The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
CONFIDENTIAL
RFD* 25
Board of Governors o f t h e Federal Reserve System
D i v i s i o n of Research and S t a t i s t i c s
International S e c t i o n
REVIEW OF FOREIGN
December 1 0 , I9I4.5
The Agreement w i t h B r i t a i n : An A p p r a i s a l . • • . 1
Settlement of Lcnd-Lease, Surplus Property,
and Other Claims.•...........,..,
•.... $
The Fund, Exchange Restrictions, and the
British Loan Agreement, ••...«•••••
••• 9
The Commercial Policy Agreement... •.f....... 17
Note
In view of tho importance of tho negotiations just concluded,
tho issue dute of this numbor of tho Rovlew hus boon advanced one week.
The Agreement with Britain* An Appraisal
Lloyd JU Metzler
With the signing of the recently-announced agreements
between the United States and the United Kingdom, tho executive
branches of the two governments* have "presented tho Congress of tho
United States and tho P&rliemont of the United Kingdom a sot of
proposeds for solving somo of the most pressing economic and financial
problems which face the post-war world. The financial agreement, providing for a loan of $5*750*000,000 from the United States to tho
United Kingdom, is probably the most important part of the arrangements.
The 'agreements as a wholo go much further than this, howovor, for, in
addition to the loan agreement, agreements have been made for the final
settlement of lend-loase, mutual aid, and surplus property claims, and
for the roiaovul of barriers to trade an4 commerce* In tho words of
the joint statement mado by the President of the United States and the
Prime Minister of Greut Britain, tho discussions wht;vo covorod the
questions of financial assistance from the United States to the United
Kingdom, the demobilisation of war-time trade and monetary rostrictions,
the settlement of lond-loaso, tho disposal of surplus war property in
tho Unitod Kingdom owned by the United States, and, finally, longrange commercial policies in tho broad sense, embracing tho fiolds of
trado barriers and discriminations, policies in respect to commodities
in world surplus, controls, an international trudo organisation, and
international aspects of domestic moasurps to maintain employment.n
In viow of the breadth of subjects included, it is not surprising that
the negotiations which preceded the signing of the agreements covered
a poriod of throe months. Approval by the legislative bodies of both
- 2 -
CONFIDSNTIAL
countries of the proposals set forth in the agreements will be an
important contribution to the establishment of normal trade relations
in a large part of the world*
The agreement between the two governments was presented in
three parts: (l) a joint statement regarding the understanding reached
on commercial policy; (2) a joint statement regarding settlement for
1end-lease, mutual *id, surplus war property, and claims; (3) a financial agreement* Since the first two of those are discussed in
later sections of this Review, presort discussion will be limited to
the financial agroemont*
Significance of the Loan* The loan of $3,750#000,000 pro*
vlded for in this agreement is to be made in the form of a "line of
credit11 upon which the British may djraw at uny timo between the
effective dv*to of tho agreement and the end of December 195X • In
addition to this amount, & loan of |65OfOOO,OOO is agrood upon in
tho joint statement regarding lond-Ioase, mutual aid, and surplus
property*
Tho loans are significant principally because they clear
the way for tho resumption of trade und for the romovul of the bwriers
to trade which accumulated during the war, as well as in tho inter-war
period. It is wall known that many of tho pre^wcr restrictions upon
trv.do and commerce were to some extent a direct result of a world
shortage of dollars* Tho depression of tho 'thirties \ms more sever©
in tho United States thr.n in most other p*..rts of tho world, and exports
of other countries to thQ United States woro correspondingly reduced*
Paced with a loss of dollar receipts from exports, a number of countries,
including the United Kingdom, sought to restore equilibrium in their
baloncos of peiymonts by'forcing a reduction of imports* Tariffs, import
quotas, and exchange restrictions developed rapidly* During the war,
those trade and exchange restrictions were further extended cs a moans
of controlling exports and imports of nocossury commodities*
In tho absonce of financial aid from the United States, many
countries of both Europe and Asia would bo confronted by a sorious
shortage of dollars in the post-war years*. Import requirements for
reconstruction will, of course, bo high, vrhile ability to export will
bo at u low ebb* In some countries, it will bo possible to moot those
transitional needs out of accunmlutod dollar reserves* But in tho case
of the United Kingdom available dollar reserves are small in relation
to probable requirements* It is therefore clear that unless fin&ncial
aid is extended to the United Kingdom it will bo necessary for that
country to retain most of its wartime tr«.vdo and exchange practices*
It is this fact which lends particular importance to tho prosont loan,,
for the loan agreement contains provisions -which will reduce restrictions
upon trado and commerco between tho United Stutes and the United Kingdom*
Terms of the Loan* The terms of tho loan wore carefully
druwn with a view to avoiding mistakes mado after the first World War,
In particular, flexible repayment provisions were inserted so that
exchange difficulties nood not result from attempts at repayment. Thus,
tho interest irate is fixed at two per cent, and repayment of both interest
and principal is to bo made in fifty equal annual installments, beginning
• 3 -
COHFIEBNTIfiL
on December 31, 1951* Shis moans that, if the entiro credit is used,
tho annual payment of principal and interest by tho United Kingdom
will amount to approximately ^11*0,000,000. If the United Kingdom has
difficulties with its bulance of payments, however, u part of this
annual payment may bo wedvod. Thus, if in any year the average Unitod
Kingdom income from exports and invisible items in its balance of payments during the preceding five years is less than the value of 1936-38
avoruge imports, after correction for prico changes, the United Kingdom
may ask for a wt&ver of th&t pert of its annual payment which consists
of interest. This moans, in general, tteut tho Unitod Kingdom does not
nood to pay interest as long as recoipts on current account are inudequ?vto to purchase tho pro-war volume of imports •
Even if payments are made in full, however, it is unlikely
that thsy will constitute a sorious burden to the Unitod Kinsdom. The
average value of imports into tho Unitod Kingdom in the pro-war yours
1936-38 was fc866,000,000. In terms of post-wur prices, this same
volume of imports will probably be at least 80 per cent more expensive,
so thut the post-war Vvlue of the avcrugo imports received before the
war will be approximately il,559>OOO,000. At tho present rate of exchange, this is equivalent to $6,236,000,000. Thus, tho annual paymont
on Britain's debt to the Unitod Statos, if mudo in full, will amount
to no more th^n one-fourth of ono per cent of that countryfs annual net
receipts on current account. It does not seem probable that payments
of such a small magnitude will bo the sourco of financial embarrassment
to the Unitod Kingdom.
Jn addition to the loan from the Unitod States, financial
assistance will also bo received from certain countries of the British
Empire; Service payments will^ of course, bo made on these loans. In
order to insure that such payments do not impair th$ ability of tho
Unitod Kingdom to mako payments on the .American loan, the agreement,
provides that loans which tho British receive from governments of the
Commonwealth between December 6, 19U5* and December 31 > 1951 $ shall be
on terms which are no more favorable to tho lender than those contained
in tho Merican loan. Moreover, tho agreomont provides specifically
that if tho interest pc>ynont is waived on tho jtoerican loan a steiilar
waiver must also apply to intorost on loans from Empire governments•
Sterling Balances. Closoly rslcted to thq problem of interest
payments is tho pr ot>lem of payments on accumulutod sterling balances.
It is well known thut the Unitod Kingdom hes incurred lexge debts to
other countries, particularly to members of the Empire, in the form of
short-term bank balances. These balances arose largely through British
military expenditures ovorseas, as well as through imports which were
not matched by exports from the Unitod Kingdom. In pro-war yoars, many
of tho presont creditor countries normally held balances in tendon,
partly us a reserve against central bank liabilities and partly as &
moans of payment for intornutiond transactions. Nevertheless, the
sterling balances today have reached c lovel which is four or five
times the size of normal requirements, and if such balances wore made
freely convertible into non-sterling currencies there is no doubt that
tho demand for outside currencies would be entirely boyond the capacity
of the United Kingdom to pay. This mouns that an under8taiding must be
reached with the holders of sterling balwc^s for gradual repayment.
