Addressed to the Prime Minister, Mr. Curtin.
Article VII discussions.
From Melville to Minister for External Affairs and Treasurer.
2. Telegram 2784  arrived after the conclusion of the Conference  and adoption of agreed summary of discussions in various Committees on monetary, commercial policy etc. All new documents circulated at Conference, together with minutes of meetings, have already been despatched by air bag and copy of agreed summary of discussions will be similarly forwarded. 
3. However, in view of great concern of Cabinet Sub-Committee as expressed in telegram 2784 and doubts whether I had correctly followed instructions, I set out hereunder brief review of general attitude I have taken throughout Conference and of position reached in major subjects considered in relation to my instruction from Government and Australia's vital interests.
4. With regard to the Government's policy, I understand this to comprise of the following elements- (a) Points of agreement between Australian and New Zealand Governments January 1944  (vide Dr. Evatt's letter 27.1.44 ) (hereafter referred to as ANZ).
(b) Recommendations on page 6 of Cabinet Agendum dated 18.1.44  (vide Dr. Evatt's letter 27.1.44).
(c) Oral instructions received from Treasurer and Minister of External Affairs.
5. On preferences in particular, about which I understand Cabinet Sub-Committee is most concerned, Government's attitude is indicated in No. 4 of ANZ, and on pages 3 and 4 of Agendum.  On basis of these references, my understanding is that Government is prepared gradually to reduce preferences-the extent to which the reduction can go depending on International collaboration on other fields proving successful in maintaining stability in Australia, i.e. by successful employment, commodity and currency agreements and the reduction of duties in non-Empire countries.
6. Purpose of British Commonwealth talks just concluded was, of course, to explore at official level possible methods of giving effect to Article VII (Note-It was constantly emphasised by all delegations throughout the talks that there was no commitment on Governments.) 7. Accordingly, throughout discussions I have necessarily had constantly before me precise terms of Article VII which provide for agreed action directed towards expansion of production, employment and consumption, the reduction of trade barriers and the elimination of all forms of discriminatory treatment in international commerce.
8. In addition, of course, I have also had constantly before me the Government's interpretation of commitment in Article VII and I have at all times taken great care to ensure that officials of the United Kingdom and other Dominions fully appreciate the Australian approach to the carrying but of Article VII. I therefore strongly urged- (a) That major emphasis must be put on the positive aspects of Article VII (i.e. the expansion of production, employment and consumption) not only because of their deeper significance as an end (pt. 1 of ANZ principles) but also because it is only by successful measures in the fields that any reduction of trade barriers and elimination of preferences, etc., can be safely undertaken, (b) That in addition any proposals for the reduction of trade barriers and the elimination of preferences must avoid sweeping and sudden measures which might cause distress and must permit economic measures necessary to ensure maintenance of employment and the development and diversification of industries.
9. I have also emphasised that any agreements should take into account the dislocation to the economies of countries affected by war (pt. 5 of ANZ). Thus in my opening statement I said that, while plans for long term future were being discussed, the uncertainties of the period of transition from war to peace should be recognised and that some order of priority might be needed both in plans in which agreed action was desired and also in the acceptance of obligations. See also paragraph 24 below.
10. On the other hand, I have made it clear that Australia desires- (a) International economic policies in the transition period designed to avoid the evils of aggressive economic nationalism (No. 2 of ANZ), (b) A maximum degree of economic collaboration as a permanent feature of international economic relation (No. 3 of ANZ).
Because, however, of the necessity to emphasise strongly our proposals for an employment agreement  and the safeguards and exceptions which, we feel, are essential, it has been difficult to preserve a balance which would avoid giving the impression that Australia, whilst anxious to secure benefits which might come from various proposals, is reluctant to accept any obligations in return.
11. Employment Agreement-After initial reluctance, the United Kingdom officials wholeheartedly accepted our proposal provided that Governments are not asked to submit to the judgment of an International Tribunal upon the efficacy of their employment policies or to impose sanctions if the obligation to maintain employment is not fulfilled. They consider that opinion has not yet developed sufficiently for this.
