Foreign Relations of the United States, 1958–1960, Western European Integration and Security, Canada, Volume VII, Part 1

46. Circular Telegram From the Department of State to Certain Diplomatic Missions⁰

January 23, 1959, 7:02 p.m.

893. Polto circulars 34 and 35; Polto 2000.¹

1. This message outlines basic US views on application quantitative import restrictions on discriminatory basis against dollar area by participants in recent convertibility move.

2. In terms foreign exchange implications our thinking distinguishes between two kinds of discrimination: (A) discrimination resulting from retention of import restrictions against goods from dollar area while restrictions on same goods have been completely removed (liberalized) for trade among OEEC countries and (B) discrimination in non-liberalized sector, which results from applying certain restrictions more stringently to dollar area than OEEC, particularly maintenance of quotas for exporting areas or countries on discriminatory basis.

3. Regarding type A discrimination it has been argued that there are still some foreign exchange risks in equalizing liberalization. This argument assumes that if restrictions on certain goods from dollar area were removed total imports of such goods might significantly exceed amount of similar types presently being imported primarily from countries to which liberalization already applies. To illustrate: assume European country has liberalized radios for OEEC and not for dollar area and that free imports from OEEC countries amount to $500,000 and licensed imports from dollar area $75,000. If discrimination removed by applying liberalization to dollar area it is argued that total imports might far exceed $575,000 thus causing an exchange drain. Presumably this could come about because American prices are lower than OEEC prices (but this does not appear to be generally true) or because American goods have a special appeal for consumers (but experience indicates this largely over-rated factor and in any case short run phenomenon). Although we are not persuaded that risks are as great as some seem to fear, we are not challenging policy of caution by a country whose reserves need strengthening. Thus we are prepared to see gradual progress according to country’s circumstances and would not insist on immediate nondiscrimination.

4. For type B however it is clear that all discrimination against dollar area within import ceiling for particular product can be eliminated without additional exchange risk. Absence of liberalization for a product means country can control total payments to all nonresident suppliers, and under nonresident convertibility there is no exchange reason to differentiate between nonresident areas. For example assume European country maintains general restriction on typewriters with quotas of $300 thousand for various OEEC countries and $25 thousand for US. Country quotas could be combined into one universal quota of $325 thousand without raising foreign exchange ceiling. In essence therefore our position is that end of discrimination in non-liberalized sector (type B) is immediately feasible in foreign exchange terms. Such discrimination should be eliminated promptly.

5. Application this principle to quota issues now being considered in Europe means that all quotas existing on December 31, 1958 as well as all increases effective January 1 and thereafter would be non-discriminatory. This applies to quotas maintained by the Six and the Eleven. Note that this principle would in no way interfere with schedule for elimination of quotas as specified in Rome Treaty and would involve no exchange risk not already inherent in Rome Treaty obligations. Nor would it prejudice possible use quotas which could be justified under GATT on non-financial grounds in connection future special problems such as implementation EEC common agricultural policy.

6. This position may come as surprise to some Europeans who may not have focused on significant difference between problems in liberalized and non-liberalized sectors of OEEC trade in relation to convertibility move and dollar discrimination. Nevertheless believe it important in terms US commercial interests and long run integrity fundamental principles of commercial policy that position be presented now, during beginning of period of convertibility and before contrary European opinion crystallizes. Note reftels indicate active European discussion this problem now current.

7. US position may be regarded by some Europeans as intervention on part US in issues between Eleven (especially British) and Six (especially French). This of course not correct. We consider neither Eccles proposal nor French position on limited applicability increase in quotas appropriate to new financial circumstances of Europe. US position has possible advantage in that it could enable both British and French to save face by acknowledging that all 1958 proposals for discriminatory application of quotas have been overtaken by events, i.e., convertibility moves.

