Addressed to the Prime Minister, Mr. Curtin.

Article VII discussions.

From Melville to Minister for External Affairs and Treasurer.

2. Telegram 2784 [1] arrived after the conclusion of the
Conference [2] 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]

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 [4] (vide Dr. Evatt's letter 27.1.44 [5])
(hereafter referred to as ANZ).

(b) Recommendations on page 6 of Cabinet Agendum dated 18.1.44 [6]
(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. [7] 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 [8] 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 [9] satisfactory, a view which I gather from your
telegram 51 [10], 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 [11], also following extract from Commercial
Policy Report [12]-

'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 [13] 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. [14]

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)] [15], 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) [16])
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 [17] 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.

BRUCE