12. Acceptance of the United Kingdom officials marks a big step forward and, in the circumstances, I consider the amended draft Agreement  satisfactory, a view which I gather from your telegram 51 , is shared by the Government.
13. In addition to accepting draft Agreement, United Kingdom officials quite spontaneously inserted in reports on other subjects paragraphs which emphasised the central position of the employment objective and agreement. For example, see my telegram 59, paragraph 5 , also following extract from Commercial Policy Report -
'There was general agreement that...stress should be laid upon importance of maintaining high level of employment and trade activity if a widespread reduction of trade barriers is to be practicable...'
14. Monetary Fund-Major aspects for Australia in draft presented for discussion  were- (a) Possibility of Fund interpreting prescribed objectives in manner inimical to local full employment policy.
(b) Size of aggregate and annual quota.
(c) Control of exchange rate.
(d) Quantitative import restrictions to protect balance of payments.
(e) Future of our sterling reserves.
15. With regard to (a) our points were reasonably met by the re- drafting of clauses 1 and 2. 
16. United Kingdom also undertook to urge on United States officials a higher aggregate quota, but they had to record a reservation re annual quota.
17. Question of Fund's control of exchange rates is one of considerable difficulty and, in view of differing official views, in absence of instructions from the Government, I did not record a reservation. I feel, however, that the question requires considerable further examination.
18. With regard to (d), new statement in Report on Commercial Policy adequately covers our requirements. See my paragraph 6.
Definition of appropriate objective criteria will, however, require considerable examination.
19. With regard to [(e)] , United Kingdom made full and frank statement of their general views on long term future of sterling and also on position in transition period. Indications are that we could expect to have some sterling working balance available unless sterling's position was desperate. We have, however, no assurance that question requires much further consideration.
20. Generally monetary discussions have resulted in substantial improvement in proposals from Australian point of view and also in considerably increased knowledge on which to base further examination of them.
21. Commercial Policy-on tariffs, views I expressed during discussions are summarised in agreed report as follows-
'The Australian Delegation expressed doubts as to the desirability of proceeding by a general formula for tariff reductions. A general formula would impose reductions of protection on all industries regardless of their intrinsic worth. It might impose on Australia heavier obligations in return for concessions which she might better obtain by a series of bilateral trade agreements.
They thought, however, that some of these difficulties might be moderated by a policy for the maintenance of full employment throughout major countries of the world, by reasonable arrangements for imposition of moderate new protective duties, by the use of subsidies as an additional means of protection and by approaching tariff reductions through a series of steps rather than a single cut.'
22. In view, however, of majority agreement to pursue exploration of formula approach we undertook, without commitment on general policy even at official level, to examine carefully the effect which a graduated tariff cut (see my 40, paragraph 10(d) ) would have on Australian industries and overseas trade.
23. On preferences the agreed summary reads as follows-
'The United Kingdom, Dominion and Indian Delegations all agreed that the reduction of preferences should be made depending on reduction of tariffs and that an adjustment of preferences should be contemplated only in return for a sufficient reduction of tariffs and other barriers to trade, which in words of Article VII led to "mutually advantageous economic relations" between the countries concerned. It was recognised that Article VII, though it distinguished between the final goals of the reduction of tariffs and the elimination of discriminatory treatment, contemplated that it might prove possible immediately to take only first step towards these objectives. The Canadian, South African, New Zealand and Indian Delegations, however, stated that although a radical adjustment of preference would involve serious problems of adjustment for their economies, they would be prepared to face substantial reductions of preferences, extending to abolition of some, in return for sufficiently extensive counter concessions.