- k •
COMFIDBNTIAL
In the present financial agreement, the United Kingdom has committed
itself to seek an early settlement of all such buluncos. For this
purpose, the accumulated baluncos are to be divided into three cate*
goriest "(a) balances to be relousod at once, and convertible into
any currency for eurrent transactions $ (b) balances to be similarly
released by installments over a period of years beginning in 1951$
and (c) balances to bo adjusted as a contribution to the settlement
of war and post-war indebtedness. •• • •w
Since the British do not have the resources with which to
supply adnormally largo exports in the noar future, it is probable
that a large part of the sterling balances which are released under
these prospective settlements will bo converted into dollars or othor
currencies outside tho sterling area* This means that payments on
balances which &ro releaaod immediately will be made largely from
British gold and dollar reserves* Payments on the balances which are
released in installments, on the other hand, will presumably be mr.de
from the proceeds of current British exports. In order thevt such payments will not receive priority over payments on tho American loon, the
financial agreement contains two provisions with respect to released
sterling* First, in deciding whether tho United Kingdom1 s not income
from exports and invisible items is sufficient to meke an interest peyment on the American loon, not more than iii*>,75O,OOO may be charged
agednst such incomo in any one ye^r on account of released sterling
balances. Beyond this point, any additional payments must be regarded
as capital transfers. Second, if tho annual payment to the United States
is reduced by a waiver of interest in any year, a proportionate reduction
must be made in tho annual installments of released sterling balances.
The net effect of these arrangements is to insure that payments on
sterling balances, like payments on loons from other countries, will
not endanger the ability of the United Kingdom to make payments on the
loan from tho United States.
Exchange Arrangements and the Sterling Area, During the weir,
the United Kingdom adopted a comprehensive system of exchange controls.
This system was .emulated by the other countries in the sterling area,
and an integrated currency system wus developed with London at the
center* Under this system, all countries in the area turned over their
receipts of ^hord* currencies^-primarily dollars—to London authorities,
and payments for imports from the hard^currency countries were then
made by application to London. The effect of the sterling or op. exchange
arrangements and tho so-called dollar pool was thus to make transfers
between members of the sterling area and outside countries subject to
centralized control•
In view of Britain1 s difficult financial position, the
question naturally arose as to whether those exchange controls would
bo continued and even strengthened in the post-war years. The present
financial agreement has settled this question by committing the United
Kingdom to a system of free oxchanges on current account. TS/hile the
sections of tho agreement relating to foreign exchange are somewhat
complicated, two points pro particularly important* First, both
countries have agrood thut within a period of one year after the agreement becomes effective no restrictions will be imposed upon payments
- 5-
CONFIDENTLY
and transfers for current transactions* Exception to this rule is
made for balances of third countries accumulated before this provision comes into force, for restrictions made under the Articles of
Agreement of the International Monetary Fund, and for restrictions
necessury for finding and disposing of Gorman and Japanese assets*
Both countries agree, however, not to moke use of the clause in the
Monetary Hind Agreement which permits exchange controls in the tran.sition&l post-war years* Second, the United Kingdom ugrees to make
sterling freely convertible into dollars on current acoount us soon
as the agreement bocomos effective* Thtfse exchtngs arrangements
remain in effect until December 1951* by which dute it is anticipated
that more comprehensive urruigements will lu-.vo been made*
The exchange provisions of tho fin&nciul agroomont ore dis*
cussed in detail in unothor article in this Review* Those provisions
w e undoubtedly canong tho most impprtant pexts of tho agreement, for
they roprosont substantial progress in the move toward unrestricted
multilateral trade and commerce*
Import Arrangements* Equally important is the section of
the agreement relating to imports* In this section, each country
agrees not to impose or ihuintcdn qu^ntitutivo import restrictions
which discriminate against imports fror* the other country* TUfhile tho.ro
are exceptions to this rule, the general effect of the agreement is to
place inp.ort quotas on a non-discriminatory basis* Tho broad problems
of commercial policy in general ur© discussed in another article in
this Review* Even moro significant than the commercial policy section
of the financial agreement is tho joint statement regarding commercial
policy, which commits both countries to the support of a broad progrom
for removing trade barriors*
Conclusion* The financial agreement, together with tho
joint statements on commercial policy cjid on lond-loaso, mutual aid,
etc*, represents an integral pwrt of a broad progrcaa for reviving
post-wur internet!onal trude not only between tfrc two largest trading
nations in the world, but also betweon those two nations and tho rest
of the world* Bach part of the program is essential to the success
of tho entire program* But most important of all, trade cannot be
conducted on an unrestricted busis unless the financial stability of
the oxch^nge murkots is assured* The loan to th9 United Kingdom, by
filling the temporary gap in tho British bul^noe of payments, mokes
a substantial contribution towurd such stability*
"
6
~
Settlement of Lgnd^Lofig^f Surplus Proporty, and
Other Clftims
COMFIBBflTIfl.
Lewis Dembitz
In connection with the financial agreement between the United
States and the United Kingdom, tho various outstanding claims between
the two countries arising out of lend«*lease, or otherwise arising out
of the war, wore also settled* Accordingly, the agreement reached
includes a complete financial settlement between the two countries*
Tho principal Matters for considoration were (l) settlement for lendlease goods consumed during the wur, (2) disposition of lond-loaso
goods remaining in tht? hands of the British (*lend-leaso inventory11),
(3) payment for goods ordorod by the British under 1 end-lease before
V-J Day but not delivered until tvftor the termination of lond-leaso
("lond^le.ase pipeline11), (h) disposition of surplus property belonging
to the United States Government but located in the Unitod Kingdom, and
(5) settlement of all other financial claims between the two govern*
ments arising out of the conduct of the war* The agreement provides
for the payment of $650 million by the British in full settlement of
these items, payublo over a 55->y°l*r poriod on the sam* terms as the
terms of repayment of the $3*750 million of new money being loaned*
Tho $650 million is made up of an agroed ©mount of $532
million, covering tho lfl^nd-lease inventory* and United States surplus
proporty in the United Kingdom, plus $118 million estimated to coyer
the ^end-lease pipoline11 minus the not sum that will bo duo to tho
United Kingdom undor the settlement of tho miscellaneous financial
claims* 35io figure of $118 million will bo subject to adjustment when
an exact figure becomes available from a detailed accounting* These
amounts need not bo included in tho authorization to be sooured from
Congress, inasmuch us tho credits involved euro merely incidental to
sales of goods, or settlement of claims, for which settlement on such
a basis h^s ulroady been authorized by previous Acts of Congress*
For lond^lease goods consumed by the recipient during the war,
the original leM^lease a^poments between ^he United Stutos aid the
United Kingdom contemplated that cash payment might never be made* The
present agreement constitutes formal confirmation that no such payment
will be mude in respect of goods furnished by the United States to the
Unitod Kingdom under lend^louse or in respect of goods furnished by the
United Kingdom to the United States under reciprocal aid (reverse lendlease)* The principal considerations received for tho lend-lease goods
that have been consumed in thp prosecution of the wur are, of course,
th9 benefits received in the defeat of the common enemies. In addition,
in .accordance with the provisions of the original lond-le&se agreement
that looked toward post-wt«r action to promote the betterment of worldwide economic relutions, the commercial policy agreements now being
made (and other agreements that will be unier discussion in such fields
as telecommunications and civil aviation) may be regarded as further
fulfillment of tho objectives of the lend-lquse arrangemonts*
AB to the "lend-lease inventory," howevor, consisting of
lend«*leaso articles th*t vrore not destroyed, lost, or consumed during
the war, the original ugreomont provided that these goods should be
returned to tho United States at the Qnd of the omerg?noy as determined
by the President* The United States Government will actually want the
~
7
•
CONFIflBNTI/lL
return of very fow or these articles. Tho British .armed forces are to
retain possession und use of the quantities for which thoy have a continuing need* As to the remainder, v/hich is to be loft in British
hands for conversion to civilion peace-time uses or for scrapping, the
present agreement arranges for tho trunsfor of outright ovmorship to
the British Government. This remainder consists partly of durable
goods (including aircraft and other munitions items); those items
range from new articles, not yet put into usq, to those that have
suffered heavy use or battle damage, and from articles readily usable
for civilian purposes (such as transport aircraft) to articlos usable
only for military training purposes or for scrap* The inventory also
includes substantial amounts of non-durable goods that were awaiting
consumption at th$ end of tho war, including food, clothing, end
products*
During the courso of the rooent negotiations, thore was
tfonsidored the possibility of making a detailed inventory of the
it$ms in tho hands of tho British and then negotiating on the basis
of this* inventory to dotornine a fair price to bo paid by tho British
for outright ownership of tho goods involved* This procedure, however,
would huvo involved bargaining on tho prospective peace-time values of
thousands of individual itoms, and on the dollar pricos at v/hich the
British would bo justified in buying pach item for foroign exchange in
preference to using new items of their domestic manufacture* Therefore, it was considered preferable to agree on a bulk payment to cover
the total estimated valu^ for pet.ee-time purposes of all tho articles
in thu inventory that have poaeo-timo uses and thut are redundant (or
are expected to become redundant) to the needs of the armed forces*
The payment of $532 million is to be doomed to include paymont in full
for til articles th~t t+ro converted to civilian end-uses, and for
military equipmont that becomes surplus and is disposed of as scrap*
The items in use by the British urmed forces are not included, and no
paymont'for these is contemplated; the United States retains a right
of recapture as to those items, but has indicated that it doos not
intend "to exorcise generally* this right of recapture.
