1. In a sense, the North Atlantic Economic Community already exists. The North Atlantic countries are tied together by ageold ties of trade and finance. Something like 80% of the world's trade takes place within this community. North Atlantic countries, which are entirely independent politically, are completely interdependent economically. This does not mean, however, that the situation of each country or of the group can be improved by putting a fence of trade preferences around the area. On the other hand, it may be improved if trade barriers within and around and beyond the North Atlantic area can be further reduced, especially the barriers that separate the "soft" currency countries from the "hard". This reduction would bring further "integration" of the free world trading area, and more especially of the North Atlantic area which is by far its largest element. But this integration is easier said than done for it involves farreaching changes in industry and trade which are difficult enough for the countries that are strong, economically and politically, but raise almost insuperable problems for the weaker ones who look for strength and support to the stronger. This paper deals with the difficulties and possibilities of further integration of the North Atlantic countries.

I. North Atlantic Concept Competition with other Economic Concepts

2. People promoting the concept of a North Atlantic economic community find that their ideas must compete with other concepts. These others are embodied in "going concerns"; they are older and they have deeper roots:

(a) European Economic Unity. This concept is chiefly embodied in OEEC, but it is surrounded and buttressed economically, politically and militarily by such con­cepts as the Council of Europe, the European Army, the Schuman Plan, the Pflim­lin Plan, etc. The idea of European unity is fairly new, at least in its modern dress, but it is gathering disciples in some parts of the Continent.

(b) The British Commonwealth and the Sterling Area. This community is tied together economically by Imperial Preference, fairly free movement of capital, use of London as a financial centre, and the special ties of the wartime accumulation of sterling balances. It has deep emotional and political roots.

(c) The Free World Trading Area. Most of the important trading countries in the Free World (plus Czechoslovakia by historical accident) are members of the GATT, and also of the Fund, and have made undertakings to each other to eliminate dis­crimination and promote multilateral trade and payments as far as they can. The concept of a Free World Trading Area is founded on the fundamental principles of liberalism. Under these principles, members of GATT can welcome increasing trade not only with each other but with less favoured nations and (at least in non­strategic goods) with countries beyond the Curtain.

II. Canadian Economic Policy Since World War II

3. The weight of Canadian support has been thrown towards (c) the Free World Trading Area. With our worldwide trading interests, combined with sources of eco­nomic strength that are second only to those of the United States, we have pro­moted freedom of trade and exchange. We have had little to risk and almost everything to gain. Our expeditions into bilateralism have not ended up very suc­cessfully (e.g. agricultural contracts with U.K.); restrictions against U.S. imports proved most unpopular; free multilateral trade suits us politically and economically.

4. Any proposal to establish a new economic grouping of North Atlantic coun­tries which would give special preferences or other commercial benefits to each other, while withholding them from the rest of the free world, would not be likely to get a warm welcome in Ottawa. Recent policy towards existing Imperial Prefer­ences is, not to toss them away, but to keep those that serve some special purpose and to bargain the rest away in multilateral tariff negotiations.

5. We have urged our multilateral ideas on others in the Commonwealth and in OEEC. Admittedly many other countries have need of import controls to protect their reserves and trade balances; nevertheless, we have hammered away against the protectionism which leads to maintenance of import restrictions (against Cana­dian goods) beyond what can be justified on balanceofpayments grounds. This is pure GATT and Fund doctrine; we have preached it in many pulpits.

6. We have not railed blindly against all import quotas and embargoes that hurt our exports but we have supported those people, in OEEC and the Commonwealth, who regard special preferences and special protections as temporary supports for economic activities that can be strengthened rather than permanent props for funda­mentally unsound positions. Our emphasis has always been on the ultimate reduc­tion and elimination of discrimination and restriction. This should be to the long­run advantage of the countries and areas concerned; protection breeds monopoly, inefficiency, sloth and decay. And we have practiced what we have preached. Although we were forced to put up a fence of import restrictions in 1947 we tore it down despite the protests of those interests that it favoured as soon as our gold and dollar reserves got back to a healthy level.