The Australian officials, while recognising some reductions in preferences to be inevitable in accordance with the terms of Mutual Aid Agreement, explain that the Commonwealth Government, before committing themselves to any substantial reductions, would need a clear idea of the effect such reductions are likely to have upon Australian export trade. Prospects for Australian exports are very dependent upon the extent to which United States duties on important Australian commodities, for example wool, meat and butter, can be reduced. Moreover, Australia was concerned lest buying power of other Empire countries should be impaired. The reduction of duties contemplated under proposed tariff formulae might not be sufficient to ensure that Australia had a substantial market in the United States and, though Australia normally has a large trade in European countries, such countries would not be required to grant concessions which would contribute to the increased trade in important Australian products including wool, though it might help in others such as beef and sugar. Commodity agreements, particularly in such products as wheat and sugar, might be of considerable assistance, but in view of all these uncertainties, Commonwealth Government may wish to retain a fair margin of preference for some products in the United Kingdom market.'
24. With regard to carrying out of tariff and preference cuts, all other Delegations urged an early and drastic cut. We, however, recorded the following-
'The view is advanced by the Australian representatives that the convention should provide for trade barriers to be reduced gradually in order to allow countries time to adjust themselves to lower levels of protection. It is argued that objectives of the Washington proposals  could not be achieved without affecting some industries very seriously indeed, that Governments would not be willing to face risk of serious unemployment at [the time] when demobilisation was proceeding, that the simultaneous adjustment from war to peace conditions and from high to low protection would be more than many countries could stand, particularly those whose industries have been dislocated by the war, that smaller countries would need time to see whether larger countries were willing and able to maintain full employment and finally that the gradual assumption of the more drastic obligations would not interfere with the attainment of the objectives of the convention because the transitional period would be one of scarcities which would, in any case, encourage importing countries not to place obstacles in the way of imports.'
25. Generally, the commercial policy discussions were the most difficult in which to preserve a decent balance. On this occasion we have, I think, been able successfully to temporize, but indications are that this will become increasingly difficult. In my opinion, it is urgently necessary for a detailed investigation to be made of the effects (as far as possible in quantitative terms) of the latest formula and of the prohibition of the two price system, on Australian industries, employment land overseas trade]. This investigation would need to include a detailed examination of the extent to which subsidies can be used as an alternative form of protection (i.e. to offset all or part of the effects of the tariff cut or prohibition of two price system) because the subsidy safety valve is an integral part of the commercial policy proposals. It was not practicable for detailed calculations to be made for this Conference because of the lack of time and vagueness of proposals. It is, however, my considered opinion that it would be most undesirable for Australia to participate again in international discussions on commercial policy without the Government having before it the detailed data necessary for it to determine what reductions, if any, in tariffs and preferences and alterations in protective methods generally, it could accept. Such Government directions would also need to include whether or not formula method was a practicable and acceptable means of achieving the approved tariff cuts.
26. Other subjects-Commodity policy, Cartel policy and international investment policy did not raise any controversial issues requiring urgent attention.
27. With regard to New Zealand's attitude, views expressed by New Zealand officials have been reported in my earlier telegrams.
Generally there has been a substantial similarity in views expressed but New Zealand officials have not participated in the discussions to the same extent as ourselves. Neither have they, possibly because of the differences between the economies of the two countries, stressed all difficulties raised by us. This particularly applies to preferences and the formula approach to tariff reductions.
28. On tariffs their final views were recorded as follows-
'In general the United Kingdom, Canadian, New Zealand and South African Delegations, while realising nature of adjustment to their economies which a general reduction of their tariffs would involve, expressed strong opinion (which they understand is now shared by most United States officials) that the best hope of reducing all types of trade barriers over a wide area as an essential contribution to the expansion of international trade was by means of a commercial policy convention containing among other provisions a multilateral formula for the reduction of tariffs. In the view of these four Delegations only alternatives appear to be either a tariff standstill based on the position before the war which they regard as impracticable and, indeed, highly inequitable or bilateral negotiations, which they consider to be too slow, piecemeal and uncertain in result.'
29. On preferences text of their final summary is quoted in paragraph 23 above, and on methods of introduction of tariff cuts they supported the view that the convention should provide for an early and drastic cut.