Imperial Preference and GATT

MR. STARK: This is the day of initials. Important international organizations are no longer known by their longwinded names, but simply by their first letters. It would be quite accurate, if not particularly enlightening, for me to introduce Mr. L. Dana Wilgress to you today simply by saying that he is chiefly known for the prominent part he played in NATO, ECOSOC, GATT, in PJBD and in OEEC. However, it would not be fair to Mr. Wilgress or you to leave it at that. The fact is that Mr. L. Dana Wilgress has served his country well and in two very important capacities, both as an economist and as a diplomat.

He was born in Vancouver in 1892. He was graduated in Japan and in Victoria, British Columbia. He graduated with honours in Economics and Political Science from McGill University, Montreal, and he first joined the Canadian Government Service in 1914, when he entered the Department of Trade and Commerce.

In the early years of his career, he acted as Trade Commissioner, carrying out important trade missions in the United Kingdom, Germany, Southeastern Europe, the Soviet Union, and China. In 1932, he was made Director of Commercial Intelligence in the Department of Trade and Commerce in Ottawa; and in this post, he played a large part in planning Canadian economy during 1938 and 1939. One year later, he was appointed Deputy Minister of Trade and Commerce.

However, in 1942 he changed over to the career of the diplomat, and he had the honour of being appointed Canada's first Minister to Moscow in 1942, being promoted to Ambassador in 1944. In 1947, he was appointed Minister to Switzerland, with the rank of Ambassador; and from 1949 to 1952 he served as Canadian High Commissioner in London.

Mr. Wilgress has had great experience at international conferences, and that brings us to the initials. He attended the first three sessions of the United Nations General Assembly and the seventh session of the ECOSOC (Economic and Social Committee of the U.N.). He was one of the framers of GATT which, as everyone knows, means General Agreement on Tariffs and Trade; and he has attended practically all GATT conferences since 1946. In 1953, he became Canadian Permanent Representative to NATO and only retired from that post in October of 1958.

Mr. Wilgress is one of those men who does not stay retired. Since his nominal retirement from the Department of External Affairs, the Government calls on him from time to time, chiefly in the role of trouble-shooter. He led the Canadian delegation to the meeting of Technical Experts on minimizing the possibility of surprise, a conference which was held in Geneva in November of 1958. His latest important appointment was as Chairman of the Canadian section PJBD, that is to say, Permanent Joint Board on Defence, Canada and the United States, to which he was appointed in April, 1959.

Some forty years ago, in 1919, Mr. Wilgress married Olga Buergin, a Russian by birth. At that time he was acting as Trade Commissioner in the USSR. His family consists of two sons and one daughter.

I have great pleasure in now presenting to you a very distinguished Canadian diplomat, Mr. L. Dana Wilgress.

MR. WILGRESS: It affords me much pleasure to be meeting with you today and talking to you about matters of interest to your Club. Your Executive invited me to speak to you about GATT, of which I was the Chairman for the first three years of its existence and again for another period of three years from 1953. I have thought, however, that it would be better to relate what I have to say about GATT to a subject which is of very direct interest to the Empire Club of Canada. It is for this reason that I have chosen as my topic for today the subject of "Imperial Preference and GATT".

The relation of GATT to Imperial Preference is often not properly understood. In Great Britain, GATT is frequently attacked as an obstacle to the further extension of preferences. This is due to the provision which precludes new preferences or the enlargement of existing preferences. However, it is partly due to GATT that the whole system of Imperial Preference has received unqualified recognition as a well-established exception to the operation of the most-favoured-nation clause, or the principle of nondiscrimination. Nor is it widely understood that one of the motives for the negotiations leading up to GATT was an attempt to eliminate some of the discriminations inherent in the system of Imperial Preference.