111. Present Position and Prospects of the Commonwealth, European Integration and the North Atlantic Economic Community

7. What is happening in the preferential areas? Are they succeeding or failing? Consolidating or falling apart?

8. Commonwealth Preferences were probably never more popular in the United Kingdom than they are today. Perhaps it is a measure of the economic weakness of the United Kingdom and its unwillingness to face North American competition. There is also some antiAmericanism mixed in. The same attitude exists to a lesser extent in other Commonwealth countries, except Canada (and there could be a revi­val of it here if, regardless of GATT, the United States goes on restricting imports from Canada such as cheese and dried milk). In short, the Commonwealth and Ster­ling Area is certainly not dead. Frequent ministerial conferences are designed to keep it alive; ministers concerned with finance, supply and even the Colombo Plan.

9. European economic integration does not seem to be as healthy. After a quick and promising start, clearing away a part of the postwar underbrush of quotas and bans, it ran into the tall timbers of strong national and commercial vested interests. Then it slowed down quickly. When, last year, the "trade liberalization" pro­gramme bogged down new outlets were sought for the urge towards European eco­nomic unity:

(a) the workingparty set up under GATT to explore possibilities of reducing the higher European tariffs (France and Italy) without equivalent reductions by the lowertariff countries, assisted perhaps by some tariff concessions by North America;

(b) the socalled "sector approach", which would reduce European trade barriers in certain specific fields such as iron and steel (Schuman Plan) or agriculture (Pflimlin Plan) but which is open to the everpresent danger of protective cartel arrangements in these fields;

(c) international financial arrangements to facilitate expansion of industries that are economical and desirable from a European standpoint, and to alleviate the impact of the necessary contraction of other industries (the Pella, Petsch and Stik­ker Plans).

However, with the exception of the Schuman Plan which for political and military reasons has made good progress at least on paper, none of these programmes seem to be meeting with much success.

10. The European Payments Union (EPU) has proved to be a useful piece of machinery. It provides for multilateral settlement of trade balances within Europe and thereby reduces the dependence of European countries on bilateral tradeand­payments arrangements. During the last six months, when Western Germany was in special difficulties, it arranged temporary credits to finance German imports and thereby averted the possibility of a trade war on the Continent. But, unless the United States continues to pour new funds into it, its strength and scope are limited. It is even feeling some strain because it is being called upon to bear a part of the very limited burden arising from the Benelux integration movement. As a result of reduction of trade barriers, the Netherlands has a deficit with Belgium. This is being financed by EPU. Belgium, instead of being forced to grant bilateral credits to finance its exports to the Netherlands, is persistently getting paid in gold by EPU, and people are beginning to wonder how long Belgium (or Benelux) can be kept inside the EPU.

11. We may conclude that "integration" can make some progress in Europe, despite vested interests, if it is quite limited in scope and if someone comes in from outside and picks up the chips. Benelux can go ahead up to a point if EPU picks up the chips; European integration can go ahead up to a point if ECA picks up the chips or if North America can offer some other incentive such as unilateral tariff reductions.

12. If we widen our vision from the European area, and take in the whole North Atlantic area, a number of conclusions seem to emerge;

(a) A North Atlantic Preference Area, with all members substantially reducing trade barriers against each other but retaining existing barriers against the rest of the world, is completely impossible politically, financially and economically. It clashes headon with the Commonwealth and Sterling area and with European unity. Already the chips to be picked up by the United States as a result of a mild measure of European integration have proved pretty expensive; the chips to be picked up in Europe as a result of wholesale reductions of European barriers against North American competition would be enormous. Congress (let alone the Canadian parliament) would not pay the price even if European governments would accept it, and a host of European interests would be up in arms with their very lives at stake. Finally a North Atlantic Preference area would split the Free World in two: the North Atlantic countries on the one hand and all the rest on the other.

(b) The reduction of North American tariffs and other import barriers has helped and can help other North Atlantic countries as well as the rest of the free world. Since the most vexed tariff issues in the world are located in Europe, North Ameri­can concessions designed to help in solving these issues would help to bind the North Atlantic area together economically.

(c) The most tangible evidence of a North Atlantic economic community is now, and is likely to continue to be, the provision of direct aid across the Atlantic and, to a lesser extent, amongst the European countries: United States aid under ECA or Mutual Assistance; Canadian mutual aid; similar aid from the United Kingdom to Continental Countries and so forth.

(d) In the past aid of this sort (under Lend Lease as well as ECA) has been used by the United States as a lever to get European countries to lower their trade barri­ers against each other and the rest of the world. This sort of pressure can and should continue.