8. Recognize position outlined above contrary to underlying assumptions recent European discussions entire problem of relaxation remaining restrictions in non-liberalized sector. That is, Europeans apparently have assumed non-Europeans would be satisfied to see continuation of discrimination against non-Europeans within quotas notwithstanding convertibility. US position derives from general principle that by and large quantitative import restrictions justifiable (and have in fact been justified) in terms individual country’s balance of payments position and not for commercial protection. (Any exceptions e.g. agricultural restrictions must be supported under GATT either in accordance specific GATT provisions or on basis special justification.) Therefore with removal financial justification quotas should not be used by OEEC countries to discriminate against non-European areas or even in case Common Market to differentiate between Member and non-Member countries. Despite fact that Rome Treaty contains many elements full economic union Six would be justified in giving each other more favorable treatment on quotas only when their financial systems so integrated that EEC constitutes in effect single balance of payments unit. Dept recognizes that French or others of Six may claim right differentiate on quotas under GATT Article XXIV and may also claim that denial this right would alter balance concessions envisaged when Rome Treaty negotiated. As consistently maintained by US however Article XXIV does not authorize discrimination in application import restrictions imposed to protect balance of payments position. Moreover Rome Treaty negotiated when early move to convertibility not foreseen. (Although this paragraph indicates arguments we and others have made on Rome Treaty–GATT legal issues, desirable of course we base our position on policy rather than legal grounds as far as possible.)

9. Dept realizes that in context FTA discussion Six, especially French, have made their ability to discriminate on three percent quotas a political symbol of Common Market unity. Therefore necessary introduce US views with special care in order minimize risk adverse political reactions. In particular would wish make crystal clear that US position on quota problem in no way derogates from strong support for Common Market. Neither would our position on Eccles proposal involve taking sides against Eleven. In addition to gradual emergence of tariff differentiation through establishment of customs union, ties among Community members will be increasingly reinforced through operation their common institutions and coordination their policies in agriculture and other important spheres economic life. Our sympathy and support these objectives is unchanged. Convertibility and consequent removal quota restrictions should help realize treaty objectives of increasing internal competition and contributing world trade. Should also help cement ties between Six and their European and non-European partners.

We accept and understand fully that in establishing customs union unavoidable as practical matter that non-members will be treated differently from members in important respects. We see nothing in US position which would prevent carrying out Treaty objectives. Our difficulty is with proposition that quota regime instituted to conserve hard currency before European convertibility should be used for commercial differentiation between Member and non-Member countries. Nevertheless matter delicate and consequently must take account political and psychological situation.

10. Dept has in mind that Butterworth should discuss foregoing at high levels in European Commission for example Hallstein Marjolin Rey perhaps referring Marjolin views reported Strasbourg’s 102 to Dept² (rptd Paris 21, Bonn 9, Rome 9, Hague 9, London 3, Brussels 12, Luxembourg 12) and that Embassy London should discuss at high official level British Govt for example Sir Frank Lee.³ In light reports on these two discussions Dept would consider desirability action by other addressee Missions.

11. However, before authorizing any action to be taken pursuant this message Dept requests urgently any comments USEC, USRO, Embassy London and Embassies in Community of Six countries may wish submit on substantive or procedural aspects. Dept would also welcome any comments other addressees.

Dulles

0. Source: Department of State, Central Files, 840.00/1–2359. Confidential. Drafted by Goldstein and Myerson and cleared in E, OT, WE, W, RA, BNA, and GER. Sent to Ankara, Athens, Bern, Bonn, Copenhagen, Dublin, The Hague, Lisbon, London, Oslo, Ottawa, Reykjavik, Rome, Stockholm, Vienna, Geneva, Paris also for USRO, Luxembourg, and Brussels.
1. Polto 2000, January 19, reported on meetings held that day between British and French officials dealing with British objections to EEC trade policies. (ibid., 840.00/1–1959) Polto Circular 34, January 15, and Polto Circular 35, January 16, reported on the January 15 meetings of the OEEC Council. (ibid., 396.1/1–1559 and 396.1/1–1659, respectively)
2. Dated January 13, telegram 102 from Strasbourg reported on the favorable reaction of EEC Vice President Robert Marjolin to “convertibility” as part of a general move to trade liberalization. (Department of State, Central Files, 840.00/1–1359)
3. Joint Permanent Secretary of the British Treasury.