Exploratory discussions on the future of GATT and commercial policy took place between members of the United States State Department and a group of our own officials, in Ottawa, on May 26 and 27. ⁵⁶ An informal record of these discussions has been circulated to interested departments.

The Americans took the position that it is desirable to proceed in November with the Review Session of GATT, even if the position of Congress is insubstantial and disappointing with regard to the future of United States foreign economic policy. The Americans evidently hope to submit an internationally negotiated parcel of proposals to a more receptive Congress in 1955.

In these discussions, Canadians expressed alarm at the prospect of commending the Review Session in circumstances in which the United States would be unable to increase its own commitments with respect to any part of GATT and in which it would be withdrawing from its present level of commitments in certain important respects, notably agricultural import controls. The Canadian officials also expressed distaste for getting involved in such important negotiations with the United States Administration, in advance of any indication whatsoever of Congressional willingness to accept the results. Mainly for these reasons, the Canadians felt it would be desirable to press for a delay in the Review Session of GATT until about the end of the first quarter of 1955, to provide additional time for Congress to consider the President's proposals.

In advance of the forthcoming meetings of the United Kingdom - Canada Continuing Committee, it is desirable that the above position be reviewed by the Interdepartmental Committee on External Trade Policy. It is clear that any position officially adopted on the timing of the Review Session of GATT should be sufficiently flexible to be revised in the light of developments in the United States. The Committee will also wish to bear in mind the possibility of various overseas countries moving toward convertibility and the desirability of adjusting the timing and substance of the GATT Review to the constructive needs of such countries. In the Collective Approach, it was made clear that the United Kingdom would wish, as part of a convertibility operation, to reach firm understandings with other important trading countries on the subject of the rules of trade during a transitional period. ⁵⁷ In reaching our own decision about the timing of the Review Session of GATT, therefore, it is desirable to explore with the United Kingdom the relationship of the Review Session to a convertibility operation.

A separate memorandum has been circulated by the Department of Finance, on the subject of Tariff Negotiations under GATT, including the re-negotiation of selected items now included in GATT schedules.

Confidential
[Ottawa], May 26 and 27, 1954

After a frank exchange of views, which were particularly divergent on the timetable for "reviewing" the GATT, the United States team left for Washington in the words of their leader "severely tested". We cannot say what impact may have been made on the State Department officials but we expect they are now reappraising the case which they expounded in Ottawa for renegotiating GATT this Fall. For our part, we continue to have very grave doubts about the wisdom of attempting the revision of GATT at this time. This memorandum provides an outline of the discussions - with as much detail of the specific proposals for rewriting the General Agreement as appears useful in the circumstances.

2. Evans said that their proposals concerning the timetable for the Review of the General Agreement were Administration views as such, but that their specific proposals for various parts of the General Agreement had not as yet been discussed with other agencies nor with Administration's political leaders.

Timetable for Review of the GATT

3. Evans declared that it had been decided in the White House both to seek a renegotiation of the organisational provisions of the General Agreement and to make at least a start on the substantive provisions this fall. The United States would propose that the Intersessional Committee meet this summer for a very preliminary exchange of views and that the Review Session commence in the second week of November.

4. Evans explained that the Administration wished to submit the renegotiated organisational provisions of the General Agreement to Congress early next year. He inferred that it might well be of some assistance to the Administration in obtaining a three year Trade Agreements Act in 1955 if the organisational provisions of GATT were already in a form which Congress could accept; and he suggested that the alternative was that a three year act might be jeopardised. He also saw other reasons for proceeding with the review this fall. The following developments would be taking place:

(a) In OEEC further progress would be made in considering the intra-European trade rules which would apply as countries moved towards convertibility or went convertible;

(b) The United Kingdom and the United States would be discussing standby arrangements for sterling convertibility.

These developments and the GATT Review are all closely related and if some progress were not made on each, it would be difficult to conclude any one of them. Finally, Evans observed that the State Department was worried at the possibility that those who had supported a liberal commercial policy would lose interest and heart if nothing seemed to be happening on the GATT this year.

5. We indicated that in our opinion this fall appeared to be an inopportune time to go ahead with the Review Session for several reasons:

(a) Canada and the United States represented the element in GATT which wanted high standards of commercial behaviour. Hitherto progress in this direction had been made at a time when U.S. commercial policy generally appeared encouraging to other countries and there were prospects of expanding trade owing to the U.S. power to negotiate tariff reduction. Now, however, the U.S. Administration appeared to have suffered a severe defeat. What had been described as the most important element of its program in the field of foreign economic policy had been set aside. While opinions might differ about the practical value of the contents of the Trade Agreements Bill, the fact that the Administration had acquiesced in the shelving of it appeared ominous to the outside world. Other countries might be justified in wondering whether the Administration would be in a better position next year than now to obtain necessary legislation. In this atmosphere (which was also affected by uncertainty about possible "escape clause" actions) it was hardly likely that other countries would be prepared to accept a tightening of the trade rules. Experience showed that it was very difficult to conclude satisfactory negotiations on these matters when there was not a fairly good idea of what the United States might do.

