1. Wilson's telegram T.17
Issues raised in this telegram have been under discussion in
Delegation since our arrival in London and it was my intention to
telegraph results our discussions soon as possible. We are agreed
that principle involved in Article 14 [1] and related Articles in
fundamental and that our attitude towards it is major
consideration in determining our attitude towards Charter as a
whole. It is not involved in 'experimental' negotiations [2] which
we have just commenced but it is important that our attitude
should be determined before we embark on Charter discussions this
month.

The following issues are involved.

(I) The effects on Australia of acceptance of Article 14 and
related Articles
(a) in relation to commercial policy generally,
(b) in relation to preference in particular.

(II) Alternatives open to us.

(III) Whe[ther] we are committed in our attitude towards this
question in anyway and if so how far by our acceptance of Article
VII of Mutual Aid Agreement.

(IV) Attitude of other countries
(a) foreign countries,
(b) British countries, and [3]

IA. Effect on Australian Commercial Policy generally

Article 14(1) maybe generally described as 'the rule of equal
treatment' or 'the rule of non-discrimination'. Scope of rule
clearly extends beyond tariff and import charges and assessment of
effects of its acceptance require detailed examination of
Australian protective trade administration and fiscal practices.

Charter already provides particular exceptions to rule (e.g.

Article 28 in relation to discrimination in quantitative
restrictions) and they may be capable of extension but these
specified exceptions should not in our opinion prevent careful
examination of general application of the rule.

[I]n following analysis of what appear to be important
implications of rule we have given weight not only to limitations
on freedom of Australia to discriminate in favour of others and of
others discriminate in favour of us but also the limits to the
freedom of other countries to discriminate against us.

It has been suggested that Article 14(1) and particularly its
reference to Article 15 would make difficult the continuance of
Australian two price systems. [4] It is clear such systems are
dependent upon complete exclusion of imports. It seems to us that
no serious difficulty arises in connection with such schemes as
the butter and wheat marketing plans since there are no imports of
products concerned and this situation can effectively be continued
under existing articles of the Charter. The sugar two price system
appears at present to be dependent upon embargo on imports which
would be proscribed by the Charter. The embargo could, however, be
rapidly replaced by a tariff which would be prohibitive [5]
effects. Generally we are satisfied that the two price systems can
be maintained on commodities in which Australia is at present
interested.

In our view application of the rule would be of greatest
importance apart from its effect on preference in relation to
(a) quantitative restriction of imports,
(b) tariff changes.

In relation to former we would no longer be able, if we find it
necessary to impose such restrictions for the protection of
balance of payments, to discriminate in favour of the strong[6]
area as whole United Kingdom, New Zealand, Pacific Islands as we
have done to varying degrees. Similarly, from point of view of our
exports we will find other British countries unable maintain
discrimination in our favour which they have permitted in past. We
are experiencing first effects of this in present limitation of
imports of Australian books in United Kingdom. We understand that
there are other instances of loss of export sales to United
Kingdom for same reason. In view of the probability that United
Kingdom and New Zealand are likely to maintain quantitative
restrictions [7] on imports for considerable time these examples
may well multiply affecting particularly new and developing export
manufacturing industries. Major exports are unlikely to be
affected while our exports to other countries have in past
suffered considerably from imposition of quantitative restrictions
discrimination against them has not been significant. It would
appear therefore that application of rule of non-discrimination
would, if past experience is a guidance, [be] a greater departure
from customary practices by British countries than others.

Most we can expect under Charter in future is that quantitative
discrimination might be permitted in special circumstances for
balance payments reasons but that discrimination based upon
political or traditional associations would be debarred.