For seventy years from the conclusion of the Franco-British Commercial Treaty of 1860, Great Britain was the main upholder of the most-favoured-nation clause. This was seen as the commercial policy counterpart to the doctrine of Free Trade. It was for this reason that Canada's moves in the direction of Imperial Preference at the end of the last century met with no response from Great Britain. Undismayed, Canada contributed further to the evolution of the system by incorporating bound margins of preference in the trade agreements concluded with the British West Indies and, later, with other Commonwealth countries. Thus the stage was set for the conclusion of the Ottawa Agreements in 1932; these agreements having been made possible by the introduction of a protective tariff by Great Britain, thereby signifying the abandonment of Free Trade.

A short time later, the cudgels on behalf of the most-favoured-nation clause were taken up by the United States. Mr. Cordell Hull made it the cornerstone of his reciprocal trade agreements programme. They had to recognize that the preferences exchanged between British countries were exceptions to the operation of the clause, but they hoped to work towards the elimination or reduction of preferences through the trade agreements programme. Then came the war and in August 1941, Winston Churchill and Franklin Roosevelt met off the coast of Newfoundland to draw up the Atlantic Charter. Largely on the prompting of Mr. Sumner Wells, the President urged that there be included in the proposed charter a commitment for the dismantling of the British Preferential Tariff System. Churchill stoutly resisted and succeeded in securing the insertion of the words, "with due respect for their existing obligations". Subject to this proviso, the Charter contained a commitment to further the enjoyment by all states of access, on equal terms, to the trade and raw materials of the world.

A more explicit undertaking with regard to preferences was included in the master Lend-Lease Agreement also concluded during the early period of the war. Article VII of that Agreement, after referring to the promotion of mutually advantageous economic relations, provided for agreed action directed, among other objectives, "to the elimination of all forms of discriminatory treatment in international commerce".

After the war, steps were taken to give effect to these commitments. In December 1945, the granting of a postwar loan to the United Kingdom coincided with the signing of the Anglo-American Financial and Commercial Agreement. This contained a provision for the discussion by both governments on agreed action to attain the objectives of Article VII of the Lend-Lease Agreement. Hence, the principles enunciated in that Article were made the starting point for concrete action to secure the liberalization of world trade.

The agreed action took the form of a joint statement by the British and United States Governments, which indicated that the two governments had undertaken to begin negotiations between themselves and with other countries relating to all types of trade barriers. The negotiations were to be based on a document entitled, "Proposals for the Expansion of World Trade and Employment", drawn up by the United States Government and made public at the same time as the joint statement. These proposals envisaged "mutually advantageous concessions", providing for the elimination or reduction of preferences and customs duties. They foreshadowed the setting up of an International Trade Organizatlon, or ITO, that would promote commercial co-operation between nations and the carrying out of the agreed principles. These principles were essentially liberal, and the most basic was that of non-discrimination as exemplified in the most favoured nation clause.

Thus it was that for over six months at Geneva in 1947, twenty-three countries carried on the first multi-lateral tariff negotiations ever attempted on any large scale. The experiment proved to be a great success. The results of the negotiations were embodied in a multi-lateral tariff agreement known as the General Agreement on Tariffs and Trade. It was the initials of this agreement that gave rise to the word, "GATT".

To the great disappointment of the Americans, the Geneva negotiations did not succeed in making much of a dent in the British preferential tariffs. The Commonwealth countries sought refuge in the phrase, "mutually advantageous concessions". They were more ready to buy concessions from other countries through reductions in most favoured nation rates than through reductions in preferences. The preferences were interlocked by the system of bound margins agreed upon at Ottawa in 1932. This made it necessary to secure the consent of the receiver as well as of the giver of the preference. The receiving country was usually reluctant to grant such consent, except in terms of what the other party considered an unreasonable quid pro quo. A major achievement from the American point of view, however, was the provision in GATT that no new preferences could be introduced, nor could existing preferences be increased.

