I attach a draft of a memorandum? to Cabinet on new United States policies on cotton subsidies which are to come into effect on August 1. I understand Mr. Harris, with the concurrence of Mr. Howe and Dr. McCann, intends to circulate this memorandum for a Cabinet discussion of the matter at the special Cabinet meeting on the morning of Friday, July 20, and that all three Ministers have agreed to it in its present form.

2. United States officials have indicated both in Ottawa and in Washington that they consider Canadian anti-dumping duties should not be levied on imports of subsidized United States cotton manufactures. It is considered that the Canadian position should be explained to the State Department, and two Aide Mémoires have been drafted interdepartmentally for presentation in Washington: one indicating certain objections to the new United States policies because of their probable effect on world trading and on common defence objectives; and the other describing our position regarding the application of Canadian anti-dumping duties on imports of subsidized United States cotton manufactures. Copies of these draft Aide Mémoires are attached, and I should be grateful to know whether you agree these should be presented in Washington on Friday afternoon, provided Cabinet approves the Canadian position as stated in the Memorandum.¹²⁷

3. The draft memorandum to Cabinet and the drafts of the two Aide Mémoires have been thoroughly discussed by officials of this Department, the Bank of Canada, and the Departments of Finance, Trade and Commerce and National Revenue. Mr. Couillard from the Embassy in Washington was present at a discussion of these drafts on July 13, and the Canadian position is being recommended by officials in the full understanding that there may be a fairly vigorous reaction on the part of the United States. It was considered that because of the chances of increasing competition from cheaper cotton goods imports from third countries, future developments should be carefully watched and further measures to protect the position of Canadian cotton manufactures might have to be considered.

J. L[ÉGER]

[PIÈCE JOINTE 1/ENCLOSURE 1]

Projet d'un aide-mémoire

Draft Aide Mémoire

THE BROAD ASPECTS OF U.S. COTTON SUBSIDIES

The Canadian Government wishes to refer to the policies which are being adopted by the United States to subsidize exports of raw cotton and exports of cotton textiles. The Canadian Government has given careful study to the information which has become available regarding plans for a two-price system for the disposal of cotton and related measures of subsidization of exported textiles. Concern is felt in Canada about the consequences of these policies from two points of view. First, their effect will be to upset and disorganize world production and trade in raw cotton and in cotton textiles, in direct ratio to the vigour with which the measures are applied. Difficulties will predictably be increased for numerous countries overseas. Strains will therefore be imposed upon various international undertakings and agreements in which the United States, Canada and others are co-partners, not only in the field of trade and finance but in the fields of security and defence as well. The second of these concerns pertains to particular problems which these policies create for the administration of Canadian laws and it is being dealt with in a separate Note (aide-mémoire).

2. The Canadian Government has for some time been sympathetically aware of the accumulation of surplus cotton in the United States, of the problems attendant thereto, and the difficulties which have been encountered in finding solutions to these problems. The Canadians Government is equally aware, however, of the difficult problems of numerous countries, which are producers of cotton or cotton textiles, and which will consider that they are being injured by these policies of surplus disposal and subsidy. The United States Government must also have felt concern on this score. Included amongst these countries, in addition to ones which are well disposed on matters of defence and security, are others which are uncommitted to the objectives which are held in common by the policies of United States, Canada and others in the Western World. While the Canadian Government understands that final decisions have been made in the United States to implement these new policies, it would express the confident hope in the light of all the circumstances that the administration of these policies will be tempered by recognition of the problems of others which are likely to be adversely affected.

3. Referring to the payments which will be made to United States exporters of cotton textiles, the text of the General Agreement on Tariffs and Trade has been carefully examined and reconsideration has also been given to what should properly be understood by the concept of a governmental subsidy. As a result of this examination the Canadian Government concludes that these payments must be regarded as subsidies even though they are referred to as equalization payments. The Canadian Government is concerned, therefore, about the implications of these policies of assistance to exports for the revised provisions of the General Agreement on Tariffs and Trade, which were negotiated in 1954-55. The apparent conflict between these new policies and the revised form of Article XVI of the General Agreement gives rise to uncertainties regarding the status of the new articles and the plans of the United States in this connection.

4. While, of course, affected by the measures applicable to exported cotton textiles, Canada is not itself a producer of raw cotton. Nevertheless, the Canadian Government cannot remain indifferent to the consequences for the world overseas of the two-price system for raw cotton. The Canadian Government fully understands and appreciates the motives which have led the United States to consult the interests of other countries and often to take these interests into account in other connections. It hopes that similar considerations will be kept fully in mind in this new context.

[PIÈCE JOINTE 2/ENCLOSURE 2]

Projet d'un aide-mémoire

Draft Aide Mémoire

THE IMPACT ON CANADA OF U.S. COTTON SUBSIDIES

In an accompanying aide mémoire the Canadian Government has set forth its general concern regarding the broad aspects of the newly adopted policy of the Government of the United States in selling raw cotton abroad at a subsidized price and instituting a related subsidy on the cotton content of exported manufactures containing cotton. In this aide mémoire the Canadian Government makes special reference to the direct impact of these actions on Canada.

