Commercial Secretary, Canadian Embassy
• State Department
  • Mr. C. Tylor Wood, A–T
  • Mr. W. G. Brown, CP
  • Mr. E. Gale, IR
  • Mr. L. Weiss, CP
  • Mr. Andrew Foster, BC
• Department of Agriculture
  • Mr. Leslie Wheeler
  • Mr. Robert Schwenger

This meeting was called at the initiative of the United States in order to resolve the differences in viewpoint between Canada and the United States regarding the subsidy provisions of the ITO Charter.

Mr. Brown summarized the subsidy amendment suggested by the American Delegation at Havana. This amendment would prohibit export subsidies on manufactured goods but would permit them on agricultural products. However, such export subsidies on agricultural products are not to be used to acquire a share of the market in the particular product in excess of the share prevailing in a previous representative period. If any export subsidization should cause or threaten serious prejudice to the interest of other members and consultation fails to result in a limitation of the subsidy so as to avoid such prejudice, the organization may authorize a complaining member to suspend the application to the subsidizing member of such obligations or concessions under the Charter as the organization determines to be appropriate. The foregoing provisions providing for historical shares of the market and for procedures for complaint and possible penalization in the event of serious prejudice to other members, would apply not only to export subsidies but to all types of subsidization, domestic or otherwise, affecting exports.

Mr. Deutsch thereupon presented Canada’s position, including its objections to the subsidy amendment proposed by the United States. Firstly, he pointed out that whereas the United States was objecting to the present requirement in the Geneva Draft Charter for prior approval for the use of export subsidies, it was insisting on prior approval for the use of quantitative restrictions for economic development and in other instances. Canada shared the United States conviction for the necessity of prior approval with regard to “QR”, and for the same reasons that it deemed prior approval desirable in this case, it also considered prior approval to be desirable in connection with export subsidies.

Secondly, he argued that the representative period formula suggested in the American amendment was vague, indefinite and difficult to apply. He believed that the American subsidy proposal in fact gave no substantial protection against the use of export subsidies and their injurious consequences.

Thirdly, Mr. Deutsch argued that since export subsidies were less expensive and thus easier to apply than domestic subsidies, it was desirable that the Charter provisions on export subsidies should be tighter than those on domestic subsidies. He pointed out that the greater expensiveness resulting from the subsidization of the entire output of a particular commodity, as would be the case under a domestic subsidy, would serve as an effective restraining influence on the employment of such subsidies. Since an export subsidy involves payment only on the proportion which is exported and not on the total output, it is less expensive and hence there is not as effective a restraint to the use of such subsidies as there is in the case of domestic subsidies.

In reply, Mr. Wood and Mr. Wheeler pointed out that in general export subsidies in the United States are incidental to this country’s agricultural price support program, and that the United States has not employed export subsidies, with possibly one exception or so, to acquire an undue share of the market. They emphasized the fact that the United States price support program has been ingrained in domestic legislation at least since the early 1930’s and that the United States Congress could not accept any Charter which in practice might prohibit the use of export subsidies and impair the price support program. This was a hard, practical fact which could not be overlooked and which is crucial in the United States position regarding subsidies.

Issue was taken with Mr. Deutsch’s contentions regarding the reasonableness of the present Charter distinction between domestic and export subsidies. It was argued that countries exporting the predominant proportion of a particular product, such as Canada in the case of wheat, would in effect be employing an export subsidy even though in form the subsidization was not applied directly on exports and would be considered “domestic” in terms of the Charter.

It was also argued that the subsidy amendment proposed by the United States should assure adequate protection to Canada as well as other countries against the injurious use of export subsidies. First, the United States formula offered a restraint by restricting export subsidies so that they would not result in shares of the market in excess of those prevailing in a previous representative period. Secondly, the formula afforded an additional restraint in that a price would have to be paid, namely the withdrawal with respect to an offending member of obligations or concessions under the Charter, if subsidies were used so as either to cause or threaten serious prejudice to other members of the organization.

