Repeat T&C, Dept of Finance, Bank of Canada, Washington, London, T&C London, Paris, Rome, Brussels, Hague, Bonn, Geneva (Information).
By Bag Oslo, Copenhagen, Stockholm, Berne, Vienna, Dublin, Lisbon, Athens, Ankara from London.

THE FUTURE OF THE OEEC AND FTA NEGOTIATIONS

A great deal has been written and much more will probably be written on the prospects for the OEEC and the FTA negotiations on which the commercial content of the Organization so much depends. Forecasts are hazardous and doubly so when even the present is difficult to assess. Perhaps we are too close to take a synoptic view particularly in the present hazy atmosphere. Our present views must therefore be regarded as tentative. And if it were not for the forthcoming meetings of Senior Commonwealth Officials in London we would not be rash enough to commit ourselves, albeit with much qualification, to writing.

2. The OEEC is in a state of animated suspense. Local European delegates are quick to point to the necessity of the continued - indeed revitalized - existence of the European Organization which has accomplished so much over the past ten years. But recent monetary developments in Europe which highlighted the strengthened financial position of most member countries combined with the suspension of the FTA negotiations have been body blows to the Organization. Between rounds speculation continues. Nevertheless despite a certain amount of sympathy with the aging underdog there is some doubt that when (and if) the bell sounds the Organization will be willing or able to leave its corner. The lifeblood of the OEEC has been, and if the Organization is to survive in its present form must continue to be, commercial cooperation. And its continued capacity for commercial cooperation is under present circumstances severely limited.

3. The hard fact seems to be that in the present atmosphere multilateral commercial negotiations are not likely to be resumed in 1959. They may not be taken up again on a strictly European basis even in 1960. Seen from here the climate does not seem to be appropriate; nor for the present at least can we detect the political will to resume the negotiations.

4. At the same time we must admit that future developments may affect the prospects one way or another. Uncertainties as to the results of the British elections, of Chancellor Adenauer's promotion, of the state of Anglo-French and Franco-German relations, the economic health of the French economy, longer term effects of the achievement of convertibility combined with important and pressing international political problems are some of the factors which make forecasting difficult.

5. If a FTA had been achieved by the (British) target date of January 1/59, there is real doubt that it would have been fully acceptable to us. The compromises which would have been necessary not only to accommodate the French but the European under-developed countries would have been staggering. Now that the (relatively) false sense of urgency has been eliminated there is time to reflect. Moreover continued European and particularly French recovery will make the necessary economic adjustments easier to accept and sustain and the price of some form of closer commercial cooperation might become progressively less extravagant.

6. To assume that the FTA negotiations will not be resumed in the foreseeable future and that the achievement of external convertibility (and of course the financial strength on which it has been based) has weakened the original raison d'être of the Organization does not of course mean that the OEEC should cease to exist. At a minimum there will continue to be need for a European forum for consultations perhaps more along the lines of those presently conducted in the Canada-UK Continuing Committee and the USA-Canada Economic Committee. Moreover there will continue to be the residual functions of the OEEC, e.g. the European Nuclear Energy Agency and work in productivity and science, where much useful work remains to be done. It is nonetheless important for the Organization in taking stock of its real accomplishments to take full account of the new environment in which it finds itself. It must be admitted that there are those (of whom the Secretary General of OEEC is one) who are urging the continuance of the OEEC activities along traditional lines. (Sergent argues that a solution to the problems created by the EEC cannot wait too long and that an extended period of uncertainty would lead to critical conflicts and the progressive deterioration of cooperation among the 17). And many feel - wrongly we think - that the OEEC will be the appropriate forum when and if the FTA negotiations are resumed. In more practical terms the "atrophication" of the Organization will mean that the movement already under way of the competent members of the Secretariat to other jobs will be accelerated.

7. How about the future? Here the ground is even more treacherous. We have suggested that the chances for a satisfactory (from our standpoint) European multilateral association have improved with aging. It is relevant to note that protectionism (one of the basic reasons for the breakdown in the FTA negotiations) seems no longer to be the guiding principle of the French economy - nor we might add such a conspicuous result of the working of the EEC. But there is also now a greater possibility and scope for acceptable alternative solutions. At a moment when suggestions are being made for new initiatives with respect to the Common Market and the FTA it might be worth relating them more directly to the GATT. And with the hope that quota discrimination will assume relatively less importance attention will have to be focussed on tariffs if a satisfactory multilateral solution is to be found to the commercial, economic and political problems raised by the creation of the European Economic Community.