(e) From now on North American aid to Europe will be largely military. Whatever international aid is forthcoming for economic development from the United States, Canada, and other countries, is almost sure to go to the "under­developed countries". This will strengthen the free world, and alleviate burdens that might otherwise have to be carried by the old Colonial Powers, but it will not con­tribute in any direct way to a North Atlantic economic community.

(f) A "community" based on "aid" which, although it is called "mutual" always appears to flow in one direction, is likely to breed squabbles within itself. The rich­relation poorrelation relationship hangs over it.

13. In short, it would probably be a mistake to try to force the further growth and integration of the economic community by any sort of purely economic discrimination amongst NATO countries and against the outside world. One might almost say, judging from nineteenthcentury experience, that if the North Atlantic Treaty is a success in paving the way towards more peaceable world conditions, politically and militarily, the economic community of the North Atlantic will grow and flour­ish as it did a century ago when the international movement of men and money and goods was much more free than today. However, peace seems unlikely to break out suddenly and it is the special problems of cold war and hot peace that are the most pressing. In the economic field these problems consist of emergency shortages of materials, emergency government controls, and uneven impact of the burdens of defence. Some of these problems, notably material shortages, can only be approached on a worldwide basis, such as the International Materials Conference; but even in the field of materials there appears to be an obligation on NATO mem­bers, quite outside IMC, to make sure that urgent defence production is not held up because of particular shortages at particular times and places. Thus, the role of NATO in promoting the development of the North Atlantic Economic Community seems to lie in the following fields:

(a) reviewing the aid provided by some NATO countries to others in the light of the general position and weight of defence burdens;

(b) associating this aid with continuing pressure to reduce all sorts of trade barriers, but such reduction to be as far as possible on a mostfavourednation basis and as little as possible on any preferential basis;

(c) minimizing the harm which the emergency controls in one NATO country do to the others;

(d) arranging, if necessary, for particular help from one NATO country to another, in the fields of materials, techniques, manpower, etc., if thereby the pro­duction of urgently needed arms can be increased.

14. The important thing is, not to expect some new sort of North Atlantic Eco­nomic Community to spring fullgrowth from a few North Atlantic Council meet­ings, but to realize that economic structures grow gradually like coralreefs or ant­hills. They are produced, in our relatively free world, not so much by legislation as by the constant economic intercourse of private businessmen and financiers. The fact that people of various countries bureaucrats and businessmen work together for defence and for political objectives lays in itself both a political and economic basis for further "economic integration" i.e. for further trade and finance.

IV. Comments on Some Recent Proposals and Problems

(a) NATO vs. OEEC

15. We have seen that, for some time to come, military aid is almost sure to be at the heart of whatever may be called a North Atlantic Economic Community, and that there may be a good deal to be done, during the period of rapid rearmament, in eliminating conflicts over shortages of materials, over the impact of emergency controls, over burdensharing, etc. As far as NATO is concerned, these matters are now focused in the Financial and Economic Board in Paris. Similar, often identical problems, connected with the European Recovery Programme, were focused in OEEC.

16. Unhappily, for various reasons some of which are obscure, FEB and OEEC have not yet settled down together. The "larger" and "smaller" circles, hopefully forecast, have so far been tangential instead of concentric. The membership is so nearly the same especially if West Germany comes into NATO that it is most unsatisfactory for them to live beside each other in splendid isolation. From the Canadian point of view it would seem desirable that NATO (FEB), with its broader and more immediate concerns, should, at least during the period of rapid rearma­ment, largely take over the staff and activities of OEEC, with its limited objectives of European cooperation and integration. If this could be done, at least on a tempo­rary basis, and without too much damage or offence to aspirations for European unity, much would be gained. Canadian representatives have a much stronger status in NATO than in OEEC and have always been worried by the possible LittleEuro­pean tendencies within the latter organization. With ECA aid dwindling and Mutual Security aid increasing, the American influence in FEB is likely to be stronger than in OEEC, and this influence may, in the last analysis, be counted on to resist LittleEuropeanism.

