Britain, the Six and the World Economy

When France and Germany, with Italy and the three Benelux countries, made it clear that they were really going to form a customs union, they forced the British government to face a decision it had hoped to avoid. Now Britain’s decision to join the Common Market, if reasonable terms can be agreed on, requires the United States to make some major decisions of its own. Our action—or the lack of it—will pose new choices for the rest of the world.

The British decision followed a long reexamination of the courses open to the United Kingdom once the Six had left little doubt—especially by their decision of May 1960 to accelerate tariff reduction—that they would succeed in creating a common market. Conversations in Europe, including those following the Adenauer-Macmillan talks of August 1960, presumably gave the British a reasonably good idea of the terms they would have to meet if they chose to go in. On the assumption that the Europeans would concede some essential points, the Prime Minister worked at building popular support at home and a majority in the House of Commons of a size appropriate to so fundamental a decision. The explicit opposition that remains—strongest at opposite ends of the Tory and Labor parties but scattered throughout the country—will undoubtedly gain recruits as a result of some of the compromises the government will have to make as a condition of entry. Concern for the Commonwealth will also influence votes. Still, the decision to seek entry could hardly have been made except in the belief that in the end the fundamental conviction would prevail that in the future Britain will be better off in the new Europe now taking shape than outside it.

Of course it takes two—or in this case seven—to make an agreement. Though the major champions of European integration have always said they looked forward to the time when Britain, and others, would join the Six, there has been opposition to British entry on the Continent as well as in Britain. Many confirmed “Europeans” were long opposed because they believed the British would undermine the European Economic Community, either in pursuit of a traditional balance-of-power policy or, less deliberately, because their Commonwealth preoccupations would inhibit full acceptance of European solidarity. No doubt this suspicion still lingers, but the British turnabout has been drastic enough and the progress of the Community substantial enough to silence most doubts, at least until it is seen where the negotiations lead.

A second main source of opposition to British entry lies in France. There the economic rationale for keeping the British out has largely faded, but France still aspires to be the main spokesman for Europe and does not welcome competitors. It is unlikely, though, that Frenchmen of these views—or Germans who have similar ideas, for that matter—would in the end stand out against a Community majority favoring British entry. Both sets of views— “European” and more traditionally nationalist—are likely to make themselves felt in a stiffening of the conditions that Britain will be asked to accept.

The three main sets of problems to be dealt with in the negotiations that have begun in Brussels concern Britain itself, its fellow members of the European Free Trade Association (EFTA), and, most important of all, the problems of the Commonwealth. How these problems are dealt with is crucial to the place of the enlarged European Community in the world economy.

II

During the years that Britain was in the wilderness so far as European integration was concerned, it was often advised that the way to set things right was to “accept the Treaty of Rome.” That seemed an oversimplified view to those who were aware of the intricate set of compromises among national interests—and particularly between France and the others—with which the broad ideals of that document had been embroidered. Still, largely because Britain comes late and as a petitioner, it has virtually had to accept the existing rules so far as its own economy is concerned. “. . . We accept without qualification,” Edward Heath, the Lord Privy Seal and chief British negotiator, told the Ministers of the Six, “the objectives laid down in Articles 2 and 3 of the Treaty of Rome, including the elimination of internal tariffs, a common customs tariff, a common commercial policy and a common agricultural policy.” Gone is the argument for tariff autonomy and the established British tariff structure with its low duties on raw materials and foodstuffs that played so great a part in the British proposals of 1956 for a free-trade area. Heath made it clear that the British would not question most of the rates already agreed on for the common external tariff but asked that duties be eliminated on aluminum, woodpulp, newsprint, lead and zinc, which the United Kingdom now imports free, largely from the Commonwealth. (Benelux and Germany already have the right to import substantial quantities of some of these materials duty-free in spite of the common tariff.) On such matters as social security laws, regulation of business practices, taxes, and rules covering the establishment of foreign business, the British have asked only for time to adjust their arrangements to those called for by the Treaty. They know that as members they will have a voice in determining how the broad principles of the Treaty are to be applied in these matters.