At the same time as the tariff negotiations were underway, a Preparatory Committee was drawing up a draft charter for an ITO. The original United States proposals were being watered-down by attacks from two quarters. One came from the underdeveloped countries who saw in the principle of non-discrimination, a device to favour the economically strong countries at the expense of the weak. They attached importance to the use of quantitative restrictions and bi-lateral deals as a means of furthering their economic development. The other attack came from the neo-Keynesians who were fearful that rigid adherence to the principle of non-discrimination might interfere with national policies of full employment and lessen the ability of smaller countries to protect themselves against a falling-off in economic activity in one of the major countries.

The resulting draft charter for the International Trade Organization was submitted to an international conference which met at Havana and was attended by representatives of sixty-four countries. There, the underdeveloped countries were much more numerous. The result inevitably was a further watering-down before an acceptable compromise could be reached in the form of an agreed charter.

In the light of subsequent events, one of the compromises reached at Havana is worth recording. The Latin Americans, in particular, had been attacking the "no new preference rule" as unfair to the underdeveloped countries. They argued that, unlike the British countries, the underdeveloped parts of the world had not yet had the time to evolve preferential systems of their own. To meet this criticism, the concept of a free trade area was worked out and offered to the underdeveloped countries. The Geneva draft had contained a provision for customs unions being recognized as exceptions to the operation of the most favoured nation clause. This was necessary because customs unions are a recognized exception of long standing. Moreover, the Benelux customs union was then in the process of formation. The concept of a free trade area with a different external tariff for each national unit was something new.

In my opinion, the granting of this concession to the underdeveloped countries was a mistake. It would have been better to have allowed them to conclude preferential arrangements designed solely to facilitate economic development. This would not have permitted developed countries to take advantage of this exception to the most-favoured-nation clause. It is important that any such exception granted to the developed countries should meet the criteria of being easy to define yet difficult to attain. A customs union fulfills these criteria-a free trade area as defined in GATT, much less so.

As you all know, the Havana Charter was never ratified by the United States Congress. The Senate felt they would be delegating too much authority over trade and tariffs to an international organization. This meant that the ITO never came into existence. GATT, however, was already in existence. The articles of GATT reproduced many of the commercial policy provisions of the Havana Charter. It had been the intention that GATT should be administered by the ITO. There had, however, been included in the articles of GATT one sentence reading as follows:

Representatives of the contracting parties shall meet from time to time for the purpose of giving effect to those provisions of this Agreement which involve joint action and, generally, with a view to facilitating the operation and furthering the objectives of this Agreement.

It is on the basis of this simple provision that meetings of GATT have been held regularly over the past thirteen years. It is on no more solid foundation than this that GATT has come to fill the need for a forum in which commercial policy questions can be subject to international review on a world-wide basis.

It soon became realized that something more substantial than this provision was necessary if GATT was to have the standing required to make its influence fully effective in world trade. At a review session held in the winter of 1954-55, an Agreement on the Organization for Trade Co-operation was drawn up and submitted to governments for ratification. Once again, the United States Senate failed to ratify. It was said that they did not approve of this attempt to have the Havana Charter ushered in through the back door. So it was that GATT has continued to function under the simple provision I have just quoted.

Another little-known fact about GATT is that the Agreement is only being applied provisionally and not, definitively, as provided for in the articles of the Agreement. All that countries have done is to adhere to a Protocol of Provisional Application. This was originally drawn up to enable certain countries to sign on October 30th, 1947, and thereby permit the tariff concessions exchanged between them to come into effect provisionally on January 1st, 1948, pending a definitive approval of the whole Agreement according to the constitutional procedures of each country. The Protocol of Provisional Application permits any country to withdraw from the agreement on sixty days' notice.