17. However, we must not press for NATO to bite off a pert of OEEC, even temporarily, without realizing some possible consequences. Canada, which has hitherto been merely an observer of the processes of European integration, may become a full participant in an organization which not merely calls the tune of trade liberalization, on the Continent and across the Atlantic, but which also has to pay the piper. In one way or another some of the costs and burdens of trade read­justment would fall on Canada whether through financial contributions or tariff reductions. Further, we must not forget that OEEC is the leading symbol of Euro­pean economic unity and any new growth which seems to put it in the shade will call forth most vigorous opposition.

18. Against these difficulties and disadvantages must be weighed not only the gain to NATO of a greatly improved staff in Paris but, in the long run more impor­tant, the advantages of economic integration extended over a wider area and on a firmer economic foundation. In a nutshell, the costs to be met may be the price which we have to pay, and which we shall want to pay, for more permanent mar­kets for Canadian goods in Europe and for a Canadian seat at a council table where European as well as North Atlantic issues are being thrashed out.

(b) Stikker's "Phasing" Announcement

19. Mr. Stikker proposes to announce that, after 1954, Europe can hope to resume more rapid progress towards higher living standards, with 1946-50 as the recon­struction period and 195054 the rearmament period. This announcement would have political advantages at the present time, even though it gives hostages to the future and to Mr. Stalin. However, it is most desirable that any statement about the "progress" phase, which is the pieinthesky, should be carefully thought out.

20. It should not be in terms of a "little OEEC" or consolidation of Europe. If possible it should be in terms of an Atlantic Community within the framework of freer trade in the free world. The emphasis should be against protection and restraints, whether between NATO countries or around their circumference, and towards supporting (indirectly) the GATT and the Fund rather than undermining them. References, if any, to OEEC Schuman and Pflimlin Plans should be as steps towards the broader strengthening of the free world. NATO is in a military sense the nucleus of the free world; but if a nucleus is to remain nuclear it must not do anything to cut itself off from the rest of the structure.

(e) Proposals for Financial (Plans) Devised to Promote Arms Production in Europe

21. During the past year NATO representatives of several European countries have noted that there were industrial plants in Europe available to make arms and have proposed various financial schemes to bring them into production. A recent survey of unemployed arms capacity, carried out by the Defence Production Board, has given new life to old ideas, particularly to those advanced by Mr. Van Zeeland.

22. Production of arms could be speeded up in a number of European countries if the United States would place orders there "offshore purchases" of arms. Financially and economically they are not strong enough to expand arms produc­tion without aggravating existing inflation and unrest. It now appears that the United States is going to place orders in Europe for spare parts of U.S. equipment and for ammunition. Orders are limited to these two items because there would be both political and strategic objections in the United States if complete equipment to be produced in Europe were ordered. (It is understood that the Canadian Depart­ment of Defence Production is willing to place orders overseas, but in practice the scope for this sort of thing appears quite limited. In so far as it can be made to work, this form of transatlantic financing seems the most efficient and effective means of promoting arms production in idle European plants.

23. Some European spokesmen (French and Italian a year ago, but more recently Belgian) have suggested a "common fund" in NATO to finance additional arms production. Up to the present the obvious disadvantages of such a fund have pre­vented very serious discussion. It is supposedly designed to meet an emergency. Yet it could only be set up after protracted negotiations to decide how much each member should put into it and how much each could expect to get out of it and how it would be managed and controlled, and its subsequent operation would probably be cumbersome and contentious. Certainly, as long as the United States continues to view the proposal askance it has no chance of adoption.

24. However, if the United States changed its position, deciding that it was politi­cally easier to place arms orders in Europe through a pool rather than directly, and if a pool were agreed upon then Canada would, of course, be expected to contrib­ute. It is an open question whether, in the long run, we would provide more assis­tance through a common fund than we might otherwise provide under bilateral mutual aid. Certainly mutual aid seems more simple, more direct, and in general more satisfactory. On the other hand, if a common fund does emerge it will cer­tainly become a centre of NATO attraction and activity, with possibilities of long­run political importance in the development of the North Atlantic Community.

(d) NATO "Watchdog Committee" of Ministers Concerned with Article II

25. This proposal should be welcomed as long as it is not expected to produce startling positive results quickly. Watchdogs exist to bite intruders to protect against untoward developments.

