Reference: Our telegrams on Free Trade Area Negotiations.

At the end of 1956 Working Party 17 of the O.E.E.C., which had been set up to determine whether it would be technically possible to operate a free trade area in Europe which would include the common market of the Six, came to an affirmative conclusion. In March 1957 the Ministers of OEEC countries agreed to explore the possibilities of concluding an agreement and the project of a European Free Trade Area, not without many hesitations and reservations, was launched on the seas of preliminary negotiation. In the months that ensued three crews (Working Parties 21, 22 and 23) did what they could to manoeuvre through the cross-currents of European political and economic interests and to steer a forward course between the narrow United Kingdom concept of a Free Trade Area involving little more than the progressive removal of quantitative restrictions and tariffs for industrial products and the more ambitious ideas of the Six, particularly France, whereby a Free Trade Area would be expected to go a long way down the road to Rome. By the end of July the Free Trade Area had by no means foundered but the vessel lay barnacled and becalmed, no firm hand held the wheel, the way ahead seemed uncharted, and the prospects for successful and speedy completion of the voyage seemed slim indeed.

2. Now, as 1957 draws to a close, the breeze, if not set fair, is at least blowing and the Free Trade Area has regained momentum. Of course, difficult water lies ahead and many dangerous shoals remain to be navigated, especially around the French coast. But the new crew, under Reginald] Maudling's command, are not without skill, and it seems possible that in the end harbour will be made and agreement reached on a Free Trade Area Convention representing a not too unhappy compromise between the divergent approaches of the prospective members.

3. A number of factors account for the changed atmosphere in which the Free Trade Area negotiations are now being conducted. We would be inclined to give first place to the success which attended British efforts, prior to the informal October Ministerial meeting, to convince Continental European countries that a Common Market not complemented by a Free Trade Area would act as a divisive economic and political force in Europe and would strike at the root of the cherished structure of European economic co-operation so laboriously built over the years since 1948. When Ministers came together in October there was no dissent from this United Kingdom argument and even Faure spoke of the desirability of a Free Trade Area (subject of course to the Free Trade Area being of a kind acceptable to France). The outcome of the discussions was a firm expression of determination to secure the establishment of a Free Trade Area to take effect in parallel with the Treaty of Rome. This was a decision of principle which had eluded the British at the March meeting and it is having its effect.

4. A second important factor in getting the negotiations under way again was the more forthcoming United Kingdom attitude, particularly in regard to agriculture, but also on a number of other subjects to be dealt with in a Free Trade Area Convention. To what extent the U.K. readiness to do something more in the field of agriculture will meet the desires of the Six and of OEEC agricultural exporters remains to be seen, but the gesture was made in October and without it the affirmative decision on the desirability of establishing the Free Trade Area would not have been obtained.

5. Mention should also be made of the less inflexible attitude of the Six. It would appear that, with the French ratification out of the way and every prospect of the Treaty of Rome entering in force at the end of the year, the member countries, with the exception perhaps of France, find it possible now to approach the Free Trade Area negotiations in a less defensive and more relaxed and business-like way. The passage of time would also seem to have resulted in some regaining of perspective which has brought with it renewed recognition of the desirability of achieving free trade throughout the whole of western Europe rather than in the Common Market alone.

6. Another significant reason for the improved climate of the negotiations is the fact that they have been entrusted to a Ministerial group of very high calibre and apparent sincerity of purpose. Maudling is an outstanding and skillful Chairman with the happy faculty of extracting the maximum measure of agreement from his colleagues; but the Ministers whom the other countries have named to the Committee (Erhard, Skaug, Faure, Carli, Fayat, van der Reugel) are also very talented men with an impressive grasp of their subject. To hear them in debate and to see the cross-fertilization of their ideas narrowing differences and producing agreements has been a rewarding experience.