Agriculture once seemed a great hurdle. Although Mr. Heath spoke about it at length in presenting Britain’s case, he was mostly asking for time to make adjustments. The British seem to have decided some time ago that they could afford to switch from their system of relatively low prices and subsidies for farmers to the continental one of price supports. Consumers will pay more; the treasury will pay less and gain some customs revenue; overseas sellers may get higher prices. Though the present disposition in Britain is to minimize the cost of the change, there is room for some concern about the effect of higher living costs on wages. What this part of Britain’s entry price comes to will depend to an important degree, in the short run, on the arrangements made for the importation of Commonwealth foodstuffs and, in the long run, on the influence Britain will have on the common agricultural policy of the Community.

EFTA, conceived to a considerable extent as a collective bargaining device, has become something of a problem for Britain in its new posture. Denmark and Norway will probably follow Britain into the Common Market. Portugal’s rather limited trade problems are not expected to be troublesome. The difficulty centers on Austria, Sweden and Switzerland which send a high proportion of their exports to the Common Market but are not prepared to join it because so many of its leaders stress its long-range political purposes. The Austrians say the Russians would forbid their joining. The Swiss say their neutrality would be compromised. The Swedes say much the same and put themselves forward as a necessary bridge to Finland; but there is a significant minority in Sweden that favors entry. What the three “neutrals” would like is a form of association that would give their exports easier access to the Common Market without involving them in commitments on other matters. They are meeting resistance from some of the leaders of European integration who see this as a dilution of the Community at a moment when British accession makes it particularly important to stress solidarity and the obligations of membership. The British are involved in the problem because they have virtually committed themselves—by an agreement that will sooner or later invite charges of bad faith—to delay joining the Common Market until the interests of the other EFTA members are satisfied.

The problems of Britain’s relations with the rest of the Commonwealth are even harder and more numerous. In the first instance they concern trade—a large volume of trade. Most of Britain’s imported food comes from the Commonwealth. The economies of Canada, Australia and New Zealand have been shaped to a significant degree by the importance to them of the United Kingdom’s market for grain, meat, dairy products and fruit. If Britain were simply to step behind the common tariff of the European Community, long-established trade patterns would be disrupted. Dominion products that had previously entered the United Kingdom freely would encounter tariffs. The tariff preferences that now favor the Commonwealth would be replaced by others favoring European products. When the Community’s common agricultural policy became fully operative (if it followed the lines now contemplated), Commonwealth foodstuffs, like those of the rest of the world, would be subjected to variable levies intended to limit imports to the amounts the Community could not produce for itself with an expanded agriculture.

Tropical Commonwealth producers have different problems. With the major exception of sugar, their competition is usually not in Europe, so the common agricultural policy is of little importance to them. Some of their products face no tariff barriers; taxes on coffee, tea and cocoa that hold down sales of these commodities to the Continent will not be affected by British accession. But some Common Market tariffs exist for the purpose of giving preferential treatment to the products of the African countries associated with the Community by virtue of their former colonial affiliations. If Britain entered with no special arrangements, it would levy a tariff on cocoa from Ghana but not the Ivory Coast, and on peanut oil from Nigeria but not Senegal.

The advanced countries of the Commonwealth, and especially Canada, sell relatively small but growing quantities of manufactured goods to Britain. Tariff preferences, which are generally supposed to be particularly important for this trade, would be lost if Britain joined the Common Market, and replaced by a preferred position in the U.K. market for manufactured goods from the Six. Some underdeveloped Commonwealth countries send cheap manufactured goods to Britain, where they are treated far more liberally than in the continental countries (or the United States). There has been remarkably little public worry about what British entry into the Common Market might do to one of the most sensitive parts of this trade—the export of cotton textiles from India, Pakistan and Hong Kong. Perhaps there would be no great change since present tariff rates are less important to this trade than import quotas on the Continent and export restrictions which the Commonwealth countries apply on shipments to the United Kingdom. Also, negotiations are under way for a multilateral agreement on cotton textiles that might widen continental markets for Commonwealth producers. This is, however, only the first installment of what promises to be a major trading problem of the future as developing countries increase their exports of cheap manufactured goods.

There is little doubt that the Six will agree to arrangements which will protect some parts of the Commonwealth’s trade structure. But other segments will inevitably be subjected to new barriers and some degree of discrimination as Britain eliminates tariffs on imports from the Continent and adopts the common external tariff. British participation in the Community’s common agricultural policy is bound to affect Commonwealth trade, but how much depends on whether the prices set for Community producers lead them to expand output enough to displace Britain’s imports from the Commonwealth and whether the preferences of British consumers will be strong enough to persuade them to keep buying such things as Canadian hard wheat at higher prices than they have been used to.

