The Trade Agreement concluded between Canada and the USSR in 1956⁶⁰is due to expire on February 28th next year. It may be extended by mutual agreement prior to November 29th. Alternatively, a revised agreement might be negotiated if the two Governments were willing.

The main benefit to Canada under the present arrangement is an undertaking by the USSR to purchase a minimum of 400,000 tons of wheat annually for the three years of the Agreement. This undertaking is contained in a separate exchange of letters. In return for these guaranteed purchases, Canada in the Agreement extended most-favoured-nation tariff treatment to the Soviet Union. In addition, provision was made for MFN treatment for Soviet merchant ships in Canadian ports. On the Canadian side, in order to prevent injury to Canadian industry from possible low-priced imports from the USSR, Canada, in a separate exchange of letters, reserved the right to impose special values for duty purposes on Soviet goods. A general security clause in the Agreement permits either country to impose prohibitions or restrictions of any kind to safeguard its essential security interests.

The Agreement has been of substantial value from the point of view of our wheat trade. Continued annual sales of about 15 million bushels of wheat (the equivalent of 400,000 tons) to the USSR would be of considerable importance to Canada and to Western wheat producers. This amount represents about 5 per cent of Canada's average annual wheat exports. Sales to the Soviet Union of this order could not be counted upon in the absence of a specific undertaking by the USSR to purchase minimum quantities.

A continuation of the Agreement would appear desirable also from the political point of view. Political considerations played an important part for both sides when the present Agreement was negotiated in 1956. It was the view of the Canadian Government that a trade agreement could help to establish mutual trust and reduce suspicion. Trade agreements provide one of the few points of mutually advantageous contact between East and West, and may help to influence the Soviet leaders away from their isolationist approach. Renewal of the Canada-USSR Agreement would not be without value in this direction. On the other hand, its expiration would be more consequential and might well be interpreted as a deterioration in our political relations with the Soviet Union.

Preliminary indications are that the USSR would be interested in renewing the Agreement as such, but would be reluctant to accept a continuation unchanged of the obligation to purchase Canadian wheat. It is reported that the Soviet wheat crop this year is exceptionally large, including the harvest in the far eastern areas of the USSR where there is usually a deficiency. Normally, it is economic for the USSR to import wheat into the far eastern deficiency area from Canada through their Pacific ports. The marginal production areas being developed in the northern USSR result in even greater uncertainties from year to year regarding wheat crops than are experienced in Canada. The Soviet authorities are reported to be concerned that Soviet exports to Canada have not developed and that the trade balance has continued substantially in Canada's favour. In a renewal negotiation they may try to obtain what they would consider to be a more balanced agreement from their point of view by endeavouring to secure an obligation on the Canadian side to purchase specific quantities of certain Soviet goods. In 1957 Canadian exports to the USSR amounted to $10.7 million (mostly wheat), while Soviet shipments to Canada amounted to $2.8 million (fur skins and chrome ore). A table listing the main items in Canada's trade with the USSR is attached.&mdagger; In endeavouring to obtain a further undertaking by the USSR to purchase similar quantities of Canadian wheat and perhaps to buy other Canadian products, it may be necessary to find benefits to offer the Soviets over and above the continuation of most-favoured-nation treatment. Because of the nature of our economy, because we are not a State trading country and because, as a matter of policy Canada, with only one exception in the post-war period, has refused to enter into formal arrangements involving undertakings to import specified quantities of particular products, it would appear that such additional benefits might have to be found in other fields such as relaxation of travelling restrictions on Soviet traders and commercial representatives.

There are, in addition, a number of changes which could improve the Agreement from the Canadian point of view. For instance, we might again endeavour to set down in the Agreement obligations for Soviet State trading corporations to make their purchases and sales solely in accordance with commercial considerations, and an attempt might be made to obtain some understanding concerning disruptive Soviet sales of aluminum and other products of interest to Canada in world markets. As a minimum, our concern about sales of this kind could be registered with the Soviet authorities during the negotiations.

In any renegotiation the question of Soviet use of the St. Lawrence Seaway might well arise and the Soviet authorities may press for guarantees of access for their vessels. The terms of the present Agreement would permit Canada, under the general security provisions, to deny the Seaway to Soviet ships, although there would be an obligation to continue most-favoured-nation treatment for Soviet vessels in Canadian ports of permitted entry.

It is recommended that:

1. At this stage officials be authorised to open exploratory discussions with the Soviet authorities through the Embassy of the USSR in Ottawa, and, if necessary, through the Canadian Embassy in Moscow, in order to examine the possibility of extending the Agreement or renewing it on substantially the same lines as at present, and, in either case, with an undertaking by the USSR to purchase annually substantially the same quantities of Canadian wheat as under the previous Agreement.

2. A report be made to Cabinet on the results of these preliminary discussions.

3. At that time Cabinet decide whether formal negotiations should be initiated, what directives should be given to the Canadian negotiators, and where these negotiations should take place. In this connection, representatives of the Soviet Embassy have already mentioned informally that Moscow might be the appropriate venue for the final negotiations, inasmuch as the 1956 negotiations took place in Ottawa.⁶¹