Reference: Our Tel 412 Jul 21.?
Repeat London, NATO Paris, Paris, Brussels, Geneva, Rome, Hague, T&C Ottawa, Finance, Bank of Canada, Washington from Ottawa (Information).

CANADIAN ECONOMIC RELATIONS WITH GERMANY

In my telegram 412 July 21, I said that among the problems I should like to discuss with officials in Ottawa in September were those aspects of Canadian foreign economic policy which are of special interest to this mission. In advance of my return it may be helpful if I outline some of the points on which I should appreciate the views of officials in the departments concerned.

2. My first concern relates to the objective of maintaining and expanding our exports to Germany. This country is now our third most important market and the quantities of such commodities as wheat and barley which are imported from Canada are of great importance to us.

3. Those who are responsible for our trade policy in Ottawa have devoted the most careful attention to Germany - particularly over the past two years during the inflamed period in GATT when the German restrictions problem was under discussion. It was patently obvious to the Germans that Canada was among the most conscientious if not repeat not uncompromising of their opponents in GATT.

4. During this period the Canadian attitude caused a good deal of hurt surprise bordering on resentment in the German Ministry of Agriculture and other agricultural circles in Germany. There was even some danger that, by our conscientious efforts to secure the removal of German quantitative restrictions on agricultural products, we might have induced the Ministry of Agriculture to retaliate by reducing Germany's purchases of Canadian wheat and barley.

5. The Minister of Agriculture, Dr. Luebke, who becomes President of Germany in September, used to come closest to threatening us. His second in command, Dr. Sonneman, is an even more fervent agricultural protectionist than his minister, but he had been less threatening. Indeed he has sometimes assured members of this mission that he would see to it that his minister did not repeat not carry out his threats against Canada. He does however feel strongly and even bitterly about the line which successive Canadian delegations took on Germany's QRs.

6. In speaking to us at the beginning of June, Sonneman said that the extreme pressure brought to bear on his government at the recent meeting in Geneva was nothing less than "blackmail" and that the result was a "humiliating defeat" for Germany. He was very unhappy about the attitude of the Canadian delegation at Geneva which was more "brutally" expressed than it need have been.

7. I must add, however, that from conversations with some of Sonneman's officials and with Harkort of the Foreign Office we have learned that Sonneman may be a good deal less displeased with the GATT compromise than we would have gathered from the explosive words he used to us. Nevertheless I feel there is, in general, sufficient latent annoyance with our attitude to warrant our taking special care in future to avoid whenever possible irritating these substantial purchasers of our agricultural products and to make opportunities for reinforcing our relations with them, explaining our positions to them and in turn listening sympathetically to an exposition of their very considerable agricultural problems.

8. One way of doing this would be to invite senior officials such as Sonneman to Canada. He paid a very successful visit to Canada three years ago at the invitation of the Wheat Board with whose members he has the friendliest relations. Indeed he appears to like Canadians generally and his relations with the Embassy are most cordial. A second visit to Canada in the near future might be wise particularly since Germany will shortly introduce proposals for revising the GATT rules on agriculture.

9. Also I think it important that our third largest customer should receive more attention than in the past from senior officials concerned with our economic policies in Ottawa. Could they not repeat not make a point of coming to Bonn for consultations more frequently? As a start perhaps Mr. Ritchie might come over before or after the meeting of Commonwealth Finance Ministers in September.

10. The substance of our relations, particularly GATT relations with Germany, presents more intransigent problems since Germany is only a part - albeit a large part - of the world market. Up to the present we have, I gather, been basing our policies on two fundamental points:

(1) maintenance of the integrity of the rules of GATT,

(2) insistence that countries which are not repeat not in balance of payments difficulties, live up to the rules.

11. In following this line of approach with Germany, in refusing to contemplate special arrangements for agriculture, I think we have, up to the present, had some measure of success. We and our exporting partners in GATT have certainly obliged the Germans to review their own situation carefully - both in the industrial and agricultural sectors. The pressure that built up against them obliged Germany to relax import restrictions that might not repeat not other-wise have been relaxed so soon. Nevertheless, the Germans in the compromise decision of last May³⁵³ have, by emphasizing the industrial sector, got off relatively lightly in the agricultural sector. The main structure of agricultural protectionism remains and the procedures agreed for review are not repeat not as strong as we would have wished. I am afraid there can be little doubt that the Germans will pay more attention during the next three years to formulating proposals for revising the agricultural rules of GATT than to preparing the way for the removal of quantitative protection.

12. There are thus the seeds of opposition, trouble and acerbity in Canadian-German relations in the GATT over the next three years. The Germans will want to soften the GATT agricultural rules; we, I assume, will wish to maintain the present ones or harden them. The annual consultations on Germany in the GATT will probably give many opportunities for finding that the Germans are not repeat not making sufficient progress toward eliminating their QRs. In the situation that can be foreseen, I think it is extremely important that we plan carefully to avoid repercussions from GATT on the level of our exports to Germany. The Germans are not repeat not above threatening us; they may not repeat not be above carrying out these threats in extreme circumstances.

13. What I would like to find out, when I am in Ottawa, is the general view of officials on the prospects for holding the line on agricultural rules in GATT and on the prospects as they see them for Germany's removing agricultural QRs, i.e. whether they think it is likely that any foreseeable German government will find it possible politically to remove them in view of the general low productivity and the high cost of farming in this country.

14. My own forecast of what will happen is reasonably clear. I do not repeat not believe that the German Government will remove agricultural QRs. It is just possible that a deficiency payments method of protection might be forced on them, but I think it unlikely. The general assumption here is that something like the German marketing law system will be applied in the Common Market and I think the probability is that this will happen. In this case there will be encouragement to uneconomic production of cereals in the Common Market countries and Canada as well as other low cost exporters will find their markets under continuous pressure - alleviated only by bad harvests in Europe and increasing demand due to population growth and improved living standards. My guess is that it will be very difficult to hold the line on GATT rules with the EEC lined up firmly in favours of a change and with support from other agricultural protectionist countries.

15. I should like to have the comments of officials on this long term appreciation together with the factors which I hope they will be able to provide which might make the prospects appear less gloomy.

16. I do not repeat not wish to recommend at this stage a future line of policy which might tend to alleviate our GATT and German problems. We do not repeat not yet know what the precise nature of the German proposals on agriculture will be although they have already discussed them with their EEC partners. Nor do we yet know the nature of the German report to the Tokyo GATT meeting.

17. There seem however to be two broad lines of approach.

(1) To continue our present policy on GATT agricultural rules in the hope that whatever compromises are agreed to in future may be more liberal than if we adopted a less firm position at the outset.

(2) To consider possible alterations of GATT rules and procedures at this stage which might bring them more into line with your forecast of the level of protectionism that is likely to prevail.

These rules and procedures could conceivably be drawn up so as not repeat not to diminish the degree of effective pressure which the exporting countries could exert on the importers.

18. In either case I think it is important that we study the politico-economic problems of German agriculture very carefully and that there should be an exchange of visits of officials concerned so that both the Germans and ourselves realize that their counterparts have made every effort to understand the others problems. We might also be able to influence German policy and at least should be able to preserve a more friendly climate for our considerable agricultural exports to Germany.

[ESCOTT] REID

³⁵³Voir/See document 64.