22 Full Cabinet Submission by Keane, Scully and Dedman [1]

Agendum 1019A CANBERRA, 11 January 1946

UNITED STATES TRADE & EMPLOYMENT PROPOSALS

A. GENERAL CONSIDERATIONS

1. The United States Government has submitted to the United Nations a programme for international economic collaboration which includes Proposals for the Expansion of World Trade and Employment, the Bretton Woods Agreement to set up an International Monetary Fund and a Bank for Reconstruction and Development, and the Anglo-American Financial Agreement and Lend-Lease Settlement.

2. This programme should be examined as a whole before decisions are made on individual proposals.

The Objective of multilateral Trade 3. The main objective of the programme is to restore as far as possible 'multilateral' trading conditions throughout the world- that is, conditions in which countries do not seek to direct their trade towards particular countries or groups of countries.

4. Especially during and after the World Depression, countries sought economic and military security through regional tariff preferences (e.g. Ottawa Agreements [2]), and special barter and exchange arrangements (e.g. Germany, after 1932). These arrangements diverted trade from its 'natural' channels to obtain exclusive advantages for the countries adopting them.

The Objective of Reducing Trade Barriers 5. A second objective is to reduce barriers to world trade and thus, the U.S. believe, encourage the use of resources in accordance with comparative efficiencies of production instead of seeking to influence their use by national economic policies. The measures contemplated include drastic reduction of tariffs, prevention of exchange fluctuations, stabilisation of commodity prices, removal of export subsidies, prevention of restrictive business practices, strict conditions on the use of quantitative restrictions and simplification of Customs formalities.

6. The United States programme thus aims at a multi-lateral system of world trade, and at limiting 'economic nationalism'. These limitations will reduce participating countries' sovereignty in economic policy, but the U.S. Government claims that countries could expect a higher average standard of living, gained by a more effective use of the world's resources.

Prospects for Australia 7. Australia can expect both advantages and disadvantages from the adoption of the U.S. programme. The balance between these advantages and disadvantages will depend primarily upon the conditions of world trade in which the programme operates. If for instance, there is a high and stable level of demand for internationally traded commodities then the balance is likely to be favourable.

8. Australia's trade is essentially 'multilateral', i.e., we sell more to certain countries than we buy and spend the proceeds on goods from other countries, to which we may export little.

Australia's exports suffered in the 'thirties because some countries from whom we purchased little sought to balance their trade with Australia by buying less. The limitation of restraints on multilateral trade, therefore, would assist Australian exports of those commodities in the production of which we have comparative advantages, particularly wool and wheat. Australian exports of foodstuffs and raw materials would also benefit from the effect of the measures on general consumption levels. Provided that the general level of international demand remains satisfactory, multilateral trade would lead to greater prosperity for these industries and consequently make possible a higher standard of living in Australia.

9. Similarly, any lessening of economic nationalism in other countries would assist Australian exports. This would apply not merely to primary products, but also promote exports of selected lines of manufactured products. Wartime increases in costs of U.S.A. and U.K. have probably been such as to increase Australian competitive advantages in manufactured products.

10. Disadvantages of the American programme for expanding international trade derive mainly from the possibility of their operating in adverse world economic conditions. Thus, for instance, an undertaking to refrain from discriminating practices would, in the event of a serious world depression, prevent us making mutually advantageous arrangements with other countries determined to maintain full employment. Similarly, the reduction of trade barriers might prevent us from using trade restrictions to defend domestic employment and industrial development against unfavourable economic conditions.

11. Furthermore, a programme designed to prevent trade being diverted from its 'natural' channels tends to give advantages to established industries in already developed countries. It is difficult for new producers to overcome the advantages of established production and trade connections. This may retard the development of new resources and the raising of productivity and might therefore check the expansion of world trade which accompanies rising productivity and standards of living.

12. Provided international demand can be maintained we can expect real benefits from a freer multilateral system. The American proposals show a considerable advance towards the Australian view that the volume of world trade is largely dependent on the domestic economic conditions in the participating countries, particularly the major industrial and trading countries of the world. Fully to meet our views, however, the American proposals need strengthening. If this can be achieved and the proposals successfully implemented, the effects on Australian employment and living standards would be beneficial.

Regional Systems 13. In view of the possible disadvantages of the American multilateral proposals, it might have been considered desirable to join with the United Kingdom and other like-minded nations in a more limited 'regional' trading system, based on common objectives of full employment and rising living standards. Our willingness to consider this alternative was made plain to the United Kingdom during the recent negotiations concerning Financial Aid and the Lease-Lend Settlement.

