1. The negotiations in this matter commenced in 1925 and were pursued until the middle of 1929 when a deadlock arose owing to Germany insisting upon the grant of national treatment while the Saorstát was not prepared to go beyond most-favoured-nation treatment. They were resumed on 2nd December at the request of the German Consul-General, Herr von Dehn, Herr Sarnow of the German Ministry of Finance being sent to Dublin to take part in the negotiations.

2. In the previous stages the German Government had submitted a long and detailed draft treaty, dealing primarily with the position of individuals, of associations and companies, and of shipping while other provisions dealt with such matters as Commonwealth preference and International Conventions such as those relating to the simplification of customs formalities and to import and export prohibitions. The general effect of the draft treaty was to provide for reciprocal national treatment in all these matters, to restrict or abolish Commonwealth preference and to impose on the Saorstát the obligations of International Conventions to which the Saorstát had not adhered. On behalf of the Saorstát an alternative draft treaty was submitted which substituted most-favoured-nation treatment for national treatment in all cases, maintained Commonwealth preference in its widest interpretation and adopted only such provisions of International Conventions as were open to no objection from the Saorstát point of view. It was on the receipt of this alternative Irish draft by the German Government that a deadlock in the negotiations arose, the German Government indicating that it could not proceed with discussions in which the right to national treatment was withheld.

3. At the opening of the discussion on 2nd December it was explained to the German representatives that the Saorstát representatives were not Plenipotentiaries and could only submit for discussion their proposal that a treaty should be concluded on the most-favoured-nation basis. They were prepared to hear the point of view of the German representatives on all the matters dealt with in the draft treaties that resulted from the original negotiations and where any German proposal was inconsistent with the instructions received from the Saorstát Government to examine the reasons for and merits of that proposal. They would then require to report the result of the whole discussion to the Government for further instructions. The German representatives stated that they were in the position of Plenipotentiaries and had authority to conclude the Treaty if one could be drawn up which was within their general instruction to secure national treatment.

4. The German representatives then indicated their general position to be that national treatment should be accorded in all respects to German individuals, associations and companies, and shipping. They particularly stressed shipping as a matter in which national treatment was essential. They added that unrestricted and undefined Commonwealth preference was objectionable from their point of view and that while special considerations might apply to preferential treatment in the matter of customs preference might in other matters involve serious restrictions on German nationals. They added that since the German Government's policy now was to give national treatment to other countries, giving most-favoured-nation treatment to the Saorstát meant in effect giving national treatment.

5. The Saorstát representatives explained that they were prepared to discuss national treatment in relation to shipping as a special matter but that in other matters the Government did not consider that the economic position of the Saorstát would justify them in conceding national treatment. Since the Saorstát policy towards other countries was most-favoured-nation treatment, if it accorded national treatment to one, this meant the grant of it to all.

6. The previous draft treaties submitted by each party were then examined in detail, the German representatives producing a number of additional provisions mainly of a kind supplemental to the principal provisions of the drafts. There was general agreement as to the form which each Article should take except that where the German representatives adopted 'national treatment' the Saorstát representatives adopted 'most-favoured-nation treatment'. This detailed examination of the Articles concluded on 4th December. It was then pointed out to the German representatives that an agreement on essential principles was not substantially nearer than it had been when the discussions began and that it seemed important to make some approach to an agreement, if possible, before the Saorstát representatives reported back to the Government. After consultation between themselves the German representatives stated that under their instructions they had no authority to alter the position they had taken up but that they would take the responsibility of recommending their Government to agree to a modification of those instructions if they were satisfied that the modification would result in an agreement. This modification they explained as follows, that if Commonwealth preference was restricted to customs duties and the same general treatment in other matters given to German individuals, associations and companies as is or may be given to British individuals, associations and companies the German Government should be satisfied. A copy of a memorandum subsequently received from Herr von Dehn amplifying this statement is attached.²

7. This development appeared to the Saorstát representatives to throw such an entirely new aspect on the negotiations as to require separate consultation. As a result of that consultation the Saorstát representatives were of opinion that the modification of the German attitude indicated by Herr von Dehn created a position which, as they understood the intention behind their instructions, offered a good prospect of agreement. Obvious difficulties presented themselves if the treatment of German individuals and companies was to be precisely the same as that of British individuals and companies but these difficulties were considered to be of a minor character such as probably could be disposed of. It was agreed not to be desirable to enter into any detailed discussion on such minor difficulties with the German representatives pending consideration by the Government of the essential principle involved in the German modification. On resuming the discussion, however, it was put to the German representatives that their statement was understood to mean that the treatment they desired was, except in the matter of customs duties, to be in general the same as that given to members of the Commonwealth and was not inconsistent with the retention of minor differences which the special relations between Great Britain and the Saorstát might necessitate. The German representatives made no difficulty about accepting this view and indicated that undue importance would not be attached by them to minor differences. The discussions then terminated pending the receipt of further instructions by the Saorstát representatives.

