Foreign Relations of the United States, 1949, Western Europe, Volume IV

ECA Telegram Files, FRC Acc. No. 53A278, Paris Torep: Telegram

The Administrator for Economic Cooperation (Hoffman) to the Acting United States Special Representative in Europe (Katz), at Paris

secret
priority

Washington, August 3, 1949—9 p. m.

Torep 6847. From Bissell.

1. Request limited distribution following message in OSR at discretion Katz.

2. Following paper handed today to State and Treas by ECA as suggested US position on liberalization of Intra-European Trade and Payments and its consequences.

3. Appreciate your comments soonest.

I. Relaxation of Intra-European Trade and Payments Earners

In accordance with the policy enunciated by the Congress in Section 102(a) of the Economic Cooperation Act of 1948,¹ as amended, the US should take the position that the maximum relaxation of trade and payments barriers within the non-dollar world, especially among the OEEC countries, is essential and must be considered an immediate objective. The abolition of quantitative restrictions and exchange controls on current transactions among the participating countries, their dependent overseas territories and the sterling area would provide a wide, competitive, internal market which would be conducive to a broadening of entrepreneurial horizons and an eventual lowering of European costs and prices through the increased productivity generated by competitive conditions and, therefore, to a permanent improvement in Western Europe’s competitive position in the world economy.

II. Readjustment of European Exchange Rates

The removal of trade and payments barriers among non-dollar countries without a corresponding abolition of discrimination against dollar goods creates the danger that a soft currency area insulated from dollar competition will thereby be created in which discrimination against the dollar would tend to be self-perpetuating. Also, it is unlikely that freer trade and payments among participating countries can in fact be achieved or permanently maintained so long as their mutual imbalances and their general dollar deficits are so great. The larger the surpluses and deficits among participants and the more intense their mutual discrimination against the dollar, the more difficult it is to induce net intra-European creditors or participants whose dollar position improves more than average either to join a freer trade and payments area or to remain within it. A mutual readjustment of exchange rates among participating countries and a devaluation against the dollar, particularly of the pound sterling, would tend to minimize intra-European imbalances, would improve the dollar position of participants and would thereby lessen intensity of their discrimination against dollar goods. It is believed, therefore, that removal of trade and payments barriers would be transitory or, if by some chance maintained, would raise the danger that dollar discrimination would be self-perpetuating if these removals occurred in the absence of measures, such as the readjustment of Western European exchange rates, which lessened intra-European imbalances and narrowed disparity between dollar and non-dollar prices.

III. Continued Discrimination Against the Dollar

There is a sense in which immediate effects of relaxation of trade and payments barriers will result in increased discrimination against dollar goods. If this increased discrimination results from improved competitive advantage of Western European goods in non-dollar markets (i.e., the deterioration in terms of trade of the entire non-dollar world with the dollar area) then the US will not object. However, there is also the possibility that discrimination against dollar goods would be increased by actually raising existing barriers against dollar goods (i.e. further administrative reductions in dollar import programs). The US could not agree to the removal of intra-European trade and payments barriers if participating countries felt that such removals made it necessary or desirable for them to increase existing barriers between dollar and non-dollar areas.

IV. Dollar Settlements in Intra-European Trade

In order for benefits of both devaluation and relaxation of trade and payments barriers to be felt, arrangements must be made for minimizing dollar settlements in intra-European trade. The possibility of earning dollars in intra-European trade would encourage participating countries to increase their surpluses or decrease their deficits with one another in order to obtain or save dollars. The simultaneous effort to increase exports to other participants and decrease imports from other participants would result in a strong contractionist influence on intra-European trade which would reverse trend to abolish quantitative restrictions and exchange controls. During remainder of ERP the ECA will endeavor to facilitate the solution of this problem by holding in reserve a small pool of unallotted program funds which can be used to cover unexpected surpluses which arise as a result of the removal of trade and payments barriers.

V. The Problem of Eventual Economic Union

It is quite possible, that, as trade and payments barriers are relaxed among participating countries, increasing difficulties will be encountered because of the very great interdependence of individual national economies of Western Europe and consequent unwillingness of participants to “open up” their own economies to unpredictable impacts generated by their neighbors’ economic (particularly monetary and price) policies. Should this prove to be the case, a closer form of economic association may have to be created among all or groups of participating countries, their dependent overseas territories and the sterling area. Such a development would be consistent with policy established by Congress in Section 102(a) of Economic Cooperation Act of 1948, as amended, which states: “It is further declared to be the policy of the people of the US to encourage the unification of Europe …”

It is probably too early and unnecessary at this time to decide upon particular groupings of countries or upon degree of closeness of their economic association which US should favor. The question is likely to arise, however, as to position of the United Kingdom vis-à-vis the sterling area on one hand and the continent on other. Since the eventual solution cannot be discerned at this time, it is important that no measures be sanctioned which would prevent the UK and the sterling area generally from participating in some closer form of economic association with continent should such prove ultimately desirable. Basically the US position should be that the participating countries must take steps now which would be consistent with progress toward closer economic association, regardless of its eventual membership and degree of closeness, and must refrain from taking steps which are inconsistent with or detrimental to progress in this general direction. [Bissell.]

Hoffman

1. Title I of Public Law 472, 80th Cong., 2d sess.