The concluding plenary session[s] of the Preparatory Committee [1]
have been deferred until next week and will then consider the
reports of the principal Committee. The drafting Committee, which
I referred to in my letter of 15th November, will meet in New York
from January 20th. This Committee will be responsible for tidying
up the work of this session and for the preparation of a new draft
document embodying the alternatives that have been suggested and
this will be available for consideration at the next session of
the Preparatory Committee. The intention is that this Committee
will consist of two of the less senior officers who were attending
this Conference. In accordance with your instructions I am cabling
to you concerning this proposal. As the drafting Committee will
not be involved in any decisions that would be binding upon
governments but is merely in the nature of a working group arising
from this Conference, I have recommended for your approval that we
should agree to participate. [2]

It is at present contemplated that the Conference, commencing in
Geneva on April 8th, 1947, should begin with tariff negotiations,
and that consideration of the terms of the draft Charter should
begin on 6th May, thereafter continuing concurrently with the
tariff negotiations. The preliminary Conference in London between
Commonwealth countries, beginning on 11th March, would also assist
us in the preparations with limited staff that is available.

Copies of the documents setting out the agreed heads on Employment
and Industrial Development have already been sent to the
Departments. Brief Notes of other developments are included in
this letter.

Employment
The only outstanding section has been the impairment clause which
would operate in the event of a failure by a member to maintain
effective demand. An amendment has been made to Article 30 of the
draft Charter which, whilst not directly mentioning employment or
effective demand, adequately provides an escape in the event of a
country failing to maintain effective demand, particularly when
read in conjunction with the employment section. This clause,
whilst meeting our needs, has also been accepted by the United
States.

Industrial Development
There is no further comment following the acceptance of the report
of the Sub-Committee [3], a copy of which was enclosed with my
letter of 18th November.

Quantitative Restrictions
A detailed report on this subject will be forwarded to the
Treasury shortly. Substantial modifications have been made to the
original draft, and, in particular, provision has been made for-
(a) the maintenance of quantitative restrictions of imports in the
early post-war transitional period essential to-
(i) the maintenance of war-time price control by a country
undergoing shortages subsequent to the war;

(ii) the orderly liquidation of industries developed in a member
country owing to the exigencies of the war which it would be
uneconomic to maintain in normal conditions.

(b) an amendment to Article 19(2)(e) to ensure that restrictions
on the importation of agricultural products will not reduce the
total of imports relative to the total of domestic production, as
compared with the proportion which might reasonably be expected to
rule in the absence of restrictions.

(c) the use of balance of payments restrictions when necessary to
stop or forestall the imminent threat of a serious decline in
reserves, or in the case of a member with very low reserves, to
achieve a reasonable rate of increase in its reserves.

(d) freedom to impose quantitative restrictions to safeguard the
balance of payments without prior consultation with the
Organisation when it would be impracticable to consult before the
application of restrictions.

(e) the right of a member to obtain the previous approval of the
Organisation for restrictions which it intends to impose or for
the imposition of restrictions in the future under specified
conditions. To the extent that agreement has been reached on the
conditions of their imposition, there cannot be a subsequent
challenge of the member's right to impose the restrictions.

(f) preventing the Organisation from recommending the withdrawal
of restrictions on the ground that they could be avoided by a
change in the domestic, employment, reconstruction, development
old social policy of the member.

(g) the selection of commodities to be imported, on the grounds of
essentiality, when quantitative restrictions are imposed.

(h) discussion with other international agencies to remove the
underlying causes of a disequilibrium resulting in persistent and
widespread application of quantitative restrictions.

The section dealing with exchange restrictions provides that
members of the Organisation would as a general rule be required to
be members of the Fund, but that non-members of the Fund (or
countries withdrawing from the Fund) could enter into a special
exchange agreement with I.T.O., which would then become part of
their obligations under the Charter. The Committee's Report on
this Article, however, states that no final decision was reached
on the question of common membership, which was left for further
consideration until the probable membership of the Organisation
and of the Fund became clearer.

Tariffs and Preferences
It was apparent when I wrote to you earlier that there was a
disagreement in principle regarding the methods by which margins
of preference should be reduced and also on the extension of
existing preferences to other Commonwealth countries not at
present enjoying them.

The majority opinion is that any negotiated reduction in the
m.f.n. [4] rate should automatically reduce the margin of
preference unless there is agreement among the parties-including
the country making the request -that a lesser reduction in the
preferential margin is satisfactory. The United States delegation
has said that for political reasons they could not possibly agree
to withdraw this formula. The Indian proposal is that the
automatic formula should not apply and that members should be free
to negotiate for a reduction in the preferential rate of duty as
well as in the m.f.n. rate provided that the margin between the
two negotiated rates is not greater than that existing on a date
to be agreed upon.