8. On the merits of the new German proposal the Saorstát representatives understand that their instructions in so far as they related to the securing of most-favoured-nation treatment were based on the importance of maintaining open access to foreign markets for the exports of such firms as Fords and Jacobs and of ensuring that industrial developments dependent on any substantial export trade would not be prejudiced while, so far as they indicated that national treatment could not be conceded, their purpose was to leave the Government a free hand to differentiate between Saorstát nationals and the nationals of other countries engaging in business, and especially in industrial production in the Saorstát. The new German proposal, if minor points be adequately dealt with, seems to safeguard both these objects. Irish exports will be secured most-favoured-nation treatment in Germany which is all they require. If Germany in the matter of individuals and companies is accorded the same treatment as Great Britain the power to differentiate between Saorstát individuals and companies and the individuals and companies of other nations remains unimpaired, it not being conceived that any such differentiation was in view which would not have to apply against British individuals and companies. In so far as the Saorstát may have to fear economic penetration such penetration for a long time will be much more intense from British individuals and companies than from those of any other countries. In the matter of goods, it will be noted, the German Government proposes no restrictions on the freedom of the Saorstát in respect of preferential customs duties in favour of Great Britain and the other members of the Commonwealth.

9. The new proposal made by the German representatives on the 4th December represented so radical a change in their previous attitude that careful consideration has been given to the possible motives for it. In this connection it must be realised that under a provision in the Treaty between Germany and Great Britain the Saorstát is entitled to most-favoured-nation treatment for its goods so long as it accords the same treatment to German goods. The German representatives must be fully aware that if the Saorstát secures most-favoured-nation treatment for its goods it secures what must be for it under present conditions the principal object of any commercial treaty and that there is no immediate incentive for it to make concessions in order to secure wider advantages from Germany. On the other hand so long as most-favoured-nation treatment for goods is secured only by an incidental clause in a treaty with a third party, and that clause can be denounced by the German Government on three months' notice, safeguards thus secured for Saorstát exports are too uncertain and unstable to meet its needs. It is understood, moreover, that as a result of the recent agreement in London it is in the direct interest of the Saorstát to secure national treatment for its shipping in positive terms. The underlying reason for a proposal which appears favourable to the Saorstát is probably the anxiety felt by the German Government as to the future of German firms, of which Siemens-Schuckert may be taken as an example, engaging in business in the Saorstát under conditions in which they may expect strong competition from British firms. It is a matter of considerable and immediate importance to the German Government to secure for German firms already operating in Ireland that the competition of British firms shall not be intensified by privileges and advantages other than preferential customs duties, to which the latter might be entitled under the conditions attaching to Commonwealth preference if that be not clearly defined.

10. The Saorstát representatives indicated to the German representatives no views whatever on their new proposal. They consider however that it is one which in principle the Government could adopt and that having regard to the importance of maintaining the freest possible access for Saorstát exports to foreign markets it involves no concession greater than must probably be made if most-favoured-nation treatment for Irish exports on a basis promising stability is to be maintained. In arriving at this view the Saorstát representatives have not regarded it as any part of their duty to consider any purely political aspect of the proposal.

11. The Saorstát representatives desire to add that the discussions have made plain the great importance of an early consideration of the economic position of the Saorstát in relation to international economic conventions. On several occasions the German representatives stressed the difficulty that must be felt by any country such as Germany, which has become a party to international conventions of the types relating to the simplification of customs formalities and to import and export prohibitions, about entering into agreement with countries that have as a matter of policy not so adhered. The adhering country is necessarily bound to concede to all other countries the advantages that the international convention confers on them and will be increasingly slow, in those circumstances, to permit other countries to withhold such advantages from their nationals or goods by virtue of specific agreement to that effect. Conversely the Saorstát, or any other country which has refused to adhere to international conventions, is confronted with a parallel difficulty; if in effect it accepts the provisions of such a Convention in one of its treaties it automatically grants a similar concession to all other nations with which its relations are on a most-favoured-nation basis and the result will be the same as if it had adhered to the convention itself. It would seem desirable that the Departments which have been represented in the present treaty discussions should prepare a memorandum that will bring the whole of this question before the Executive Council at an early date.

12. This Report is submitted for instructions as to whether the Saorstát representatives may now resume discussions with the German representatives with a view to arriving at an agreed draft of a Treaty based on the German proposal stated at the end of paragraph 6 which can be recommended to the respective Governments for favourable consideration.