(b) To endeavour to renegotiate the GATT in this climate would be a very difficult exercise which might do real harm to the General Agreement. Moreover, the United States would be entering into such negotiations with the avowed intention of subtracting from its obligations on both the organisational and substantive sides. Previously the United States had been able not merely to move forward but in fact to provide some leadership. The GATT is a finely balanced instrument and it would seem likely that other countries might well use the Review in order to lessen their own obligations. The net effect might approach a disaster.

(c) The U.S. proposals concerning the agricultural provisions were for us perhaps the most troublesome feature of the circumstances which would exist at a review session this fall. International trade is becoming more competitive. The United States would be asking other countries to bind themselves concerning manufactures but to leave the United States free on agricultural products. Considering the nature of Canadian trade this was hardly a program which could be readily sold to public opinion here - particularly if there was no positive element in the package. There would have to be a reasonably balanced deal.

6. Evans did not dissent from our views. He could only take careful aim with what weapons he had. He observed that the United States program was not entirely negative and their "subtractions" from GATT would likely be modest. They would hope to make the GATT a more effective instrument both by strengthening the balance of payments clauses and by the United States possibly accepting GATT as a full fledged international organisation with well-defined procedures and with an effective secretariat. Rosensen observed, perhaps significantly, that account must also be taken of what the United States might be doing outside the GATT. If the United States supported convertibility for sterling this would be a forward movement and could provide a very favourable outlook. In such circumstances the major trading countries might be prepared (we thought the word he implied was "induced") to proceed with the GATT review.

7. We suggested that countries might not be ready in November to define their attitudes to the new long term trading rules and that it was hardly likely that November would provide the atmosphere which the United States side suggested might prevail.

8. There was some discussion about whether it appeared feasible to proceed with a review of the organisational provisions without getting into the substantive provisions. If such a separation was possible it might appear more feasible to have at least a partial review this autumn. This discussion was inconclusive but the following points emerged:

(1) A review of the organisational and substantive provisions could not be entirely divorced, largely because some of the important substantive provisions (i.e. Balance of payments and economic development) involved procedures which would be affected by the proposals for modifying the organisational provisions;

(2) Some sort of start might be made on both the organisational and substantive provisions - which might be enough to show the U.S. Congress in what direction the Review was moving.

(3) A renegotiation of some of the provisions might be completed this fall but accepted only ad referendum.

The United States Proposals Concerning the Organisational Provisions

9. The exposition by the State Department team was very helpful and it removed or reduced some of our doubts about the United States proposals. The State Department have in mind a fairly tight criterion which would have to be met before a contracting party could stand aside from a majority or a two-thirds decision. As Evans explained the criterion, the decision which the Contracting Parties were taking would have to alter explicitly a specific right or obligation in the basic contract in a manner which would materially affect the minority contracting party. The two main provisions of GATT involved were waivers and economic development measures affecting items in the schedules. In such circumstances, and only in such circumstances, the contracting party affected would have the right to terminate on a bilateral basis its obligations towards the contracting party obtaining the waiver (while continuing to be a member and to have a voice in GATT discussions including those affecting the other contracting party). Evans observed that such a termination was so drastic that it seemed unlikely that countries would go so far unless a very important right was affected. (The majority would be reluctant to place a country in a position where it would have cause to resort to such action, and the Contracting Party itself might even then hesitate to avail itself of the right of terminating its obligations unless the case was a very serious one.) The United States side pointed out that in most instances it would not be legally possible to terminate obligations on a discriminatory basis since old most-favoured-nation agreements would come into play in the event of any suspension of obligations under the GATT and would prevent such discrimination.

10. From this discussion it appeared that the cases in which United States would be unwilling to subject itself to the majority opinion of the Contracting Parties might be more limited than had been expected. In respect of most provisions in the GATT (e.g. balance of payments, nullification and impairment, etc.) they would hope that sufficiently precise standards could be incorporated in the organisational instrument (or possibly in the substantive provisions) that the Contracting Parties would merely have to determine whether those standards were being lived up to. The United States would apparently in those cases be prepared to be bound by such collective determination and to comply with any procedures for enforcing these standards (including any necessary consultations). They would also be willing to have the Contracting Parties given considerable powers of interpretation and to have the Contracting Parties make recommendations for the consideration of governments on almost any subject. The "let out" which they would require would be only in the case of waivers and closely analogous provisions.

The Balance of Payments Provisions

11. The United States team explained their "highly tentative" proposals in considerable detail. With the United States' general objectives there was of course no disagreement. These proposals include

(1) replacing the present unsatisfactory "objective" criteria (e.g. level of reserves) by procedures which could take account of underlying conditions and not merely symptoms;

(2) getting the important trading countries out from Article XIV of the I.M.F. to Article VIII so that countries going convertible would not have to fear new quota restrictions, or countries might undertake not to use for three years Article XIV without prior approval of the Fund; ⁵⁸

(3) obtaining the abolition of existing restrictions over a further period - possibly three years;

(4) taking care of the special case of the underdeveloped countries under Article VIII; and

(5) devising some means of closer cooperation between GATT and the Fund.