All these changes will be introduced in stages, over a period of years. If the British economy should respond to the stimulus of the Common Market by growing more rapidly than it has in recent years, imports of Commonwealth products might expand in spite of the new pattern of trade barriers. Moreover, the Community’s external tariff is going to be subject to international negotiation during the years ahead. Commonwealth countries will have the same chance as the United States to bargain it down. The addition of Britain is likely to strengthen the low-tariff forces in the Community. Of course, trade is not the Commonwealth’s only concern. An expanding British economy might be better able to provide capital for development. A paper prepared for the Third Afro-Asian Economic Conference in New Delhi suggested another point when asked, “Is not the stability of sterling a better cement than the maintenance of ‘preferences’?”

Even if British entry into the Community brings substantial economic benefits to the Commonwealth in the long run, will it also strengthen the Commonwealth as a political system? Considering the imponderables by which the Commonwealth lives, and the ability it has shown in one decade to accept conditions that seemed impossible in another, one would be foolhardy to give a flat answer. Perhaps the course of the negotiations will give us an idea of what calculation Whitehall has made about the long-run future of the changing Commonwealth and Britain’s chances of continuing to lead it while also joining Europe—a feat once held to be impossible. Clearly, one of the main tasks of British diplomacy must be to hold on to as much influence in the Commonwealth as it can. It would surely defeat that purpose for Britain to enter the European Community with no concessions for Commonwealth trade. But it is unlikely the Six will refuse some special measures, at a minimum to ease the transition but perhaps also with a view to establishing new trade relations between the Commonwealth and Europe.

III

There are a number of different ways in which the problems posed by Britain’s entry into the Community might be handled. While it seems improbable that Canada, Australia or New Zealand will apply for membership, one or another of them might seek some form of association with the Community to improve its access to the European market, as the EFTA neutrals are doing. Britain has already agreed to let the Dominions negotiate away its preferential position in their markets and some have thought the thing to do was to extend these privileges to the Six in return for enlarged European purchases of foodstuffs. Tariff-free quotas or minimum-purchase guarantees of some sort are likely to be used as transitional devices and may also be proposed as lasting arrangements, not only for food but for some Commonwealth raw materials as well, if the Community rejects the British proposal to reduce these tariffs to zero.

One way of dealing with the problems of Africa would be to give the British dependencies and former British territories the same privileges as the former French, Belgian and Italian countries have in relation to the Community. An alternative would be to put all the underdeveloped countries of Africa, Asia and Latin America on an equal basis, providing their major exports with equal access to the markets of all the industrialized countries of the free world, as Alfred C. Neal proposed in Foreign Affairs in January 1961. In relation to the EFTA countries the question is whether to apply the same simple choice—in or out—that has been applied to Britain or to accept the view that a different political situation justifies a more limited kind of special agreement tailored to meet the problems of the European neutrals.

These “solutions” differ greatly in their economic and political implications. The concessions they would require by one side or the other vary widely. Quite a few of them are not compatible with GATT—the General Agreement on Tariffs and Trade. Some of them clearly enlarge the area of free or liberal trade while others mostly give one nation a preferred position at the expense of another.

This spill-over of European economic integration creates great problems for outside countries and may do much to shape the whole free-world trading system. The pressures to get agreement without disturbing existing trade patterns too much are bound to encourage special deals and other arrangements that in substance if not in form give certain countries preferred positions in the European market. If the arrangements are only temporary, no one need worry too much, so long as he is sure they will in fact be terminated soon. Otherwise, integration in Europe may lead to fragmentation in the economy of the rest of the free world.

