A decision is required on whether or not Canada should support the United States proposal that an invitation be extended to Japan to enter into tariff negotia tions with Contracting Parties to the General Agreement and with certain other countries with a view to Japan's accession to the General Agreement.

2. The tariff negotiations have been scheduled by the Contracting Parties for September, 1950. Present Contracting Parties will negotiate between themselves and with other countries to be invited. It is expected that the United States will propose, at a special meeting of a Committee of the Contracting Parties to be held in London beginning Monday, September 26, that Japan should be invited to those negotiations with a view to its accession to the General Agreement.

3. A decision is required now as to what countries, like Japan, which are not Contracting Parties, should be invited because of the long prior preparations which are required (e.g. exchange of information on trade and tariffs, lists of tariff concessions desired, etc,), Our High Commissioner has been asked to give an opinion on Tuesday, September 27.

4. The negotiations which are scheduled to begin at the end of September, 1950, will probably be quite lengthy in view of the fact that as many as forty countries will probably be participating. In the light of past experience, the results of those negotiations would probably not enter into force before the second half of 1951. There is little likelihood, therefore, that Japan could accede to the General Agreement before that time. A two-thirds vote of the Contracting Parties is necessary to approve such accession. Once a Contracting Party, however, Japan would have to be granted MFN treatment by all other Contracting Parties, including Canada.

5. The United States proposed earlier this year that the Contracting Parties, at their Annecy meeting, should consider the possibility of entering into a multilateral most-favoured-nation agreement with Japan. This proposal was placed on the agenda of the Annecy meeting. In this connection, Cabinet approved in April of this year the following instructions to the Canadian delegation to the Annecy Conference:

"(1) The Canadian Government cannot consider entering into an unconditional most-favoured-nation agreement with Japan at the present time.

"(2) The Canadian delegation should try to persuade the United States representatives to drop, or at least postpone, the whole proposal.

"(3) If the United States representatives will not agree, the Canadian delegation should explore the possibility of a conditional most-favoured-nation agreement. The agreement should provide reasonable protection to Canadian industry against the products of cheap labour, dumping, arbitrary currency valuations and similar practices, while promoting mutually advantageous trade between the two countries."

6. Because of strong opposition by those Contracting Parties whose participation in the proposed most-favoured-nation agreement for Japan was essential or desirable, the United States delegation withdrew its proposal and the item was dropped from the agenda. The attitude of the Canadian delegation, based on the second paragraph of its instructions outlined above, was probably the determining factor in the United States decision.

7. The main arguments for and against Japan's participation in tariff negotiations and its accession to the General Agreement remain fairly well the same as those which were placed before Cabinet earlier this year when the question of an MFN agreement was discussed.

Arguments for

          (1) Canada's trade policy since the war has been to lower tariff barriers. We have followed this policy by extending most-favoured-nation treatment unconditionally to many countries and by urging other countries to do the same for us and for each other. In this policy we have worked very closely with the United States. Each country has depended on the support of the other. If we turn back now, this fact will be seized upon by other countries that have either abused the most-favourednation approach in general, or have given it lip-service while in fact pursuing a policy of bilateral trade treaties. It is probably not too much to say that, if Canada now announced that it would have nothing to do with the American proposal, this would put an end to the American efforts in that direction.

          (2) It is Canada's post-war policy to help rebuild the economy of conquered countries such as Japan. Japanese trade is at present most unsatisfactory. There is an adverse trade balance of about half a billion dollars a year. The United States is at present having to advance money to Japan to cover this deficit. Japan cannot permanently continue as a pensioner of other countries. If Japan is excluded from all useful export markets, it will be a fertile field for the spread of misery, disease and communism.

          (3) Many of the undesirable pre-war trade practices of Japan were adopted by the Japanese Government or under its influence for the purpose of waging or preparing to wage war. With the removal of the former government, and of the motive of preparations for war, it is not to be expected that pre-war practices will he resumed, especially if improved access to world markets makes it possible for the Japanese economy to become self-supporting without them.

          (4) If other countries make most-favourable-nation treaties with Japan, Canada should do so too. Otherwise, those countries will have freer access to the Japanese market than ourselves; our exporters will be at a disadvantage, and we shall probably find a substantial Japanese content in some of our imports from most-favourednation and preferential sources.

          (5) One of the arguments which we made against our participation in an MFN agreement for Japan was based on the fact that different rates were quoted for the yen in terms of foreign currency. This meant that, by arbitrary decision of the authorities in Japan, goods could be offered at unduly cheap prices in foreign markets. This situation has now been corrected and a single value of the yen was stabilized on April 25, 1949.

          (6) Negotiations between Japan and the United States would mean that many United States tariff items might be reduced. This has not been possible in former negotiations when the United States withheld these tariff items from its negotiations for the reason that Japan was the main supplier.

          (7) Japan's membership in the General Agreement would mean that it would be bound on a reciprocal basis by all the provisions of that Agreement to the same extent as all other Contracting Parties. These obligations would extend far beyond the MFN rule particularly once the Agreement is applied definitely. Furthermore, Japan's trade practices would be subject to the close supervision of the Contracting Parties who would have a more effective and direct channel of consultation and complaint than is available at present.

Arguments against

          (1) Experience during the 1930's has taught us that Japanese goods are likely to be dumped in this market-and in other markets of the world. It seems that the danger of dumping and other unfair trade practices in fact is still present.

          (2) In addition to Canadian fears about unfair practices, such as selling below cost, there is the underlying fear of competition from Japanese goods produced by very cheap labour.

          (3) Japan must obviously increase its exports it if is to stand on its own feet. However, we are likely to bear more than our fair share of the impact. If the increase of export takes place under unconditional most-favoured-nation treatment, the goods that the Japanese will place most vigorously into foreign markets are: textiles, metal products, pottery, glassware, toys. These are not products in which Canada has any special "natural advantages". Our domestic producers are not in a position to stand up to intense foreign competition of goods produced by cheap labour.

          (4) Our most-favoured-nation duties on these products are substantially lower than those of the United States.

          (5) It is not only our own manufacturers who will suffer the impact. The sort of goods that we take from Japan are the same as the sort that we take from the United Kingdom. Yet, it is the present policy of the Canadian Government to foster imports from the United Kingdom.

          (6) The question of Japanese trade and tariffs should not be discussed apart from the whole question of Japan's industrial and economic future.

L.B.PEARSON