Mr. Deutsch disputed the effectiveness of the safeguards afforded by the American formula and the United States contentions regarding the inequity of the present Charter distinction between domestic and export subsidies. He pointed out that although on a representative period basis the United States might be accorded a share of the market in a particular product, it might not be able to achieve such a share on the basis of comparative advantage,¹ a principle which, he noted, presumably underlies the objectives of the Charter. He recognized the political difficulties involved in the United States acceptance of the Geneva provisions on export subsidies. He pointed out, however, that Canada has comparable political problems and that the Charter now contains provisions which it would be very difficult to accept in his country. For example, although the Charter would permit quantitative restrictions on agricultural products, it would not permit them (subject, of course, to balance of payments and other similar exceptions) on manufactured products. He indicated that this distinction is of great concern to a country like Canada which is vitally dependent on markets abroad for its agricultural exports and which at the same time has manufacturing interests to consider.

Mr. Wood indicated his appreciation of the Canadian position but inquired whether it might not be possible to work out some formula which would adequately safeguard Canadian interests and at the same time permit acceptance of the Charter by the United States Congress. Mr. Deutsch, emphasizing that he was speaking off the cuff and was not making a firm proposal, inquired whether the United States would be agreeable to dropping all the subsidy provisions in the Geneva Draft except Article 25. In effect this suggestion would mean that the Charter provisions on subsidies would be identical with those in the General Agreement on Tariffs and Trade. Mr. Wheeler indicated that such a proposal would be acceptable to the Department of Agriculture. Mr. Brown stated that although we had not given previous consideration to such a suggestion, he felt that the United States would probably prefer to see the Charter retain some provisions on the order of our proposed amendment restricting the use of export subsidies rather than simply relying on the general consultative provisions of Article 25.

Mr. Brown inquired whether, in view of the fact that the Canadians seemed to be troubled by the distinction made in the United States subsidy amendment between export subsidies on primary products and those on manufactured goods, Canada might be agreeable to accepting subsidy provisions which would treat manufactured and non-manufactured products on the same level. In other words, rather than prohibit outright export subsidies on manufactured goods, as the present United States amendment would do, Mr. Brown suggested that the representative period limitation now applicable in the United States amendment only to agricultural products be also applied to manufactured products, so that export subsidies on such products would be permitted if they did not result in a share of the market in excess of that prevailing in a previous representative period. If such subsidies on manufactured products caused or threatened serious prejudice, the procedure in the present United States amendment for withdrawal of obligations or concessions under the Charter would apply. Mr. Deutsch indicated that he would give this proposal consideration.

Mr. Deutsch made a further suggestion with a view to ensuring greater safeguards in the application of the representative period formula. He inquired whether the United States would be agreeable to accepting, in the event of disagreement regarding the appropriate representative period on which to base export shares, final determination by the organization. He felt that such a procedure would subject the selection of the representative period to a relatively impartial and objective party rather than to a particular interested country as would be the case under the present United States proposal. The State Department’s representatives indicated that Mr. Deutsch’s proposal seemed reasonable enough and appeared acceptable. Mr. Wheeler concurred for the Department of Agriculture.

Mr. Wood emphasized the necessity for trying to reach a reconciliation of views on this question. Mr. Deutsch stated that he was leaving for Ottawa on Thursday and would consider the various suggestions made at this meeting with his people as soon as he returned to Canada. He thought that he would be able to give us a definitive answer by Saturday. He stated that in the interim he would get in touch with Mr. Wilgress² in Habana regarding the question. We indicated that we would consult with Mr. Wilcox and others regarding the various suggestions made at this meeting.³

1. According to this theory a country specializes in those products in which it achieves the greatest relative efficiency in production.
2. Leolyn D. Wilgress, Head, Canadian Delegation at Habana.
3. In reporting this conversation, the Department in telegram 762 to Habana, December 30, advised the United States Delegation that pending receipt of the Canadian Government’s reaction, “we believe acceptance Organization determination representative period and elimination difference treatment between primary and manufactured products would be small price pay for Canadian acceptance our Habana draft.” (560.AL/12–2347)

   In telegram 9, January 3, the Department advised the delegation in Habana, that the Canadians had reluctantly accepted the general proposition that subsidies would be subject to ITO determination as to whether they were representative. (560.AL/1–348)