2. The actions which the U.S. Government proposes to take will, as has already been noted, be certain to cause repercussions in the markets for raw cotton and cotton manufactures all around the world. But the nature and extent of these repercussions is quite uncertain: it is not yet known how far or how rapidly the U.S. Administration is expecting to proceed in carrying out the intention of Congress to recapture certain markets for raw cotton; it is not yet known how far and in what ways U.S. exporters of cotton fabrics will make use of the subsidy provisions relating to exports of manufactures; and it is not yet known how the markets all around the world, both in raw cotton and cotton manufactures, will react to these new circumstances. All that can be said with certainty is that a period of unusual stress and difficulty may be anticipated.

3. Canadian manufacturers of cotton textiles, like Canadian manufacturers of other products, are afforded a certain protection by the Canadian tariff. This protection consists of the particular rates of duty provided for particular classes of goods, supplemented by an anti-dumping duty (Section 6 of the Customs Tariff) which comes into effect when, and to the extent that, goods are sold for export to Canada at prices below their fair market value within the exporting country. It will be noted that, in Canadian law, the definition of dumping is in close accord with provisions of the GATT.

4. Under a provision of the Customs Tariff the Government may suspend the anti-dumping provisions of the law. This provision has been used on very few occasions. When it has been used its purpose has been either to mitigate shortages in Canada or to facilitate imports into Canada from countries in balance-of-payments difficulties. Imports of cotton goods from the United States do not fall into either of these categories. Accordingly, any suspension or exception in favour of these goods would constitute a major departure from Canadian practices, well established over many decades, and its suspension under circumstances of great uncertainty in which a Canadian industry is threatened with material injury could not be defended.

5. Canadian manufacturers, in all sorts of lines, rightly regard the anti-dumping duty as an essential element in the tariff protection afforded to them. Most of them are, by American standards or even by European standards, relatively small operators with relatively high costs per unit and continent-wide transportation and selling costs to meet. Canadian tariff rates are, in comparison with those of many countries, moderate if not low, and if imports were permitted to be valued at prices even lower than the prices prevailing for home consumption in much larger markets abroad, Canadian manufacturers would at any time be liable to suffer material injury. Indeed, if the Canadian anti-dumping duty did not exist in its present form, many Canadian tariff rates would have to be a great deal higher than they are at present.

6. The Canadian cotton textile industry is no exception to the general statements made above regarding the position of Canadian manufacturers, indeed it may be taken as a prime example of them. Canadian textile firms are smaller than comparable firms in the U.S.A., their volume of production (especially in so-called style goods) is much less, their costs per unit are higher, and their sales must be made in a relatively small market scattered across the whole continent. Nevertheless Canadian tariffs on imports of cotton textiles are moderate by any standards, indeed the Canadian industry claims that there is no cotton textile industry anywhere in the world with less protection. The anti-dumping duty is an essential and established element in that protection.

7. The vulnerability of the Canadian cotton textile industry is illustrated by its experience since the war. During that period most Canadian industries have been rapidly expanding and greatly prospering. But the cotton textile industry has failed to expand and prosper. The Canadian consumption of cotton textiles has grown greatly - by about two-thirds of its pre-war level. But virtually the whole of this expanded consumption has been supplied from abroad. Imports from the United States have risen spectacularly. Before the war U.S. imports supplied less than 10% of Canadian consumption; recently they have been supplying nearly 40%. Despite these developments, the Canadian Government has resisted persistent requests that particular tariff rates, which for technical reasons actually give even less protection than before the war, should be raised and that the relevant escape clause provisions of the GATT should be invoked.

8. Considering the vulnerability of the Canadian cotton textile industry, considering the established position of the antidumping provisions of the tariff as an essential element in the tariff as a whole, and considering the fact that the proposed U.S. actions are bound to produce a period of unusual stress and difficulty throughout the world in markets for raw cotton and cotton manufactures, it is quite out of the question that the Canadian Government should forthwith suspend or modify the normal application of the anti-dumping duty. Accordingly the Canadian Government has decided that, at this time, no change will be made in the normal application of that duty.

9. At the same time, the Canadian Government has decided that, at this stage and pending clarification of the situation, it should not resort to its extensive powers to apply anti-subsidy duties under Section 6A of the Customs Tariff.

10. The Canadian Government intends to keep the situation under close scrutiny and to consider adaptations in its policy in the light of developing circumstances. If it appears, in the light of experience, that serious inequity is developing, this will be taken into account. Moreover, it is anticipated that textile industries situated overseas, receiving cheaper raw cotton as a result of the U.S. actions, will be able to compete even more effectively than formerly for a share of the North American market. This intensified competition will have to be kept under continuous review.