324 War Cabinet Submission by Dr H. V. Evatt, Minister for External Affairs, and Mr J. B. Chifley, Treasurer

Agendum 88/1942 10 February 1942

SECRET

PROPOSED UNITED KINGDOM-UNITED STATES OF AMERICA AGREEMENT IN CONSIDERATION FOR LEASE-LEND

A. OUTLINE OF DEVELOPMENTS Under Section 3(b) of the United States Lease-Lend Act, it is laid down that the conditions on which any Government receives lease- lend aid 'shall be those which the President deems satisfactory, and the benefits to the United States may be payment or repayment in kind or property or any other direct or indirect benefit which the President deems satisfactory'.

2. The United States Government does not interpret these conditions as involving return for lease-lend aid in terms of money or goods. Instead it asks that the consideration the United States receives in return for lease-lend aid should be in the form of an undertaking by the Governments concerned to collaborate in a post-war trade policy directed towards the objectives desired by the United States.

3. In conformity with this intention a draft agreement in consideration of lease-lend aid was communicated to the United Kingdom Government by the American State Department at the end of September last. (Annex 1). [1]

4. The significant clause in the draft agreement is Article 7. In telegram D.591 of 30th September [2], the United Kingdom Government stated that it regarded the preamble and the first six articles as acceptable. On Article 7, however, it was felt that it was not possible to enter into a commitment which was ambiguous in its phraseology and which could be held to prejudge the right of the British Commonwealth to maintain an imperial protection system.

5. Subsequently, to meet the difficulties raised by United Kingdom, the United States submitted a revised draft which placed greater emphasis upon the positive aims of promoting employment, production, consumption and exchange and on the fact that the agreed action provided for in the redraft would follow conversations and be governed by economic conditions of the time.

The redraft read- 'In final determination of the benefits to be provided to the United States of America by the Government of the United Kingdom in return for aid furnished under the Act of Congress of 11th March, 1941, the terms and conditions thereof shall be such as not to burden commerce between the two countries, but to promote mutually advantageous economic relations between them and betterment of world wide economic relations. To that end they shall include provision for agreed action by the United States of America and the United Kingdom open to participation by all other countries of like mind, directed to the expansion by appropriate international and domestic measures of production, employment and exchange and consumption of goods which are the material foundation of liberty and welfare of all peoples; to the elimination of all forms of discriminatory treatment in international commerce and to the reduction of tariffs and other trade barriers; and in general to the attainment of all economic objectives set forth in the joint declaration made on 12th August, 1941, by the President of the United States [3] of America and the Prime Minister of the United Kingdom. [4]

At an early convenient date, conversations shall be begun between the two Governments with a view to determining, in the light of governing economic conditions, the best means of attaining the above stated objectives by their own agreed action and of seeking agreed action of other like-minded Governments. (D.O. D.754, 20/12/ 1941 [5]).' 6. The principal objections seen by the United Kingdom Government to this redraft were (Telegram D.753, 20th December) [6]:

(i) The words 'elimination of all forms of discriminatory treatment in international commerce' were not qualified and therefore committed the United Kingdom to a policy involving the ultimate elimination of imperial preference and other bilateral trade arrangements.

(ii) The wording of Article 7 was capable of varying interpretations which might prove embarrassing to both Governments unless an agreed interpretation could be secured.

7. In ensuing exchanges between the United Kingdom Government and the British Ambassador at Washington [7], the latter emphasised- (i) that great importance was attached to the agreement by the United States Administration and by the President in particular;

(ii) that there was no chance of the United States Government revising its main decision on Article 7; and (iii) that the agreement involved the United Kingdom in no more than an undertaking to work towards certain objectives on lines to be agreed upon and provided that the United States also worked towards them.

8. In reference to the question in a telegram of 2nd February [8], the Australian Minister at Washington also pointed out that the Americans admit that they have in mind the removal of imperial preference, although they say it is an objective and not a specific undertaking. Mr. Casey's impression is that the Americans do not hope to secure the entire removal of imperial preference, but to make material progress towards that end as one of several measures designed to make and keep international trade fluid.

9. The State Department originally asked for a reply from the United Kingdom Government by mid-January, but no decision had been come to in London by that time, partly because Mr. Churchill, while in Washington, had gained the impression that the whole question of the agreement could now be deferred in view of the new situation arising from the entry of the United States into the war. This impression, however, has not be confirmed by recent communications from Lord Halifax who reports that, on the contrary, the United States Administration, including the President, are anxious to obtain signature of the agreement at the earliest possible date, including Article 7 in its existing form.

One reason for this concern is the fear that if a settlement is not reached Congress might take the matter into its own hand with unfortunate results.

10. In these circumstances, the United Kingdom Government has now decided to accept the American redraft of Article 7 and to conclude the agreement, subject to an exchange of interpretative notes with the United States Government which will, among other things, make it clear that the United Kingdom Government does not regard the word 'discrimination' in Article 7 as applying to special arrangements between the members of the British Commonwealth, and that before accepting any definite commitments involving modification of the existing system of imperial preference, the United Kingdom Government would require to consult the Dominions. Lord Halifax has already been instructed to approach the State Department in this sense. (Telegrams D.66 and D.67 of 6th February.) [9] This proposal does not include acceptance of the draft agreement as it stands without exchange of interpretative notes, and thus obviously indicates that the United Kingdom Government still maintains the objections referred to in paragraph 6 above.