It is a little hard to believe that the long-run interests of the free world are advanced if Australian meat can be sold to Britain and the Continent on more favorable terms than meat from Argentina or if coffee growers in the Ivory Coast are given privileges denied to those in Uganda, while Brazilians and Colombians have to cope with entirely different marketing problems. The rule of equal trade treatment embodied in GATT is not just a relic of the nineteenth century or an idealistic premise nurtured in back rooms in Washington by postwar planners. The departures from it that could be sanctioned in good conscience in the postwar period have been justified, as in the case of European integration, by three criteria: the dollar shortage, the achievement of long-run political benefits or the ability of a few nations to go substantially further in breaking down barriers to trade among themselves than would have been possible for a larger group. The dollar shortage is over, so far as Europe is concerned, but the others remain rather good tests, whether the question is one of granting Austria special status, assuring a market for Canadian wheat, or either adding Ghana to the Common Market’s associated states or subtracting Dahomey from them. It makes quite a lot of difference, too, whether the special problem is met by measures that discriminate between one country and another or by concessions directed toward the special needs of one but extended equally to others. To a considerable extent the application of GATT rules will meet these standards and GATT provides the best place for discussing hard cases and departures from the rules. But it will be largely up to the “outside” countries and particularly the United States to insist on this.

IV

The new critical phase in Europe is one to which American policy has contributed. We have encouraged European integration, tried to strengthen the Community, and hoped it would expand, at least to include Britain. To reverse that policy now would be nonsense inviting chaos. If the British decide to throw in their lot with the Community, we should welcome the result for what it will do for the political strength, balance and orientation of Europe. To cope with the resulting problems we have only a limited choice of policies.

Quiescence has not much to recommend it. If the United States were to stand by, waiting, the Six, Britain, the Commonwealth and the remaining countries of EFTA would probably work things out. The price in terms of American economic interests might be high and we would probably have missed the chance to use the period of flux in Europe to move decisively toward a better ordering of the free world.

An active policy does not mean a once-for-all action. If the United States sets out to play a major part in shaping the changes that have been set in motion, we shall have to be prepared for a long process of dealing with a large number of more or less discrete problems in as coherent and consistent a fashion as we can manage. Our power abroad will be limited; to use it we will often have to overcome domestic inhibitions of the sort that arise when pursuit of the general interest damages particular interests. This means we will be involved in struggle and compromise and will have to accept inadequate and unsatisfactory measures a good part of the time. This is nothing new, but it will make trouble if we do not have a clear idea of our direction and aims.

American policy should have three purposes: to encourage the success of the negotiations between Britain and the Six; to minimize the short-run economic costs to the United States of British entry into the Common Market while opening as many chances as possible of economic gain for ourselves over the long run; to take advantage of the processes of change being set in motion by Europe to improve the organization of the free-world economy. The last two purposes may sometimes conflict with the first since we shall be asked to put up with arrangements we dislike or disapprove of on the grounds that they are necessary to get an agreement in Europe. There is no general solution to that dilemma but it is worth remembering that fuzzy, temporizing arrangements sometimes offer the best chances of change later on.

The pursuit of the second and third aims will often ran along a single course. It has been obvious for a long time that it is important to the United States to have the Community’s tariff on our exports as low as possible; with Britain added, this will be all the more true. Regardless of one’s views on the particular points of President Kennedy’s trade-policy proposals, there can hardly be any serious doubt that only by a major step of this sort can the United States hope to be effective in furthering its export interests and preventing the negotiations for British entry into the Common Market from spawning a series of special arrangements that might do much to disintegrate the free-world economy.

We should have allies in this course. Japan, Latin America, the unaffiliated countries of Asia and Africa, European outsiders, and, on many occasions, the members of the Commonwealth have interests similar to our own. Canada, with its striking postwar record of pursuit of a multilateral trading system, has been tempted by the view that “lying low right now is our best tactic,” as The Financial Post of Toronto put it. Fortunately, the mood seems to be changing as it becomes clear that Canada is unlikely to get very much of a free ride as a result of American and British bargaining with Europe, and that meanwhile things will be decided in which Canada will want to have a strong voice. It is important that the outsiders see their common interests, for if each country felt forced to come to whatever terms it could with the new Europe, each would be likely to seek arrangements partly at the expense of the remaining outsiders, and real disintegration would set in.

Some people have supposed that the best way out of a difficult position would be for the United States to “join the Common Market.” This is hardly a meaningful statement. Addition of the United States would so transform the Common Market—in size, scope and character—as to make it something else. Hence the talk of an Atlantic free-trade area. There is a strong case for the view that free trade between Western Europe and North America would, after a period of adjustment, strengthen the whole area and make these countries better able to meet their triple need of providing for defense, satisfying the wants of their people and contributing to the economic development of the underdeveloped countries. But the United States is plainly not nearly ready for so drastic a step, and the Europeans are probably not ready for it either. Some would fear a check in the progress toward Western European integration. And if we were all ready, it would be most unwise to create an Atlantic free-trade area before Europe and the United States were substantially agreed on measures that would help the other countries outside the Soviet bloc meet their trade needs.