14. This alternative, however, was not acceptable to the United Kingdom. Refusal of financial aid would have meant continued 'austerity' and would probably have led to the abandonment of plans for the international economic collaboration agreed to at San Francisco. A 'regional' solution of world economic problems cannot now be considered as a practical alternative.

Non-participation 15. It is difficult to assess what would be the position of Australia if she remained outside while U.S. and U.K., and the majority of the United Nations participated in the U.S. programme of collaboration. From the 'Explanatory Outline' which accompanied the American, invitation to the Conference [3], it appears certain that members of the Organisation will at least be asked to withhold benefits from countries failing to adhere to the agreement. It seems unlikely that we could escape considerable losses from the resulting 'isolation'.

16. Furthermore, we cannot ignore international political considerations. In particular, by our signature at San Francisco of the Charter of the United Nations Organisation, we are committed to seeking political and military security through international collaboration. Similarly, in supporting the establishment of the Economic and Social Council we have accepted international collaboration in economic and social matters.

17. Furthermore, by our participation in the Mutual Aid Agreements, we are committed by Article VII of those Agreements to 'agreed action' directed to the reduction of trade barriers, the elimination of discriminatory treatment in trade and the expansion of employment, production and consumption.

18. It seems most probable, therefore, that, when the complete picture presents itself at the forthcoming Conference on Trade and Employment, we shall find that the most favourable conditions for Australian economic life and international trade can be built within a freer multilateral system. Consequently, Australian participation in a system of international economic collaboration seems the most likely outcome of these discussions in which we shall take a full and active part.

19. This being so, it would appear the most appropriate course for Australia to follow would be to seek to modify certain sections of the American proposals so that Australia will be able to participate with reasonable hope that there will be a balance of advantages to Australia from such participation.

B. SPECIFIC PROPOSALS

20. Throughout the international economic discussions during the past three years, the Australian Government has emphasised the importance of positive measures to expand world trade and pointed out that these are relatively more important than measures merely to modify restrictions.

21 It has been the Australian view that the major factors keeping international trade small have been (1) Loss of income resulting from unemployment and idle resources;

(2) The failure by individual countries to use to the full the international resources at their disposal;

(3) The low level of productivity and therefore of incomes in underdeveloped parts of the world.

The American proposals require strengthening to deal adequately with these factors.

22. The American proposals place great emphasis on measures to lessen restrictions on international trade. Particularly when considered together with the Bretton Woods proposals for an international monetary fund, they therefore involve some limitations on the freedom of member governments in relation to commercial and trade policy.

23. The chief limitations suggested on freedom of action which appear likely to affect Australian policies of full employment and industrial development appear to be the following- (a) Import Control. The right to control imports when the balance of payments is believed to be threatened would be subject to certain 'criteria and requirements'.

(b) Industrial Protection. There is no recognition of protection as a legitimate means of stimulating industrial development and the diversification of the economy. Furthermore, some duties are likely to be 'bound' under trade agreements and subsequent increases precluded, and some restrictions may be imposed on the use of subsidies for protective purposes. The proposals undoubtedly call for some readjustment of Australian industry, both primary and secondary. This needs to be kept within manageable limits and with planned diversion to other lines of production. In some industries, tariff adjustments which we will be under pressure to make will need to be offset by greater relative efficiency in Australian production.

(c) Stabilisation of Primary Products. Measures such as the Australian 'home price' system [4] may be questioned.

24. it may be that these aspects of the proposals are designed primarily to exclude the more extravagant forms of economic nationalism and will not in fact prove unduly restrictive on Australia. However, they should be carefully watched to ensure that the agreements do not hamper Australian domestic policy or prevent adequate defensive measures should world economic conditions at any time become unfavourable.

25. These limitations fall also on the freedom of action of other countries and may therefore affect their trading relations with Australia either favourably or unfavourably to Australian interests. on the other hand Australia may expect to benefit substantially from the general stimulus to demand for primary products which would arise out of a widespread reduction in tariffs designed to increase exports from manufacturing countries.

It is moreover a big advantage that in the review of subsidies, the subsidy schemes not only of other large exporting countries, but also of the importing countries, should be brought into question. It is particularly important to Australia that the subsidy arrangements of the importing countries should be reviewed.

