TRADE DISCUSSION WITH JAPAN

1. At the meeting of November 19th, 1952, the Cabinet considered the general lines to be followed in discussions with the Japanese concerning the proposed most-favoured-nation trade agreement. The discussions have proceeded since that time on the basis of the Cabinet's directions, but a stage has now been reached at which further direction is urgently necessary. At an early stage in considering this matter, the Cabinet agreed that it was important not to give any impression that Canada was trying to protract or delay the negotiations. There has been some indication recently that the position of certain Canadian exports in the Japanese market, particularly dissolving woodpulp, may be threatened by the absence of a satisfactory agreement. The importance of Japanese-Canadian trade to Canada has increased in the last year or so. The proportion of exports to imports was 6 to 1 in 1951, but in 1952 the balance in favour of Canada was 8 to 1. It is, therefore, more important even than when the Cabinet had this matter last under consideration to avoid anything that might endanger Canadian exports to Japan.

2. At the November 19 meeting, the Negotiating Group set up by Cabinet on July 31 (consisting of A.E. Ritchie, Department of External Affairs; J.J. Deutsch, Department of Finance; and C.M. Isbister, Department of Trade and Commerce) were instructed:

(1) to seek a reservation of the right to apply fixed values on imports which cause or threaten to cause serious injury to Canadian industry; and

(2) to seek certain assurances from Japan concerning the treatment of Canadian exports; including an undertaking by Japan not to discriminate against imports from Canada in the application of trade and exchange restrictions, which would in effect be additional to any safeguards afforded by GATT in the event that Japan is admitted to GATT.

3. The Cabinet memorandum concerning the type of assurances that should be sought from Japan on the treatment of Canadian exports was as follows:

"It could be pointed out to the Japanese at the outset of the negotiations that the proposed extension to them of most-favoured-nation rates represented a major concession, particularly as they reflect the results of negotiations in GATT. In the light of this, and the fact that Japanese imports into Canada would not be liable to any form of discrimination, the Committee consider that we would be justified in asking for similar non-discriminatory treatment of Canadian exports to Japan. This would apply particularly to the 100% surtax on the present tariff duties which the Japanese authorities may, under existing legislation, impose on goods from any country discriminating in any way against Japan. It would apply also to quantitative import restrictions and the allocation of foreign exchange, which are at present being administered by the Japanese on a discriminatory basis. The starting position should probably be to insist on complete non-discrimination between hard and soft currency countries. If the position could not be maintained in the course of negotiations it might be desirable nonetheless to have the principle of non-discrimination spelled out in the agreement with the reservation that, if the Japanese found it necessary to depart from this principle, they would enter into full consultations with us at our request. The last position to which we might move would be to insist at least on the non-discriminatory allocation of exchange among the hard currency countries. The question whether we would be prepared to retreat this far would have to be decided at the time in the light of the progress achieved in the negotiations as a whole."

4. Initial discussions were held with the Japanese on the basis of a draft agreement submitted by Japan. The Japanese draft was found to be unsatisfactory in several respects and had to be substantially modified to take into account the Canadian point of view. Accordingly, a revised draft of a most-favoured-nation trade agreement was submitted to Japan as a basis for negotiations which included:

(1) an escape clause to permit, in certain circumstances, the imposition by Canada of increased values for duty; and

(2) provisions requiring complete non-discrimination by Japan in the application of trade and exchange restrictions.

5. Since then several discussions have been held with the Japanese on the basis of the revised Canadian draft agreement. As a result of these discussions the position of the Japanese Government on the two main proposals contained in the revised draft has now become clear.

6. It would appear that the Japanese Government is prepared to accept the principle of a valuation procedure which would permit, in certain circumstances, the imposition of increased values for duty on imports causing or threatening to cause serious injury to a Canadian domestic industry. The Japanese have indicated a preference for covering the escape clause on valuation by means of an exchange of notes rather than by way of a formal provision in the Agreement itself, but have not excluded the latter possibility. Accordingly, it is not expected that the inclusion of satisfactory provisions relating to valuation will create any difficulties, although the details remain to be worked out.

7. With respect to the Canadian proposal requiring complete non-discriminatory application of trade and exchange restrictions, the Japanese Government are not prepared to accept such an undertaking. In their view, uncertainties affecting the future of the Japanese balance of payments, and the widespread inconvertibility of currencies, make it imperative for them to retain the right to impose discriminatory trade and exchange restrictions in order to safeguard the External financial position of Japan. The Japanese have put up several counter-proposals, but these offer no real protection to Canada against the continuation and extension of discriminatory trade and exchange restrictions affecting Canadian exports. While these proposals are, of course, unacceptable to us, it is clear that provisions requiring complete non-discrimination will not be acceptable to the Japanese.

