During the past week the main work of the Cooperation Committee has been the discussions and preparation of the section of the Final Report dealing with intra-European trade exchanges, with particular reference to the question of Customs Unions.

I should say at the outset that the Committee's consideration of this subject has been directed throughout not to the question what the 16 nations represented here would do themselves if they were considering the problem in vacuum, but to the question how far they could go in the Final Report to meet the very definite views on the subject already formed by the American Government. As I have mentioned in previous reports, the American negotiators here have told the Executive Committee that there is no possibility of Congressional approval of large-scale American aid to Europe unless the European nations themselves indicate at least a willingness to consider certain points of view about European trade and economic relations which are widely held in the United States. These points of view relate principally to the Draft Charter of ITO, to quantitative restrictions on imports, and to the abolition of tariff frontiers in Europe by the formation of Customs Unions.

A full dress debate on this section of the Final Report began in the Cooperation Committee on the 21st August. After the debate had proceeded some distance the British delegation put in a draft of the section of the Final Report dealing with this subject. A copy of this British draft, marked 'A' is attached.¹ After some discussion, this British draft was referred for detailed consideration to a Working Party of ten countries, of which I was appointed Chairman. After working almost without respite throughout the 28th, 29th and 30th August, this Working Party finally arrived at a text which will be submitted to the Cooperation Committee at its meeting tomorrow afternoon. A copy of this text, marked 'B' is attached.²

You will see that this final draft (marked B) deals with three main subjects viz.

1.  The expansion of world trade and the importance in this connection of the Draft Charter of ITO (paragraphs 1 - 4);
2.  Customs Unions (paragraphs 5 - 6);
3.  Export and import restrictions due to payment difficulties (paragraphs 9 - 14).

The following comments on these separate sections of the draft may be useful:-

I. The Expansion of Trade and the Draft Charter of ITO
We objected to the phrase 'competitive efficiency and the specialisation of human skill and productive capacity', in the first paragraph of the British draft, as expressing a 19th century conception of national welfare which we could not accept. The phrase was changed at our insistence.

The Swiss, Italians, Austrians and ourselves objected to the proposal in the second paragraph of the British draft that the Cooperation Committee should express approval of the objectives of the Draft Charter. We argued that our Government could not possibly be expected to approve even the general objectives of a document of which they had no official cognisance and had not had an opportunity of considering. The draft was changed to take account of this point of view.

Paragraph 4 of the final draft which more or less repeats paragraph 11 of the British draft, presented us with some difficulty. Its purpose is, of course, to emphasise the importance of a reduction in American tariffs, and increased American purchases of European goods as an essential condition of a balanced payments position between this part of Europe and the rest of the world. It is difficult to see how the paragraph could be tactfully phrased otherwise to convey this idea. On the other hand, the paragraph suggests a general view about tariffs which we could obviously not accept. With these considerations in mind, I thought it well to make a statement to the Cooperation Committee on the sense in which we understood this paragraph. I said that we could not accept any suggestion that tariffs were an evil in themselves, and that in the case of our country, which is industrially under-developed and which normally imports foreign goods to the full extent that our external payment position allows, the only contribution which we could make towards the expansion of world trade was an increase on our national income and our national productivity, and that for that purpose the tariffs required to enable new industries to get on their feet were essential and, for the reasons I had indicated, desirable. I suggested that the industrialisation of under-developed countries was a necessary condition for, and a valuable contribution to, the expansion of world trade. I said that I didn't propose to suggest any changes in the paragraph, but I wanted to make the position of our country quite clear. Nobody questioned this statement which is on the record and which will, I think, obviate any risk of this paragraph of the final report, which, of course, in any case is rather vague in its terms, being misconstrued and used against us later.