You are no doubt asking yourselves how it is that an organization based on such a slender legal foundation should be steadily growing in size and influence with more countries adhering each year. The answer is that, first of all, GATT fills a real need. It provides a forum for the discussion of commercial policy questions on a worldwide basis. Secondly, the contracting parties to GATT are bound together by the exchange of numerous tariff concessions, those agreed upon at Geneva in 1947 being later augmented through further rounds of multi-lateral negotiations that took place at Annecy, Torquay and Geneva (in 1956) and Geneva again this year. A country would have to think very carefully about the consequences if it should contemplate withdrawing from GATT. That would mean losing the benefit of the many reductions in duty incorporated in the schedules to the Agreement and thus subjecting its products to tariff discrimination. This more than anything else, may be said to bind the GATT countries together.

For nearly twenty years commencing with the outbreak of the second World War, Canada derived little benefit from the tariff preferences accorded by other British countries. This was because, being outside of the sterling area, Canada had to be subject to discrimination for balance of payments reasons. To protect their balances of payment, the other British countries were compelled to introduce quantitative restrictions and discriminate against imports from the dollar area. In such a situation, the tariffs of these countries had little influence on trade, and, hence, tariff preferences were meaningless.

When GATT was negotiated, this situation had to be recognized. The use of quantitative restrictions was permitted to protect a country's balance of payments. A country was permitted to discriminate if it could import from one source rather than another with less danger to its balance of payments. Canada accepted this situation but looked forward longingly to the day when balance of payments difficulties would no longer justify the use of quantitative restrictions, and tariffs would once again be the chief influence on trade. This day came rather suddenly at the end of 1958, when the Untied Kingdom, followed by one European country after another, declared for the external convertibility of its currency. This removed the justification under GATT for quantitative restrictions imposed for balance of payments reasons, and we have witnessed since then the progressive removal of this form of trade barrier.

Under the new situation, Imperial Preference once more was of practical value to Canadian trade. The other Commonwealth countries found they could purchase North American-type goods; and of the two sources from which such goods could be obtained, Canada enjoyed a tariff preference over the United States. That explains the present buoyancy in the demand for Canadian products in the United Kingdom and in other Commonwealth countries. Some of this trade may prove to be of a transient character as United Kingdom and other Commonwealth manufacturers will adapt themselves to making the same type of goods, but much of the trade will be permanent in that the footing established by Canadian exporters will be utilized for a steady expansion of sales. In the meantime, it has afforded a very practical demonstration to Canadians of the value of Imperial Preference.

The present situation would be an ideal one from the point of view of Canada if it were not overshadowed by the existence of two rival trading groups in Europe. The emergence of these two groups is a long and complicated story, and in the time at my disposal, I can only touch upon some of the salient points as they affect Imperial Preference and GATT.

The first point to be mentioned is that throughout the post-war period Great Britain has been confronted with the difficult task of reconciling her relations with the Commonwealth and her relations with Europe. For a long time, they skilfully avoided having to make a choice between the two, but they have been faced with this dilemma ever since the negotiations for a free trade area to be associated with the European Common Market, broke down in December 1958. The choice they eventually make is bound to have a great influence on the future of Imperial Preference.

The second point worthy of mention is that, shortly after GATT had been negotiated, there took place a significant shift in the United States' approach to the problems of commercial policy. This change may be described as one from a global to a regional approach. Canada, however, continued to remain steadfast to the global approach or multi-lateralism. This explains why we have always been strong supporters of GATT.

With the introduction of the Marshall Plan in 1947, the main influence on United States' economic policy began to be exerted by the Economic Co-operation Administration, or ECA, rather than by the State Department, who had sponsored the ITO and GATT. The approach of ECA was a regional one. They wished to see the weakened economies of Western Europe restored as rapidly as possible so that they would cease to be dependent upon United States' aid. Their favourite instrument became the Organization for European Economic Co-operation or OEEC, and GATT was shoved into the background. OEEC had been formed to divide up Marshall Plan aid. When that task had been more or less completed, Mr. Hoffman, the ECA Administrator, went to Europe in October 1949, and delivered a major address before the Council of OEEC, in which he made a forthright appeal for European integration. He defined this as the formation of a single large market within which quantitative restrictions upon the movement of goods, monetary barriers to the flow of payments and, eventually, all tariffs are permanently swept away.

