Volume #23 - 323.|
COMMON MARKET AND EUROPEAN FREE TRADE AREA
High Commissioner in United Kingdom|
to Secretary of State for External Affairs
December 30th, 1955|
WESTERN EUROPEAN INTEGRATION: COMMON MARKET PROPOSALS|
1. As you have learned from several quarters, the United Kingdom, perhaps prematurely, has taken up a very definite position on the common market proposals. This is that, by reason of its Commonwealth ties, the United Kingdom cannot itself participate in a common market and that, if progress is in fact to be made toward a greater measure of unity in Europe, the common market scheme must somehow be fitted into the broader European context.1 While there is nothing in this position which is inconsistent with the terms on which the United Kingdom agreed to participate in the preliminary discussions at Brussels, its communication to the six governments busy trying to implement the Messina resolutions has proved pretty upsetting.
2. As far as I can see, the two steps which the United Kingdom has recently taken in relation to the common market proposals follow fairly directly from the premises on which the United Kingdom position is based. Looked at from London, participation in the plans for a common market would mean that the United Kingdom would have to accept an eventual commitment (i) to remove the preferential margins which it has promised Commonwealth producers to preserve, and (ii) to withdraw from overseas producers the assurance of tariff free entry of their products into the United Kingdom (except in the unlikely contingency that it would be able to persuade its partners in the common market project to place all Commonwealth products now admitted free of duty into the United Kingdom on a general European free list).
3. In informing the Six Powers that the United Kingdom would not be able to join the common market scheme, it was intended only to reaffirm, at a time when practical proposals were on the point of formulation, a proposition which had been made clear from the outset. And in carrying the common market issue into the OEEC forum, I assume that the United Kingdom wished to ensure not only that there was no duplication of functions but that the common market initiative would not split the OEEC wide open at a time when, in any case, that body is finding itself short of fresh avenues of activity.
4. The United Kingdom position and the steps by which it has recently been reiterated have naturally occasioned some resentment among the Six Powers and notably on the part of Spaak and Beyen. Just as there is a feeling on the part of the United Kingdom that the common market proposals should be considered in the OEEC forum before firm and irrevocable decisions have been taken at Brussels, so the Six Powers feel, not perhaps without justification, that the United Kingdom initiative at this stage was unhelpful and that it was deliberately intended to frustrate the common market proposals before final shape could be given to them. There is, of course, little advantage in the kind of mutual recrimination to which all this is bound to give rise and which is already threatening to spill over into organizations like the OEEC and NATO in which we are directly interested.
5. I gather from the minutes of the Continuing Committee and from your statement at the NATO Council meeting2 that you are not entirely unsympathetic to the views of the United Kingdom. On the political plane we are naturally bound to favour any initiative which is designed to contribute to the greater strength and unity of Western Europe and which, in the process, weaves a fabric in which Western Germany can be firmly held. This has also, of course, been the traditional United States position. If our support for closer integration in Western Europe has been, on the whole, less forthright than that of the United States, it is because of our relatively more exposed trading position and the correspondingly greater injury which a closed economic system in Western Europe might do to our trading interests. It is on these general grounds that, as I understand it, we have tended to look warily at the current proposals for the creation of a common market.
6. There is no doubt a danger that a common market in Western Europe might tend to reinforce the existing pressures for protection in some of the participating countries. This implies a real possibility that the common market, once it has come into being, might be used as an excuse to justify the continuation of discrimination against dollar imports even after the balance of payments justification has ceased to be valid. If these dangers were of a temporary nature they should not, in themselves, seriously vitiate the general arguments in favour of the closer economic integration of Europe. But we do not, of course, have any assurance at this stage that the common market initiative may not bog down somewhere along the fifteen-year course which has been charted for it. If this were to happen, we might well be left in a position which was rather less favourable than our position at the present time when there is at least no serious retrogression from the objective of a freer world system of trade and payments.
7. However legitimate our fears about the effects of a common market may be, I hope very much that this will not prevent us, when the time comes, from taking a reasonably constructive line on the proposals which are now being developed. These proposals like those for the establishment of EDC, were received with a good deal of scepticism when they were first launched. They have now reached the stage where scepticism has given way to concern about their practical implications. This development is, I think, in itself evidence that the practicability of the common market scheme in one form or another is being taken much more seriously than it was a year ago.