As we interpret the United Kingdom - United States and United
Kingdom Canadian Loan Agreements our main purchaser has already
contracted until end of 1951 not to discriminate against those
countries in our favour. Whether rule of nondiscrimination (as
distinct from general limitation of use of quantitative
restrictions) is likely be serious and unjustifiable handicap to
policy in British countries thereafter seems to depend upon
whether need for import restrictions to meet balance of payments
deficiencies arises from general collapse of markets or from
failure of demand in particular, key countries. In former case
discrimination among British countries alone would distribute
burden of necessary reductions of imports among non-British many
of whom may be equally blameless and it is not surprising that
they should wish to prevent this. Where however, quantitative
restrictions become necessary because of shortage of particular
currencies there are articles of the IMF and in draft ITO charter
(for example 28 35 and 66/3) which provide possibility of
identification of cause of exchange deficiencies and introduction
of discriminations to meet them (subject approval of one or both
these organisations). The provisions in ITO charter are in our
opinion inadequate and even if main principle of Article 14 were
accepted we would intend work to have them strengthened. In this
connection reference has been made here to growing support from
economists for view we have advocated that restrictions and[8] to
be discriminatory if effect on world trade is not to be greater
than is necessary to restore equilibrium in balance of payments.

Apart from this, in view contractual or implied United Kingdom
commitments to U.S., the practical possibility of Australian trade
gaining advantages from let-outs to non-discrimination principle
are probably limited. In relation to tariff changes outstanding
point is that objective of application of rule of non-
discrimination may well conflict in some instances with general
purpose of reducing trade barriers. It is clear however that
United States in particular regards objectives as separate and
that in some cases at least they give prior importance to non-
discrimination. This illustrated by explanatory note to their
requests which indicated that their request for elimination of
particular preferences would be met by either a reduction in MFN
rate or an increase in BPT rate. Practical application of rule to
tariff formulation may result in higher duties being imposed as
between British countries than would be so if discrimination were
permitted.

Perhaps most important illustration of this in relation to our own
tariff making arises in connection with our desire maintain higher
effective duties against lower cost producers and countries whose
export policies make them severe competitors. In past Tariff Board
has recommended BPT and MFN rates designed effectively to protect
relevant Australian industry and at same time (in accordance with
undertaking in Ottawa Agreement) to give United Kingdom suppliers
opportunity of reasonable competition on Australia market. Board
has carried out this dual task ordinarily by assessing first rate
necessary to protect Australian industry against United Kingdom
producer (with due regard to Ottawa undertaking) then adding a
sufficient margin to give protection against foreign producers
where their costs are lower while ensuring that margin added was
not less than minimum provided for in Ottawa Agreement. If Article
14 accepted it may become impossible [for] Ottawa undertaking to
be observed and at same time effective protection to be granted to
Australian industry. For example, if Board considers MFN rate
required for effective protection is higher than that current it
would be necessary (to avoid widening preferential margin) to
increase also BPT rate even though this was inconsistent with
Ottawa undertaking that BPT rate would be such as to place United
Kingdom suppliers on a reasonably competitive basis with
Australian manufacturers.

Generally Australian protective rates are high and problem will
most frequently arise therefore in course of goods which it may be
desired to protect and in respect of which protective rates of
duty have not previously been provided. It should therefore be
made clear to United Kingdom that acceptance of Article 14 will
require a review of undertaking given in Ottawa Agreement.

I have discussed this question generally with members of United
Kingdom delegation who argue that problem can generally be
overcome by use of alternative specific rates aimed at low cost
producers.

However, fact that United Kingdom is featuring possibility of
tariffs on empire goods which are now free of duty may be evidence
of their awareness that Article 14 may require higher intra-
Commonwealth tariffs. My own opinion is however that primarily
they are concerned to establish value of binding of free entry as
a bargaining counter to reduction on BPT rates which they seek.

1B. Effect on preference

Effect of Article 14 would be to prohibit new preferences and also
increases in preferences remaining after reductions negotiated at
Geneva have been implemented.

Importance of this to Australia depends upon the probability of
Australia being able in future to obtain new benefits if right to
establish new and increased preferences is retained.

In relation to preferences enjoyed by Australia we have at no time
since Ottawa sought extensions of any importance. It is true that
meat quota provides for Australia obtaining 'an expanding share'
of British market. This provision is not a new preference and we
would regard ourselves as entitled to require a higher price for
modification of quota than if it did not include this provision.

