COMMONWEALTH PREFERENCES (Hansard, 15 May 1970)

§ Sir Ronald Russell (Wembley, South)

The subject I wish to raise in this unexpectedly early Adjournment debate is the continuing effectiveness of Commonwealth preferences. May I say at the outset that I am grateful to the Joint Under-Secretary of State, Foreign and Commonwealth Office, for coming to reply to the debate in the absence of his colleague from the Board of Trade who has had to go elsewhere.

The reason I wish to raise the subject is contained in paragraph 56 of the White Paper " British and the European Communities ", Cmnd. 4289. Dealing with what is likely to happen to Commonwealth preference in the event of this country not joining the Common Market, it says: But in order to make a true comparison of our situation inside and outside the Community some years hence, it is necessary to take into account the probability of continuing erosion of preferences in the Commonwealth and the possibility of new preferential trading arrangements between the Community and some of our trading partners. It is relevant in this connection that a number of Commonwealth countries in Africa have found 1702 it to their advantage in recent years to give tariff preferences, to our disadvantage, to the Six. I maintain that that part of the paragraph is misleading.

I think that I am right in saying that only four African Commonwealth countries have so far sought, or have made, arrangements with the E.E.C.—Kenya, Uganda, Tanzania and Nigeria. None has yet been ratified. I know that " four " taken literally is a number, but when No one says " a number of Commonwealth countries ", one usually means more than four, perhaps 10, or thereabouts. I cannot help feeling that the expression is somewhat misleading. However, although that is material, it is not the main point.

In order to clarify the position. I tabled a Question to the Board of Trade on 26th March asking: What will be the factors leading to the continuing erosion of Commonwealth preferences, referred to in paragraph 56 of Command Paper No. 4289. affecting our exports to Canada, Australia, New Zealand and the Republic of South Africa, other than the effect of inflation in those countries on specific preferences. Those countries are the leading importers of British products in the Commonwealth Preference Area and most important to our trade. The Parliamentary Secretary to the Board of Trade replied: Mainly increased protection for domestic industry and bargains struck with our competitors in multilateral tariff negotiations."—[OFFICIAL REPORT, 26th March, 1970;Vol. 798, c. 553.] Since then, I have gone into the position in some detail.

It is worth mentioning that the three Commonwealth countries and South Africa are most unlikely to be able to reach any arrangements with the E.E.C. for associate status, or anything like that. Last year, Australia took £321.2 million worth of our exports and re-exports; New Zealand £121.3 million; Canada, £308.6 million; South Africa, £290.8 million. Those figures are taken from the Overseas Trade Accounts of December, 1969. They give a total for the four territories of £1,041.9 million, which is more than half our exports to the Commonwealth Preference Area as a whole. In the Commonwealth Preference Area I am, of course, including South Africa and the Republic of Eire. Eire was our third largest customer last year, taking £339.5 1703 million worth of our exports and re-exports. That trade is clearly essential.

The United Kingdom-Australia Trade Agreement lays down that the margins of preference in the Australian tariff for British goods are protected by that agreement which guarantees the maintenance of certain minimum margins of preference. They are generally either 7½ per cent. or 10 per cent. They apply to both ad valorem and specific rates of duty. Even if the level of protection were increased on particular items, British exporters to the Australian market would, as a general rule, retain at least the minimum margin of preference applicable. Some preferences are very much above the minimum and even though the Australians took power to reduce them under the agreement, in fact they have not done so.

The agreement envisages the possibility of reductions in existing margins of preference. For example, where the difference between the British preferential tariff rate and the most favoured nation rate is greater than the guaranteed minimum margin of preference, the Tariff Board recommendation might result in a reduction in the margin of preference either by a reduction in the M.F.N. rate or an increase in the British preferential tariff rate if Britain were the major supplier.

The highest margin of preference which New Zealand is required to give us by our trade agreement is 10 per cent., but in practice some preferences are much higher. For instance, the tariff on cars entering New Zealand is only 6¼ per cent. on British cars and 45 per cent. on foreign cars, giving a margin of preference of 381 per cent. I am told that the National Development Conference in New Zealand last year as a basis of its policy recommended that the level of protection for the manufacturing sector should be such as to encourage competition, efficiency and reasonable prices to other sectors and to consumers, and should also have regard to the need to give the consumer choice and variety. It was recognised that the system of protection should be flexible, that import licensing should be replaced by tariffs as the main measure of protection of domestic industry and that this transition should be carried out in accordance with a clearly defined programme and within a reason- 1704 able time. Action to implement that recommendation has already been taken. But it is not likely to be on such a sweeping scale as to bring about a general erosion of Commonwealth preferences.

I understand that the South Africans have no plans for making tariff concessions to any of our competitors which would reduce the margin of preferences. The only country which goes against what I am suggesting is Canada, which has been on the course of trying to liberalise its trade policies for some time, but that means again that there is not much danger of increased protection against our exports.

The possibility of erosion due to bargains struck with our competitors in multilateral tariff negotiations seems highly unlikely, as I understand that any more negotiations of this kind would need a new round like the Kennedy Round and that is not on the horizon at the moment. It would depend on future United States trade legislation to begin with, and also the willingness of other countries, like the E.E.C. and Japan, which would have to take part actively.

