United States response on wool duty requests.
McCarthy, Morton and I saw Clayton yesterday  and informed him that United States response on Wool  was completely unacceptable and that if it represented firm United States position it almost certainly made an agreement between United States and Australia impossible and made exceedingly doubtful, Australia's continued participation in negotiations. In stating our case we emphasised following points- (A) Australia's exports generally are not faced with substantial tariff barriers except in United States-barriers to our export trade normally taking form of domestic subsidies, quotas, etc.
Consequently Australia could not in any case obtain widespread benefits in negotiations directed towards a change of tariff concessions. We have therefore to look to benefits on wool, meat and butter in United States tariff to justify the great number and variety of concessions sought from Australia by United States, United Kingdom and other countries.
(B) Wool is by far the most important of these both because it is our major industry and because United States consumption per head is normally so low relative to that of other high living standard countries, that there is scope for expansion if price can be reduced by elimination or reduction of duty.
(C) We had a right to expect substantial reduction. In previous negotiations in 1938, the United States had offered 10 cents which was rejected by Australia as inadequate and in 1941 a maximum of 13 cents-latter negotiations were terminated not because agreement could not be reached but because of delays following the entry of Japan into war and finally because United States considered it preferable to defer finalisation so that they could be incorporated in the proposed multilateral negotiations.
(D) That this rejection of Australia's request on wool came on top of- (1) unsatisfactory responses on beef  and the suggested imposition of a quota on butter, (2) requests by the United States on other Commonwealth countries which involve substantial modification of preferences upon which major Australian rural industries depend, (3) the threatened failure of wheat negotiations  which threw serious doubts on the value of Chapter VII of the Draft Charter which we had hoped would offer greater stability for primary products, (4) uncertainty in Australia as to United States will and capacity to give effect to positive provisions of Charter and to carry through without resort to escape clause tariff reductions likely to lead to significant increases in United States imports.
(E) That the effect of these considerations on political opposition in Australia to proposals and negotiations, already strongly developed and vocal, may well make it impossible for Australia to continue as a participant.
In replying, Clayton divided his argument into political and economic considerations. On the political aspect he stated that administration in anticipation of these negotiations had attempted last year to introduce a Bill (the O'Mahoney Bill) designed to place price support for wool industry on a direct Government subsidy basis. If this had been carried it had been their intention to offer reduction in duty. The Bill was, however, defeated owing to opposition of New England merchants.
Furthermore, fears for the realisation of substantial stocks held by the Commodity [Credit] Corporation had led to increased pressure for higher duties which had culminated in the present proposal for an import fee to be imposed at the discretion of the Secretary for Agriculture in order to prevent possible lower prices for imported wool forcing disposal at a loss. 
The Administration hoped that this proposal introduced by the Agricultural Committee would be rejected and would exercise its influence to this end. If this failed it was probable that the President would veto the proposal although withdrawal of Australia from negotiations would make this impossible as the President's veto would be based on binding of the present 34 cents duty under the [Reciprocal] Trade Agreement [s Act].
Finally Clayton stated that it was impossible for the Administration to go further at the present time than to prevent Legislation raising present duties. In future if the stock position became less difficult and Legislation along the lines of the O'Mahoney Bill were successfully enacted might be possible to reduce duty. In reply to a question he stated that it was uncertain whether it would be possible introduce such Legislation during progress of the negotiations and unlikely that Congress would deal with it if introduced.
On the economic side, Clayton argued that with increase in United States consumption and decrease in United States domestic wool production Australia could count on substantial market for her wool in United States irrespective of the present duty and that provided increase were avoided we would obtain 90 per cent of benefits anticipated from reduction in any case. Pressure to reduce duty could be designed only to obtain greater share of United States market at the expense of United States producers which was unnecessary in view of present trends and likely lead to violent opposition in United States. Furthermore reductions in price of raw material were unimportant in cost of final consumption goods and therefore unlikely to affect demand.
In reply, we argued- (a) That while some permanent increase in United States market can be anticipated present demand conditions are abnormal and we would be foolish to count on their persisting-our request was clearly based on longtime considerations.
(b) It was not desired to drive the United States wool grower out of production-we were prepared to see him maintained by domestic subsidy provided this was done in a way which enabled price of wool in United States to be lowered towards import parity.
