These matters are likely to be introduced into Cabinet later this week by the Minister of Finance. They were the subject of an emergency meeting yesterday of the Interdepartmental Committee on External Trade Policy called by Dr. Clark. A recent telegram from Washington was under discussion (WA 6450. It quoted ECA estimates purporting to show drastic cuts, in United Kingdom imports from Canada particularly imports of wheat. A draft reply to that telegram is being sent to you under cover of a separate memorandum.

2. The United Kingdom import programme for 1950 51 is not yet settled; it cannot be settled until the size and conditions of the ECA appropriation are much more clear than at present. A meeting of the Canada U.K. Continuing Committee had been planned for April but has been postponed by mutual consent. Separate discussions were planned regarding U.K. imports of Canadian wheat and flour when the present contract runs out at the end of July. Mr. Howe had planned to discuss these matters with the United Kingdom late in May or early in June.

3. In the Committee meeting Dr. Clark proposed, partly supported by Mr. Towers, that before new negotiations began the Canadian Government should suspend further drawings by the U.K. on the Canada U.K. Credit. Drawings have been running at the rate of $10 millions a month. There is some $90 millions left in the Credit enough to last until the end of 1950. Dr. Clark feels that, in the coming negotiations, we shall need all the ammunition we can accumulate; that it is unlikely and perhaps unnecessary that Parliament would vote further financial aid to the U.K. this year; and that as much as possible of what credit is available should be held in reserve as a bargaining weapon.

4. Mr. Towers, while agreeing with Dr. Clark that suspension of drawings was desirable, proposed to put it up to the U.K. in a more conciliatory way and, if possible, to gain their agreement. There are purely financial grounds on which the U.K. might (other things being equal) be willing to forego drawings. The U.K. are, temporarily and accidentally, very flush with Canadian dollars; their working balance in the Bank of Canada is some ten times its normal size. For the past five months their drawings on the Canadian loan have merely added to their swollen balance in the Bank; over the coming five or six months they would have no difficulty even if they were not allowed access to the credit because they could simply draw down their bank balance. Meanwhile, if the Canadian Government provides them with additional money from the Credit, this money has to be borrowed by the Government at an appreciable cost in interest.

5. Mr. Mackenzie said that, if the suspension of drawings could be justified and accepted on purely banking grounds, that was one thing; but it was quite another if the suspension was connected in any way with ECA statistics, with the threat of U.S. food exports to the U.K. and with the coming negotiations between the U.K. and Canada. He felt that, as a result of tripartite and other discussions, Canada was under some moral obligation to allow continuing use of the U.K. credit. (This was vigorously denied by Dr. Clark who said that, last September, he told Sir Henry Wilson Smith that there was no commitment beyond December). Mr. Mackenzie also expressed misgivings about the reaction in Washington if Canada (without full agreement from the U.K.) stopped financing even a share of the North American export surplus.

6. Mr. Plumptre, representing this Department, did not take an active part in the discussion, but gave some support to Mr. Mackenzie.

7. Dr. Clark said he would be advising his Minister to propose in Cabinet the suspension of drawings on the U.K. loan. Since he could not get the full support of the Committee he suggested that other departments represented should tell their Ministers of the action he proposed.

8. Mr. Mackenzie undertook to raise with his Minister the possibility of advancing the date at which new negotiations with the U.K. would take place regarding wheat and flour. (He did not expect to get any commitment from the U.K. except covering flour). The other members of the Committee all felt that the date should be advanced, and that it should be fixed immediately. The Government would then be able to say the first steps towards new arrangements had already been taken - a desirable statement to be able to make if recent ECA estimates on wheat exports leaked out to the public.

9. The text of this report is being sent to London and Washington for comments.³² The Minister of Finance cannot attend Cabinet until Saturday and we should have some replies by that time.

E. R[EID]

³² Envoys it l'ambassadeur aux États Unis télégramme N° EX 490 du 22 mars 1950 et au hautcommissaire au Royaume Uni, télégramme N° 396 du 22 mars 1950.

Sent to Ambassador in United States, Telegram EX 490 of March 22, 1950 and to High Commissioner in United Kingdom, Telegram No. 396 of March 22, 1950.