11. Although the Dominions have been kept informed of developments by the United Kingdom, their views have not yet been specifically requested. In view of all that is involved in the question, it is considered that the opinion of the Commonwealth Government should be brought before the United Kingdom at the earliest possible moment. Mr. Casey has reported that Canada has already notified its agreement with the whole of the proposed agreement, including Article 7. Meanwhile, the United Kingdom Government has been informed that we are communicating our views in the immediate future, and that we hope, therefore, that it will be possible to defer Lord Halifax's approach until these are received.

B. THE PROBLEM 12. A decision must be made as to whether, in return for lease- lend aid received by the Empire, and which it is hoped to receive, the Commonwealth Government will recommend to the United Kingdom a course implicitly committing the British Commonwealth to collaborate with the U.S.A. in a post-war trade policy, the stated objective of which is to reduce restraints on trade. We need to recognise that this may involve the modification and ultimately the elimination of imperial preference and will limit our freedom to continue import and exchange control and other war time measures for trade purposes in the post-war period. In effect this decision involves a choice as to whether we work with the U.S.A.

towards the stated objective of freer multi-lateral international trade or whether by refusing we accept the prospect of a probable drift into the system of restrictive bilateral agreements and exchange control. A first step in the application of this collaboration would be to reach agreement on the trade negotiations now in progress with the U.S.A.

13. This is a major decision and imposes definite obligations on the Governments of the British Commonwealth. Accordingly, an interdepartmental committee representing Commerce, Customs, Treasury and External Affairs was asked to report upon the effect of these obligations on our own economy, and to draft a telegram to the Dominions Office. Because of the importance of the issues concerned we urge that their report, which is attached", should be closely examined.

C. CONCLUSIONS OF THE COMMITTEE 14. The Committee's conclusions may be summarised as follows:

(1) If we accept Article VII we undertake to work step by step with U.S.A. to expand international trade and to relax trade barriers; if we reject we must face an almost certain drift into world trade governed by restrictive agreements in which countries would exploit economic, political and military advantages to secure favourable trade terms.

(2) Acceptance of Article VII would involve being prepared to modify imperial preference, with possibly adverse effects on certain export industries and would limit our freedom to impose prohibitively high tariffs. Nevertheless, on balance Australia would probably gain from a relaxation of trade barriers even if imperial preference were modified or ultimately eliminated.

(3) A general return to restrictive national trade policies would lead to contracting world trade offering little future for Australia.

(4) We should at the same time sympathise with the United Kingdom in her fear of incurring a definite commitment without seeing clearly either the circumstances in which she will be called upon to honour it or the precise compensating advantages. Therefore, we should support any attempt to emphasise the reciprocal character of the agreement and the importance of expanding production and trade in making relaxation of trade barriers acceptable.

(5) If the reciprocal character of the agreement is recognised and the positive aims of expanding production etc., can be achieved, the kind of post-war collaboration implied in Article VII is in the longterm interest of the British Commonwealth and provides a basis for peaceful international relations.

D. IMMEDIATE POLITICAL FACTORS 15. There can be no doubt that the United States administration and the President attach great importance to the early acceptance of the Lease-Lend Agreement. This urgency apparently arises from two factors- (a) A conviction that unless the United States and United Kingdom bind themselves now to collaborate economically after the war, world economic conditions will become chaotic and collaboration will become practically impossible.

(b) A desire to present to Congress an agreement sufficiently precise to represent an acceptable return for lease-lend aid.

(Recent cables have emphasised that if the United States administration does not soon announce an agreement Congress itself may wish to lay down terms which would almost certainly be less favourable to the United Kingdom than those now suggested.) 16. Experience in the last war indicates that it is dangerous to wait until the war is over before laying the foundations of the post-war order. Furthermore, after general agreement has been reached close study will be necessary to determine the scope and character of the collaboration.

17. The British Commonwealth, and Australia in particular, are vitally dependent upon United States material and military assistance. It is in our interests to show a sympathetic understanding of the American viewpoint.

18. Furthermore, it should be remembered that Article VII is only an expansion of undertakings to which both the United Kingdom and Australia have given adherence in the Atlantic Charter. (Annex 2.)

these undertakings when invited to do so.

E. RECOMMENDATIONS 19. We are in broad agreement with the conclusions of the Committee and feel that political considerations make it imperative that an agreement acceptable to the United States should be reached promptly. We recommend therefore- 1. That a cable be despatched to the United Kingdom outlining our views and stating- (a) that provided contributions by United States and other countries are adequate and commensurate we are prepared to accept and do our best to give effect to the obligations imposed by Article VII even if this involves the modification of imperial preference;

(b) that we consider that the intentions of the United States administration could be more adequately expressed either by an amendment to the wording of Article VII or by an exchange of notes in the terms suggested (excluding Clause 4 which seeks to exclude imperial preference from the scope of the agreement); but (c) that we consider the meaning both of the proposed amendment and the remaining clauses of the draft note already implicit in Article VII and that therefore these matters should not be pressed if they prove unacceptable to the United States of America. (A draft telegram is attached.) [12]

2. That the Reconstruction Committee on International Relations be instructed to consider the principles on which United States and British collaboration should operate in order to achieve in particular the positive aims of that collaboration. [13]

H. V. EVATT J. B. CHIFLEY

[AA:A2671, 88/1942]

1 Not published. On file AA:A2671, 88/1942.

2 See Document 78, note 2.

3 Franklin D. Roosevelt.

4 Winston Churchill.

5 & 6 On file AA:A981, Defence 66.

7 Lord Halifax.

8 Document 315.

9 See Document 315, note 7.

10 Not published. On file AA:A2671, 88/1942.

11 & 12 Not published. On file AA:A2671, 88/1942.

13 These recommendations were endorsed by War Cabinet on 10 February. See AA:A2673, vol. 10, minute 1878 and Document 328.

[11] We cannot with consistency avoid giving precise definition to