Following for Pearson from Robertson: United Kingdom and France, though both appalled at technical and administrative difficulties inherent in idea of a Western European Customs Union, will undoubtedly address themselves to a pretty thorough examination of its feasibility. Suggest you study likely short and long term effects of such a development on Canadian export trade. My guess is they would not be very serious, e.g. the distribution pattern of our exports as between United Kingdom and Western Europe would tend to return to pre-1932 lines, with some substitution of one market for another, and perhaps a greater dispersion of outlets, but I would not expect any significant net effect on the volume of any of our staple exports. By and large this would probably he found to he true in respect of Australia and New Zealand also, i.e. net import requirements from overseas of a Western European Customs Union, for wheat, lumber, base metals, newsprint, fish, etc., would not differ from sum of import requirements of individual countries which might make it up. Long run effects might tend to limit European market for such agricultural products as eggs, bacon, cheese, apples etc., and for a wider range of manufactured articles.

Suggest you consider implications of Western European Customs Union, not only in terms of its probable direct effects on volume and direction of Canadian exports, but as means of underwriting our general political and economic interest in its stability and prosperity.

General attitude of Canada towards this sort of development is probably worth some public definition during next few weeks. European dependence on North American (not just U.S.A.) economic support is pretty generally recognized and measure of assistance already extended by Canada is appreciated. Canadian interest and encouragement of closer European economic cooperation would add an clement absent from U.S. endorsement in that it would come from a country of the Commonwealth and from a beneficiary (nominal) of existing preferential arrangements. Some recognition that the United Kingdom can play its full part in European economic cooperation and still he a member of the Commonwealth in good standing, just as Canada combines Commonwealth membership with the fact that it is also an "American country", might be helpful in its effects over here.

2. At a time when Canada and the United States are being asked to take a benevolent interest in the effort of European countries to put their economic affairs on a more orderly continental basis, we might consider whether the prescription for Europe has not an application nearer home. I have felt that the current pressure on the Canadian dollar position might squeeze our economy in either of two ways: i.e., it could, for trading purposes, push us into an impoverished sterling area, held together by policies of discrimination against United States exports and not much more; or, conceivably it could result in a much closer continental integration of our economy with that of the United States. Of these polar extremes, I much prefer the second, and wanted to come home to talk to you about it before the Government committed itself to the first and orthodox course. However, it now looks as if we shall have a few months' grace to think things over while the countries of Europe are desperately seeking some constructive solution to their much graver problems.

3. The consideration now being given to the possibilities of European regional economic cooperation makes me wonder whether we should not more or less simultaneously he thinking of a real reciprocity agreement with the United States, which would strengthen our dollar position in the short run, and, in the long run, ensure us against too great a dependence, relative to the United States, on the European market. It might he possible to work out a scheme for a graduated approach to reciprocal free trade in a good many commodities on a continental basis, with the steps selected and their depth determined largely by the requirements of our dollar position, perhaps on an understanding that in five years' time we would match the tariff removals that the United States would undertake to accomplish in two. All this is very speculative and only half thought out, but I do feel very strongly that the political and economic consequences of a purely "defensive" discriminatory policy against United States imports would he so disastrous, both for Canada and the world generally, that we should explore exhaustively every alternative to such a course.