S. The Negotiating Group has attempted to find a way out of this impasse by devising a formula which, while recognizing the realities of the Japanese balance of payments position, would at the same time give reasonable assurances for the principal Canadian exports to the Japanese market. It is considered that such a formula should include the following provisions:

(1) an undertaking by Japan not [to] discriminate against Canada in favour of other hard currency sources of supply; and

(2) an undertaking by Japan not to impose any trade or exchange controls which have the effect of discriminating against traditional Canadian exports to Japan.

9. The Negotiating Group considered that the most effective way to cover these points was to include in the draft agreement a specific reference to a list of Canadian exports to Japan for which we seek complete non-discriminatory treatment. The Negotiating Group is aware that the inclusion in the Agreement of special safeguards for a list of key exports raises a number of presentational difficulties. At best, any special list of export products would have to be strictly limited in number if it is to have a reasonable chance of being acceptable to Japan. Exporters of other products might object to the fact that their products were not included on the list entitled to full non-discriminatory treatment. Other objections might arise because the special list comprises mainly basic foodstuffs and other primary products. Canadian manufacturers, who would have to meet increased competition from Japanese imports, may argue that the Japanese concessions with respect to these basic primary products were obtained at the expense of the Canadian manufacturing industry. The Negotiating Group would have preferred a formula stated in more general terms to cover our position but was unable to devise a general provision which covered the situation adequately. Appendix "A" to this memorandum contains a revised article dealing with trade and exchange restrictions which meets the criteria set out above and which, in the view of the Negotiating Group, may provide the basis for an acceptable compromise between the Japanese and Canadian positions.

10. It should be pointed out that the appended list of export items selected for special treatment are commodities which combine the following characteristics:

(1) they are finding or are expected to find an important continuing market in Japan;

(2) they are obtainable by Japan from non-dollar sources of supply;

(3) the Canadian producing these goods would be seriously affected if the Japanese market should be closed or severely restricted.

These products account for about 85 per cent of Canadian exports to Japan in 1952. Although 9 commodities are included in the special list, the most important are barley, wheat and woodpulp which together have made up about 60 per cent of our total exports to Japan in recent years. The attached list of export products for which we propose complete non-discrimination can, therefore, be regarded as a negotiating list, and certain deletions could be made without impairing seriously the value of the concessions sought from Japan.

11. Total imports into Japan of the products in the special list account for about 17 per cent of Japanese foreign exchange allocations, so that, in the view of the Negotiating Group, the inclusion of a list of roughly this magnitude should not create insurmountable financial difficulties for Japan. At the same time, it should be noted that implementation by Japan of a proposal along these lines would involve substantial changes in the present Japanese system of trade and exchange controls. It would limit Japan's freedom in making bilateral agreements by which exclusive trade privileges are exchanged with a number of countries; and might also involve some additional hard currency expenditures for the importation of the listed products. For these reasons Japan may find it difficult to agree to a proposal of this kind. From the Canadian point of view, however, it is important that we should seek to obtain some assurances along the lines contained in our proposal which offer real benefits for our exporters.

12. The provisions described above concerning the use of trade and exchange restrictions by Japan would, the Committee believes, give Canada a number of important assurances affecting the treatment of Canadian exports to the Japanese market. While Japan would retain the right to continue to impose trade and exchange restrictions for the purpose of protecting her balance of payments, certain clear limitations would be placed on Japan's right to apply such restrictions in a manner which discriminated against imports from Canada. Under these provisions, Canadian exports to Japan would be assured the following treatment.

13. With respect to the list of principal Canadian export items which are specifically enumerated in the draft agreement, any balance of payments restrictions imposed by Japan would have to be completely non-discriminatory. That is, Canadian exporters would have the right to compete for all Japanese imports of these commodities on the same basis as the exporters of any other country, regardless of whether the currency of that country is hard or soft. The specified list of Canadian exports are basic foodstuffs or raw materials, essential to the Japanese economy, so that Japan will no doubt continue to import these goods in substantial quantities. Because these goods are also available from soft currency sources of supply, an undertaking by Japan to give Canada equal treatment with all other suppliers would constitute an important commitment by Japan of real significance to Canada's export trade.

14. With respect to all other Canadian exports Japan would retain the right to apply trade or exchange restrictions in a manner which favoured imports from soft currency countries. Japan would not be permitted, however, under the proposed provisions, to discriminate against Canada in favour of other hard currency countries, i.e., the United States.

