1. Discussion of base date nomination has stimulated review of the
general question of Article 14 and of relationship between the
proposed General Agreement on Tariffs and Trade and the ultimate
Charter. Before discussions with Cabinet Sub-Committee take place
we feel it would be useful to recapitulate the issues as we see
them and obtain your comments.

2. As we understand it, the effect of Article 14 would be to
prohibit any new or increased preferences and to bind against
increase all preference margins-
(a) negotiated at Geneva or subsequently;

(b) not negotiated at the time of the entry into force of the
Article, but defined in terms of a base date.

Since margins covered by the negotiations will presumably be
bound, the practical effect will be confined to (b).

3. The automatic binding of margins and of preference-free
treatment would appear to involve a direct conflict with the
principle of reciprocal and mutually advantageous negotiations
upon which we are taking our stand. The reply to this claim given
by the Preparatory Committee (Chapter III, Section A.2 (C) (ii)
was that 'due weight' would be given to this automatic concession
under Article 14 because 'countries would not be called upon to
subscribe to the most-favoured-nation ... provisions until
selective tariff negotiations had been completed and vice-versa
(sic)'.

4. This reply is unsatisfactory for the following reasons:-

(a) It is not easy to evaluate the blanket commitment of Article
14 in terms of the item-by-item bargaining of the tariff
negotiations.

(b) Although it would be possible to avoid an unsatisfactory
outcome of negotiations on a particular tariff item by reserving
the item from the Geneva negotiations, it may not be possible to
avoid the contemplated commitment on Article 14 except by
rejecting the proposed General Agreement as a whole.

(c) If it is generally assumed during the Geneva negotiations that
Article 14 will operate at their conclusion, other countries will
scarcely be prepared to give us compensation for a concession
which they expect to receive automatically in due course. Section
C.3 of the Procedural Memorandum highlights this danger.

(d) We shall be required to enter into a further series of
negotiations with countries not covered by the agreement reached
at Geneva. If Article 14 has been incorporated in the Geneva
General Agreement we shall have signed away the right to secure
any reciprocal concessions from these countries in return for the
binding of preferences, even although the items may be ones in
which no 'Geneva' country has any real interest.

(e) Where only the B.P.T. rate has been bound on any items at
Geneva we would lose our bargaining power for subsequent
negotiations not only in respect of the binding of the preference
margin but also in respect of the binding of the M.F.N. rate.

Moreover, if the Tariff Board clauses of Ottawa [1] continue to
operate in relation to unbound B.P.T. rates, the Tariff Board
limitation will be extended automatically to the corresponding
M.F.N. rates, and any Tariff Board recommendation for a reduced
B.P.T. rate will carry with it, if implemented, a reduced M.F.N.

rate. Apart from the loss of bargaining power, the protective
implications in relation to M.F.N. rates may be serious.

5. Other points to be noted are:-

(a) Acceptance of the Article 14 commitment would mean that if,
because of the development of competition from a low-cost foreign
country, Australia found it desirable to raise the most-favoured-
foreign nation rate on an item which had not been bound at Geneva,
it could not do so without simultaneously making a corresponding
increase in the British Preferential Tariff. The same factors will
operate elsewhere and accordingly the general linking of B.P.T.

rates to M.F.N. rates through the binding of preference margins
will tend to create new and unnecessary tariff barriers between
Empire countries (c.f. U.K. suggestions for imposing duties on
Empire products at present accorded free entry).

(b) A prohibition on the extension of preferences to parts of the
British Commonwealth not at present enjoying such preferences
could severely limit the scope for fruitful agreement between
British countries.

6. In other words, even tacit acceptance of Article 14 places us
in the same bargaining predicament as that in which the U.K.

already finds herself as a result of her acceptance of the binding
of preferences at the time of the Anglo-American Financial
Agreement. So far we do not appear to have made any strong
official protest against Article 14 as we have against Article 24,
and indeed our message to the United Nations Secretariat
commenting on the Procedural Memorandum did not object to the
reference to Article 14 in Section C of that Memorandum, although
we safeguarded our position by expressly reserving our attitude on
the contents of the General Agreement. The 'experimental' approach
which we are making to Article 24 (which may involve reserving
from negotiations items in respect of which a satisfactory bargain
may be prevented by the 'Automatic rule') cannot be applied to
Article 14, since to reserve an item from negotiation means the
automatic binding, without compensation, of the preferential
margin if that Article is to operate.

7. From the point of view of the Geneva negotiations it would seem
that any binding of preference margins should be limited to the
items included in the schedules to the General Agreement and that
there would be no justification for accepting a blanket commitment
preventing the granting of new or increased preferences on
unscheduled items in which the countries parties to the General
Agreement might have little or no interest. Even considered in the
wider context of the ultimate Charter, in which it is hoped to
secure the general acceptance of broader commitments in other
fields (particularly full employment and industrial development)
there would still seem to be no justification. (except perhaps the
political value of such a concession to the United States) for
accepting a blanket commitment on preference margins.

8. Whatever our view on the ultimate balance of advantage, there
would seem to be merit in pressing our objection to Article 14 to
the point of forcing the U.S.A. to admit, as they have in effect
on the Automatic Rule, that the Article cannot logically be
justified as a matter of principle. One possibility would be to
press for the principle that the General Agreement should be
confined to negotiated tariff and preference schedules with a bare
minimum of general clauses necessary to protect the schedules
against nullification by extraneous factors. This would of course
involve consideration of wider issues than Article 14. Other
possibilities were mentioned in our message No. 69 of 7th February
to our representatives on the drafting committee in New York which
we will repeat to you in a succeeding telegram for convenience of
reference. [2]

9.If we are to take any active steps in relation to Article 14 the
question of timing requires careful consideration. On the
'Automatic Rule' it has been decided not to seek an immediate
showdown but in the case of Article 14 an early declaration of our
attitude might be preferable particularly in view of paragraph (6)
above.