26. The risks involved in accepting the suggested limitations of our freedom of action depend largely upon the success of the positive measures to expand world trade. For instance, if- (a) high and stable levels of employment and production are maintained in the main industrial and trading countries, (b) there is a rapid development of undeveloped countries, (c) major countries such as U.S.A. spend or invest abroad to the limit of their capacity, it is unlikely that the limitations on our freedom of action embodied in the proposals would prove irksome, and the benefits to our exports would be considerable.

if, however, these conditions are not fulfilled, it may be necessary for Australia to take prompt and effective action to protect her domestic economic situation. In these circumstances much would depend upon the skilful and sympathetic administration of the trade and monetary organizations.

C. PROCEDURE AND TIMETABLE

27. The United States Government published the proposals in November 1945 and the United Kingdom has subscribed to them as a basis for discussion. It is intended that the United Nations Organization shall call a World Conference to consider the establishment of an International Trade Organization. The U.S.

invitation received by the Government which Cabinet decided to accept (see Agendum No.1001A), was to a preliminary meeting only.

The purpose of this preliminary meeting is to:

(a) Negotiate, for the consideration of the proposed conference, concrete arrangements for the relaxation of tariffs and trade barriers of all kinds which would command the support of governments attending the conference; and (b) consult, and to reach such preliminary understandings as may be practicable with regard to other topics on the proposed agenda for the conference referred to above.

28. It is clearly understood by the main parties concerned that these preliminary negotiations will be preceded by discussions in London between representatives of British Commonwealth countries.

At these discussions all the important matters of principle involved as well as the details of the new re-alignment of trade will be reviewed. United States officials regard these discussions as an essential preliminary step.

29. The time-table contained in the United States invitation named March or April, 1946, for the beginning of the preliminary negotiations, to be followed by a World Conference in the middle of 1946. The latest informal advices received however, indicate that the timetable will probably be as follows:

Late April or May. Preparatory Commonwealth discussions in London.

June. Preliminary international negotiations, probably in London.

Autumn. International Trade & Employment Conference.

Conclusions and Recommendations 30. It is recommended- (1) That Australia should take an active part in the forthcoming international discussions on trade and employment, with a view to contributing to a successful conclusion;

(2) That the Delegation should be informed that, provided satisfactory agreement is reached in the negotiations, Australia is prepared to join the International Trade Organization; but that this decision should not be made public and should be subject to review when the work of the Trade & Employment Conference is nearing completion;

(3) That they should seek to have the American proposals amended and expanded to ensure- (a) that international collaboration is directed to maintaining satisfactory economic conditions throughout the world, particularly to promote approximately full employment in the major industrial countries of the world;

(b) that the operation of the system actively promotes the development of new forms of production and higher levels of productivity in relatively under-developed countries; (c) that the agreement permits the use of defensive measures in economic emergencies.

(4) That with this end in view the Sub-Committee has requested Departments to prepare appropriate amendments of the American proposals and a brief analysis of the amended proposals bringing out the Australian point of view.

(5) That the attached list of requests (see Appendix 'A') be presented informally to the Government of the United States as requested to enable them to complete formalities in regard to their Trade Agreement legislation, on the understanding that the list will be subject to subsequent amendment.

(6) That when the above list is presented a request be made for a similar list of proposed U.S. requests upon the Australian Government. [5]

CABINET SUB COMMITTEE R. V. KEANE, ON TRADE AND EMPLOY- MINISTER FOR TRADE & CUSTOMS.

MENT CONFERENCE W. J. SCULLY, MINISTER FOR COMMERCE & AGRICULTURE.

J. J. DEDMAN, MINISTER FOR POST WAR RECONSTRUCTION.

1 On 17 December 1945, Full Cabinet had agreed to accept the U.S.

Govt's invitation to preliminary discussions on relaxation of trade barriers and on an agenda for a full conference to establish an international trade organisation (Volume VIII, Document 444) and appointed Keane, Scully and Dedman as a sub-committee of Cabinet to consider how the Minister to represent Australia should be instructed (Agendum 1001A).

2 Bilateral trade agreements between British Commonwealth countries, drawn up at an Imperial Conference at Ottawa in 1932.

3 See Volume VIII, Document 444.

4 Schemes to encourage exports of some Australian products financed by higher prices paid for the same goods on the home market.

5 On 18 January Cabinet approved recommendations 1, 4, 5 and 6.

Recommendation 2 was altered to read: 'Provided agreement satisfactory to Cabinet is reached in negotiations, Australia is prepared to join the International Trade Organisation.' Recommendation 3 was approved with deletion of the word 'approximately' from section (a). Cabinet stipulated that the terms of any agreement should be circulated and agreed by Cabinet before being entered into or ratified, and that negotiations should be undertaken in close collaboration with New Zealand.

[AA:A1067, ER46/1/10]