12. Under the arrangements in (3) above the State Department is considering two approaches, one through I.M.F. and the other through GATT. The U.S. team agreed that the form and method by which joint GATT-IMF consideration might be given to these questions appeared to raise several problems.

(a) the criteria by which the "level of restrictions" might be judged posed a formidable problem and it was not evident that the appropriate "level" could be determined without regard to the nature or composition of any proposed list of restrictions. Internal policies would certainly have to be examined.

(b) The IMF and the GATT had different forms of voting and the establishment of any form of joint consultation would tend to raise certain juridical problems, particularly as to the relationship of any joint body to the Fund. The extent to which conclusions of any joint body would be reviewed by, or could be appealed to, the full GATT and Fund membership would have to be considered. The views of the Fund and GATT might then have to be reconciled if they differed. The State Department have not thought these problems out yet.

(c) For the Fund to determine that the transitional period is at an end might not be satisfactory unless all the important trading countries agreed; and it appeared unlikely that they would voluntarily terminate the transitional arrangements and accept the Fund as presently constituted (e.g. weighted votes, and full time officials without responsibilities in their own capitals) as the final arbiter on restrictions.

(d) From the point of view of timing we also observed that it could hardly be expected that the countries with restrictions would agree to any new regime until the new trade rules had been agreed. In particular the countries which were not going convertible would find little attraction in the proposed new arrangements which would further limit their freedom without giving them any apparent benefits.

The Agricultural Provisions

13. Evans declared that the State Department's objective (which in fact was the original intention of Section 22 of the A.A.A. ⁵⁹ though it had not taken this form) was to obtain agreement to the following "fair share" principle. If as a result of a domestic program imports are entering in larger volume than if there were no such program, imports could be restricted to the level at which they might reasonably be expected to have entered in the absence of a domestic program (which would normally be the amount of imports in a previous representative period). Evans said that an attempt would have to be made to revise Section 22 accordingly. The GATT might therefore be renegotiated along these lines this fall, the United States would reserve its position, and hope to be able to accept the new provisions when, and if, new legislation replaces Section 22. Alternatively, (as the U.K. has apparently suggested) this Article might be left temporarily in its present form in any GATT emerging from the proposed Review and the U.S. might merely attach a reservation to it until it can be renegotiated.

14. We pointed out that apart from the problem of defining a "fair share" the United States would be seeking a concession from the present provisions in the GATT or would be leaving a good deal of uncertainty concerning their attitude towards restrictions on agricultural imports. We agreed that it would be helpful to obtain some well-defined concept of imports which would not be interfered with; but countries would be looking for some additional commitment to restore the balance of the Agreement. At present agricultural export subsidization was of grave concern and we wondered whether the United States could not enter into some international commitment along the lines of the provisions in Section 550 of MSA not to interfere with normal marketing.

15. Evans saw logic in this proposal but he suggested that any effort to obtain such commitments in present circumstances would do more harm than good. He thought the Administration could accomplish more by administrative action and if they tried to get some international commitment they might be over-ruled by Congress. Weiss said that United Kingdom officials had indicated that they did not want the subsidy question opened - owing to the pressure to apply quotas in the U.K. to reduce the agricultural subsidies in the budget.

Tariff Negotiations with Japan

16. Evans thought that there was some possibility that the Ways and Means Committee would report out the Trade Agreements Bill without any strings attached. At least this was the White House intention. No consideration had been given as yet to fitting negotiations with Japan into the GATT timetable. He hoped however that a multilateral negotiation with Japan might be feasible. Negotiations would take at least two and a half months and an announcement in the United States would have to be made towards the end of August.

17. We indicated that while we would welcome Japan's accession to GATT, we were about to extend to Japan low most-favoured-nation rates; and inasmuch as Japan was not the principal supplier for many items of interest to us there would not be much scope for direct negotiation. The scope for reductions might however be widened if there were concurrent negotiations with the United States on items of interest to Japan. Evans did not appear to rule this possibility out.

18. Evans also remarked that if there appeared to be any great difficulty for the Administration in obtaining Congressional passage of both the one year extension of the Trade Agreements Act and the Customs Tariff Simplification Bill the Administration would opt for the former. He thought the chances were good for the Jenkins' bill on valuation.

Further Binding of the Tariff Schedules

19. We pointed out that consideration would have to be given to the future status of the Schedules before their present period of validity expired. The Schedules have been extended until June 30, 1955, but at the Eighth Session of the Contracting Parties it had seemed to us that a number of countries were anxious to make adjustments in their tariffs. It seemed likely that there would be more pressure than there was last year for adjustments in the schedules; and this pressure might endanger tariff stability. The United States team agreed that further steps to ensure the continuation of the Schedules should be considered before too long, although the exact timing might depend upon the prospects for holding new negotiations.

20. We had a word with Evans about the possibility of a postponement of the Intersessional Meeting. Evans was non-committal but indicated that he would give the matter further consideration during the next few weeks - (no doubt in conjunction with a re-examination of the timetable for the Review Session).