Furthermore, United Kingdom prepared (and committed) accept
binding of preferences as is Canada also. It is improbable
therefore that even if we sought increased preferences we would be
able obtain them on any significant scale, and on other hand
preferences between ourselves and India have the possibility,
abandonment of which would represent a real sacrifice. In London
we began by seeking to retain right to extend area of existing
preferences but apart from India herself found no support from
other Commonwealth countries. Furthermore we understand from
United Kingdom delegation that they have been advised that India
for political reasons proposes abolish all existing empire
preferences next year. If this correct it would appear to rule out
possibility of our gaining significant benefits in other markets
from extension to us of new preferences. Sacrifice involved in
prohibiting granting of new or increased preferences by Australia
falls upon country potentially enjoying the preference and would
be of importance to Australia only as a limitation in our
bargaining power i.e., by depriving us of the benefits we might
buy from other countries by offer of preferential treatment in our
tariff. As we state above now India can be excluded it is unlikely
that there is anybody from whom we can purchase significant
benefits by offer of preference at least while preference retains
its essentially political basis.

It must be remembered also that Article 14 not unilateral
prohibition affecting only Commonwealth countries but prohibits
other countries from forming new preferential systems and
increasing margins within existing systems. Existing systems are
not of great interest to Australia except perhaps that between
U.S.A. and Philippines but it was apparent at first session that
number of other countries were interested in possible future
preferential arrangements on a regional or political basis e.g.,
India, Lebanon, China and several South American countries.

Similarly proposals for low tariff areas short of customs unions
were frequently advanced in inter-war period of various groups of
European countries, these may well be revived. Another possibility
which has to be borne in mind is emergence of new tariff areas
from breaking up of existing colonial empires e.g.; Dutch and
French. It would not be surprising development if as territories
sought tariff autonomy they were willing to grant preferential
treatment to countries of whose tariff area they have previously
been part. While I am by no means certain that developments would
on whole be harmful it is clear that superficially at least they
would be detrimental to British Commonwealth interest and
abandonment of right to establish them can reasonably be regarded
as concession by other countries at least to some extent
offsetting our own general undertaking. In inter-war period United
Kingdom strongly opposed establishment of several such systems.

Apart from these general considerations it is clear that rigid
interpretation of rule might prove administratively inconvenient.

For instance, we allow import under bylaw at concessional rates
with narrow preferential margins of goods normally classified
under protective items with wider margins. When circumstances
justifying by-law admission no longer exist and by-law is
withdrawn goods automatically become liable to protective rates
already provided with tariff. This may be regarded as increasing
an existing preference. There are other examples with which we
and/or other Commonwealth countries are concerned. It was agreed
in London recently that in any case Commonwealth countries would
press for adequate exceptions to cover these cases.

II The alternatives open to us

Immediate issue is to determine basis upon which Delegation will
enter discussions of Article 14 and related parts of Charter in
forthcoming discussions. It seems that following possibilities
exist-
(1) To oppose Article 14 and related articles in their present
form and seek to replace them by Articles which would allow
(a) any group of countries,
(b) a group of countries associated politically or geographically
or,
(c) British countries to discriminate in tariff and other
commercial policy in favour of other countries within group.

(2) Not to make a stand on general principle embodied in Article
14 but
(a) to seek to retain as large proportion of existing and
operating discriminations and preferences favourable to us and to
obtain as large a measure of concessions as possible for
reductions we grant,
(b) to claim that acceptance of Article 14 is a greater concession
by British countries than by others and therefore to extract the
maximum concessions both in individual agreements and in Charter
itself as price of our acceptance,
(c) to work for inclusion of provision for 'administrative' type
exceptions also on lines agreed with other Commonwealth countries.

[III.] Are we committed [9] by Article VII of Mutual Aid
Agreement

There can be no doubt that Article 7 was aimed among other things
at discriminations practised between Commonwealth countries and
particularly at preference and that we undertook to provide for
agreed action by United States and ourselves directed inter alia
to elimination of all forms of discriminatory treatment in
international commerce. In telegram 130 of 12th February, 1942, to
Dominions Office following War Cabinet decision of February 10th
we stated 'General relaxation of trade barriers would seem to be
possible if positive aims of collaboration referred to in Article
7 are achieved' and further that 'consequently British countries
should be prepared to accept general commitments involved in
Article 7 even if this involved some modification in existing
preference scheme'.

