NAC Files, Lot 60D137

Memorandum by the NAC Staff Committee to the National Advisory Council


Doc. No. 1054

Subject: South African Restrictions

I. The Problem

The National Advisory Council last considered South African exchange and import restrictions on February 28, 1950, and took Action No. 392, advising the United States Executive Director of the International Monetary Fund as to the position he should take in the Fund in connection with a report to GATT on these restrictions. Since that action was taken, the South African Government has announced major revisions in its system of restrictions which are to become effective January 1, 1951. The immediate questions before the Fund are: (a) the propriety of continued maintenance of exchange restrictions by South Africa at their present and proposed level, and their application on a discriminatory basis; and (b) a report to the GATT meeting at Torquay on the financial aspects of the parallel problem of the South African import restrictions. It has therefore become necessary for the Council to review the situation again and determine whether its previous instructions to the United States Executive Director should be revised.

II. Background

Under the scheme now operative but which is to be replaced on January 1, 1951, the South African Government issues two types of [Page 729] import permits. “Universal” permits permit the holders to import merchandise from any currency area. Payments are made in hard currency and the value of universal permits issued is limited to the amount of South Africa’s current gold production (minus additions to reserves) plus its hard currency earnings.

“Restricted” permits are issued covering the remainder of South Africa’s import requirements. Holders of such permits can make purchases only in soft currency areas and payments are made in sterling. Restricted permits are issued up to the value of South Africa’s soft currency earnings and soft currency capital inflow (minus additions to sterling holdings).

In its previous action the National Advisory Council concluded that this system resulted in substantial discrimination which was wholly unjustifiable in view of South Africa’s very large gold production, and instructed the United States Executive Director in the Fund to take a strong position opposing the system.

After considerable discussion in the Executive Board of the Fund, the Fund submitted a report to the Contracting Parties which concluded that the over-all level of South African restrictions was justified, but that further consideration of the discriminatory aspects was necessary. The Fund Staff subsequently prepared papers analyzing the South African restrictions and referred these papers to the South African Government for its comments.

Under the new system “general” permits (which will replace the old universal permits) will be issued enabling the holder to purchase imports from any currency area. Generally, such permits will be issued up to the total amount of South Africa’s current earnings of foreign exchange—not merely the amount of hard currency receipts and gold production. In addition, restricted permits will now be issued apparently measured by the amount of the soft currency capital inflow into the Union.

III. Discussion

While the results of neither the present nor proposed scheme can be determined with precision, there seems every prospect that the area of discrimination in South African trade will be greatly reduced under the operation of the new plan. If the present plan were to be continued, roughly one-half of the Union’s trade might be reserved on a discriminatory basis for soft currency area suppliers. Subject to certain variable factors which are described below, it seems likely that the area of discrimination under the proposed new arrangements may be reduced to approximately 15 per cent, leaving 85 per cent of South Africa’s purchases to be made on a completely competitive and nondiscriminatory basis.

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There are, however, certain elements of uncertainty which surround the new scheme and which can only be resolved by observation of the scheme as it is actually administered. The division of specific commodities between the “general” and the “restricted” import permits is important. The discrimination would be more serious if restricted import permits are issued for commodities which are normally purchased in the dollar area, thus transferring the market for these items to soft currency suppliers.

The estimate that 85 per cent of the Union’s imports would be nondiscriminatory is based upon the assumption of the maintenance of the levels of monetary reserves which exist on January 1, 1951, and the expenditure by the Union of all of its current earnings of foreign exchange. Insofar as permits may be withheld to increase reserves, this would reduce the amount of trade coming in under general permits, and, therefore, the proportion of total trade entering the Union on a non-discriminatory basis.

The steady improvement in South Africa’s monetary reserves now raises the question of the general level of its restrictions. The new system proposed for January 1, 1951, may contemplate continued additions to gold reserves. GATT Article XII, paragraph 2, provides that import restrictions (whether or not discriminatory) may only be used either to prevent a decline in monetary reserves, or “in the case of a contracting party with very low monetary reserves, to achieve a reasonable rate of increase in its reserves”. The determinations under these provisions are explicitly left to the Fund. In an interim report to GATT, made in March of this year, the Fund said that South Africa then had “very low monetary reserves”. The present level of South African reserves would seem to justify a new finding that the South African reserves can no longer be considered to be “very low”. Indeed, in South Africa’s letter to the Fund, it states that “the present level of these reserves could be regarded as satisfactory”. Under these circumstances, it is believed that we should take the position that South African reserves are no longer “very low”.

The Union of South Africa also has recently agreed to sell to the United Kingdom one million ounces of gold per quarter. Provided that soft currency suppliers get enough business under general permits so that this amount of gold would flow to the United Kingdom under the permit system, this would not constitute a drain on South African gold resources. A question would arise, however, if competition between suppliers under the general permit system should work out so that gold in this amount would not be needed for settlements with the United Kingdom. The Union Government has stated that under such circumstances, it would meet the shortfall from its gold reserves, and accumulate additional sterling. This arrangement would tend to [Page 731] weaken South. Africa’s gold reserve position and to increase the likelihood of future increased discrimination in its import and exchange controls. It will be important for the Fund to follow closely the operation of this gold sale agreement between South Africa and the United Kingdom.

It appears that South Africa has taken a major step to reduce greatly the area of discrimination in its trade and exchange control practices. At the same time, economic and financial conditions surrounding the South African economy have not changed in any way which would indicate the desirability of modifying the Council’s previous conclusion that no discrimination is justified. However, since there seems to be the prospect for so much improvement, it would probably not be desirable to press the Union for the complete elimination of discrimination at the present time.

Particularly, there does not seem to be any real economic justification for relating the small remaining area of discriminatory import licenses to the inflow of capital from soft currency areas, but since this is relatively small and the political background on this point is particularly delicate, it does not seem necessary to press for a final resolution on this problem at the present time.

It will be necessary to keep the situation under continuous review and to follow closely the operation of the new plan. To this end the Union should be pressed to furnish full and complete information as to the commodity composition of its general and restricted import lists, the actual flow of trade under these licenses, the extent of exchanges of restricted licenses for general licenses, if that continues to be permitted, and complete figures on gold production, gold sales, and capital movements.