26. The main activities of the Committee might be:

(i) to review from time to time the broad influence pulling NATO countries together and, more important,

(ii) to keep a special vigilance on economic causes of dissention and disunity, especially those that arise during a disturbing period of rearmament and infla­tion. The Committee would be specially concerned in FEB (and OEEC); precau­tions might have to be taken not to bypass the Council Deputies.

(e) An. Executive Boss for NATO

27. This is probably not a very practical proposal from a political point of view. However, anything which is successful in moving forward NATO plans for mobil­izing and arming its forces contributes to the fundamental health of the organiza­tion. And, as argued above, the North Atlantic economic community is more likely to flourish on the basis of a NATO organization that is functioning healthily and busily for its own immediate (defence) purposes, than on the basis of broad resolu­tions for cooperation or a narrow straight jacket of new preferences and protectionism.

(f) A "Declaration" Regarding Article 11 of the Treaty

28. We understand that Mr. Van Zeeland has enlisted and is receiving U.S. sup­port for some "declaration" at the coming Council meeting affirming support for the broad principles of social and economic cooperation set forth in Article II of the Treaty. Such a declaration must clearly receive strong Canadian support. No text of the proposed declaration has been received and so detailed comments cannot be made. However, most of the points in this memorandum will probably have some bearing on it.

(g) NATO and EastWest Trade

29. If the United States does sponsor such a declaration, it would seem difficult for it to attempt, at the same time, to insist on the restriction of EastWest Trade in Europe. If, as we have always insisted and the United States may now be going to insist, NATO is not merely a temporary military device but a permanent economic and social structure, this emphasizes that NATO countries, must, as a longrun pol­icy, try to soften rather than harden the iron curtain. This, surely, is the end towards which we should work unless we believe that World War III is imminent and inevitable.

[APPENDICE A/APPENDIX A]

Note de l'ambassade des États-Unis

Memorandum by Embassy of United States

SECRET                                                                                                                                           Ottawa, August 29, 1951

NONMILITARY OBJECTIVES OF NATO

This paper represents a summary of United States thinking as it is currently evolving with respect to the nonmilitary aspects of NATO. These ideas have been discussed informally in London with Starkenborgh, Wilgress, and Bryn, where the immediate reaction was strongly favorable. They also reflect some of the ideas developed by Stikker with regard to the concept of a North Atlantic Community on a longrange basis.

In our view it is important to develop quickly our ideas as to means of strength­ening the NATO organization and to discuss them in the NATO Council Meeting in Ottawa in September with a view to obtaining formal approval by the Council for a program of action. Consideration must be given to the problem in both its short­term and longterm aspects if we are to counteract the growing uneasiness in Europe regarding the manner in which NATO is developing, as reflected in Pear­son's observations during his recent tour of Europe.

ShortTerm. Objectives

For the immediate future every effort must be made to overcome the impression that we value NATO only for purposes of military security, an impression which has developed presumably because of our concern with such current problems as the admission of Greece and Turkey to NATO and the implementation of the Medium Term Defense Plan. Reassurance is needed that the United States is prima­rily interested in preventing, not winning, a war and that the strength of the western nations when developed will never be used for aggressive purposes. We should also affirm our awareness that the defense buildup and the development of economic strength in Europe are mutually consistent and mutually necessary. The present intensive military buildup must be regarded as an investment which, when made, will permit a resumption of the drive to develop a higher standard of living in Europe.

LongTerrn Objectives

We regard it as important to develop a more positive attitude on the part of European nations toward NATO, which is fundamentally a program of mutual self­help and selfpreservation requiring European leadership and drive as well as American initiative and assistance. It is important to counteract the impression that the United States seeks to dominate its partners in NATO by imposing United States policies upon them and we must demonstrate our desire to take account of the views of other nations in the formative stages of policymaking. It must be made plain also that the United States is interested in furthering the integration of Europe equally with developing the full potentialities of NATO, in order to forestall fears of a BerlinParisRome axis unbalanced by a broader grouping.

In particular the United States is interested in the longterm objective of developing the nonmilitary purposes implicit in Article II of the North Atlantic Treaty. This has a certain relationship to the problem of European integration, to which the European defense force and the Schuman plan appear to be giving genuine impe­tus, but that relationship lies in the background of our thinking. The important thing is that United States interest in Europe will not terminate when Europe can stand on its own feet militarily; we will not bring our troops home and return to the attitude which preceded World War II.