(c) Low per capita consumption of wool in United States, sensitivity of wool sales and prices to employment and income changes as well as widespread investigation of effect of price on low and middle income expenditure on wool all confirm us in the view that price is significant factor and will create increased market for wool in United States. It is in this increased market that Australia is interested, not in competition with the United States domestic wool grower.
(d) Furthermore price is a significant factor in influencing choice between wool and substitutes which may be of paramount importance in future. International wool organisations have urged that long term interests of all wool producers including those in United States are best served by efficient production at least possible price to user.
In subsequent discussions Clayton in effect abandoned economic argument and relied on the following points:-
1. United States Administration unable at present to do more than hold the present position and may be unable to do that.
2. Reductions in other tariff items to ourselves and other countries are extensive and generous and can be expected to lead to substantial increases in United States imports thus increasing purchasing power of world generally from which Australia will benefit.
3. That Australian withdrawal would imperil negotiations and I.T.O. proposals generally. This may mean the end of attempts at economic negotiations international collaboration and would possibly lead to generally increased United States duties against Australian wool and other products as well as strained economic relations generally. This was  responsibility for Australia to take.
We replied that the second point was at best speculative and that so far as the third point was concerned, we had no desire to imperil collaboration-indeed on the contrary and would consider withdrawal only if United States' attitude made it impossible for us to continue, i.e. that responsibility for this situation lies with them.
Following discussion with Clayton, we called a meeting of Commonwealth Countries where we outlined the position including the substance of discussion with Clayton. South Africa is directly affected by the wool proposal and is as bitterly hostile as we.
Other Dominions agree that United States response is unreasonable and completely inconsistent with their protestations.
We emphasised that the United States attitude may well make an agreement between Australia and United States impossible and that this will involve refusal to accept modification of preferences we enjoy. This will affect the whole series of United States Commonwealth negotiations and indeed the Charter itself. South Africa stated they would be certainly unwilling to modify existing preferences and would wish to maintain the right to develop preferential system unless satisfactory agreement can be made.
All Dominions and United Kingdom agreed- 1. that United States proposal should be resisted strongly and that joint action should be taken to this end, 2. that it would be unwise to precipitate crisis by Australia withdrawing or making declaration policy at this stage.
The United Kingdom Delegation, however, added that if Commonwealth Countries were finally forced into position of accepting United States offer or rejecting whole proposals it would be necessary to bear in mind that effect of rejection would be substantial reduction of United Kingdom standards of living and international purchasing power from which we should all suffer serious hardship.
While admitting the seriousness of the choice we pointed out that carried to extremes such an attitude would mean acceptance of any United States requests, however unreasonable, if firmly held by United States and that issue raised by United Kingdom was not relevant until it became apparent that strong combined action could not force change in United States attitude. This view was accepted by all Delegations.
Nevertheless it is possible that a position may develop in which United Kingdom and possibly Canada would wish to proceed with agreements while other Dominions would refuse. In such circumstances United Kingdom and Canada would presumably seek our concurrence in modification of preferences they grant us and if this were withheld they would have to choose between denouncing Ottawa Agreement and concluding possible agreement with the United States.
Following Commonwealth Talks we have formally advised United States Delegation that offers presented to them this week were made on the assumption that we would receive reasonable responses to our requests and that in view of wholly inadequate response on wool it will be necessary for us to reconsider the offers made. We have also formally advised other Dominions similarly in relation to modifications of preferences on their tariffs to which we had provisionally agreed and have asked them to advise United States that these modifications also must be reviewed. This action formally registers our dissatisfaction and gives us time to review the whole position without committing us in any way.
These developments are critical and it is impossible at this stage to view the whole position dispassionately. Whatever we may finally decide to do it is important that each step should be carefully considered if only to ensure that responsibility for breakdown is clearly placed where it belongs, that is with the United States. I am inclined to think I should return to Australia for consultation before future lines of action are defined but it may be desirable to watch developments here for a week or so before leaving.  Will advise further on this point after a few days. In the meantime will attempt to make contact through Mr.
Beasley with Cripps to ensure that United Kingdom Government is fully aware of our position.