I further category of claims to be settled concerns itojns
in the tflend^loase pipeline11—i*e*, goods that wer$ ordered by the
British Government boforo V^J Day, for v/hich delivery undor tho lendlease ugreomont w^s contemplated, but v/hich v/ere gwlting delivery or
were still in process of manufacture when lend-.lease terminated. It
is $eti®&ted thut the total value of such goods delivered between V-J
Day and December Jl, I9J4.5, will bp about §172 million; the figure of
^118 million represents this amount minus the estimated $54 million of
miscellaneous financial claims to be credited to the British*
In the oases of othor countries having similar lond-loase
orders outstanding, arrangements are being n&de or have boon made
whereby they will take delivery of the goods and, if not in a position
to pay cash, will pay the United States Government in dollars over a
30-»year period with interest at 2-3/8 per cent* In the case of the
British, payment for these goods is to be made on the seme terms as
those being madtf for rop^yment of tho $3#75O million now credit* This
- 8 -
CONFIDENTIAL
may.appear to be giving more favorable terms to the British than have
been given to some other purchasers,* but these terms are tho swno as
would have resulted if the now credit had boen increased by $118
million and the British had then bought the "pipeline" goods for cash.
Those items consist of new goods and the agreed payment is approximately equal to their cost plus freight; many of tho outstanding orders
ware of course cancelled on V-J Day, and the j>r,esfmt agreement covers
the remainder on which delivery is being completed.
The problem of disposal of surplus property was similar to
that of the lend-lease inventory, in that the property involved consisted of a heterogeneous mixture of durable and consumable goods in
vurious stages of depreciation and with various degrees of convertibility to peace-time us<n The surplus property under discussion, however, consists, not of articles U.reudy in the hands of the British,
but of articles in the possession of the ipnerioun rarood forces, which
happen to bo located in tho United Kingdom. Thoro are also fixed
installations in the United Kingdom in which the United States has an
interest to bo disposed of. The transfer of ownership of all these
items to the British is covered by the $532 million payment.
The agreement also includes tl*o settlement of miscellaneous
financial claims of the United States and the United Kingdom aguinst
eeah other. Tho items to be settled include payments for goods which
were delivered under lendfloaso or undor reciprocal-aid and subsoquently resold by tho recipient, rofunds of omounts paid by ono party
to the other for articles that should h^ve boen supplied under the londlouse agreements without payment, reimbursements in oases where either
party made expenditures for the joint account of tho two allies, end
tho like. The agreed items result in a balunce of $5U million to be
credited to the British. It is agreed thvb this figure, in combination
with tho sottlomont being made for the lundrleuse inventory rotcdnod by
tho British, uxd with certuin specified classes of claims reserved for
later settlement, will constitute the complete and fined settlement of
*11 claims between the United States and the United Kingdom arising
out of lend-le^se (and reciprocal aid) deliveries or arising otherwise
out of th<* conduct of the
- 9The Fund, jSxchvJage Restrictions, *JKI $ho British
Loan /groetrient
~
CONFIDENTIAL
Alice Bournouf
The British loan agreement has very important repercussions with
respect both to the prospects of acceptance of the International Monetary
Fund and the prospects of achieving its ultimate objectives• First of all,
British acceptance of Bretton Woods is implied in the Joan agreement• It
is understood that the British will consider the Bretton Woods Agreements
in Parliament this week and acceptance in short order is practically as* .
sured* Since China has already taken the necessary steps, acceptance by
Canadaf France, South Africa, and ope or two countries with very small
quotas will suffice to bring the Agreements into force fJL/ Secretary Vinson has stated that he is confident the countries named will accept the
Agreements before December 31a ^d the prospects of meeting the deadline
are decidedly better them they were a few weeks ago.
The second, and most important, connection between the British
lostn and the Fund is that the loan will ©nablo Britain, and probably several of the sterling area countries, to eliminate exchange restrictions
on current transactions much sooner than w u l d have been possible without
the loanf Furthermore, without the loan Britain and some of the sterling
area countries might have been forced to resort to restrictions during tte
early years to such an extent that vested interests would have seriously
prejudiced the possibility of their eventual removal, The Fund aims to
eliminate exchange restrictions on current transactions so that residents
of all member countries will be free to buy in the cheapest market and
so that the proceeds of exports to any one member will be available to
finance purchases in any other member country• The changes of achieving
the ultimate objectives of the Fund, therefore, are greatly improved by
the loan*
The third direct connection between the loan agreement and the
Fund Agreement is that there are a number of commitments relating to exw
change restrictions in the actual loan agreement. These commitments are
different from, and in certain respects stricter thaja, the obligations
the United Kingdom will accept as a jneriber of the Fund* It may be worthwhile to examine the commitments and interrelations in detail and tp analyse the extent to which the commitments in the loan agreement assure
greater freedom from exchange restrictions than would be assured by membarwhip of the United Kingdom in the Fundt Assuming that the United Kingdom
accepts the Fund, it seems reasonably certain that the loan itself will be
of more fundamental significance as far as the removal of exchange restrictions is concerned than the precise commitments concerning restrictions in
the loan agreemsnt* Conditions may even ariss under which it will be im~
possible for the United Kingdom to live up to the stricter commitments in
the loan agreement•
There are four clauses in the io$n agreement which relate to ex- .
ehange restrictions• One refers to restrictions imposed by the United
Kingdom (or the United" States) on current transactions in general; another
refers to restrictions imposed by the United Kingdom on current transactions with the United States and vice versa; the third refers to the convertibility of sterling proceeds of exports to the United Kingdom from
See this Review #&3#"" yxv
tlOm
CONFIDENT I/L
sterling are* countries; and the fourth refers to the convertibility of
any sterling balances available for use for current transactions* The
fundamental purpose of obtaining the commitments contained in these four
clauses is the same as the purpose of embodying commitments of a similar
nature in the Fund Agreement* Two clauses directly obligate the United
Kingdom not to restrict payment for current transactions during a period
ending on December 31* 1951 except with Fund sanction or approval and even
then not on transactions with the United States unless the dollar is
scarce, The other two clauses obligate the United Kingdom, for the life
of the loan agreement, not to make payments in sterling or let sterling
be available for current payments unless it is freely usable in any currency area* These clauses aim to eliminate a type of currency arrangement under which the United Kingdom and the other countries concerned have
a strong incentive to discriminate in favor of purchases from countries
parties to the arrangements afcd against purchases from other countries *
Each of the four clauses will be discussed in detailf
General Clause
The clause in the loan agreement which applies to restrictions
on current transactions in general is 8(ii)* The obligation of the United
States and the United Kingdom in this clause is not to impose restrictions
on payments and transfers for current transactions, exoept in conformity
with the Fund Agreement, during a period from one year after the date on
which the loan agreement comes into effect until December 31* 1951 * In
addition the United States and the United Kingdom promise, after the loan
agreement has been in effect for a year, not to continue tp invoke the
special transitional period clause in the Fund Agreement (Article XIV),
unless in exceptional cases they agree otherwise^/ Clause 8(ii) means*
thenf that the only restrictions imposed by the United Kingdom on payments
and transfers for current transactions during the stated period must be
(j) restrictions permitted under the Fund Agreement when a currency has
been declared scarce (Article VII) or (2) restrictions approved by the
Fund under its general power to approve or disapprpve of any restrictions
a member wishes to impose (Article VIII, Sections 2 and 3) *J
In order to understand what is involved in the promose not to
continue to invoke the transitional period clause in the fiind Agreement it
1/ The'phrase "unless in exceptional cases they agree otherwise must refer to the possibility of an agreement to postpone the date on which restrictions imposed under the transition period arrangements are discontinued since ono3 a member has eliminated its transitional period restrictions it can not reimpose restrictions under the transitional
arrangements provisionf
This clause does not refer to the period after Decamber 31 $ 19^1, but
restrictions on current transactions oan be imposed by the United Kingdom after December 31t 1951* only in the two cases just mentioned provided- the United Kingdom continues to be a member of the Fund. However,
nothing in the loan agreement limits the United Kingdom's freedom to
withdraw from the Fund after December 31 $ 1951 • I* might ev*n be argued that Britain could withdraw from the Fund before that date provided
it imppsed restrictions only in the two cases described and provided the
Fund was willing to approve or disapprove of restrictions imppsed by a
non-member *
-11is necessary to recall briefly iwhat this clause provides. The clause
permits members to maintain and adopt exchange restrictions during the
transition period and the provision implies that this period is expected
to last from 3 to 5 ysars t The Fund has power to require a member to
withdra#w exchange restrictions maintained under the transitional ar~
rangements if it deems them unnecessary but it is not clear whether this
applies only after 5 years or at any timsf Furthermore, each member
promises, even though it maintains exchange restrictions under the transitional arrangements# to remove them as soon as it deems it possible,
without the restrictions, to balance its transactions without undue use
of the Fund*
The commitment not to continue to invoke the transitional arrangements for more than one year after the effective date of the loan
agreement, therefore, may not alter substantially the rate at which the
United Kingdom eliminates exchange restrictions in the transition period
ais compared to the rate at which it would have eliminated them? assuming
the loan had been made available without this commitment, under the transitional arrangements in the Fund Agreement• Under the transitional arrangements the Fund might require speedy elimination of restrictions be**
cause the loon would enable the United Kingdom to balance its transactions
without such restrictions. On the othvr hand, under the loan arrangement
there may be agreement to postpone the date on yrtiich the transitional
period restrictions are eliminated. Furthermore, undor the loan arrangement the Fund may permit restrictions after that date, under its general
power to approve or disapprove of restrictions, which may be no less
stringent than those the Fund would have allowed the United Kingdom to
maintain under the transitional arrangements« The principal affect of
the commitment in the loan agreement^ than, is to shift ths burden of
proof from the Fund to the United Kingdom* Under the transitional ar^
rangements clause the burden of proof is on the Fund to show that the
United Kingdom can afford to eliminate restrictions whereas if the United
Kingdom applies to the Fund to approve the imposition of certain restrict
tions, the burden of proof will be on ths Unitad Kingdom to show thct it
needs to impose them.