7. The press reports on the Ministerial meetings have not reflected the positive and constructive tone of the discussions to date in the Ministerial Committee and to this extent have given a somewhat misleading impression. It is true that the French have been, are, and no doubt will continue to be very difficult. But our feeling, for what it may be worth, is that the problems of French intransigence have been overstated. There is still a long way to go to bring the French and British positions together but the movement has started and, despite some of Faure's more extreme statements, the general atmosphere of the meetings seems now to reflect a collective will to bring about a mutually satisfactory Free Trade Area arrangement.

8. It is not only the better spirit now inspiring the negotiations which leads us to believe that the odds are now in favour of eventual agreement on a Free Trade Area Convention. While this is a very relevant consideration, we have been more impressed by the fact that in certain fields agreements are being reached and by the evidence that Ministers are beginning to abandon initial positions and shift towards middle ground.

9. We would first note the greater flexibility of the U.K. approach relative to the British attitude in the earlier part of the year. We have already mentioned their revised position on agriculture, but this is not the only example.

10. Indeed on numerous occasions in the current negotiations Maudling has expressed readiness to take the provisions of the Treaty of Rome as the starting point for dealing with similar problems in the Free Trade Area. The United Kingdom is of course a long way from accepting the French thesis that a Free Trade Area has, in effect, to be a customs cum economic union to operate successfully and fairly. But it is clear that the United Kingdom is now prepared to have quite a range of subjects covered in a Free Trade Area Convention which are not directly or intimately related to the freeing of trade through the removal of tariffs and quantitative restrictions. The British have thus moved some way to meet the position taken by the Six. Similarly the United Kingdom is also now prepared to accept that for a number of questions the Institutions of the Area should be given a deciding rôle and has recognized that in certain cases unanimity would have to give way to majority rule. The United Kingdom has also accepted that the less developed European countries must be members of the Free Trade Area, must be given derogations from the general rules and, although no decision has as yet been taken, it seems evident from the discussions that the United Kingdom, in the final analysis, would not rule out some special assistance to such countries to help them more quickly to assume the full responsibilities of Free Trade Area membership.

11. The attitude being taken in the Committee by the Six other than France and Italy is also encouraging. The interventions of the German, Dutch and Belgian Ministers have been particularly constructive and to the point, and suggest that there is a general desire on their part to achieve a Free Trade Area in Europe. Admittedly they are anxious to find solutions which would be compatible with those of the Treaty of Rome and which will keep their French partner in the fold. But in the circumstance this is not an unhelpful rôle. Our telegram No.2150 of December 2 will have shown, for example, how, when Faure on the one hand and the liberally minded Ministers from Norway and Switzerland on the other were bitterly divided on the principle and philosophy of harmonization of internal policies, Hallstein and van der Beugel intervened to bring the debate back to a practical plane and to focus attention on the rather narrow range of questions on which specific satisfaction had been given to France in the Rome Treaty. Again German willingness, announced by Erhard, to provide some financial assistance to the less developed countries of Europe was doubtless an important factor in the agreement to give new instructions to Working Party 23 which go some distance to meet the Greek, Turkish and Irish points of view. Moreover, it was Hallstein who first came out formally against Faure's proposal that an interim arrangement for the Free Trade Area might be worked out in the first stage after which there should be a stocktaking to see whether or not it would be possible to move forward. This point of view was shared by the Committee and Faure then agreed that his idea was a non-starter and that some degree of irreversibility had to be provided in the Free Trade Area Convention. Finally, the solidarity of the Six has not been maintained on the vital question of origin. The extreme position of France has not recommended itself to the majority of its Rome Treaty partners. Theirs is a much more pragmatic approach. They accept that there may, in certain sectors and for certain products, be worrying problems of trade deflection which will have to be dealt with (possibly by some tariff harmonization) but they doubt whether these will be numerous and important, and do not think that the general rules need be tailored to such exceptional cases. Since the British are also now prepared to look at and try to devise solutions for special problems of trade deflection which might arise in a Free Trade Area in which liberal origin rules in general applied an area of understanding and agreement is being built up between the great majority of the negotiating parties from which it may be difficult for the French and Italians in the end to stand apart.

