NAC Files, Lot 60D137, Box 367
Memorandum by the National Advisory Council Staff Committee to the National Advisory Council
Doc. No. 1053
Subject: Intensification of Import Restrictions by the United Kingdom, India, Pakistan, Australia, Ceylon, New Zealand and Southern Rhodesia.
1. The Problem
In the summer of 1949 the Governments of the British Commonwealth countries listed above agreed to intensify restrictions on imports from dollar area countries so as to reduce their total dollar imports by approximately 25 per cent. The Governments of these countries stated that the additional restrictions were required for balance of payments reasons. Pursuant to the provisions of the General Agreement on Tariffs and Trade these countries have agreed to consult with the Contracting Parties about changes in their import restrictions, and the Contracting Parties have, in turn, requested the advice of the International Monetary Fund on the financial and balance of payments aspects of the import restrictions imposed by these countries. The United States Executive Director of the International Monetary [Page 753] Fund has requested the advice of the Council as to the form and the scope of the report which the IMF should make to GATT, as well as the nature of the recommendations to be included in the report.
2. Background
All of the countries involved in this investigation are in the sterling area and Southern Rhodesia is also in the common currency quota of the U.K. in the IMF. India, Pakistan, Ceylon and Australia and New Zealand do not independently hold substantial reserves of gold and dollars. It is their practice, as members of the sterling area, to maintain their foreign exchange reserves in sterling. When they achieve dollar surpluses as a result of their payments relationships with other areas, they traditionally sell the surplus dollars to the United Kingdom. When they incur deficits which must be met in dollars, they traditionally obtain those dollars from the United Kingdom.
In the summer of 1949 when the action to restrict dollar imports was taken, the gold and dollar reserves of the United Kingdom were falling at a rate of approximately $1 billion per year. All of the countries mentioned above were, individually, incurring deficits in their payments relations with the dollar area, although Ceylon had had a dollar deficit for only a very short period of time, this deficit for Ceylon might have been due to seasonal factors in the country’s trade.
Since the devaluation of sterling, however, the dollar position of the sterling area as a whole and the position of each of the individual countries mentioned above, with the exception of Pakistan, has improved materially. The reserves of the United Kingdom have risen from a low of $1,330 million on September 18, 1949 to $2,756 million on September 30, 1950. Although a part of the increase in the sterling area reserves had been attributable to ECA assistance and to drawings on the Canadian credit, a significant portion of the increase has been earned. Since January 1, 1950, the United Kingdom, including the dependent territories which are associated with it in the common currency quota of the International Monetary Fund, has achieved a substantial dollar surplus quite apart from the receipt of external assistance. India, Ceylon, Australia and New Zealand also have had a surplus in their balance of payments relations with the dollar area since January 1, 1950 although some of the surpluses have been fairly small. Only Pakistan has remained in deficit with the dollar area.
3. Discussion
At this time a primary objective of the United States and the Free World is to strengthen military defenses. U.S. policies in the trade and exchange field must necessarily be compatible with this objective [Page 754] The United States should continue to encourage the progressive removal of discriminatory trade and exchange barriers so long as the removal of these barriers does not interfere with the rearmament effort.
Since, with the exception of Pakistan, each of the individual countries for which a report has been requested, has an earned surplus with the dollar area, there would no longer appear to be a justification on balance of payments grounds for the retention of discriminatory import restrictions against dollar area imports at their present level, unless the rearmament effort or other U.S. programs were expected to bring about a reversal of the balance of payments position.
The question also arises as to whether these countries are to be treated as a unit and the rise or fall of the dollar reserves of the United Kingdom utilized as the basis for justifying a particular level of discrimination in each of the sterling area countries. This would imply acceptance of a uniform policy toward intensification or relaxation of restrictions.
The alternative is to treat each country separately and base recommendations on the dollar position of the individual country without regard for the trend of the reserves of the United Kingdom. This would imply that one country might relax restrictions even though U.K. reserves were dwindling and other countries were intensifying restrictions.
