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

73. Memorandum of Conversation⁰

October 6, 1959.

SUBJECT

• Community of Six and Outer Seven

PARTICIPANTS

• Sir Roger Makins, Joint Permanent Secretary of the Treasury¹
• Lord Cromer, Economic Minister, British Embassy
• The Under Secretary
• John M. Leddy—U

Sir Roger Makins called at the Under Secretary’s invitation.

The Under Secretary began by saying that he appreciated this opportunity, before Sir Roger’s return to London, to exchange views on some of the longer-term problems in the field of international trade with which we might be confronted within the next three or four years. What he had in mind was a purely informal discussion of the future shape of world trade relationships.

The first major question related to the possible implication for world trade of the developments now taking place in Western Europe. The Under Secretary recalled that at the time of the renewal of the Trade Agreements Act last year,² the Executive Branch had encountered a considerable amount of static in the Congress about the effect on American trade of the discrimination inherent in the Common Market. This potential opposition on the Hill had been overcome mainly by pointing to the significance of the Common Market as part of a thorough-going economic integration among the Six designed to achieve the important political objective of Franco-German rapprochement. It was not clear, however, what might be the reaction a few years hence to another discriminatory arrangement in Europe which would not have this same political attraction. In other words, there was a possibility, although obviously it was not possible to predict with any certainty, that we might encounter serious difficulties in going forward with a liberal trade program a few years from now if there were new and wide-spread trade discrimination against U.S. exports to Europe. We were in the process of trying to assess this problem as well as the related one of the implications of the new European arrangements for world trade generally, i.e. the possibility that regional arrangements would spread to other areas, leading to a fragmentation of the world market.

The Under Secretary said that we had for some time been concerned over potential protectionist tendencies in the Common Market, just as the British had, and had brought pressure on members of the Common Market to move in a liberal direction. We had seen the recent recommendations of the High Commission of the EEC and felt that the proposed actions were in the right direction.³ The Under Secretary mentioned that we had just had some encouraging conversations with members of the French delegation to the Bank and Fund meeting. In particular we had reason to believe that the French might well now step out front in bringing about a truly liberal common policy in the Common Market. This, of course, would be a reversal of past French trade policy and would be a very hopeful thing for Western European and world trade. From what we had learned in these conversations and with other members of the Common Market, we had been particularly struck by the evident disposition on the part of the Common Market countries to make special accommodations for products of particular interest to other countries in Western Europe. Such accommodations, of course, would be applied on a non-discriminatory basis. For example, one such accommodation might take the form of a substantial reduction of the Common Market tariff on motor cars, which would benefit Western European countries without leading to any great increase of imports from the U.S. because of the small demand for American-type cars. The Under Secretary stated that he would very much like to hear the U.K. views as to how the U.K. saw these developments in the years ahead.

The Under Secretary then said that the second important problem which we were becoming increasingly concerned about was the question of severe competition from manufactured goods produced in low-wage areas such as Japan and Asia. So far we had been able to cope with increasing domestic pressures in the U.S. by making voluntary arrangements with Japan whereby the latter limited their exports to us. We understood that the U.K. had just completed similar arrangements with India, Pakistan and Hong Kong affecting their exports of textiles to the U.K. A number of countries, because of this problem, had refused to extend the provisions of GATT to Japan in order that discriminatory restrictions of one kind or another could be maintained against Japan. These various devices might be all right for the time being but they could not meet the longer-term problem. He wondered whether there was not some general theory or formula which could deal with this question and still be acceptable. Perhaps it would have to be a transitional device of some sort.

Answering the last question first, Sir Roger said that the U.K. had been giving some thought to this problem but had not found anything very satisfactory as yet. He pointed out that the failure of Continental Europe to extend non-discriminatory treatment to Japan intensified the problem from the U.K. as well as the U.S. point of view. He said that he would mention our interest upon his return to the U.K. and that perhaps the Under Secretary could have a further discussion of the matter with Sir Leslie Gore-Booth during the GATT meetings in Tokyo later in the month.

Turning to the second question, Sir Roger recalled the history of the Free Trade Area negotiations. He said the British had undertaken these negotiations in an effort to overcome the serious economic disadvantages of the Common Market for the rest of Western Europe. The U.K. had been led along the garden path by the French, who had stated their acceptance of the FTA in principle but had steadfastly refused to negotiate. The fact was that the French had not really accepted the FTA in principle and that the British had known this long before the negotiations were brought to a close. Having taken the lead, however, the U.K. itself could not break off negotiations but had been forced to carry things along until the French had made their real position entirely clear to everyone. The U.K. had strongly hoped for U.S. support for the FTA. While the U.S. had given support of a kind, this was mostly of a generalized nature without practical effect.

Continuing, Sir Roger said that the U.K. had now turned to the Outer Seven arrangement as the only alternative open to them to lead Europe in the direction of liberal trade. In the absence of an Outer Seven it is the British view that trade between the Common Market and the rest of Europe would degenerate into a series of discriminatory bilateral arrangements. Only by working together through the Outer Seven could the other Europeans hope to bring the Common Market around to something that would be satisfactory. With respect to the Under Secretary’s observations about the potential reception which might be given in the U.S. to the Outer Seven, he thought it would be most unfortunate if the U.S., having supported the Common Market and later the enlarged FTA, should now oppose the Outer Seven. The Under Secretary quickly replied that this was not his meaning; merely that in looking at the European trade picture as it might appear some years hence the American Congress might react against the whole European trade arrangement—not only the Outer Seven but the Common Market as well.

Mr. Leddy inquired whether, if the Common Market should undertake substantial action to liberalize its trade policies would the British feel that the objectives of the Outer Seven had been achieved—that is, to assure a liberal instead of a protectionist policy by the Six. Sir Roger indicated that this would not be enough so long as the Six insisted on refusing to generalize tariff reductions to the rest of Europe on political grounds. (While not stated in these terms, the burden of Sir Roger’s remarks was that the U.K. was not prepared to accept any justification for a Common Market with a common tariff applicable to non-Six countries in Western Europe no matter how liberal the policy of the Common Market might be.)

Sir Roger noted with interest the statement in Per Jacobsson’s speech to the Monetary Fund suggesting the possibility that the Outer Seven and the Common Market countries might simultaneously generalize to each other and to the rest of the world the second stage reduction of internal tariffs in the Common Market and the first stage reduction of internal tariffs of the Outer Seven. This, he thought, might be a useful means of coping with the problem, but, of course, it would not solve the problem indefinitely.

The Under Secretary then asked what the next steps were likely to be with respect to the Outer Seven. Sir Roger said he thought a convention would be signed within the next two months⁴ and that some time during the first half of next year it might be possible to approach the Common Market to discuss the question of relations between the two. (In his conversation he made it clear that the ultimate relationship sought by the British was the revival of the original FTA concept.) Sir Roger said that the U.K. would hope for United States support in this endeavor. The Under Secretary said that he assumed that any arrangement would be of a “non-restrictive” type (without being more specific). Sir Roger appeared to agree, although it was evident that both speakers were anxious to avoid precision.

0. Source: Department of State, Central Files, 440.002/10–659. Secret. Drafted by Leddy and approved in U on October 13.
1. Sir Roger Makins was in the United States to attend the annual meeting of the Board of Governors of the International Monetary Fund.
2. Approved August 20, 1958; for text, see American Foreign Policy: Current Documents, 1958, pp. 1526–1535.
3. See footnote 2, Document 70.
4. An agreement establishing a European Free Trade Area was initialed at Stockholm on November 20, 1959.