Reference: Our letter No. 1474 of May 11.?

You may recall that the last Ministerial Council instructed the Joint Trade and Intra-European Payments Committee to submit a report on the relaxation of QRs on imports from the dollar area to the Council not later than the first of October. Following this instruction, the Joint Committee drew up a questionnaire to Member countries to elicit information on the present levels of dollar restrictions. At the same time the Secretariat has made some effort to ascertain the degree of restrictiveness of the present controls on dollar trade and to provide some estimate of the effects on balance of payments of removing restrictions.

2. Unfortunately neither of these two avenues of approach have yielded very satisfactory information. With regard to the level of restrictions in each country, the Secretariat have endeavoured to ascribe a percentage of dollar trade on private account liberalized for each country. Apart from the well-known difficulties of choosing an appropriate base year and of ascertaining what trade would have taken place had there been no QRs, the additional difficulty that food products in some OEEC countries are subject to state trading has rendered the percentage figures almost meaningless.

3. With regard to the attempt to quantify the effects on balance of payments of liberalizing dollar imports, the results have been equally meagre. A Member of the Secretariat has attempted to compare the percentages of dollar and European imports in European countries for 1938 and 1949 and thereby draw some conclusion as to the effects of removing all QRs. There are, of course, many drawbacks to this sort of analysis and, in our opinion, it could not be used as a basis for decision.

4. The Working Party of the Joint Trade and Payments Committee met last week to discuss the best way of handling the factual sections of the report and to have a preliminary exchange of views on the recommendations to Member countries which might be suggested to the Council. Our view, which we expressed to the Working Party, is that the next Ministerial Council should make a general recommendation to Member Governments to remove all discrimination as quickly as possible. We feel that it would be better to concentrate on the removal of discrimination at this stage rather than of all QRs. There are several reasons for this:

(i) The removal of discrimination is a logical first step and will be more acceptable to European countries than an across-the-board recommendation.

(ii) With the advent of convertibility, ¹ all discrimination (unless supported artificially), will tend to disappear. Thus it is important that steps be taken as quickly as possible to reduce the degree of restriction inherent in the dollar QRs so as to reduce the "shock" effect of the removal of discrimination when one or a few currencies are made convertible.

(iii) Products which are entering freely from other European countries might be liberalized vis-à-vis the dollar area more readily than those which are under quantitative restriction from Europe as well.

The Working Group was in general agreement with the view that the principle of non-discrimination should be established at the next Ministerial Council.

5. The terms of reference of the Working Group also require it "to submit concrete proposals to the Council on such action as the Organization might take in co-operation with the United States and Canada in connection with the removal of dollar restrictions".

6. A number of suggestions have been made:

1. The establishment of a common list;

2. The establishment of percentage liberalization targets;

3. The introduction of a procedure for periodic justification of dollar restrictions (i.e. a dollar "negative list" exercise).

7. There was little support at the Working Group for a common list. The Italian Delegate thought that a common list of dollar goods which might be freely traded in Europe might serve some purpose - but he did not envisage this as a comprehensive list intended to cover all liberalized products in any one country. None of the other representatives would accept the idea of a common list of any kind.

8. The possibility of establishing targets for liberalization or for the reduction of discrimination was considered more carefully. The United Kingdom is opposed to the establishment of targets. The reason given was that they consider it inappropriate that OEEC should propose to take on a commitment to countries outside the OEEC area. Another difficulty is that there is a great difference between the dollar-liberalized percentages of different countries and it would, in practice, be most difficult to find a target percentage which would provide a useful focus for future liberalization. It might well retard the advance of the stronger countries.

9. There was no real support for the establishment of targets except surprisingly enough, from the Americans (who were without formal instructions). The FOA representative felt that the establishment of targets might be useful, but he did not press his view. They do think that some sort of review mechanism should be established so that at periods of six months or a year the Organization could assess the implementation of the proposed Council resolution and study any particular problems preventing further progress. The Working Party were inclined to agree that some follow-up work would be useful, but that no specific targets should be set, nor was there much enthusiasm for the introduction of a procedure for periodic justification of restrictions.

10. The results of this first exchange of views seem to us to be entirely satisfactory. We feel that it would be wrong (and contrary to the principles of your instructions to date), to establish a common list or a common target percentage of liberalization. This approach may have some meaning within the OEEC area where there is a definite bargaining relationship between the various countries. Between the various OEEC countries and Canada and the U.S.A. there could be no such relationship. We would be establishing the paraphernalia of bargaining without any of its content! Accordingly we are most gratified that the members of the Working Group have not picked up this idea.

11. The most helpful line for OEEC to take, in our opinion, would be to relate the desirability of the removal of dollar discrimination to the probable, if not inevitable, economic effects of the introduction of convertibility - which imply that discrimination must end with convertibility. A forthright ministerial statement of principle on the desirability of removing discrimination as an essential step toward preparing the country economies for convertibility would be a useful keystone for future work. In addition, a periodic review of country efforts might prove useful.

12. There is one economic point which does not appear to have been fully recognized in OEEC circles in connection with dollar discrimination and convertibility. It has been generally accepted that dollar discrimination will break down quickly following a move to convertibility in Europe. It is usually assumed, however, that this refers only to the commodities which have been liberalized in Europe but not from the dollar area; i.e. it is agreed that goods liberalized within Europe will have also to be liberalized vis-à-vis the dollar area.

13. It is obvious, however, that in addition to the European free lists, the lists under quantitative restriction which are now being administered in a discriminatory manner will also, on the introduction of convertibility, be administered in a non-discriminatory manner. (i.e. If France has a global quota on refrigerators which at present permits the entry of a number of German refrigerators but no lower priced U.S. refrigerators, the effect of the convertibility of the German mark will be that French authorities will have no reason to insist that French holdings of German marks should be spent on high cost refrigerators rather than transferred into dollars to pay for low cost U.S. refrigerators). This may be a very important factor. It implies that the European countries should give careful consideration to the relaxation of discrimination within the lists of commodities under quantitative restriction if they are to avoid the shock effects of a large number of adjustments at the time convertibility is introduced.

14. We shall be writing to you again as soon as some further progress is made in the Working Group.

L.D. Wilgress