The Indian delegation has entered a reservation on this point. We
have not formally joined in this reservation, but in the course of
the discussion relating to this section of the report, we stated
that the rigid application of the formula would prevent some
adjustments in most-favoured nation rates of duty in negotiations
and that it was our opinion that the formula could not operate
satisfactorily. If, however, the United States was prepared to
accept the view that in the course of negotiations some agreement
for a lesser reduction in the margin would be satisfactory, this
would help to meet the problem. We also indicated that the
concessions which had been made in the draft Charter and the
acceptance of provisions relating to employment and industrial
development materially changed the nature of the document, and
that in these circumstances, and, in view of the understanding
relating to the application of the formula, Australia would not
formally make a reservation on this point. This viewpoint was
supported by delegates from South Africa and New Zealand. In his
reply the leader of the United States delegation stated that they
appreciated the absence of a formal reservation on this formula,
which had been already accepted by the United Kingdom, and that
for their part, they would do all in their power to ensure that
the Article would operate in a manner that would enable mutually
advantageous agreements as to the reductions in preferential
margins that should operate. As I was somewhat uncertain what
return to take on this I attach a copy of the verbatim record of
what I said in relation to it and the reply given by the U.S.

delegate. The Indian Delegation also formally made a reservation
that Articles 8 and 18 [5] should be interpreted in such a way
that existing preferences; Article 18 set out members' obligations
to negotiate for reduction of tariffs and so long as a preference
remain accordable in one part of a preferential system specified
in paragraph 2, Article 8, that part of the preferential system
according the preference should be at liberty to extend the same
or lesser measure of preference to any other part of the same
preferential system which at present does not enjoy it.

Procedure
As I indicated in my letter of 15th November, it has been
necessary to prepare and attach to the report of the Conference a
memorandum supplementary to Articles 8 and 18 explaining the
procedure which will be necessary in the negotiations for tariff
reductions that are to be undertaken next year. This memorandum,
whilst embodying a desirable procedure, may not in practice be
followed during the actual course of the negotiations, and many of
the points that have been raised regarding the implementation of
those decisions can in fact only be determined in their final form
after the negotiations have proceeded. This document contains some
interesting views which I shall summarise briefly:-

(1) Date for negotiations. With the removal from Articles 8 and 18
of the dates originally included, it is necessary for countries to
inform each other of the date upon which preference tariffs in
operation shall be subject to negotiation. It is proposed that
each country shall select a date and that this will be notified to
others through the Secretariat prior to the April meetings.

(2) New tariff measures. The document expresses the hope that
between now and the negotiations next year no country will
introduce new tariff or other measures which would be out of
spirit with the terms of the draft Charter. Whilst there is no
legal obligation on countries to observe this rule, they would
lose substantial bargaining power, if, in fact, they do raise
tariffs prior to the negotiations.

(3) Principal supplier rule. Some variation in this principle has
been made in that each country may request of another the
reductions in tariffs which it wishes to have and the receiving
country will then be responsible for checking whether or not the
members of the Preparatory Committee as a whole are or are likely
to be the principal supplier of the commodity in question.

(4) Requests. It is hoped that all requests for reductions in
tariffs will be transmitted not later than 31st December, 1946,
although the United States has already indicated that its requests
upon the United Kingdom will not be available before the middle of
January next.

(5) Concessions. It has been proposed that at the opening of the
next session of the Preparatory Committee, each member should
table a schedule of the proposed concessions which it would be
prepared to make in the light of the concessions that it has
itself requested. This would take the form of a statement of what
concessions we would be prepared to make on requests to us
assuming that all our requests on other countries are met in full.

(6) Result of Negotiations. The Procedure memorandum outlines in a
tentative way the procedure that may be followed in order to make
effective the results of the tariff negotiations. It contemplates
that the new tariff rates should be embodied in schedules which
would be attached to a tariff agreement. It is proposed that this
tariff agreement making effective reduced rates of duty and
certain sections of the draft Charter should come into force after
conclusion of the negotiations and not be delayed pending the
acceptance of the whole of the draft Charter by the subsequent
World Conference. This has some objectionable features in that
there may be an undesirable variation in the terms of the Charter
which would, if foreseen, have affected the concessions that
Australia would be prepared to make. However, there is no
commitment at this stage as to the form in which the tariff
agreements will come into force, and this matter can be determined
only in the light of the negotiations themselves. It is also
proposed that an Interim Tariff Committee should be established
after the negotiations have been carried out and the I.T.O. has
been established. The purpose of the Interim Tariff Committee
would be to determine whether or not adequate tariff concessions
have been made by countries wishing to join the negotiations
subsequent to the completion of the negotiations by the original
members. This, again, is a problem which can only be determined in
the light of the negotiations themselves next year.

