1. The purpose of this Memorandum is to review for the consideration of Cabinet negotiations that have just been concluded between Canada and Honduras for the exchange of most-favoured-nation treatment.

2. Background-Since June 1955 trade agreement negotiations have proceeded in Honduras between the Canadian Government Trade Commissioner and a Special Commission appointed for that purpose by the Government of Honduras. These negotiations represent the third occasion since the Second World War on which Canada has endeavoured to conclude a trade agreement with Honduras. At present Honduras is the only Latin American country with which Canada does not exchange most-favoured-nation treatment.

In February 1946, the Honourable James A. McKinnon, then Minister of Trade and Commerce visited Honduras and the two countries agreed to negotiate a commercial modus vivendi. However it was subsequently decided to postpone such an agreement until both countries had been able to review the situation in the light of the GATT discussions then pending.

Early in 1950 the Canadian Government made arrangements for the visit to Honduras of a Canadian delegation which was empowered to sign a commercial modus vivendi with Honduras.⁶ However, Honduras was not willing to extend full most-favoured-nation treatment to Canada since, until recently, Honduran policy was to grant reduced rates only to the United States.

During the present negotiations Honduras at first proposed to exempt from most-favoured-nation treatment certain luxury items (e.g. cars, shirts, toiletries) on which they had granted reductions to the United States. However, the Canadian representatives maintained that we were not prepared to agree to any limitation on most-favoured-nation treatment because of the implications and principles involved. Agreement has now been reached between the Canadian representative and the Honduran Government for the exchange of full most-favoured-nation treatment between the two countries. The text of the proposed agreement is attached. This is similar to existing agreements with several other Latin American countries.

3. Results-The effect of an exchange of most-favoured-nation treatment with Honduras will be to place Canadian exporters of wheat flour, upper leather, rubber tires, sardines and some other products on an equal footing with the United States who at present enjoy a marked advantage through lower rates of duty. (The new Honduran tariff of April, 1955 has further increased this disparity.) Honduras would benefit in the Canadian market principally through the extension of more favourable tariff treatment for bananas and coffee.

The trade between the two countries is small. In 1954-55 Canada's exports to Honduras averaged half a million dollars, and imports from Honduras were approximately two million dollars annually. Principal Canadian exports in recent years have been upper leather, rubber tires, powdered and condensed milk, while imports from Honduras have consisted almost entirely of bananas (90 per cent of total imports), and grapefruit, Honduras has trade agreement relations only with the United States to which it has reduced duties on certain products. While the tariff preference enjoyed exclusively by the United States has restricted and, in some cases, excluded Canadian sales, the volume of U.S. exports indicates that a worthwhile market exists for a number of these products. Honduras is, more over, a completely open dollar market with no import or exchange restrictions.

4. Recommendations

I recommend, with the concurrence of the Ministers of Trade and Commerce and Finance

(a) that Cabinet approve the trade agreement between Canada and Honduras which has now been negotiated, and

(b) that Mr. Harry A. Scott, Canadian Ambassador to Cuba be authorized to sign this agreement on behalf of Canada in Tegucigalpa, Honduras.⁷

L.B. PEARSON