Clause Governing transactions with the United Statesf
In Section 8(i) of the loan agreement the United Kingdom agrees
that from tho effective dat$ of the loan agre-ement-^that is one year earlier than the date on which the general obligation just discussed comes
into force—pthe United Kingdom will not apply exchange controls in such
a manner as to restrict payments or transfers in respect of products imported into the United Kingdom from the United States, or to restrict
the use of sterling balances in the hands of United States residents
arising out of current transucticns> This obligation applies only until
December 31# 1951# &ad does not alter the >right of th** United Kingdom to
impose restrictions at any time in ca$e the dollar is declared scarce
by the Fund. During the first year of the loan agreement, therefore,
-12 -
COHPIDBHTI/L
the United Kingdom, under the terms of the loan agreement, can impose
exchange restrictions on transactions with other countries under the
Fund transitional arrangements as provided in 8(ii) but not on trans•*
actions with the United States• Presumably, also, the United Kingdom
can not impose exchange restrictions on current transactions with the
United States at any later time during the period covered by 8(ii) even
if the Fund should approve the imposition by the United Kingdom of restrictions on payments for current transactions in general under Ar*
ticle VIII. This definitely goes beyond any obligation pf the United
Kingdom as a member of the Fund* It raises a problem since the Fund
aims to eliminate disoriminatory restrictions and would probably not
want to approve the imposition of any exchange restrictions by the
United Kingdom on current transactions when transactions with ths United
States oould not be restricted#/
l/ Clause 8(ii) presumably does not apply to transactions with the United
States since clause 8(i) is stricter in at least two respects and not
less strict in any respect, The specific phrase in 8(i) referring to
the use of sterling balances held by United States residents is dif->
ficult to interpret« Possibly it means tha.t sterling, balances arising out of current transactions in ths hands of United States rest*
dents can at any time be used freely no matter when tiie ''current11
transactions took place• However, refusal to allow frse use of bal~
ances not recently acquired as a result of current transactions would
be considered under the Fund Agreement as a restriction on capital
rather than current transactions•. If this is the meaning of the
phrase, then* it gives the United States a preferred position and
limits Britain's general right to control capital transfers until
December 31 # 1951 • Perhaps the phrase is only meant to refer to
sterling balances arising from current transactions accumulated prior
to the effective date of the loan agreement*
-13 m
CONPIPBHTI/L
Clause Governing Transactions with Sterling Area Countries
Section 7 of the loan agreement relates to transactions between
the United Kingdom and sterling area countries. The obligation of the United
Kingdom comes into effect not later than one year after the effective date
of tho loan agreement," that is at the same time the general obligation under
8(ii) comes into effect, unless in exceptional cases a later date is agreed
on* However, it applies for-the whole life of the loon agreement instead of
only until December 31, 1951. The obligation is to make H h o sterling receipts from current transactions of all sterling oxer, countries—-—freely
available for current transaction^ in any currency area iririthout discrimination • «
The real purpose of this clause is to eliminate discriminatory exchange restrictions on payments to the United States by the United Kingdom
after December 31, 1951 and by sterling area countries during all but the
first year of the loan agreement. But the clause does not impose direct
obligations on either the Utoited Kingdom or the sterling cxea countries to
avoid such restrictions. As long as these countries belong to the Fund any
exchange restrictions imposed must, of course, be approved by the Fund* This
clause, however, will tend to eliminate or at least greatly reduce such restrictions even though the countries concerned withdraw from the Fund. It
will do so Igr outlawing a type of monetary arrangement v/hich would make it to
the advantage of the tfaited Kingdom and the sterling area countries to impose
such discriminatory restrictions.
During the war the United Kingdom has p&14 £or purchases from the
sterling area in sterling available for use only in the sterling area. Both
the United Kingdom and the sterling area countries have been under pressure,,
therefore, to discriminate in favor of payments within tho sterling area.
The Utoited Kingdom under this arrangement could purchase in stez\Ling area
countries without any fear of an immediate drain on her gold and dollar reserves and sterling area countries could finance purchases in the sterling
area with sterling balanqes which were not immediately available for any
other purpose. Under this sterling area clause the Ubited Kingdom cannot
make payments in sterling which is not Qonvertiblo into any other currency}
accordingly the wartime arrangements must be discontinued.
The obligation to make sterling receipts from current transactions
freely available for current transactions in any currency area is different
from the obligation not to restrict payments and transfers for current transact
tions as contained in the Fund Agreement and in the two clauses in the loan
-Ik •
CONFIDENTI/L
agreement already discussed*-*' It is less strict in the sense that it leaves
the Itoitcd Kingdom free to prevent its citizens obtaining the currencies of
sterling area countries to pay for current purchases or to prevent them
pledging sterling payments for current imports from sterling area countries*
In other words the Itoited Kingdom could restrict payments for current transac
tions with sterling area countries as long as, in cases in which it allows
its citizens to contract to pay in sterling, it makes that sterling available
for current purchases elsewhere.%/ In another sense it is much more strict
beqause the sterling receipts of sterling area countries from current transac
tions must be made freely convertible into any currency and no exception is
mode even for the case in which a currency is declared scarce by the Fund.
ttoder Section 7, if a sterling area cbmtry sells goods to the Itoited
Kingdom and wants to use the sterling proceeds to* build up investments or
reserves in the United States or in some third country it may be prevented
from doing so* Prestanably, the United Kingdom can say the sterling re-*
ceipts can only be used to buy dollars to psy for purchases of goods snd
services from the United States* Under the General clause 8(ii), on the
other hand, a non^sterling area country can insist on payment for current
exports and if there are free exchange markets the receipts can be w e d
for* current or capital transaction^• However, if the Itoited Kingdom insists on its privilege under the Fund Agreement to make payment in the
non-sterling area currency through the Fund, the non-sterling area country
may not be able to draw on the Fund to finance a capital transfer* The
limitation for sterling area countries that the sterling need only be convertible into other currencies for current transactions is perhaps then
no more strict than the limitation which implies to other countries under
the general obligation of the United Kingdom not to restrict payments for
current transactions
2/ This raises the whole question of how to draw the line between exchange
restrictions and quantitative import restrictions. Tl?e use of import
restrictions will be governed in general by the terms of the commercial
policy agreement* It might be argued that if the ttoited Kingdom refuses
to allow its citizens tp contract to purchase gopds abroad it is essenrtially imposing a quantitative restriction on transactions rather than
an exchange restriction or a restriction on payments and transfers* However, in the case of the Itoited Kingdom, which normally makes contracts
to purchase goods in sterling area countries payable in sterling, it is
only by limiting the actual contracts made that restrictions on current
payment3 can in fact be imposed* Under the general clause 8(j[.i) which
obligates the United Kingdom npt to impose restrictions on payments end
transfers for current transactions the Ttoited Kingdom cannot refuse to
allow its citizens to contract to make payments for current purchases
unless tho?e purchases are inconsistent with quantitative restrictions
on imports imposed by the Itoited Kingdom* Such quantitative restrictions
will presumably have to be in terms of specific commodities and could
not be as comprehensive as a general restriction forbidding Ubited
Kingdom citizens to contract to nake payments for current purchases over
and above a certain value per month or per country, for example.