II. Customs Union
This section of the Final Report was the subject of long and exhausting debates. It is the section to which the Americans attach the most importance, and it was frankly stated and generally accepted in the Committee and the Working Party that the section was not one which the participating Governments would put on record if they were dealing with the matter entirely between themselves but was necessary to meet the insistence of Mr. Clayton and the American negotiators. I think you will agree that as it is drafted now, the section is a great improvement on the corresponding paragraph in the British draft to which the Swiss, ourselves, the Norwegians and others object as seeming to give approval to the principle of the desirability of Customs Unions in themselves. We and these other delegations took the attitude that we would not object to the question being studied but we could not subscribe to the principle in advance. The French, Italian and other delegations strongly argued the other point of view, basing themselves on the necessity of satisfying the American requirements. As it is drafted now, the section doesn't seem to me to contain anything to which we need object. At the insistence of ourselves and the Swiss, the words 'in many sectors of production' have been inserted after the words 'greater efficiency' in paragraph 6 instead of the words 'of production'. At our insistence the words 'or as between countries with widely differing stages of economic development' were inserted at the end of paragraph 7. Incidentally, the word 'economic' in this phrase should be 'industrial'. It is a typing error which we will get corrected in the final text. The final text of paragraph 8 has not yet been settled and will depend on consultations which the rapporteur of the Working Party and myself are to have with the Scandinavian delegates in the morning to hear the results of the consideration of the Customs Union question by the Scandinavian Foreign Ministers at their recent meeting at Copenhagen.

III. Import and Export Restrictions
What I want to emphasise on this section of the final text is that it deals only with those quantitative restrictions which are due to payment difficulties or supply. On that basis I don't think this section contains anything to which we would possibly object. The subject is rather complicated, but what it amounts to is this - that once European payments are made transferable in accordance with the Benelux proposal, of which you are already aware, there is no reason why import or export restrictions due solely to payment difficulties should continue to be discriminatory in a geographical issue. Great objection was raised by France, Portugal, the Netherlands and Switzerland to the distinction between essential and non-essential goods in the original British draft. The new text is less specific on this point, but it is generally accepted that until complete convertibility into dollars of European currencies has been achieved, some discrimination as regards the categories of goods which countries will be prepared to import must continue. The new text provides for this possibility and the British delegation is quite prepared to accept it.

In the light of the foregoing considerations, I do not propose to raise any objection to the new text when it comes before the Cooperation Committee tomorrow. If, when the matter has been considered at home, it appears that there is any point which should be raised, I should be glad to be informed at once.

Finally there is the question of our participating in any Study Group formed to consider the problems involved in the setting up of a European Customs Union or Unions. As I have said, I shall not know until the morning whether or not the Scandinavians will take part in the Study Group which the British, French, Italians, Belgians, Dutch, Portuguese and others have already decided to form. The Danish Delegate told me that the Scandinavian block is severely split on the question - Denmark being in favour of taking part, and Norway and Sweden preferring to stay out. As you probably know, the Scandinavian Foreign Ministers decided last week to form a Customs Union Study Group between the Scandinavian countries themselves. A possible solution will be that a Scandinavian Study Group will be formed separately from the Conference, but that Denmark will take part in the Study Group set up by the Conference and act as liaison between the Conference Study Group and the Study Group of the Scandinavian countries. Switzerland is obviously waiting to see what the Scandinavian countries will do and Austria's attitude will depend largely on that of Switzerland. Otherwise all the countries represented at the Conference are likely to take part in the Customs Union Study Group which it is proposed to set up.

We must definitely decide our attitude before next Thursday. My feeling is that if Switzerland and Austria come in, we should come in also. Otherwise, the only States standing out would be ourselves, and Norway and Sweden, both of whom are of course purely concerned with their relations with Russia. Even if Switzerland and Austria stood out, it would still be a question whether we should not come in, so as not to be associated with countries whose policies are mainly determined by the Russian factor. As the Danish delegate said to me yesterday, the taking part in the Study Group involves no commitment of any kind and may be useful in as much as the discussions even if they do not result in a Customs Union - which they are most unlikely to do - will throw very useful and interesting light on intra-European trade relations. His Government had no idea of entering a Customs Union but would feel that Danish interests might suffer by their non-participation in discussions which might have an important influence on European trade exchanges. I will be communicating with the Department further on this matter tomorrow after our discussions with the Scandinavian States.³