Agendum 88/1942 10 February 1942

SECRET

PROPOSED UNITED KINGDOM-UNITED STATES OF AMERICA AGREEMENT IN
CONSIDERATION FOR LEASE-LEND

A. OUTLINE OF DEVELOPMENTS
Under Section 3(b) of the United States Lease-Lend Act, it is laid
down that the conditions on which any Government receives lease-
lend aid 'shall be those which the President deems satisfactory,
and the benefits to the United States may be payment or repayment
in kind or property or any other direct or indirect benefit which
the President deems satisfactory'.

2. The United States Government does not interpret these
conditions as involving return for lease-lend aid in terms of
money or goods. Instead it asks that the consideration the United
States receives in return for lease-lend aid should be in the form
of an undertaking by the Governments concerned to collaborate in a
post-war trade policy directed towards the objectives desired by
the United States.

3. In conformity with this intention a draft agreement in
consideration of lease-lend aid was communicated to the United
Kingdom Government by the American State Department at the end of
September last. (Annex 1). [1]

4. The significant clause in the draft agreement is Article 7. In
telegram D.591 of 30th September [2], the United Kingdom
Government stated that it regarded the preamble and the first six
articles as acceptable. On Article 7, however, it was felt that it
was not possible to enter into a commitment which was ambiguous in
its phraseology and which could be held to prejudge the right of
the British Commonwealth to maintain an imperial protection
system.

5. Subsequently, to meet the difficulties raised by United
Kingdom, the United States submitted a revised draft which placed
greater emphasis upon the positive aims of promoting employment,
production, consumption and exchange and on the fact that the
agreed action provided for in the redraft would follow
conversations and be governed by economic conditions of the time.

The redraft read-
'In final determination of the benefits to be provided to the
United States of America by the Government of the United Kingdom
in return for aid furnished under the Act of Congress of 11th
March, 1941, the terms and conditions thereof shall be such as not
to burden commerce between the two countries, but to promote
mutually advantageous economic relations between them and
betterment of world wide economic relations. To that end they
shall include provision for agreed action by the United States of
America and the United Kingdom open to participation by all other
countries of like mind, directed to the expansion by appropriate
international and domestic measures of production, employment and
exchange and consumption of goods which are the material
foundation of liberty and welfare of all peoples; to the
elimination of all forms of discriminatory treatment in
international commerce and to the reduction of tariffs and other
trade barriers; and in general to the attainment of all economic
objectives set forth in the joint declaration made on 12th August,
1941, by the President of the United States [3] of America and the
Prime Minister of the United Kingdom. [4]

At an early convenient date, conversations shall be begun between
the two Governments with a view to determining, in the light of
governing economic conditions, the best means of attaining the
above stated objectives by their own agreed action and of seeking
agreed action of other like-minded Governments. (D.O. D.754,
20/12/ 1941 [5]).'
6. The principal objections seen by the United Kingdom Government
to this redraft were (Telegram D.753, 20th December) [6]:

(i) The words 'elimination of all forms of discriminatory
treatment in international commerce' were not qualified and
therefore committed the United Kingdom to a policy involving the
ultimate elimination of imperial preference and other bilateral
trade arrangements.

(ii) The wording of Article 7 was capable of varying
interpretations which might prove embarrassing to both Governments
unless an agreed interpretation could be secured.

7. In ensuing exchanges between the United Kingdom Government and
the British Ambassador at Washington [7], the latter emphasised-
(i) that great importance was attached to the agreement by the
United States Administration and by the President in particular;

(ii) that there was no chance of the United States Government
revising its main decision on Article 7; and
(iii) that the agreement involved the United Kingdom in no more
than an undertaking to work towards certain objectives on lines to
be agreed upon and provided that the United States also worked
towards them.

8. In reference to the question in a telegram of 2nd February [8],
the Australian Minister at Washington also pointed out that the
Americans admit that they have in mind the removal of imperial
preference, although they say it is an objective and not a
specific undertaking. Mr. Casey's impression is that the Americans
do not hope to secure the entire removal of imperial preference,
but to make material progress towards that end as one of several
measures designed to make and keep international trade fluid.

9. The State Department originally asked for a reply from the
United Kingdom Government by mid-January, but no decision had been
come to in London by that time, partly because Mr. Churchill,
while in Washington, had gained the impression that the whole
question of the agreement could now be deferred in view of the new
situation arising from the entry of the United States into the
war. This impression, however, has not be confirmed by recent
communications from Lord Halifax who reports that, on the
contrary, the United States Administration, including the
President, are anxious to obtain signature of the agreement at the
earliest possible date, including Article 7 in its existing form.

One reason for this concern is the fear that if a settlement is
not reached Congress might take the matter into its own hand with
unfortunate results.