*15 "
COHFIBBHTI/1
If dollars were declared scarce the ttoited"Kingdom should certainly be able
to take steps to conserve its limited supply of dollars to finance its own
purchases in the United States. Perhaps it could insist that payments to
sterling area countries be made in their own currencies or obtain an agreement from sterling area countries that they will not ask to convert sterling
into dollars* But both would be contrary to the intention of the clause as
drafted and it seems more likely, therefore, that the Ufcited States and.
United Kingdom would agree to make an exception for a scarce currencyM
The sterling area clause also provides for the elimination of the
sterling area dollar pool* The statement concerning the dollar pool is
indirect and strangely worded but this %a its obvious intention. The dollar
pool involves restriqtions on the sterlings-area countries1 rights to use the
foreign exchange proceeds of their exports? they would obviously not be
willing to continue this arrangement in the postwar period in any case.
Clause Goveriftng Convertibility of Sfrerlfog Balances fo Gepera^
The final clause which relates to exchange restrictions is clause
10 which disousses primarily the settlement of accumulated sterling balances.
This clause obligates the Ubited Kingdom to make settlements under which any
sterling balances released must be convertible into any currency for current
payments. Also, any sterling balances, whether released under the settlements
or otherwise available for current payments at any time later than one year
after the effective date of the loan agreement, must be convertible into any
currency for current transactions. This commitment appears to apply for the
entire life of the loan agreement and the last clause appears to apply to
existing sterling balances and all future accumulations of sterling balances
by the nationals or authorities of any country. In general it seems reasonable and desirable to insure that no sterling balances will be available for
use only in the sterling area or any other limited area. The purpose is to
eliminate discriminatory exchange restrictions as has been explained in de-*
tail in connection with the sterling area clause. But %n this clause, as in
the sterling area clause, the loan agreement seems to go too far in insisting
that sterling balances must be convertible into any currency whether or not
it has been declared scarce by the Fund.
One obvious result of the requirement that sterling balances held
by any country shall never in the future be available fpr current transactions
unless they are convertible into any currency is to eliminate the possibility
of the United Kingdom continuing the type of currency agreement with nonsterling area countries which it has concluded in the past year with a number
1/ ttoder the fund Agreement and the two clauses already discussed the Ufaited
Kingdom has the privilege of paying a country in its own currency. Even
if no currency has been declared scarce the United Kingdom can insist on
its right to make sterling balances convertible only into the exporterfs
own currency through the Fund, (See R.F.D. £4.) It may be suggested
that the general clause 8(ii) should govern transactions with sterling
area countries when it is either more or less strict than the sterling
area clause but there %a no*evidence that this was the intention of those
drafting the loan agreement.
- 16 -
COHFIIEHTI/L
of western European countries• Under.the agreement with Sweden, for
example, Sweden agrees to accept payment in sterling balances for exports
to the United Kingdom with the understanding that these balances can only
be used to meet payments for current transactions in the sterling area.
Bilateral agreements of this sort do not necessarily involve any restrictions on current transactions forbidden under the Fund,Agreement, nor would
they necessarily be outlawed by the Fund as discriminatory currency arrangements* As long as the countries concerned were members of the Fund,
the Fund could see that they did not adopt the type of discriminatory
exchange restrictions which the agreements, like the wartime sterling area
arrangements, contemplate•
*
This commitment in the loan agreement outlaws this type of
monetary agreement, but, like the sterling area clause discussed above,
does not outlaw discriminatory exchange restrictions directly* Withdrawal
from the Fund would leave the United Kingdon, after December 31, 1951,
and the other countries concerned free to adopt such restrictions• But
the Utaited Kingdom would not be able to make bilateral financial agreements
of the type recently made which tend to lead to the adoption of such restrictions*
- 17 -
with the British on Commercial Polioy
CCEFID3OTBL
C. R# Harley
Of tho data released to t t e press On December 6, none i s of greater
importance than the "Proposals for Expansion of !?orId Trade and Employment"^
issued by the Department of ^tate as a document prepared by technical experts
of the Unitod States Government. It i s an open secret that tho main portion
of that document, the section entitled "Proposalsff for Consideration by an
International Conference on Trade and Employment, while originally drafted by
United States officials, i s , as i t now standSj the product of long and detailed
negotiations with tho British. In a joint statement regarding tho understanding reaohod on commercial policy, the Government of tho Unitod Kingdom expresses
"full agreement on a l l important points in those proposals and aooepts them as
a basis for interactional disoussion#" I t i s further rnrealod that tho two
governments will begin preliminary negotiations "at en early date" batwoun
themselves and rdth othor countries in order to develop concrete arrangements
to oarry out tho proposals* During those preliminary negotiations (preliminary
to a full-soalo international conference which the United Nations Organization
•/ill bg askod to call not later than the summer of. 1S£*6), the United States
will attempt to negotiate reciprocal t a r i f f reductions with a limited number
of countries. These negotiations will be carried on under the Reciprocal Trade
Agreements Act, renewed by Congress in- June of this your. I t will be recalled
that at the time of renewal the Act was strengthened to empower the President
to reduce t a r i r f s by as much as 50 per cent bolow the rates prevailing on
January 1, i
The'proposal s for Consideration by an I n t e r n a t i o n a l Conference on
Trade and Smployment" cover twenty printed pages* t h i s a r t i c l e w i l l attempt
t o summarize and analyze only the most important of the provisions contained
therein* The document i s divided into three p a r t s . Part "A", i n tho nature
of a preamble, s t a t e s the need for cooperative action i n regard t o tho problems of employment, trade b a r r i e r s , and discrimination as an indispensable
supplement to the Brotton Tfoods Agreements, already submitted to tho various
governments* Part "Btf consists of a fow b r i e f paragraphs stressing t h a t
maintenance of "approximately f u l l employment" in the major i n d u s t r i a l and
trading nations i s a p r e r e q u i s i t e t o expansion of i n t e r n a t i o n a l trade and to
r e a l i z a t i o n of l i b o r c l i n t e r n a t i o n a l agreements i n tho fiolds of coxnmoroial
p o l i c y , commodity problems, c a r t e l problems, monetary s t a b i l i z a t i o n , rxxd
ment t In order t o effectuate tho aims of r full omploj'mant policy, onch s i g natory nation w i l l bo asked t o undertake appropriate domestic measures t o .