One of the great advantages of the Kennedy Administration’s trade program is that it provides means of dealing with immediate problems without foreclosing the possibility of an eventual free-trade area between the United States and Europe. By concentrating on tariff bargains between the United States and the Community, the program would reduce the significance of our being outside the Common Market. By stressing adherence to most- favored-nation tariff treatment, by both the United States and Europe, the proposals make it possible to spread these benefits to other countries and, more importantly, maintain the essential principle that what is to be built is a trading system of benefit to the whole free world and not just to a rich white man’s club.

This argument does not reject the idea of an “Atlantic Community.” NATO, the Marshall Plan and the O.E.C.D. all show that the affinities and common interests of the countries around the North Atlantic provide a basis for fundamental cooperation on a large scale. That these countries need to find still more effective ways of concerting their policies seems obvious. For some purposes “Atlantic” is plainly a misnomer. Measures already taken to coordinate foreign aid include Japan; that country as well as Australia, New Zealand and others undoubtedly should have a place in other “Atlantic” activities as well. It is particularly important that they should not be excluded from trade cooperation since they have a major stake in the markets of Europe and North America.

If the time comes when Europe and North America are ready to create a real free-trade area, they should seek the broadest possible membership, tested by willingness to participate, not location around the shores of the Atlantic. Before then the industrialized countries can take steps to improve the trading position of the underdeveloped countries. One measure already under discussion would remove import barriers on a number of tropical products. Measures might follow to replace the preferences some African countries have in Europe with equal treatment for these and other countries in the markets of the industrialized countries. Measures to help offset the fluctuations in income of raw-material exporting countries would also be more effective if Europe, North America and Japan worked together with all the producing areas. A special effort will be needed to work out effective and acceptable arrangements to provide markets in the advanced countries for cheap manufactured goods from low-wage areas.

Combined with tariff concessions on a most-favored-nation basis and a strengthening of GATT—instead of the erosion that will come in the absence of a deliberate policy to support that body—steps of this sort will make it possible to move toward freer trading relations inside the “Atlantic Community” while at the same time improving the trading position of the rest of the world. This may also provide ways of meeting the problems of European countries that remain outside the Common Market. One thing it will do little to solve is the agricultural problem.

The agreement among the Six on the principles of a common agricultural policy was a major step in extending the scope of the Community. What its economic effect will be is not entirely clear and depends to a considerable extent on the support prices that are established and the way they are financed. The new policy will probably promote a greater degree of self- sufficiency in a number of farm products. It will certainly add to the difficulties of overseas countries that export food to Europe. Normal import liberalization, already very limited in agriculture, is made virtually impossible by the new policy. For some time to come the United States, the Commonwealth countries and others will probably be able to make specific arrangements for the sale of their products, but it is hard to see how they can have much assurance about the long-run future under the new system. The management of domestic agricultural economies in which almost all countries now engage is forcing increased management of international trade in farm products. But how this is to be done, and what the economics of it will be, remain obscure. The question is one more major addition to the agenda of international economic cooperation.

Quite apart from the agricultural problem, the United States will not find it easy to pursue the course called for by our new situation. We are unaccustomed to the requirements of a vigorous trade policy entailing adjustments at home. But if there is one lesson to be learned from Europe’s recent experience it is that advanced economies can function remarkably well without their traditional tariff protection. The position of the United States is not the same as that of the European countries. Sluggishness in the economy, our new-found balance-of-payments difficulties, and the need to maintain an exceptionally large export surplus to meet overseas commitments all hamper us. A vigorous trade policy cannot stand by itself, but a reduction of import barriers should contribute something to the solution of all these problems, not least by its effect on costs of production.

If the United States takes this course we are not likely to pursue it simply and constantly, with no setbacks. If we do not move in that direction we are likely, in a very real sense, to be left behind. Europe’s trade dynamism is coupled with economic strength. If the United States is inactive, Europe’s needs, desires, preoccupations and compromises will do more to shape the free-world’s trading system than will our own. Europe’s decisions that created this situation were in an important degree made possible by the policies the United States followed after the war. Now they pose new policy choices for the United States.

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