8. I have been wondering in what form it might be possible for us to support the common market initiative without at the same time jeopardizing our own trading interests. My first thought has been that it might be possible to encourage progress toward the common market goal by way of a free-trade area; i.e. members of GATT not taking part in the six country exercise could agree not to claim the generalization under MFN of tariff reductions looking toward tariff removals that the six countries might wish to apply inter se. By the same token they would not be asked to agree to any increase of tariff rates against their products imported into the six countries. This would permit a commodity by commodity approach under which tariffs and other barriers to trade within the area could be abolished first perhaps on the bulkiest commodities such as fuels and building materials, without, initially at least, any alteration of tariffs against imports from seventh countries. Such a procedure should not, at the outset in any case, require the imposition of any internal re-export controls because transportation and handling costs are likely in such commodities to neutralize whatever tariff differentials there might be between existing national tariffs. The freedom of internal movement which already exists for steel and coal, coupled with similar freedom of movement for cement, lumber and similar bulky commodities, would tend in due course to equalize basic costs in certain sectors of the economies of the participating countries and this, in turn, should facilitate further progress toward the common market goal. Atomic materials could also, I assume, be freed without much difficulty since none of the countries participating in the common market is likely to be interested in putting its atomic industry at a disadvantage by levying high tariffs.
9. Any move along these general lines should serve to lessen rather than increase the element of restriction on imports from outside the common market area. Participating countries which were given a free hand to reduce or remove tariffs inter se, but were debarred from raising tariffs against non-participating countries, might soon find themselves subject to strong local and internal pressures to reduce their tariffs against non-participating countries in order to preserve the competitive position of their ports and transportation systems. Developments in this direction should prove attractive to the United Kingdom with the advantage it implies of more ready access to the prosperous market of Western Europe at a time when Sterling area trade is showing obvious signs of lagging behind the trade of the great industrial regions of Europe and North America.
10. I understand that there may be two objections to a scheme of this sort. The first is the fairly unanimous view among the six countries concerned that the sense of the Messina decisions implies the formation of a customs union. The Dutch, in particular, are evidently attached to the concept of a customs union in which they hope to play the part of the merchant and intermediary. The kind of scheme which I envisage is not, however, susceptible to objection on this scope. It is obviously a transitional scheme and as such is designed to facilitate the eventual establishment of a customs union rather than to frustrate it. Since it does not imply any form of internal re-export controls from the outset, it should also go some way toward meeting the Dutch position.
11. The second objection arises from the fact that the scheme entails progress by sectors. This is an approach which has not generally commended itself to the Messina powers and the Germans, specifically, have taken exception to it. It is, of course, by no means unlikely that, at one stage or another, there would be difficulty over the order of priority in which commodities should be freed from internal controls and tariffs. But I think that this kind of situation is equally likely to arise on the basis of the proposals which are currently being discussed at Brussels. It is, in fact, already clear that one sector, namely agriculture, will prove to be obdurate and will have to be left till reasonably near the end of the period over which the common market is to be established. In any proposals which it is intended to implement over fifteen years, it is the start which is important and difficult, and I feel that something like this would provide a relatively smooth, if slow, start.
12. Whether a start is made by way of a free-trade area or whether some steps are taken from the outset to rationalize external tariffs with a view to the eventual achievement of a full customs union, I am inclined to think that we need not be too rigidly guided by the provisions of Article XXIV of the GATT. The article obviously poses only minimum conditions and its very wording that the provisions of this agreement shall not prevent . . . the formation of a customs union or of a free-trade area makes it clear that the contracting parties are left with a good deal of discretion in the matter.
13. Would it not be possible for us, therefore, to put our price for a waiver somewhat higher than the minimum terms set out in Article XXIV (5) of the GATT? What I have in mind is that we might require the countries proceeding toward a common market to undertake simultaneously to lower their external tariffs over a period of years under some such automatic formula as that put forward by the French in 1951. This would, I think, have certain immediate advantages. It would ensure that the common market initiative in Western Europe falls into place among the other measures which are being taken to free world trade. It would meet the position of the Benelux countries who have little inclination to raise their domestic costs by increasing their tariffs to suit the French. It might also, possibly, attract the Scandinavian countries into the common market. In terms of the common market countries themselves, of course, it would have the effect of automatically narrowing the differentials in their respective tariff levels while lowering the height of the fence which separates them from the world outside.
14. While the tariff reduction formula might be thought of as applicable in the first instance only to the countries of the common market, it would obviously be much more acceptable to them if it were taken up generally as part of a wider initiative toward lowering tariff barriers. This would depend, of course, on the attitude of the United States, but it is not impossible that this is a price which the United States would be willing to pay for a stronger Europe, especially since it could be shown to Congress that the formula satisfied the requirements of reciprocity.
15. At this stage, I think it important that we should not commit ourselves to a purely negative position which, as the experience of the United Kingdom has already shown, will earn us little sympathy in Europe and which may be blamed for their failure to get together on a common policy. I fully recognize the dangers which the common market proposals imply for Canadian interests, but I have a feeling that these dangers could be neutralized and the common market initiative turned to advantage by correlating it in one way or another with the collective approach to a freer trading world to which we are already committed.