aohievo and maintain full omplojiuent i n i t s own ar^a, t o exchange information
on employment problems, t r e n d s , and p o l i c i e s , and t o consult regularly with
othor nr.tions on employment problems. A much more important undertaking ro~
quested i s t h a t "No nation w i l l seel: to maintain employment through mocsuros
which arc l i k e l y t o crep.to unemployment i n othor countries or which e.ro i *•compatible with i n t e r n a t i o n a l undertrJcings do signed t o promote an expending
volume of i n t e r n a t i o n a l trado and investment i n accordance with comparative
efficiencies of production/ 1
- is ll lt
Part
C t entitled "Proposals Concerning an International Trade
11
Organization, constitutes the principal portion of the document• Chapter I
expresses the purposes of the proposed Organization in terms comparable to
Article VII of the Haster Lend-Lease Agreements - - the expansion of thu production, exchange, and consumption of goods, and the creation of eoonomic
conditions conducive to the maintenance of world peace. Chapter II states
that the original members of the Organization should bo those countries p a r t i cipating in tho Conference which accept membership, a phraseology whioh does
not disclose whether or not certain neutral or oa>onomy countries will bo
eligible for original membership,
Tho spooifLo commercial polioy. provisions to bo presented to tho
proposod trade conference aro contained in Chapter III (General Commercial
Policy), Chaptor IV (Restrictive Business Practices), and Chapter V (ihtorgovwrnmcmtal Commodity Arrangements). Some of the provisions will bo dis~
pussod in the following paragraphs*
Tariffs and Preferences^ This w&s doubtless one of the thorniest
problems facing the nfcgbti&tors and i t i s in no way surprising that the provision.? on which agreement was reached i s only slightly moro stringent, from
the Briti sh jpoint of view, than the commitment accepted by the United Kingdom
in Article VII of the Master Lend-Leese Agreement. In the lettter document the
United Kingdom undertook to cooperate with tho United States i n "agreed action
• • • directed t o • . • tte elimination of a l l fonns of di scriminatory troat~
mont in international commerce, and to reduction of t a r i f f s and otter trade
barriers." In the present "Proposals" the link between reduction of t a r i f f s
and elimination of tariff preferences i s ovon more clearly rbatod, r.s ovidonood
by tho phrtset w Aotion for tho oliraination of tariff profcrwncos i s to bo
takon in conjunction v/ith adoquato moe.suros for tho substantial roduotion of
barriors to world t r a d e " It may bo presumed thr.t thu United Kingdom v/i 11
retain a fair11moasuro of bargaining power concerning what tariff reductions
aro "adoquato and "substantial" oA tho part of, for oxnmplo, tho United $tatos t
Tho Unitod Stf;tos received throo specific assureincos^ hov^ovcr, which will
materially further abolition of imperial prefwVwncos; one sluould not forget
that those oommitmonts work both wcys, i»e», tht-.t thoy will ^pply with equal
forco to preferential tariff policies of the United Status, such r.s those now
in force for tho benefit of tho Philippinec and Cuba»l/ Tho "Proposals" state
thr.t i t should be agreed as an i n i t i a l step in tho process of eliminrting
t a r i f f preforences thatj
in s6 ifer cis those proforoaoos apply to agricultural products, o»g. f sugar,
part of the advantage lost by tho supplying country through tho abolition
of profur^nco might bo regained through the receipt of gvnorous quota a l looations permissible undor Chapter I I I f Sootion C(e) t Tho price advantage
l bo lost v/hilo a sizable r.ssurod market might bo rotcinod*
- 19 -
CONFIDBNH/L
1.
Existing international commitments w i l l not be
p e m i t t e d to stand i n the way of action agreed
upon with rospect to t a r i f f preferences*
2#
All negotiated reductions i n most-favoredonation
t a r i f f s w i l l operate automatically to reduce or
eliminate margins of prefersnoe#
3»
Margins of preforenoe on any product w i l l in no
oaso bo inoreased and no new preferences w i l l bo
introduced.
The Tariffs and Preferences section also provides that oxport
t a r i f f s should bo opon to negotiation i n the samo way as import duties. Newspaper reports indicated that the United States would h&vo preferred the a b o l i t i o n of export tariffs#
!Ifeero aro, howoVwTf strong argujaents for permitting t
moderate export t a r i f f s for thu raising of necessary rovonuos i n backward
areas# Export tariff's &ay, of course, bo abused, particularly &t the wxporting
area enjoys a nr.tural monopoly in tho exported produot| incidence of tho ox~
port tax i n t h i s situation w i l l bo upon the importing nations* The reverse
situation may apply, however, i f an import duty i s loviod by a oovmtiry taking
a lcrgp proportion of tho ooinjnodity produced. Similarly the argument that an
export tax on a raw material may operate as a subsidy to an i n e f f i c i e n t processing industry i n the country of production may be applied with equal force
against a high import duty affording protection to i n e f f i c i e n t industries or
raw material producers# The type of export tax which bra proved most distaste^
ful to tho United s t a t e s in tho past i s tho discriminatory export tax under
which, for oxsmplo, t i n exported from Malaya to B r i t i s h rofinorios was l e s s
hoavily taxed than that exported to r e f i n e r i e s in non-Empire countries.
Under tho terms of tho "Proposals1*, member countries would undortako t o
abmdotf oxport dutios "v/hioh differentiate by reforjneo t o the destination t o
vfhich the goods r.ro exported. 11
A third paragraph of tho section undar discussion suggests that
countries granting t a r i f f reductions should«bo pomitted to include an "escnpo
clause 11 under which thoy Eiight tcJco temporary action to prevent sudden and
widespread injury t o any group of producers concerned* This provision was
undoubtedly inserted t o permit tho United States t o u t i l i z e tho tfoscape clause"
formula whioh hr.s boon developed i n recent years i n connection v/ith tho rociproct.l trade agrcoments progrrm.l/ TJhi^o clauses of t h i s typo may introduce tho
danger that some carefully negotiated concessions may later bo withdrawn, they
provide a. useful tool for cllaying tho somotimos unrursojaablc fears of producerg*
1/ Article XI of tho trr.de agroomc'nt botrn^n tho United Str.tcs and Hoxi
(uffoctivo Janurjry 30, 191+3) contains tho l a t u s t version of this formula
The f i r s t sontonco of thc.t ngroomont i s as followsi
n
If, c.s a r e s u l t of unforosoun dovelopmonts end of tho conoocsion
granted on any a r t i c l o enumerated end described i n tho Sohodulos ennoxod
t o t h i s Agroomont, such artiolo i s boing iir^orted in nuch increased
quantities and under such conditions as to ccuso or threaten serious in*j w y to domestic produoors of like or similrr a r t i o l e s , the Grovorncaon^
of oithor country shall be firoo to withdraw tho concession, i n v/holo or
i n par1?, or to modify i t to the extent and for such time as may be
nocossary t o prevent syoh injury* n
- 20 -
C0N?in3NTI/I
Quantitative Trade Restrictions* It has been widely recognized
that during the inter-war peHoT^uariti^ative trade restrictions constituted
a far nore disruptive influence in international trade than did tariffs. In
general, quantitative restrictions create more inflexible barriers than
tariffs; they can usually bo applied or changed moro rapidly? thoy can bo •
usod with groatqr precision against specified products or against specified
countriest The precision with which qtaota restrictions may bo employed i s a
faotor oommqnding thorn to tho use of governmental acenoiosi i t may bo no
criticism of tho tool that i t lends itsolf to the oxooution of highly discriminatory polioios# In spite of the first subtitle of tho section —
"Gonoral diminution of quantitative* rw&trietions" — i t i s clear that tho principlo purposo of tho provisions i s not so much tho elimination of quantitative
restrictions as it i s the avoidance of discrimination in their application^
Tho opening sentence states that, "Except as provided for olsewhoro in this
Chapter, membors should undertake not to maintain any quotas, embargoes, or
other quantitative restrictions on their export or import trado with othor
members." Tho rest of tho Section enlarges upon the exceptions to this uxriorteking and on the preservation of equality of treatment in tho application of
quantitative restrictions* Tho major exceptions to tho prohibition of quantitative restrictions aro fivet
1) A general exception for approximately three years on export
or import prohibitions or restrictions essential to a) the
efficient use of shipping, b) tho equitable international
distribution of products in short supplyf o) the orderly
liquidation of surplus government stocks*
2)
Import quotas may be plaoed on agricultural produots i f these
are necessary to the enforcement of governmental measures
which operate a) to restrict the quantities of like domestic
produots which may bo marketed or produced, or b) to remove
a temporary surplus of like domestic produots through distri^
bution free of chargo or at below-mcrkot priceB.
3)
Restrictions required to safeguard tho belrnoo of payments.
(This exooption is to bo operative undor conditions and
procedures to bo agreed upon.)
4)
Restrictions applied in accordance with tho "scarce ourrunoy11
provisions of the International Monetary Fund,
5) Restrictions designed "to maintain the par valua of the currencies of territories having a common quota in tho International Monetary Fund."