Program of Action

Tentative ideas have already been developed for a program of action which we hope will find full expression in the Council Meeting in September in Ottawa. Vari­ous possibilities are under discussion approximately as follows:

1. There is some feeling in Europe as a result of Stikker's interest in the concept of a North Atlantic Community that a statement might be released, probably through some European channel such as OEEC, possibly at the end of August. This possibility has been discussed by Stikker, Katz, Marjolin, and various European ministers atStrasbourg. The objective would be to generate a more positive Euro­pean leadership and demonstrate the responsibility and interest of European countries.

2. The United States has been considering the appropriateness of a statement by Secretary Acheson which might be issued before the Council Meeting in Septem­ber to reaffirm the interests of the United States in the wider longterm objectives of NATO and propose a special Council agenda item on this subject. The State Department seems to have concluded that it would be preferable for an appropriate item to be included on the agenda and that the Secretary make his statement before the Council when the agenda item is reached. Such a statement would take into account the objectives of the United States as outlined above and would propose a definite program for carrying it out.

3. We would hope to obtain from the Council a declaration of intention sub­scribed to by Ministers making it clear that, without prejudice to developments in wider frameworks such as United Nations or OEEC, or smaller frameworks such as the European Community, the members of NATO intend to work toward a progres­sively closer longterm association between any or all of them in all fields of endeavor. If in the meantime some statement such as suggested above has been made in Europe the Council might give it approval. This declaration might also include an announcement of the concrete steps to be taken.

4. One such step would be the establishment of a subcommittee of the Council designated as an advisory committee on nonmilitary objectives, composed of a small group of Foreign Ministers. There have been various suggestions as to the membership of such committee, including a proposal that its chairman might be Stikker, to bring in representation from a small European country, and that the committee should include Pearson and Lange as logical members. DeGasperi might also be included to bring in the Latin countries and the Mediterranean area as well as active support for European integration. It is not suggested that any of the Big Three be included, since the group would then be too large if all of them, plus Belgium, were to participate in this subcommittee. Still another proposal would include Spofford as a member ex officio. The subcommittee's function would be primarily of a steering and watchdog nature to follow NATO activities from the viewpoint of nonmilitary objectives and development of the North Atlantic Com­munity concept. It would make recommendations from time to time to the Council, or to the Deputies, as appropriate.

5. Another proposal, which does not seem to have made much headway, would establish a highlevel advisory committee, of which the U.S. member would be a man of the stature of Conant or Bush and whose members, such as Jean Paul David and Haakon Lie, would concurrently lead national advisory committees to recom­mend national informational programs designed to bring about a better understand­ing of the principles on which NATO and other democratic institutions are founded. These committees would be supported by NATIS and would set up a working group selected from Americans and Europeans who have already demonstrated an appreciation of and intelligent interest in problems of intellectual and psychological mobilization. The working group would develop concrete projects and suggestions for consideration by NATO.

6. There is considerable United States interest in measures to obtain maximum coordination of foreign policy in NATO. We have the example of the British Com­monwealth, where coordination is promoted in part by an extensive continuous interchange of information among partners who nevertheless maintain their free­dom to differ and to negotiate their differences. This idea has been supported by both Lange and Starkenborgh and has found some expression in the Council of Deputies, where meetings in recent months have exchanged views on foreign pol­icy questions involving Russia and the satellites. These have been of real value in developing a considerable degree of common policy toward Yugoslavia and in increasing the coordination of political guidance through the Council and the Dep­uties. A real advantage of the procedure developed in London has been its infor­mality and the nonbinding nature of the conclusions reached. We feel that this could be part of a process to obtain substantial agreement with our partners on specific issues of policy which would be helpful to the United States in reaching sound policies which our allies would be prepared to cooperate in carrying out wholeheartedly. It would probably have been desirable, for example, if the ques­tions of the German defense contribution and the adherence of Greece and Turkey to NATO could have been developed in this manner through daytoday consulta­tion on the formation of policy in NATO. We think that proposals to develop closer consultation along these lines should not originate with the United States but come rather from the Canadians, Dutch or Norwegians. The objective would to make exchanges of views on foreign policy questions a matter of accepted practice in NATO and to develop at the same time a project for expanding the interchange of information between NATO members on a regular basis.