15. Appendix "B" to this memorandum contains a statement indicating the principal products which enter into Canadian trade with Japan.

16. The Negotiating Group would like to have direction as to whether inclusion in the Agreement of provisions along the above lines appears to be appropriate. If, in the view of Cabinet, this line of approach is appropriate, the Negotiating Group recommends that:

(1) authorization be given to transmit to the Japanese Government a revised draft article on trade and exchange restrictions, to include the provisions suggested above and described in Appendix "A", as a basis for negotiation; and

(2) the Negotiating Group report back to Cabinet when the views of the Japanese Government on this proposal, or on variants of this proposal which might be acceptable to us, have been ascertained.

NEGOTIATING GROUP

APPENDICE A

APPENDIX A

ARTICLE IV

Trade and Exchange Restrictions

1. No prohibitions or restrictions shall be applied by either Contracting Party on the importation of any article, the growth, produce or manufacture of the other Contracting Party or except as provided in legislation affecting essential security interests, on the exportation of any article consigned to the territory of such other Contracting Party, unless the importation of the like article of all third countries or the exportation of the like article to all third countries is similarly prohibited or restricted.

2. In all matters relating to the allocation of foreign exchange, and to the administration of foreign exchange restrictions, affecting transactions involving the importation and exportation of goods, each Contracting Party undertakes to accord to the other unconditional most-favoured-nation treatment.

3. Both Contracting Parties recognize that the existence of balance of payments, difficulties in many countries, and the widespread inconvertibility of currencies, do not permit the immediate and full achievement of non-discriminatory application of trade and exchange restrictions affecting imports. Accordingly, notwithstanding the provisions of this Agreement, either Contracting Party may, in the application of trade or exchange restrictions affecting imports, for the purpose of safeguarding its external. financial position and balance of payments, temporarily deviate from the provisions of paragraphs 1 and 2 of this Article, provided that:

(a) if either Contracting Party maintains any trade or exchange restrictions affecting imports, such restrictions shall be applied in such a way as to avoid unnecessary damage to the commercial or economic interests of the other Contracting Party;

(b) if either Contracting Party maintains any trade or exchange restrictions affecting imports which deviate from the provisions of paragraphs 1 and 2 of this Article, such restrictions shall not be applied in such a way as to result directly or indirectly in discrimination as between countries whose currencies are convertible;

(c) if either Contracting Party maintains trade or exchange restrictions affecting the importation of any of the articles listed in Annex "A" to this Agreement, such restrictions shall be so administered as to conform fully with the requirements of non-discriminatory treatment contained in paragraphs 1 and 2 of this Article.

List of Canadian Exports for which it is Proposed that Japan will Accord Canada Full Non-discriminatory Treatment.

Wheat

Barley

Woodpulp

Flaxseed

Primary Copper

Lead in Pigs

Zinc Spelter

Synthetic Resins

Milk Powder

APPENDICE B

APPENDIX B

TABLE 1
CANADIAN EXPORTS TO JAPAN
($000)

TABLE 2
CANADIAN IMPORTS FROM JAPAN
($000)

Table I shows that in 1952 Japan was Canada's 4th largest export market. Exports to Japan at a figure of $103 million were exceeded only by exports of $2,307 million to the United States, $746 million to the United Kingdom and $104 million to Belgium. This compared with exports to other principal markets of $81 million to Brazil, $55 million to India, $50 million to Australia and $48 million to France. With respect to individual Canadian industries, Japan constitutes a highly important market for a number of products of which barley, wheat and woodpulp have been the three major exports to Japan in recent years. In 1952 Japan was Canada's largest market for barley, taking some 27 per cent of all Canadian barley exports; the 6th largest market for wheat, absorbing some 6 per cent of our total wheat exports; and the 3rd largest market for dissolving pulp as well as an important outlet for other grades of woodpulp. The woodpulp industry in British Columbia is particularly dependent on the Japanese market for rayon pulp.

Table II shows that imports from Japan in 1952 amounted to $13 million, approximately 1/8 the value of exports to that market. It should be noted that imports from Japan are spread over a wide variety of manufactured goods many of which are also produced in Canada. At present, imports from Japan are subject to the higher rates of our general tariff and this, no doubt, helps to explain the low level of imports from Japan. If a Most-Favoured-Nation agreement is concluded with Japan, Japanese goods would enter Canada at the lower tariff rates which now apply to all other countries entitled to most-favoured-nation treatment. It is to be expected that this would result in increased competition from Japan for a wide range of goods manufactured in Canada.