From that time on, there were two tendencies in Europe. One was led by the proponents of European unity, assured as they now were of United States' support. The other was led by the British, who preached close co-operation as the alternative to integration. The former tendency resulted in the formation of the European Coal and Steel Community in 1952, the unsuccessful attempt to form a European army, and after that failed, the re-launching of Europe in the successful establishment of the Common Market and EURATOM. All of these initiatives were confined to France, Italy, Western Germany, and the three Benelux countries, who henceforth became known as "the Six".

In the meantime, the British began to use OEEC as a practical demonstration of what could be accomplished by close co-operation in the economic field without the supranational features which they found so objectionable in the communities of the Six. They took a leading part in having OEEC adopt the trade liberalization programme and helped to found the European Payments Union. These two forms of co-operation became the main activity of OEEC during the seven years following Mr. Hoffman's speech. The trade liberalization programme was a form of regional discrimination inconsistent with the philosophy of GATT. It provided for the progressive removal of quotas imposed against member countries of OEEC, while permitting the continuance of quotas against outside countries. It was defended on the grounds that it was much easier to make progress in the dismantling of quotas on a regional than on a world-wide basis.

The British did not believe the Six would ever succeed in establishing the Common Market. The collapse of the European army was uppermost in many minds. A customs union seemed an even more ambitious, more impossible undertaking. Invited to participate in the negotiations, the British confined themselves to sending observers and maintained a very guarded attitude. When they saw that the whole effort was likely to prove successful, they were compelled to examine the situation afresh. It was then that there germinated in their minds the idea of an industrial free trade area to be associated with the Common Market. The juridical basis for this was found in GATT. This proposal was put before the Council of OEEC in July 1956, and for the next two and a half years the discussions relating to the proposed free trade area became the main preoccupation of OEEC.

The negotiations broke down completely at the end of 1958, when the French resented a veiled threat of retaliation by the British. They had been lukewarm towards the idea from the start. The French were concerned about the possible deflections of trade resulting from the varying levels of external tariffs. They pointed to the free access to raw materials and semi-manufactured goods from the Commonwealth enjoyed by the United Kingdom. They contended that new investment would be concentrated mainly in the United Kingdom where advantage could be taken of preferential treatment, both in the Commonwealth and in the proposed association.

The breakdown of negotiations left the British in a quandary. Finally in 1959, they welcomed a Swedish suggestion that OEEC countries outside of the Common Market form a free trade area amongst themselves. Seven countries responded to this appeal and concluded the Treaty of Stockholm. This established the European Free Trade Area or EFTA.

Whereas the Common Market has considerable political appeal as a step towards European unity, to the furtherance of which the United States is irrevocably committed, the EFTA has no such appeal and is looked upon largely as a bargaining manoeuvre.

Whatever may have been the motives behind the formation of EFTA, the result has been the division of Europe into two rival groups, the Six and the Seven, with other European countries attempting to associate themselves with one or the other. Each of the two groups is proposing to discriminate against the other and against outside countries by progressively reducing tariffs and other trade barriers within each group. The same argument is being used to justify this discrimination as was used to justify the discriminatory removal Of quotas under the former OEEC liberalization programme. It is claimed that it is easier to reduce duties within a homogeneous group than on a world-wide basis.

Nor is the present situation confined to Europe. The tariff discrimination is extended beyond Europe in that the association of overseas territories with the Common Market means that certain African territories enjoy preferences over other producers of colonial products, just as other African countries are beneficiaries of Imperial Preference. Moreover, the example of Europe is proving contagious. Already two groupings are in the process of formation in Latin America, and others may follow.

