London Embassy Files: Lot 58F47: Box 1398: 500 Marshall Plan: Telegram

The Chief of the ECA Mission in the United Kingdom (Kenney) to the United States Special Representative in Europe (Harriman), at Paris


Torep 1457, rptd Washington Toeca 1580. (Ref. Repto circ. 331.1)

Mission has studied problems set forth in reftel. We agree that in United Kingdom as probably in other countries primary attention is being directed at containing inflationary effects of devaluation in the domestic market. We also agree that every effort should be made to minimize undesirable increases in prices of goods destined for export to other participants.
Agree further that problem is especially complicated for commodities dealt in world markets. In terms of U.K. present problem this complication reflects itself in terms of the large number of commodities exported both to the Continent and to dollar markets. For these commodities problem is to balance the objectives set forth in reftel against equally commendable objective of maximizing dollar earnings. HMG has instituted vigorous campaign for penetrating dollar markets. In pursuing this objective businessmen have been advised, correctly we believe, to follow pricing policy which will maximize dollar income of United Kingdom. This is consistent with the intention of devaluation, which was to increase dollar exports so as to increase dollar earnings and it is obviously to Brit interest to secure the maximum dollar return consistent with the competitive position of those commodities and products in the dollar market. Accordingly some of the sterling prices will doubtlessly be increased even though there may also be substantial intra-European commerce in such articles and products. However the very fact that this increased sterling price [Page 844] may diminish European demand for such products is of value to their major objective because it will contribute to a switch of Brit exports from soft currency to hard currency markets.
Second category of Brit exports includes (a) commodities sold largely to participating countries rather than dollar area and (b) commodities which may sell in dollar markets in future by virtue of depreciation of pound. While export prices of such commodities and products may be slightly increased to cover increases or anticipated increases in costs on account devaluation we do not foresee at this time any substantial increase in prices. With reference to Group (a) price rises should not be large because we expect that general inflationary pressure will be fairly well controlled in U.K. With respect to category (b) U.K. producers will have every incentive to maintain sterling prices at present level, since increasing such prices might tend to prevent acquisition of desired markets.
While we agree in principle that European trade should be maximized to full extent consistent with obtaining the dollar saving and dollar earning benefits which devaluation was intended to promote, we do not feel that we can consistently ask Brit either (a) to keep sterling export prices generally low at the cost of increasing the aid burden on the U.S. taxpayer or (b) to superimpose upon existing controls the heavy and cumbersome machinery which would be necessary for dual pricing and which, even if it could be successfully administered in the United Kingdom would lead to transshipments of Brit goods to the dollar area through the Continent, and would be inconsistent with the principles of IMF and GATT.
Foregoing are preliminary views. We will proceed with more intensive study of commodities exported by United Kingdom to OPC and dollar area in effort to formulate more definitive views.
Meanwhile would appreciate notification of any commodity or product which OSR or ECA/W feels should have special attention besides those mentioned Repto circular 325.2 We wish to emphasize that most commodities and products are not subject to govt export price control and are thus subject to conditions of supply and demand in the markets concerned. Assume ECA attitude continues to be one of encouraging free play of supply and demand with resulting intensification of competition which it is hoped will lower average cost of products and channel trade through most efficient production.
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