I. A message has been received from the Secretary of State for Commonwealth Relations stating that the U.K. have been considering possible relaxation of restrictions on imports from soft currency countries. The relaxation would apply to OEEC countries (i.e.-recipients of Marshall plan aid) and also to other soft currency countries. It would not apply to Canada and other hard currency countries. Canada and the U.S. are particularly concerned with the proposal to extend the relaxation beyond OEEC countries because it would contravene the terms of the Anglo-American Financial Agreement and the Anglo-Canadian Loan Agreement. The U.K. are asking that the U.S. waive its rights to object. If the U.S. agree, the U.K. authorities hope Canada will do the same.

2. Article 9 of the U.S.-U.K. agreement of December 6, 1945, is as follows:

"If either the Government of the United States or the Government of the United Kingdom imposes or maintains quantitative import restrictions, such restrictions shall be administered on a basis which does not discriminate against imports from the other country in respect of any product; provided that this undertaking shall not apply in cases in which-

(b) there may be special necessity for the country imposing such restrictions to assist, by measures not involving a substantial departure from the general rule of non-discrimination, a country whose economy has been disrupted by war;" Article 5 of the agreement of March 6th† 1946, between ourselves and the U.K. gives us the same rights against discriminatory treatment as the U.S. has.

Discrimination in favour of OEEC countries can be justified as being in favour of countries whose "economy has been disrupted by war". More favourable treatment to other countries than to the U.S. or to Canada is barred by the agreements.

3. While it is the extension beyond OEEC countries that raises the problem of the U.K. commitments to the U.S. and ourselves, the U.K. appear to regard such extension as essential. This was made clear by Sir Stafford Cripps in putting the proposal forward in Paris on June 3rd and 4th, in the Intra-European Payments negotiations. In view of these negotiations at Paris, where the U.K. proposal has been stated to hinge on the reaction of the U.S. and Canada, the question could become one of urgency and the U.K. are so representing it to us at the present time.

4. Such information as we have received thus far as to the probable U.S. reaction is not conclusive. Treasury officials have indicated that Article 9 of their agreement could not be waived without going to Congress, and that the latter would be most unlikely to approve. On the other hand, there is apparently a feeling in the State Department that the U.K. proposal is a move toward reduction of trade barriers and should be seriously considered. They seem to think, however, that the change might be limited to OEEC countries.

5. So far as the substance of the problem is concerned as it affects Canada, it would appear that we have no legal ground for objection to relaxations applying to countries whose economies have been disrupted by war which, broadly speaking, includes the OEEC countries. (Although it could be claimed that not all have "war shattered" economies). Moreover, it is probable that such discriminatory treatment in their favour as against ourselves would not alter the realities of the present trading position. It is the U.K. proposal to extend the relaxations on a discriminatory basis to the rest of the sterling area and other soft currency countries which is contrary to the agreements and which causes concern. It is not possible to know to what extent broader relaxations might injure our position but any agreement to waive rights we now have under Article 5 would be a concession in principle and for that reason important, whatever the material result might be.

6. The U.K. have been told informally that no reply could be given to their enquiry pending ministerial consideration. No reply is strictly necessary until the U.S. has answered. However, Cabinet might wish to consider what position should be taken to Canada and whether it would be desirable to give indication of it without waiting for the U.S. reaction.⁴⁶

N.A. ROBERTSON

⁴⁶Le 16 juin 1949 le Cabinet reporta sa decision jusqu'h cc que la rcponse des E.-U. suit comue. On June 16, 1949 Cabinet deferred a decision until after the U.S. response became known.