10. In these circumstances, the United Kingdom Government has now
decided to accept the American redraft of Article 7 and to
conclude the agreement, subject to an exchange of interpretative
notes with the United States Government which will, among other
things, make it clear that the United Kingdom Government does not
regard the word 'discrimination' in Article 7 as applying to
special arrangements between the members of the British
Commonwealth, and that before accepting any definite commitments
involving modification of the existing system of imperial
preference, the United Kingdom Government would require to consult
the Dominions. Lord Halifax has already been instructed to
approach the State Department in this sense. (Telegrams D.66 and
D.67 of 6th February.) [9] This proposal does not include
acceptance of the draft agreement as it stands without exchange of
interpretative notes, and thus obviously indicates that the United
Kingdom Government still maintains the objections referred to in
paragraph 6 above.

11. Although the Dominions have been kept informed of developments
by the United Kingdom, their views have not yet been specifically
requested. In view of all that is involved in the question, it is
considered that the opinion of the Commonwealth Government should
be brought before the United Kingdom at the earliest possible
moment. Mr. Casey has reported that Canada has already notified
its agreement with the whole of the proposed agreement, including
Article 7. Meanwhile, the United Kingdom Government has been
informed that we are communicating our views in the immediate
future, and that we hope, therefore, that it will be possible to
defer Lord Halifax's approach until these are received.

B. THE PROBLEM
12. A decision must be made as to whether, in return for lease-
lend aid received by the Empire, and which it is hoped to receive,
the Commonwealth Government will recommend to the United Kingdom a
course implicitly committing the British Commonwealth to
collaborate with the U.S.A. in a post-war trade policy, the stated
objective of which is to reduce restraints on trade. We need to
recognise that this may involve the modification and ultimately
the elimination of imperial preference and will limit our freedom
to continue import and exchange control and other war time
measures for trade purposes in the post-war period. In effect this
decision involves a choice as to whether we work with the U.S.A.

towards the stated objective of freer multi-lateral international
trade or whether by refusing we accept the prospect of a probable
drift into the system of restrictive bilateral agreements and
exchange control. A first step in the application of this
collaboration would be to reach agreement on the trade
negotiations now in progress with the U.S.A.

13. This is a major decision and imposes definite obligations on
the Governments of the British Commonwealth. Accordingly, an
interdepartmental committee representing Commerce, Customs,
Treasury and External Affairs was asked to report upon the effect
of these obligations on our own economy, and to draft a telegram
to the Dominions Office. Because of the importance of the issues
concerned we urge that their report, which is attached", should be
closely examined.

C. CONCLUSIONS OF THE COMMITTEE
14. The Committee's conclusions may be summarised as follows:

(1) If we accept Article VII we undertake to work step by step
with U.S.A. to expand international trade and to relax trade
barriers; if we reject we must face an almost certain drift into
world trade governed by restrictive agreements in which countries
would exploit economic, political and military advantages to
secure favourable trade terms.

(2) Acceptance of Article VII would involve being prepared to
modify imperial preference, with possibly adverse effects on
certain export industries and would limit our freedom to impose
prohibitively high tariffs. Nevertheless, on balance Australia
would probably gain from a relaxation of trade barriers even if
imperial preference were modified or ultimately eliminated.

(3) A general return to restrictive national trade policies would
lead to contracting world trade offering little future for
Australia.

(4) We should at the same time sympathise with the United Kingdom
in her fear of incurring a definite commitment without seeing
clearly either the circumstances in which she will be called upon
to honour it or the precise compensating advantages. Therefore, we
should support any attempt to emphasise the reciprocal character
of the agreement and the importance of expanding production and
trade in making relaxation of trade barriers acceptable.

(5) If the reciprocal character of the agreement is recognised and
the positive aims of expanding production etc., can be achieved,
the kind of post-war collaboration implied in Article VII is in
the longterm interest of the British Commonwealth and provides a
basis for peaceful international relations.

D. IMMEDIATE POLITICAL FACTORS
15. There can be no doubt that the United States administration
and the President attach great importance to the early acceptance
of the Lease-Lend Agreement. This urgency apparently arises from
two factors-
(a) A conviction that unless the United States and United Kingdom
bind themselves now to collaborate economically after the war,
world economic conditions will become chaotic and collaboration
will become practically impossible.

(b) A desire to present to Congress an agreement sufficiently
precise to represent an acceptable return for lease-lend aid.

(Recent cables have emphasised that if the United States
administration does not soon announce an agreement Congress itself
may wish to lay down terms which would almost certainly be less
favourable to the United Kingdom than those now suggested.)
16. Experience in the last war indicates that it is dangerous to
wait until the war is over before laying the foundations of the
post-war order. Furthermore, after general agreement has been
reached close study will be necessary to determine the scope and
character of the collaboration.

17. The British Commonwealth, and Australia in particular, are
vitally dependent upon United States material and military
assistance. It is in our interests to show a sympathetic
understanding of the American viewpoint.

18. Furthermore, it should be remembered that Article VII is only
an expansion of undertakings to which both the United Kingdom and
Australia have given adherence in the Atlantic Charter. (Annex 2.)