Any attempt by the United States Executive Director of the International Monetary Fund to recommend the use of this latter principle as the basis for the Fund’s report to GATT might be interpreted by the Government of the United Kingdom as a direct challenge to the sterling area system. On the other hand, should the United States Executive Director approve a report based on the principle first stated, he would tacitly be indicating United States acceptance of sterling area arrangements as consistent with the objective of the International Monetary Fund and United States international financial policy in general.
This is not considered an appropriate time for the United States to challenge the sterling area arrangements as such. Nevertheless, the United States should avoid any indication that it approves these arrangements. It seems necessary, therefore, for the United States Executive Director to advocate an approach in the International Monetary Fund and a report or series of reports to GATT which avoid these pitfalls. Existing circumstances appear to permit a position which will avoid either a challenge to or an acceptance of sterling area arrangements.
The International Monetary Fund should make separate reports to GATT on each of the individual countries for which a report has [Page 755] been requested, with the exception of Southern Rhodesia. Being in the common currency quota of the U.K., Southern Rhodesia might appropriately be grouped with the U.K. in a single report. These reports would set forth the facts as to the payments position of each of the individual countries with the dollar area.
Where it is apparent that an individual country is itself achieving a surplus in its relations with the dollar area, the Fund’s report should recommend some relaxation in the severity of the discriminatory restrictions applied to imports from the dollar area, without referring to or relating the problem to the trend of—or the level of—the gold and dollar reserves of the United Kingdom. Since the U.K.’s reserves are rising and since the recommendation is the same for the U.K. itself, it seems possible to recommend some relaxation in these other countries without the recommendation appearing to be a challenge to the sterling area system. If an individual country appears to be in balance or incurring a deficit with the dollar area, the Fund need take no account of whether the country in deficit might negotiate with the U.K. for dollars and share the relaxations.
It should be recognized, of course, that the Fund’s report could be utilized as a justification for a further tightening of import restrictions against the dollar area if the particular country in deficit should so desire.
The recommendations in the report covering the United Kingdom should also be based upon the surplus or deficit with the dollar area rather than upon the trend of reserves. The United Kingdom and the dependent territories which are a part of its common currency quota in the International Monetary Fund should be treated as a unit and the report should recommend that the United Kingdom and its dependent territories devote a significant portion of any anticipated earned dollar surplus, taking the rearmament effort into consideration to the relaxation of restrictions on imports from the dollar area.
United Kingdom reserves at present equal in value the imports of the United Kingdom for a period of between four and five months. While there is no satisfactory method of determining a country’s minimum reserve requirements, there seems to be no justification for the position that Britain’s gold and dollar reserves are so low as to require that the entire amount of any earned surplus of dollar transactions needs to be devoted to a further rebuilding of reserves. On the other hand we should avoid pressing too hard initially and permit some margin of safety as protection against a reversal of the recent favorable trend in the international accounts of these countries This is particularly true at the present time when many countries are rapidly increasing their defense expenditures with consequent major repercussions [Page 756] on price levels, on import requirements, and on export availabilities.1
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The following action (No. 426) was taken unanimously by the Council through a telephone poll completed on October 16, 1950:
“The National Advisory Council advises the United States Executive Director of the International Monetary Fund that he should seek to obtain separate reports by the Fund to the Fifth Session of the Contracting Parties to GATT on the external financial position of the United Kingdom (including its dependent territories and among them Southern Rhodesia), India, Pakistan, Ceylon, Australia and New Zealand, recommending that with respect to each of the individual countries named which currently has a surplus in its balance of payments with the dollar area, a measure of relaxation of retrictions against imports from the dollar area would appear feasible.
In presenting this position the U.S. Executive Director should note that defense programs may react adversely on the net dollar earnings of certain of these countries and make clear that in the present situation priority must be given to defense considerations.” (NAC. Doc. No. 88, October 16, 1950, Lot 60D137, Box 367)
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