Commodity arrangements
The report of the Committee dealing with inter-governmental
commodity arrangements has in general met the requirements of
Australia. Under the provisions as now drafted, it is possible for
negotiations to be commenced for the conclusion of commodity
arrangements relating to any particular subject. Any country which
is substantially interested as a consumer or producer may
participate in negotiations without being committed until the time
of signing the agreement. Moreover, any country may refrain from
participating in a commodity arrangement without affecting in any
way its membership of the I.T.O. or its position as a participant
in other commodity arrangements. Almost all members of the
Committee agreed with the United Kingdom delegation that it be a
recommendation to governments that the provisions of the new draft
section on commodity arrangements should be used as a guide in
intergovernmental consultations relating to governmental policy
that may be undertaken prior to the formal adoption of the draft
Charter.

I have refrained from writing a complete review of the results of
the Conference and the relation of our point of view to the
proposals that have been formulated. This has been merely an
attempt to continue the
summary of the more important developments, and on our return home
I shall, of course, submit a complete and detailed report of the
results of the Conference. [6]

H. C. COOMBS

Attachment
DR. COOMBS (Australia): Mr. Chairman, this Article has given the
Australian delegation a considerable amount of concern. I should
say that so far as the general principle embodied in this Article
is concerned we are in agreement with it. The Australian
Government was a party to the Mutual Aid Agreement [7], in which
it did accept quite definitely an obligation to enter into
mutually advantageous negotiations directed towards the
substantial reduction of tariffs and the elimination of
preferences. That obligation the Australian Government will carry
out to the full, and it was necessary for me, therefore, to look
at this Article in the light of the previous undertaking which the
Australian Government entered into in connection with preferences,
and this raises the rather vexed question, which occupied so much
of the time of the Sub-Committee, of the word 'automatically'
embodied in Paragraph 1(b) of the Article.

It is necessary for me to say that we do feel, after very careful
thought on this matter, that the word 'automatically' is in this
context inconsistent with the general principle that the
negotiations should be reciprocal and mutually advantageous.

Generally it may be correct that an automatic reduction of the
margin of the preference by the amount of the reduction in the
most-favoured-nation rate would be reciprocally and mutually
advantageous, but it is conceivable that in some circumstances
such a reduction would not be mutually advantageous. Perhaps I
should add that it is a matter of fact that our own national
interests in this matter would not be seriously impaired by the
acceptance of the rule. Most of the commodities on which we
receive preference are on free entry or very low rates of duty, so
that the only way in which a reduction could operate would be
substantially in the same way as if it were automatic. I make that
point to emphasise what I think is important-that our feeling
about this word is not based solely upon an attempt to protect
certain advantages which we enjoy at present and does not in any
sense indicate an unwillingness to carry through to the full the
undertaking we have already given elsewhere to agree on action to
eliminate preferences. But we do feel that if negotiations are in
fact to be reciprocal and mutually advantageous, then the parties
to . . . negotiations must be free to engage in the negotiations
in ways which are determined in the light of the circumstances of
the case and in which there is no prior determination as to the
nature of the bargain which they reach. The bargain should be one
freely agreed upon by both sides, without any necessary
prescription in advance as to the nature or form of that
agreement. The inclusion of the word does to us, therefore, I
confess, rather suggest an inconsistency with what appears to us
to be the basic principle that the negotiations concerned should
be mutually advantageous. That is the position which we feel it
absolutely necessary to state.

I have given very great thought to the question of whether we
should, in the light of these views, reserve our position on this
matter. Naturally, of course, our agreement to any part of the
Charter is tentative, as is the agreement of any other Delegation
here, and is not binding on our Governments, but on some points it
has been necessary for Delegations to make a special reservation
in connection with particular items, and such a possibility has
given us a good deal of worry. I would like to say that we have
felt, in considering this, that we would be unwilling to make
reservations on particular points, unless they are of absolutely
overwhelming importance, without the consideration not merely of
the context of that particular point, but a consideration of the
Draft Report and Draft Articles as a whole, and here I feel when
we look at the Charter as a whole, at any rate, that [it] is a
substantially broader and wiser document than it was when it
appeared at this Conference, and that the Report does take many
factors into account which are to us and to other delegations of
very great importance.

While I, therefore, would not like there to be any doubt about the
feelings of the Australian delegation on this point, that it is
our absolute conviction that the negotiations contemplated under
Article 18 should be in the most complete and unequivocable sense
reciprocal and mutually advantageous, we have decided that it
would be ungracious of us to make a specific reservation on this
matter, in view of the very substantial progress which we feel has
been made at this Conference on matters of greater importance to
the Charter as a whole.

MR. HAWKINS [8](U.S.A.): Mr. Chairman, I should just like to say
that I appreciate very much the attitude taken by Dr. Coombs and
his New Zealand and South African colleagues. I know the
difficulties presented, and this particular point is of very great
importance to us. I should just like to assure Dr. Coombs and the
Australian, South African and New Zealand delegates, that it is
our firm intention that even with the rule, the negotiations will
be, so far as we can possibly make them, on a mutually
advantageous basis.