12. The various points we have mentioned, taken individually, would not warrant any particular optimism about the negotiations, particularly when the stubbornest of the French position is borne in mind, but taken as a whole we think there is enough evidence to suggest that the outlook is, presently at least, for a successful outcome.

13. The answer to whether or not there is to be a Free Trade Area Convention will no doubt turn in the end, as it did in the Treaty of Rome, on the French position. In this volatile country with its rather particular political system it would be foolish to try to forecast how the die will be cast, and the current French economic situation is certainly not such as to encourage the belief that acceptance of the obligations of a Free Trade Area (or of the Treaty of Rome) will be easy for this country.

14. The present position of the French negotiators is that France must be given even more safeguards and guarantees in a Free Trade Area than in the E.E.C., since a Free Trade Area, being a less well knit and integrated arrangement, would increase the risks arising from free trade. They also contend, and this may prove to be the most difficult point of all, that a Free Trade Area must provide for some co-ordination of tariff and commercial policy vis-à-vis third countries. Otherwise, they argue, the United Kingdom giving and receiving Imperial Preferences and having freedom to negotiate special arrangements with outside countries (the example of a free trade area with Canada is frequently cited) would enjoy an unfair and intolerable advantage over the countries of the Six operating behind the common tariff. Since the United Kingdom and a number of other countries outside the Six are not prepared to integrate their economic life to an extent which would give France the kind of guarantees and safeguards she thinks she has secured under the Rome Treaty and since these countries are, in general, not prepared to sacrifice their freedom in tariff and policy matters vis-à-vis the outside world, it might not seem illogical to conclude that the Free Trade Area is a forlorn hope.

15. A closer examination of the positions of the protagonists suggests, however, that some of the fundamental problems may loom larger than they really are and may prove susceptible to compromise solutions. Indeed the possible shape of some of these compromises is beginning to emerge.

16. Concerning the difficult question of the schedule for achieving a Free Trade Area there now seems to be a general disposition to keep in step with the Common Market timetable and to adapt to the Free Trade Area the rather involved solutions of the Treaty of Rome for moving from Stage One to Stage Two. The French, as noted above, have already abandoned their suggestion that commitments should be limited to a first stage trial period. It is also interesting that as regards the Third Stage Ministers have agreed at least to examine whether more precise obligations could be worked out than those provided for in the Rome Treaty. On internal harmonization no decisions have been taken, but some compromise solution such as that in the Protocol on France in the Treaty of Rome, whereby the non-fulfilment of certain minimum conditions of harmonization would entitle an aggrieved country to take measures of safeguard with the approval of the institutions, is actively being explored. As regards the harmonization of external policies, the depths of French insistence have yet to be sounded and they may prove very deep indeed. But even in this critical field Faure has not insisted on pushing the general argument to the breaking point and has indicated willingness to await the reports of the Trade Experts who have been charged with the responsibility of ascertaining the extent and nature of the real dangers of trade deflection in the various commodity sectors and the kinds of techniques which might be used to deal with damaging deflections. It is notable also that the United Kingdom and the other non-Six countries in the negotiations have not entirely ruled out some degree of tariff harmonization for potentially sensitive items in certain of the trading sectors. A relatively new and encouraging development was the recent French announcement that they were abandoning their tariff harmonization proposals as regards non-ferrous metals, timber, pulp, paper and machinery.

17. If there is to be a Free Trade Area, M.Faure, and he has made this very clear, must be able to go to the French Assembly and say that the position of France is as well safeguarded in a Free Trade Area as in the Treaty of Rome. We now think there is a possibility that just enough satisfaction could be given to the French on subjects where they are particularly concerned to permit such a statement to be made without going so far to meet their point of view as to vitiate the main advantages of a Free Trade Area.