It is in this setting that the fifth round of multi-lateral tariff negotiations to be organized by GATT, is commencing in Geneva. Hitherto these negotiations have been tailor-made to fit the procedures required by the United States Trade Agreements Act. In 1947, the United States negotiators were authorized to reduce duties by 50 percent in return for equivalent concessions. Now their authority is much more circumscribed in that the most they can offer is a 20 percent reduction spread over a period of two or more years. Hence, in the negotiations shortly to be under way at Geneva, the centre of the stage will be occupied not by the United States, but by the Common Market, which for the first time is negotiating as a single unit. Obviously, the more other countries can reduce the external tariff of the Common Market, the less will be the tariff discrimination against them.

The Common Market has declared its readiness to reduce its external tariff by 20 percent in return for reciprocal concessions. The United Kingdom, in particular, is likely to respond to this invitation. Not only do the British want to lessen the discrimination against them, but, the more the United Kingdom tariff approximates the external tariff of the Common Market, the easier it will be for the British to become associated in some way or other with the Common Market. Now any reduction in the United Kingdom tariff brings with it, ipso facto, a reduction in the British preference. The great bulk of Commonwealth products enter the United Kingdom free of duty and the preference, therefore, is the amount of duty levied on non-British goods.

There is a strong movement in the United Kingdom in favour of joining the Common Market on as favourable terms as can be negotiated. The Economist is the leading exponent of this school of thought. Opposition is voiced by the Daily Express and is shared by the whole of the agricultural community. The obstacles to Britain joining the Common Market are (1) Imperial Preference, (2) the difference in agricultural policies, and (3) the obligations to the other partners in EFTA. Of these, the difference in agricultural policies is probably the most formidable. In the Common Market, agriculture is supported at the expense of the consumer by a system of minimum prices maintained by control over imports. In Great Britain, agriculture is supported at the expense of the taxpayer through a system of deficiency payments. Industry benefits indirectly from this system through lower food prices. Even if the basic difference between the two agricultural policies could be reconciled, Imperial Preference would still be a formidable obstacle to British membership in the Common Market. The advantage of a free trade area over a customs union, from the British point of view, is that the former with different external tariffs gives each national unit freedom to conduct its own commercial policy. It, thus, would enable a country like the United Kingdom to continue Imperial Preference with its free entry for most Commonwealth products. In a customs union, this would only be possible after lengthy and difficult negotiations with the other partners.

Thus we see that greatly though the British have striven to avoid it, they are increasingly being faced with the necessity of making the choice between the Commonwealth and Europe. In all this, GATT has an essential role to play. The OEEC is about to disappear and to be replaced by the OECD, or Organization for Economic Co-operation and Development. The United States and Canada are to be full members of this new organization, whereas they were only associate members of the OEEC. The convention establishing the OECD, has been signed and is now awaiting ratification. This organization will review at regular intervals the trade policies and practices of the member countries. A frank and detailed examination of trade problems will be more feasible in such a small, homogeneous body than in GATT. For instance, such questions as relieving the strain between the Six and the Seven, and easing the balance of payments position of the United States, can much better be discussed in a body such as the OECD than in a multi-nation body such as GATT.

It is in GATT, the OECD, and at Commonwealth meetings, that Canada has the opportunity of putting forward her views. We have been taking full advantage of this opportunity. There is not much more that we can do a this stage. To take precipitate action would only serve make a confused situation still more complex. We have not a great deal to worry about in the Common Market as at present constituted. It may have adverse effects on our trade in wheat, aluminum, lead, zinc and a few other commodities, but Canadian trade, as a whole, stands to benefit from the increased prosperity it will bring to the six countries. What we are mainly concerned about is the threat to Imperial Preference, the division of Europe into two rival trading blocs, and the ascendency that regionalism has gained over multi-lateralism. I have great admiration for the way Mr. Fleming has mastered the intricacies of a most complicated situation and for the manner in which he has put forward Canadian views whenever the opportunity has offered. I trust that his approach will have the support of the members of the Empire Club of Canada.

THANKS OF THE MEETING were expressed by Mr. J. Palmer Kent.