United States response on wool duty requests.

McCarthy, Morton and I saw Clayton yesterday [1] and informed him
that United States response on Wool [2] 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 [3] 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 [4] 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. [5]

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 [6] 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. [7] 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.