8. At present the GATT as an entity, the EEC and to some extent the OEEC seem to be regarding one another with mutual suspicion and even antipathy. But if the unfortunate results of the so-called split in Europe are to be avoided, and more important, if the Western world is to keep pace with Soviet economic growth the GATT and its objectives must be pursued even more vigorously. At present GATT obligations are in large part considered to be time payments due on a misguided purchase in 1947. And little effort is made to point to the still desirable - and indeed essential - objectives which the Contracting Parties have endorsed. It seems to us from our admittedly limited vantage point that there is now a real need for a political recognition that the GATT with the EEC and with the wholehearted cooperation of the rest of Europe, the USA and the Commonwealth is the only really effective method of establishing a healthy trading world and a satisfactory basis for meeting the Soviet economic offensive. This is a tall order and if it is to be fulfilled must be preceded by political decisions which would permit of compromise solutions to be worked out in Geneva in a new atmosphere. Just as the theme of the Commonwealth Economic Conference was an "expanding Commonwealth in an expanding world" it may be that the time is appropriate for the Commonwealth (with, it is to be hoped, the support of the USA) to take the initiative to a concerted return to a fuller appreciation of the General Agreement.

9. Preaching to the converted as to the importance of GATT has of course a hollow ring. For one thing the frustrations and disappointments of the non-Six are not all of the kind which can be easily assuaged by efforts to make the GATT work more effectively. At least some of these countries have at present little faith in the efficacy of the GATT and, on economic grounds alone, would take some persuading to turn their backs on regionalism or at least abandon the conception of special arrangements with the Six. The practical difficulties in the way to a "return to the GATT" are staggering. At the same time the alternatives i.e. regional blocs in Europe, a Commonwealth approach to an FTA, seem to us to be second best. The real problem will present itself in 1962 when the first meaningful steps towards the establishment of the customs union are to be taken. If in the interim the Six could be persuaded to limit if not eliminate quota discrimination and to continue to reduce their tariffs on an MFN basis, if the USA Administration could persuade Congress of the necessity of ratifying the OTC and if the Community could be persuaded of the desirability of cooperating in a new atmosphere with the other Contracting Parties in the implementation of a revitalized General Agreement, substantial progress could be recorded. (We have of course ignored but through not completely forgotten the disagreeable fact that among the Western countries the USA may be the only one which is not prepared or able to make substantial moves in the direction of freer trade. Moreover European countries are by and large prepared for freer trade with almost everybody but the USA. To meet this situation it may be that something less than unconditional MFN treatment will have to be accepted as appropriate in certain circumstances.) It seems now even clearer that it will be under the aegis of the GATT and not the OEEC that the European Economic Community must be called to account. And if the FTA negotiations are resumed - or to put it another way, if European countries continue to consider it desirable to make concerted progress toward freer trade at a faster rate than other CPs are willing or able - the GATT would seem to be able to provide the appropriate framework under which negotiation could take place if the proper atmosphere prevails in Geneva.

10. What we would need to do, if our suggestions were seriously considered, would be to develop a fundamentally fresh approach to the whole complex of objectives here discussed, in order that each country of the West and each region should see its problems and objectives in the context of the wider associations available to them and be persuaded that the solution of their own problems, as well as those of the West as a whole, lie (without rejecting all other forms of association) in revitalizing the wider associations and seeing them for what they could be made to mean and do in the future.

11. In summary we are suggesting for consideration (a) a willful abandonment for at least two or three years of efforts directed toward the conclusion of formal FTA agreement or similar formal multilateral arrangements in Europe (b) a recognition by the OEEC that its original purposes have been achieved (c) a political decision to return to the GATT for leadership with the recognition that compromise solutions not wholly satisfactory to anyone must be worked out, to accommodate - not merely tolerate - the political impetus toward more intensive European Economic Cooperation. In other words we must continue to give adequate support to the objective of a closer association among the countries of Western Europe.

12. Since the real answers are to be found in Washington and London, if we are to take any initiative it would of course have to be in those capitals and not here.