83 Coombs to Chifley

Memorandum [CANBERRA], 11 February 1947

INTERNATIONAL ECONOMIC POLICY

During the international trade discussions in London I formed the impression that there are certain basic economic issues in the international field which vitally affect Australia's policy and to which I believe it is important that the Government should give careful thought since its policy on particular issues arising from time to time may well be profoundly affected by its judgment on these questions.

(1) Economic Importance of the United States economy

The level of activity in the United States economy is the greatest single factor determining levels of prosperity in the rest of the world. Despite the fact that the United States purchases abroad are a small proportion of her total requirements, they are large in relation to world trade, and, above all, they fluctuate widely.

When the United States is purchasing heavily, markets for basic foodstuffs and raw materials tend to be good on two accounts- purchases are on a larger scale and prices are higher.

A decline in the level of employment in the United States economy is the greatest single danger to the world economic system. It appears to me, therefore, to be of great importance to keep the United States participating in international economic collaboration. If this can be done, I believe two results follow:-

(i) International pressure on the United States will assist those forces in the United States who desire by governmental action to sustain employment and activity;

(ii) If there is a decline in American employment with consequent recession in other parts of the world, it will be possible to establish the cause clearly and enable countries affected to take protective action promptly and with world approval.

One of the main reasons, therefore, for Australian participation in international economic collaboration is- (i) that this will assist to keep the United States in the international field; and (ii) will enable us to concentrate attention on her international responsibilities.

(2) The declining position of the United Kingdom

The United Kingdom faces a desperate economic situation. Loss of income from international investments means that it will be possible for her to purchase the volume of imported foodstuffs and raw materials necessary to pre-war standards of living only by exporting 75% more exports than before the war. In the absence of a very great expansion of world trade, this task is impossible, and even with such an expansion will be profoundly difficult.

Furthermore, the United Kingdom will shortly face a decline in population.

To Australia the implications of this changed position are serious. United Kingdom is our most important market. During the war this dependence has been intensified. Australia, if it hopes for expanding production in export industries, cannot afford to rely on a market whose purchasing power is depleted and which will of necessity be a hard bargainer, whose population is declining and whose import needs will contract.

Two conclusions for Australia seem to follow:-

(i) We should do all in our power to maintain the prosperity in the international purchasing power of the United Kingdom. United Kingdom experts believe that their best prospects lie in an international system based upon the maintenance of full employment in major countries combined with a general reduction of trade barriers, in particular the American tariff, together with support of international financial organisations designed to provide short-term assistance in balance of payments difficulties and to promote long-term development in under-developed countries. In brief, participation in the general programme of international economic collaboration sponsored by the United Nations and including the I.T.O. [1] and Bretton Woods proposals.

So great is the importance of the United Kingdom market to Australia, particularly until we have had an opportunity to reduce our dependence on it, that I feel there is a strong case for supporting a programme of international economic collaboration if only because the United Kingdom itself believes that in it lies the United Kingdom's best chance of maintaining her prosperity and, in particular, her capacity to buy foodstuffs and raw materials from the rest of the world.

(ii) We should plan consciously to reduce our dependence on the United Kingdom market. At the present time it is difficult to do much about this while the whole of our available food surpluses are urgently required by Britain, and while the local market can absorb the whole of our manufacturing output.

One of the advantages to be obtained from the tariff negotiations to be held this year would be the opening of the United States market to important Australian products, particularly wool, meat, butter, woollen textiles. It is clear that if a substantial reduction in the tariff on these items can be secured, then a substantial market can be built up for these Australian products.

It should be noted that in meat, butter and woollen textiles we have three industries in which Australia has natural advantages and where considerable scope for expansion exists provided secure markets and satisfactory prices can be obtained.

In [the] [2] short run the opening of the American market is, I believe, the best approach to the problem of reducing our dependence on the United Kingdom. In the long run participation by Australia in developmental programmes in under-developed countries may be as important.

(3) Nationalism and development in Asiatic countries

The London conference made it clear that the tide of nationalism is running strongly in India, China and other Asiatic countries, in Syria, Lebanon and other Arab countries, the Middle East, in Malaya, Indonesia and in Brazil, Chile and other South American countries. This nationalism, apart from its political aspects, is associated with ambitious programmes of development, industrialisation, and improving standards. There are certain political issues which are a possible source of antagonism between Australia and at least some of these rising nationalisms. It would, however, I believe, be unwise for us to allow these potential differences to lead us to oppose in any way the achievement of the legitimate economic aspirations of these peoples. On the contrary, for political as well as for economic reasons it would be wise for Australia to promote rather than to restrain them. Indeed, I believe that Australia should make a conscious attempt to identify herself with these developments.

The most rapid progress is likely to take place in India.

Australia has got off to a good start in her economic relations with India, both by recent attempts to establish trade and by the mutual support given one another by the Indian and Australian delegations at the trade conference. These efforts could well be followed up perhaps on the political side by a goodwill mission headed by a senior Minister, and on the economic side by the conclusion of a trade treaty. The traditional type of commercial treaty based upon an exchange of tariff preferences is not very suitable for this purpose. I believe it would be worth while investigating the possibility of a treaty based upon collaboration by Australia in carrying through the long-term capital developments which are being planned in India. A detailed analysis of these plans would almost certainly reveal the need for capital equipment of many kinds which Australia would be capable of providing. The placement of orders in the form of a programme spread over a number of years may well make it possible and worth while for Australian firms to tool up and produce on a scale which would make them fully competitive. A treaty in this form would be a contribution to the task of identifying Australia with the achievement of Indian economic ambitions.

Plans for the development of our relationships with other countries with rising nationalisms and economic developmental plans would need to be worked out after a study of the circumstances of each country.

(4) The importance of the Soviet Union in international economic affairs

Participation by the Soviet Union in the instruments of international economic collaboration can clearly do much to increase their effectiveness.

This is not only because of the importance of the Soviet Union itself, but because of the desire of other countries to maintain good trading relations with the Soviet Union. It was clear at the London Conference that [many] countries would be considerably influenced by the Soviet attitude towards the I.T.O. proposals, or, if the Soviet Union were not a member, by the relationships required by the Charter between members and nonmembers. These countries included not merely those normally regarded as within the Soviet sphere of influence such as Poland and Czechoslovakia, but also such countries as France and Norway.

The various plans for international economic collaboration are designed primarily for economies of the modified capitalist variety found in the U.K., United States and Western Europe[an] democracies. Relationships between economies of this kind and economies more completely Socialist in character present many difficult problems, and there is a real danger that the introduction of too great a rigidity in the forms of international economic collaboration will make participation by both groups difficult. This may lead to a division of the world into separate trading blocs, with a consequent narrowing of markets and the possible intensification of political difficulties.

In this connection I believe Australia's policy should be:-

(i) to oppose the introduction into arrangements for international economic collaboration of rigidities which would either- (a) make it difficult for the Soviet Union and related countries to participate: or (b) impose undue restraints on easy commercial relations between members and non-members;

(ii) to attempt herself to develop closer trade relations with the Soviet Union and with countries whose economies are likely to be closely linked with that of the Soviet Union such as Sweden and Czechoslovakia.

Some progress has recently been made in discussions with Sweden and with Czechoslovakia, and conversations were commenced with Russian representatives more than three years ago, but lapsed because of supply difficulties. This might be an appropriate time to re-open discussions on an informal basis.

1 i.e. International Trade Organization.

2 Words in square brackets were handwritten.

[AA: A1068, ER47/70/7]