379. Despatch From the Embassy in the United Kingdom to the Department of State1
SUBJECT
- U.K. Attitude Toward Mr. Diefenbaker’s Proposals for (a) A Switch in Canada’s Imports, and (b) A Future Full-Scale Commonwealth Trade and Economic Conference
Summary
At Mont Tremblant2 from September 28 to October 1, the U.K. will take up with Canada bilaterally the possibilities for switching some proportion of Canada’s imports from the U.S. to the U.K. The U.K. reception of this proposal of Mr. Diefenbaker’s has been enthusiastic. The Embassy understands that the U.K. has a number of alternative plans which will be negotiated with Canada, and the U.K. is most hopeful that positive results will be achieved. The U.K. indicates that its proposals are within the terms of GATT.
The meeting of all Commonwealth Finance Ministers, which will take place at the same time, will consider (in addition to sterling and Free Trade Area problems) the Canadian suggestion for holding in the near future a full scale Commonwealth trade and economic conference. The U.K. Government’s attitude toward this suggestion is quite the opposite of enthusiastic. Nevertheless, the Commonwealth Relations Office indicates that the U.K. will support the conference proposal as of help to Mr. Diefenbaker, if other Commonwealth members are generally interested. The U.K. does not expect that a conference could achieve any significant increase in intra-Commonwealth trade or in availability of capital to Commonwealth members.
[Page 911]The U.K. has opposed, as doomed to failure, any inclusion on a conference agenda of tariff preferences. This is not only because of the U.K.’s over-all commercial policies and the rules of GATT, but also because the U.K. has itself attempted without success in recent years to obtain concerted Commonwealth action on this subject. The newer members of the Commonwealth have not been interested in closer preferential ties. Moreover, it will apparently be difficult to maintain even largely intact present preferences in the Free Trade Area negotiations, much less to consider their increase. Without further tariff preferences, and with import controls used only to protect the balance of payments and already considerably relaxed, there would not appear to be any easy means available to a Commonwealth conference for enhancing intra-Commonwealth trade.
British officials indicate that a plausible basis for a conference may nevertheless be found in Free Trade Area matters (which are regularly discussed with Commonwealth representatives in London in any case), in reviewing Commonwealth development and investment, and in the other agenda items suggested by Canada.
There are some indications that, if Free Trade Area plans are not realized in the coming year, the U.K. might later reconsider fully the need and the basis for further Commonwealth economic talks.
The Switch of Canadian Imports from the U.S. to the U.K.
The U.K. expects to negotiate bilaterally with Canada on the switch proposal late this month (this subject will not be one for the Commonwealth Finance Ministers in general, or for any later Commonwealth Economic Conference). It has been indicated to the Embassy that Sir Frank Lee of the Board of Trade intends to be present to handle the main work under this heading.
The U.K. has welcomed this idea of Mr. Diefenbaker’s to switch 15 percent (or some $600 million f.o.b.) of Canadian imports from the U.S. to the Commonwealth. If such a switch could be carried out, it could mean a gross increase of over one-third in British dollar export earnings, or an increase of 6 percent in total exports.
While Mr. Diefenbaker’s proposal had primarily a political motivation—to strengthen Commonwealth economic ties as a counterpoise to U.S. trade and investment interests in Canada—it is not clear from this end that Canada would take any positive steps to reach the political goal, which could only be done at some economic cost to Canada, unless there were at least a partial quid-pro-quo from the U.K. While the U.K. government is divulging very little information on this subject, it appears to the Embassy that the U.K. is counting on the necessity of offering Canada certain economic advantages in return for positive Canadian steps to help bring about the switch. Since Mr. Diefenbaker first broached the idea earlier this year, experts in the [Page 912] U.K. government have been working on various proposals as to how Canada could carry out the shift, and what the U.K., for its part, could offer in return.
Both the Board of Trade and the Commonwealth Relations Office have indicated that in working on this subject the U.K. has assumed throughout a full adherence to the present terms of the GATT on the part of Canada as well as on the part of the U.K. It has also been indicated to us that nevertheless, there is a limited amount of elbow room within the terms of GATT which could be utilized to effectuate some trade shift.
It has been hinted that the Board of Trade may have three alternative proposals to make to Canada on this subject, one involving a small increase in U.K.-Canadian trade and the other two involving a substantial increase in this trade. On the U.K. side the small plan appears to involve some further relaxations of British restrictions on dollar imports, especially for products where Canada, rather than the U.S., would be the main supplier. The U.K, will not, of course, make details available at this time in advance of negotiations being undertaken with Canada.
Since British exchange controls limit U.K. investment in Canada, and since Canada would welcome increased British investment as a balance to U.S. investment, the British appear to be in a position to make an offer along these lines if Canada can increase its purchases from the U.K. sufficiently to make it financially feasible for the U.K. The British wish in any case to relax their controls on dollar trade and investment as soon as the balance of payments permits, and for this reason, whatever inducements of this nature are offered to Canada, they are not likely to be viewed as costly to the U.K. It does not appear, however, that the British can do anything significant to increase U.K. imports of Canadian wheat. Wheat is already on world open general license and in the hands of private importers. Well over half of British imports of wheat already come from Canada.
The U.K. is, of course, well aware of the difficulties for Canada in bringing about any shift in the source of its imports, given the fact that imports are in the hands of private Canadian businesses, the natural and cultivated advantages of nearness of U.S. suppliers, and given the desire to adhere to the terms of GATT. The U.K. would, therefore, not be wholly surprised if, in the event, nothing much transpired from the Diefenbaker switch proposal other than what can be accomplished through good will, increased advertising, and exhorting and advising British exporters. It is to be noted that the Board of Trade has intensified its activities of this sort in recent months. The staffing and work of the U.K.’s trade commissioners’ offices in Canada have been under review. Publicity has been given through the press, through publications, and in the Board of Trade Journal to economic conditions and [Page 913] export prospects in Canada. More-than-usual attention and careful arrangements for press coverage have been accorded to trade missions to Canada and to their conclusions.
At the same time it appears clear that the U.K. hopes that considerably more than this minimum will be accomplished. The U.K. seems to believe that certain steps are open to Canada while still maintaining GATT principles as to such things as tariff preferences, and that when the British proposals are put forward at Ottawa, the decision will be Canada’s. It is not apparent whether, at the maximum, the U.K. would envisage any decrease in U.S. exports to Canada as U.K. exports increased, or merely a faster annual rate of increase in future U.K. sales as compared with U.S. sales.
[Here follows discussion of U.K. views on major economic issues relating to the Commonwealth.]