18. In this somewhat impressionistic account of the Free Trade Area negotiations we have tended to highlight the positions taken by the United Kingdom and by the Six, particularly France. In so doing the problem has been oversimplified and it is worth remembering that seventeen countries with varying interests in the different subjects under discussion must be reasonably satisfied with the proposed arrangements if the negotiations are to succeed. This sets some limit to what can be agreed. On the other hand the large number of the negotiating countries makes it difficult for any one of them to gain acceptance for extreme proposals. In any event it would seem that if agreement can be obtained between the main protagonists the particular difficulties of the other prospective members could also be dealt with. Of course the process of translating the desires of Ministers and their broad agreements of principle into specific satisfactory treaty terms will be a long and difficult process. But given continuance of the kind of drive at the political level which has characterized the first two meetings of the Ministerial Negotiating Committee the obstacles to agreement which might arise at the technical level should not prove insurmountable.

19. The possibility of the negotiating countries working out a mutually satisfactory Free Trade Area is one thing its acceptability to outside countries quite another. It is clear that the European Free Trade Area which may emerge will be a far cry from the kind of arrangement envisaged in Article XXIV of the GATT. The inclusion of a less rigorous régime for the relatively under-developed European countries, the special treatment for, or the exclusion of, agriculture, and the sort of techniques which may be agreed to deal with serious trade deflection, such as limited tariff harmonization and compensatory charges, make this evident enough. And there may be many other departures from virtue through escape clauses and special exceptions.

20. We in Canada will have to examine any Convention from the point of view of the GATT and, more importantly, from the point of view of our trade. As to the GATT, the recent experience in Geneva does not suggest that the Contracting Parties, faced with an agreed position of seventeen European countries and a benign United States, will be able to do much more than register their concerns about certain features of the arrangement, agree to keep the development of the Area under review and in the end provide the necessary waivers.

21. As to Canadian trade, our capacity to participate in the hoped for growth of the European market under conditions of free trade will depend to a considerable extent for our most important non-agricultural exports on the agreed definition of origin (assuming that these exports are otherwise competitive). It seems evident, given the French attitude and the concern of most of the negotiating countries to protect one or other sector of their industry to some extent from overseas competition, that we shall not get everything that we would like in the definition of origin eventually accepted. On the other hand the French have not carried their partners with them in demanding general tariff harmonization and/or narrowly restrictive origin definitions. Moreover Europe does have a real interest in obtaining raw materials for its industry from the most advantageous source and this is appreciated and has been reflected in the negotiations. Accordingly it seems not unlikely that in the outcome the development of our export trade in raw materials should not be generally hampered by the origin rules.

22. As to highly manufactured goods, free trade among the Seventeen will undoubtedly make it pretty difficult for us to compete in the European market, except for specialized products with respect to which we may enjoy particular production advantages.

23. The question of the outlook for our wheat and other agricultural exports raises more difficult questions. If the Rome Treaty arrangements were to be carried over to the Free Trade Area more or less in their entirety, our exports or potential exports would undoubtedly suffer. But this is not to be the case. Nevertheless the approach of the Six in the agricultural field seems likely to have some reflection in what is to be agreed for agriculture in the context of a Free Trade Area. The detailed United Kingdom proposals in the agricultural field have not yet been considered and it is much too early to suggest what the end result may be. Perhaps all that can be said at the moment is that it should be possible to safeguard and, with the later removal of dollar quantitative restrictions, somewhat enhance our position in the United Kingdom market. As for the rest, it is to be hoped, although there is no way of being certain, that the arrangements for agriculture worked out between the Seventeen will be of looser weave and less potentially restrictive than those under the Treaty of Rome.

24. In this letter we have attempted to supplement our series of factual reports by some indication of the tone of the present discussions and to give our assessment of the outlook for success of the negotiations and, in a very general way, of the implications for Canadian trade of the kind of Convention which may emerge. We hope that our year end musings will be of some value in your consideration of Canadian interest in the proposed European Free Trade area and trust that any excess of optimism of which we may have been guilty concerning the outlook for agreement on a Convention will be corrected by your comments and those of our colleagues in other European capitals. Merry Christmas.

L.D. WILGRESS