Exception 1 will bocome inoporctive in a reasonably short time; exception h
will be appliccblo only whon tho Monetary Fund hec declared a currency to
be scarce and only for tho poriod during which the condition of scarcity continues* Exception 5 i s poorly irorded; i t undoubtedly moans to say no more
than that restrictions may bu imposed to maintain thv value of tho currency
of a territory in a constant relationship to the vt lvte of the currency of
tho controlling state. The provision i s unfortunate in any case (although
i t may not result in trade distortions of quantitative importance) inasmuch
as i t c.ppears to staaction mutual disoriminrtion between colonial areas and
their mother countries of the type which hr.e long been rightly condemned on
political^ social and economio grounds by students of colonial problems*
- 21 -
COHFIDfiHTI/L
Exceptions 2 and 3 are of major importance. Both the United States
and the United Kingdom have agricultural programs which w i l l permit quota
restrictions under exoeption 2(a) end any country could adopt similar programs
i f i t wished t o impose quota restrictions on imports* Moreover, such schemes
are most likely to be adopted i n respect to agricultural commodities of major
importance in world trade, e . g . , in cotton, whoat, sugar, moats, e t c . l /
Exoqption 3* permitting quota restrictions to avoid or t o correct a bUTlanoe
of payments d e f i c i t , w i l l also loavo a wide field for tho uso of quantitative
controls. Just how frooly this excoption can bo invoked, howover, was apparently not dooidod in tho 7/ashington negotiations. Tho "Proposals" state
that tho provision permitting tho uso of quantitative restrictions t o old in
tho bal&noa of payments should bu oporctivu ftundor conditions aid procedures
to bo agroad upon.11
Fortunately, the Section on quantitative restrictions contains provisions designed t o limit the extent of restriction which may bo imposed
through quota programs and to insure theit such programs w i l l not result in
discrimination. In connection with restrictions imposed for balance of payments reasons, "full application of nemdiscrimination11 i s called for once the
transitional p e r i o d ^ i s over. The agreed concept of non-discrimination i n
t h i s context i s of intorost; quantitative controls w i l l bo considered nondisorimlnatory i f thoy are edministorod in a manner which doos not discriminate
among souross of supply i n respect of any imported product. This moans thet a
program drastically restricting tote.1 imports of, say, vinos and porfumos, i f
j u s t i f i e d by tho pica that tho br.lejico of payments position roquircs curtailment of luxury purchases, would not bo considered as discrimination against,
say, Franco; similar restrictions on imports of cutoraobilos end e l e c t r i c washing machines would not bo considered discrir inction e.gsdnst tho United Stctos.
Tho criterion i s tho oquality of troc.tmont accorded to any given product from
any source rrthcr than the, overall pffoct which may rosult from the quantitative
restrictions imposed. I f r e s t r i c t i o n s ere imposed in acy mciinor which fpjlls
to discloso ths rolctivo share of imports r-llocttod to a l l rations, tho member
imposing the controls i s expected t o rovocl a l l tho r^lovcnt dr.tc. to aijy other
interested country upon the latter 1 s request. Any member w i l l be entitled to
objeot to the Organization i f i t f e e l s that balance of p a r e n t s restrictions
are being imposed in a manner not i n harmony with tte principles of the
1/ An exoeption not mentioned above, since i t w i l l be discussod in connection
*"* with Chapter 5 cf the "Proposals11, permits import quotes imposed under
intergovernmental coxamedity arrangements approved by the Organization.
2 / The "transitional period11 i s to be dotominod by a procedure analogous
"~ t o that contained in Article XIV of tho International Monetary Fund
Agreement.
- 22 -
COHFIEBHTI/L
Organization* R e s t r i c t i o n s imposed i n connection with domestic a g r i c u l t u r a l
programs should, i n general, not reduce imports r e l a t i v e l y t o domestic production as compared with the proportion prevailing in a previous representative
period* They should be "no more r e s t r i c t i v e than necessary, should be removed
as soon as they cease t o bo necessary t o the operation of the governmental
programs which they supplement, and should bo made the subject of periodic
consultation with tho Organization 11 * They should i n a l l esses bo applied i n
a non-discriminatory manner*
Subsidies* On tho subjoot of subsidies tb.3 "Proposals 11 arc extremely
weakt I t appears as though the Unitod States sought t o r e t a i n froodom of act i o n i n tho granting of both domestic end export subsidies and cis though t h United, Kingdom accepted t h i s position e i t h e r as e% wolcoroo assurance t h a t i t s
own program for subsidization of a g r i c u l t u r a l production would not be pro~
scribod or es a concession t o tho Unitod States* The f i r s t provision of the
Section asks simply t h a t any nction grcnting subsidies which act to increase
exports or decrease imports undertake t o koop the Organization informed of
i t s subsidy program, tho roasons for i t , and the profcablo effect of the subsidy on trado* The subsidizing n r t i o n should also bu propr.rcd, i f i t should
bo agreed that serious injury to v/orld trade threatens t o re cult from tho
program, to consult 7/ith other n; tions on possible l i m i t a t i o n s on tho quantit y of the domestic product subsidized ~- not on elimination of the subsidy*
Subsection 2 deals with export subsidies. Subject to c e r t a i n except i o n s , members are asked t o undertake to avoid p o l i c i e s ?/hich vrould r e s u l t
i n the sale of a product i n export markets a t a price lovrer than the domestic
price* The f i r s t exception e s t a b l i s h e s a t r a n s i t i o n a l period of not longer
than three years \f before t h i s agreement v/ill become effective* The second,
and major, exception is *ith reference to commodities i n surplus supply* I f
i t should be determined the.t a cor«modity i s or i s l i k e l y t o become i n "burdenseme \?orld surplus", consultation among the major producing and consuming
countries should sook methods of increasing consumption or reducing production,
methods which night inolude establishment of an i n t e r n a t i o n a l commodity agreement* If thoso stops provo unsuccessful within a reasonable period of time,
the provisions of both sub-sections 1 and 2 w i l l cease to apply to tho product
in question. I t would apgoar t h a t , i n the face of thuso provisions, any country
unpropared to enter i n t o a subsidy race with a wotlthy competitor might feol
required to go more than half-way i n soaking tho establishment and successful
maintenance of m i n t e r n a t i o n a l conmiodity arrangement* A f i n a l paragraph of
tho subsidy Section provides t h a t no country should employ export subsidies
so as to enlarge i t s she.ro of tho wetfld markut* as conpared with tbj share
prevailing i n a previous representative period*
State Trading* That the s t a t e trading provisions of the "Proposals"
are also weaJc i s not a s i t u a t i o n inviting criticism* No problem i n the f i e l d
of i n t e r n a t i o n a l trade presents greater d i f f i c u l t y than the atbempt to evolve
meaningful regulations for insuring mutual f a i r treatment i n trade betweatt
free and controlled economies* Section E of Chapter 3 cpnti-lns only two b r i e f
paragraphs r e f e r r i n g d i r e c t l y to t h i s problem; a third paragraph r e f e r s t o the
l e s s d i f f i c u l t quostion of state monopolies of i#dividu$l produots. The f i r s t
of these embodies tho so-called "coomoroial p r i n c i p l e s clause" and suggests
\j if, iidwavor, a msmbsr feels unable to cpmply with tto undertaking nt the
on4 of three y e r r s , i t may request an extension of time; tto request w i l l
bo acted upon by a consultative group composed of i n t e r e s t e d members*
- 23 -
COMPinSNTI/ji
that members engaging i n state trading should be influenced i n their conduct
of international business only by "commercial considerations, such eg price,
quality, marketability, transportation and terms of purchase or sale."
Critics of t h i s formula point out that commercial principles nay also include
a number of undesirable practices, such as temporary underselling in order to
secure a valuable mcrket, or bulk purchases of such magnitude *-e to t i e tho
supplier firmly to the buyer almost regardless of consequences* "Sum the
operations of any buyor or seller exceed a certain magnitude, tho normal rules
of frco enterprise prove inadoqucto t o prevent abuses; tho st&to trading
country i s likoly to occupy a monopoly position i n rasny products, and tho
comnioreial p o l i c i e s which w i l l be to i t s advantage may bo typical monopoly
praoticos. However t h i s may bof tho "coraraoroicl prise ipl^s clause" i e doubtlose a stop in tho right direction* The second rocommjndrtion for state
trading countrioc i s that they establish and announce global quotas revealing
the t o t e ! valuo of th* foreign puroht gus they intond to make from year t o
year from members of the Organization -ar a group. Those purchases would bo
distributed on the basis of tho non-discriminrtory policy outlined in the procoding sentences. Tho sizo of tho global quota would bo tho subjoot of
periodic consultations between the .etf tu trading country and tho International
Trade Organization.
Other Provisions of Chapter III+ Section P of Chapter III deals >
vdth exchange controls and'the relationship of the International Trade Organization with the International Monetary Fund; i t i s discussed ct length in
another section of t h i s issue of the Review. Section 6 l i s t s certain categories
of trade to whioh the provisions of the11'Chapter do not apply. Regulations r e lating to traffic i n prlsoiwoado goods, or to international trade in arms and
ammunition are exempt from the undertaking described. One exception which exporionce. shows may be abused i s that relating to rugulctions "nooossary t o
protect human, animal or plant l i f o or health 11 ; a provision celling for international eonsultrtion cxi such regulations would by in order. Exception 9
refers t o mor.suros tdkon in pursuance of obligations for the maintenance of
peace and security.