It is possible that taking 'agreed action directed towards
[eli]mination of discriminatory treatment' does not necessarily
preclude retention of freedom to extend and increase
discriminatory treatment in some parts of the field of its
operation but it may be argued that it would be precluded by
spirit of undertaking. In this connection you will recall that in
telegram referred to we also stated 'It is of supreme importance
for British countries to assure the United States Government and
the world that our declarations are intended to be carried out in
spirit as well as in letter'. It is not unlikely that an attempt
to retain right to impose new and increased preferences would be
regarded by the United States as a breach of at least the spirit
of Article VII. Of course any commitment in relation to preference
and other discriminations assumes that effective action is being
taken by the United States to implement remaining commitments of
Article VII. However, assessment of commitment under Article 7 is
judgment largely of a political character in which it is suggested
that due weight must be given to spirit as well as letter of
Article 7. [10]

[IV.] Attitude of Other Countries

A. Foreign
At outset of London talks it quickly became clear that United
States and indeed a number of other foreign countries regarded
discrimination by Commonwealth countries as a genuine grievance
and that inclusion of Article 14 in substantially its present form
was fundamental to their acceptance of Charter. On other hand
interest of number of smaller countries in regional preferential
arrangements has been referred to above.

B. British
It is clear that the United Kingdom and Canada are prepared to
accept Article 14 as it stands (except for administrative
exceptions). At London talks last year we, New Zealand and India
argued for the right to extend existing preferences within
recognised preferential area, e.g. Australia to India. The United
Kingdom, while unwilling to take any action in this matter might,
I think, welcome continued resistance on our part on this point. I
have discussed the question personally with Mr. Nash and he states
New Zealand's view is that a claim to retain this right is
untenable. Similarly in view of information about Indian attitude
towards preference it seems unlikely that they will sustain their
stand.

In other words on indications up to date we are unlikely to obtain
significant support even from British countries. This is confirmed
by discussions in current Commonwealth talks. if there were
serious dissatisfaction among British countries at results of
tariff negotiations they might be more inclined to oppose Article
14 but see no reason at present for any change in United Kingdom
attitude.

CONCLUSIONS

Following conclusions seem to emerge:-

1. It is almost certainly useless to seek a fundamental change in
Article 14, benefit of which is confined to British countries. We
would obtain no significant support for such an attempt. Amendment
to permit discriminatory practices more generally might open the
way for development inimical to British interests. However, it is
clear that the United States and foreign countries regard
substantially present form as essential to their acceptance of
Charter. We are, therefore, likely to be faced with a choice
between acceptance of Charter, including Article 14, in
substantially its present form and complete rejection.

2. It would be better, therefore, to bargain for maximum price in
concessions both in Charter and in specific agreements for
acceptance of Article 14 In this connection-
(a) Price we can extract, however, must be limited by fact it
imposes limitations on other nations also. This is less true of
United States for whom its acceptance has become matter of
political importance and who may, therefore, be prepared to pay.

(b) It may well prove advantageous to resist incorporation of
Article 14 in Interim Tariff Agreement and to make its acceptance
conditional upon general adoption of Charter. It cannot very well
be argued that it is necessary to prevent nullification but if we
obtain benefits on individual items in return for acceptance it
will be difficult not to agree to its inclusion. The United States
is likely to argue that their concessions have been made in part
against general grant of MFN treatment.

3. In discussions we should seek to establish that adoption of
Article 14 means for Commonwealth countries a major change of
policy and that-
(a) Acceptance of Charter incorporating it depends upon a
conviction that alternative multilateral system offers not less
advantageous conditions as a whole when a long-term view is taken
than preferential system which we now operate, and
(b) A judgment cannot be made on this question until the outcome
of Charter and tariff negotiations as a whole is known.

4. We recommend, therefore, that we be authorised to proceed in
accordance with conclusions 2 and 3 above.