Section H contains thp provision that tho undertakings of Chapter
III should not prevent any mambor from joining a custome union, providing
that suoh customs union moots certain agreed c r i t e r i a . This may prove to
bo of some importance sinco several plans for tho organization of customs
unions in the prst have boon cbandonod as a result of determined disapprove!
on tho part of major trcding nations.
Section A should not be ignored. It l i s t s ten general commercial
provisions of very unequal ^significance. Among these are undertakings to
avoid excise taxes which discriminate agrinst imported goods; to agree to a
general definition of the circumstances undor which anti-dumping and countervailing duties may properly ba applied; to simplify customs formalities; to
reffrain from governmentally financed or orgonized boycotts or crjnpaigns designed tc discourago imports; end to transmit to tho Organization appropriate
trade information end str.tistics f
:
2l^.
COWFIDSNTI,flL
R e s t r i c t i v e Business Practices- (Chapter IV)* The alleged difference
of opinion between tiie B r i t i s h and United S t a t e s negotiators as t o appropriate
a n t i - c a r t e l p o l i c i e s was aired at some length i n ths p r e s s . According to
these reports, the United S t e t o s delegation favored an attempt to secure tho
passage of stringenb a n t i - t r u s t l e g i s l a t i o n i n t i l member countries v;hilo
the B r i t i s h argued the.t any such attempt would at b e s t require ©any years for
i t s success and would i n a l l probability bo f l a t l y r e j e c t e d by nvxiy countries*
I f t h i s was a true picture of tho rcspcotivo p o s i t i o n s , tho B r i t i s h advieo
has provailod* Chapter IV s t a t e s that thoro should bo individual and concerted of f o r t s ' t o "curb11 those business p r a c t i c e s i n international trado that
tend t o frustrate tho aims of tho Organization* Ta.this ond members may
opoporato (but do not pledge thqnselves t o do so) t o increase the e f f e c t i v e ness of remedial orders issuod any onu member. The Organisation i t s e l f w i l l
be impowered t o receive complaints agrinst tho operation of c a r t e l s end t o
request any member t o supply data rvlevrnt thereto* I f tho data warrants
action, tho International Trr.de Organization mcy make rcoomriundations t o tho
expropriate members and roouivo reports rs to tho implcamontation of those r o commendations* Aside ft*om t h i s , the Orcanizatipn-ojuxy conduct studios of r e s t r i c t i v e b u s i n e s s p r a c t i c e s , rjcoxmaond uniform national standards i n dealing
with oartol problems, and c a l l conferences of chamber c t c t c s for consultation*
IVhile the reported p o s i t i o n of the United States may hr.vo represented an impractical approach t o removal of tho very real and widespread
abuses carried on by private internetional combinations, the provisions of
Chapter IV are disappointingly mild# If, however, tho complaints received by
the Organization are given f u l l p u b l i c i t y end i t s rocomtoond&tions arc s p e c i f i c ,
some of the major offenders i n international c a r t e l c i r c l e s nay find t h e i r
a c t i v i t i e s greatly hampered*
Intorgovarnmpntal Cornmodity Arrangements (Chapter V)* Tho Chapter
on Intorgovernmoiital dbmmodity Arrangd&onts i s , i n tha v*rlter f s opinion, tho
most c l o s e l y reasoned and c e r e f u l l y prepared s e c t i o n of tho document* An
introductory paragraph points out that production cf and trade i n primary
commodities are exposed t o cortcin d i f f i c u l t i e s different i n character from
those generally e x i s t i n g i n tho ccso of manufactured goods, end tlu.t the repercussions o f sorious disturbanoos i n tho production c f primary products may
prejudice the prcspoct of gunord economic expansion* Accordingly i t i s suggested that, when a sorious d i f f i c u l t y threatens, tho countries most affected
should c a l l upen tho International Trade Organization to organize a 'Study
Group, composed c f rsprescntatlyoe cf tho i n t e r e s t e d neticne :nd of the
Organization, to examine tho underlying f a c t s of the commodity s i t u a t i o n i n
question* I f t h i s special stucty* shows th; t no adequate measures can bv found
to expand consumption rapidly encugh t o provent tho cccumulufcion of e x c e s s supp l i e s , tho Orgcni s a t i o n may be rsked to convene anintorgovornmontal con*
foroRoe for tho purpose of flwmlrig an intorgovsirrmontal ccjnxaodxty agroomont*
- 25 -
C0H*Ifl31?Tl/L
The objectives of any such agreement should ba threefold: t o
prevent the resort of any n&tion t o unilateral action which Y/ould tend to
shift the burden of adjustment to other countries; to prevent or alleviate
the serious.economic problems which might follow from the slow progress of
unplanned adjustment si to provide a transitional period during x>/hich adjustment of the particular commodity problem can be effected through tho operation of wide economic programs providing for tho appropriate shift of labor
end other resources to more product!vo use* In soaking those objectives
members Trill bo asked t o observe a number of specific principles* They will
be asked not to resort to intergovernmental commodity agreements u n t i l tho
investigations of a Study Group hrvo shown that a burdensome surplus hve
developed .or i s davolopii^j or that widespread unemployment has developed
or i s developing, oad t h r t correction of eithor situction through normal
competitive forces w i l l be unduly slow aid painful* I f the Study Group
recomends formation of an agreement, prospective mambor governments should
formulate and cdopt a program of economic adjustment designed t o remove
the nooossity for the agreement within & relatively brief period* Both
producing end consuming n t i o n s shovild pcrticipz to in frrxaing oommodity
agreements* Finally, tho Organization proposes t h r t member governments
should not rosort to intergovernmental commodity agreements with respect
to fabricated products unless the I#T*O* finds tlv t exceptional circumstmces
justify such action*
In operation, commodity agreements should adhere to the following
principle si
1* Admittance cf a l l interested countries on fair terms*
2*
Equal aggregate voting power for producing and consuming
interests*
3* Retention of adequate stocks to assure availability of
supplies at reasonable prices*
1|*
Inclusion of appropriate provisions to afford increasing
opportunities for supplying world requirements
from the mest efficient sources*
A commodity agreement should not remain initially in effect for r>cro than
five years and subsequent renewals of the agreement should net bo purraittod
unless tho participating countries can demonstrate that substantial progress
has boon made toward solution cf tho besio difficulties whioh brought the
agreements into being or unless tho agreement is sc revised as to bo effective
for this purpose* Full publicity should be givon to all phases of the
organization and operation cf ccnirodity cgroojnxmts*
- 26 -
COSTJ'IDBSTI/L
Among the exceptions which are not subject t o the provisions of
Chapter V are agreements r e l a t i n g to "the conservation of reserves of exhaustible natural resources". This appears to be an unnecessarily broad
exception; i t probably r e f e r s s p e c i f i c a l l y t o petroleum. Ihe paragraph
provides, however, that any agreements i n the uncovered category should
not be used t o accomplish r e s u l t s i n c o n s i s t e n t with the o b j e c t i v e s of
Chapter V, and that agreements involving r e s t r i c t i o n of production or trade
should e i t h e r be authorized by a substantial number of nations or be operated
under tho Organization*
Chapter YI f Chapter VI deals with the functions, o r g u n i z a t i t n
end prooadur© of tho proposed International Trade Organization. I t provides
that tho f i n a l authority of tho Organization s h a l l reside i n s Conference,
i n which a l l member s t a t e s w i l l bo represented* According t o the "Proposals"
as now framed, v o t i n g i n t h i s body w i l l bo on tho b a s i s of ono country—one
v o t e . A smaller Bxooutivo Board w i l l e x e r c i s e pov/ors dologr.tud to i t by tho
Conference. This Board w i l l have 18 members of which e.t l e a s t 6 w i l l roprosont nations of c h i e f ooonomic importance t o which pormanont seats TTLII be a l locatod. Tho "Proposals 11 provido that tha Executivo Board should regulate
i t s w n voting procedure. A Comoroiai P o l i c y Commission, a Commission on
Business P r a c t i c e s , and a Commodity Comivission w i l l each bo concerned with tho
functioning of tho I n t e r a c t i o n a l Trc.de Organization i n the r e s p e c t i v e f i e l d s
indicated by t h o i r t i t l e s . An Industrial md Mineral Unit i s contemplated
t o promote expansion of production and trcdo i n fabricated products, minerals,
and other primary products not under tho j u r i s d i c t i o n of tho Fbod and Agriculture Organization. Thoro w i l l be a S e c r e t a r i a t , under tho supervision
of a Dirootor-Go*xeral and throe or more Deputy Directorg->Goneral, t o provido
factual date cud expert a s s i s t a n c e to the vrrious bodies of the Intgrnction&l
Trade Organization*
@FedFRASER