Commonwealth preference has brought great benefits to most parts of the Commonwealth over many years, going back not only to 1932 but before that. At one time it was unilaterally granted by Canada, South Africa, Australia and New Zealand to us without our giving any return and no one wants to see it abolished. The value of it has been reaffirmed at many Commonwealth conferences which have been held even since the G.A.T.T. was concluded in 1947, and I cannot see in those countries which are our main markets for exports—Canada, South Africa, New Zealand and Australia plus the Republic of Ireland—that such erosion is likely to take place. We have a free trade agreement with Eire and if we joined the Common Market together we would have to share preference with the E.E.C. In the event of our not joining, presumably Eire would not join either. I can see nothing in Eire's case likely to happen which would justify any statement that there would be an erosion of Commonwealth preferences.

I am sure that if we did not join the E.E.C. and could give a stimulus to Commonwealth trade which has been lacking over the years there would be a welcome 1705 for continuation of the system just as there has been in the past and I hope the impression which I think is created by the White Paper will be corrected.

§ The Joint Under-Secretary of State for Foreign and Commonwealth Affairs (Mr. Evan Luard)

We all recognise that the hon. Member for Wembley, South (Sit R. Russell) has been a champion of the Comonwealth trading system and its benefits through many a debate and over many years. It is in keeping with his strong feelings and his long-standing tenacity on the subject that at this time, before we adjourn, and when the whole question of our future relations with the Common Market is so topical, he should have raised this subject in the House. No one would deny what he has claimed—the importance of the Commonwealth preference system within our general trading relations over many years.

It is significant that the official analysis of our world trade figures always begins with the figures for the Commonwealth preference area. Even an agreement as influential in post-war commercial relations as the G.A.T.T. contains in its first article provision for the continuation of Commonwealth preference. Governments of both parties have attached the utmost importance to the value which not only we but our Commonwealth partners receive from the continuation of the system.

The hon. Gentleman has read into paragraph 56 of the White Paper a certain depreciation of the value of the Commonwealth preference system. He believes that it gives a misleading impression in exaggerating the probability of the future erosion of Commonwealth preferences. I will say later why I think that he is perhaps slightly misled in thinking that this is so.

An Adjournment debate is, of course, not the time to argue the more fundamental issues at stake in the event of a successful outcome to our application to join the E.E.C. and of any subsequent adjustments which may be made to our present trading arrangements with the Commonwealth. These structures are a delicate exchange of interests. They range much wider than exchanges of preferences, although such exchanges are, 1706 of course, part of them. But it may be useful to respond to the hon. Gentleman by pointing out certain developments which have been taking place and which will continue to take place not only within the Commonwealth but in our general trading relationships and which may have the effect of reducing the significance of these preferential arrangements.

It is not possible to put any satisfactory figure on the trade value of preferences in either direction. Between 1959 and 1969, our exports to the present Commonwealth rose from £1,256 million to £1,601 million, although as a percentage of our exports there was a fall from 35 per cent. to 22 per cent. Over the same period, our imports from the Commonwealth rose from £1,437 million to £1,933 million. Again there was a fall in percentage from 35 to 23 per cent. of our total imports. It is impossible to estimate how much of this still very substantial trade is attributable to the existence of Commonwealth preferences.

Many of the products we import from the Commonwealth are anyway duty-free, whatever their source, and obviously preference has no influence on that. Commonwealth manufacturers enjoy no advantage over non-Commonwealth supplies. This is a development which now has a value undreamed of at the time of the Ottawa Agreements. In the reverse direction, preferences which our exporters receive in some Commonwealth countries are extensive. But a number of factors influence the direction of trade in Commonwealth countries and are modifying the rather simple pre-war and immediate post-war pattern on which the preference system is based.

There is, above all, the growth of production in other Commonwealth countries, far beyond the capacity of Britain to absorb their exports, so that they are having to look for alternative markets, which are not protected by preferences. They have naturally built up their trade with other countries. Canada in particular has developed its long-standing trade with the United States. Australia and New Zealand have increased their trade with nations like Japan, which needs their wool and particularly Australia's coal and iron. As the hon. Gentleman knows, both those two countries are looking for other markets in Asia and the Americas.

1707 The position as regards the developing Commonwealth countries is a special one. In many of them we enjoy preferences, but much as they might like to import more in total, the amount of their imports and the sources from which they buy depends very much on the aid they receive and the terms on which it is offered; that is, whether it is untied, tied or in kind.

In Australia, Canada and New Zealand and also in South Africa, although this problem does not arise, it is unreal to concentrate simply on margins of preference. Access depends on the level of tariffs and on other restraints of trade. Some preferential rates of import duties are still so high as to be a plain deterrent to Brtish exports. British companies may consider it better to establish local subsidiaries or even to face the more modest rates charged in other countries where we have no preference and compete on equal terms with other suppliers. Some Commonwealth countries, particularly certain developing countries whose economic problems impel them to restrict imports, operate import licensing which impairs the value of our preferences.

There are several reasons why our margins of preference have been eroded and why this process can be expected to continue. The rounds of tariff negotiations within the G.A.T.T. have had this effect, partly because this happens automatically when the " most favoured nation " rate is reduced on goods for which the preferential rate is nil, and partly because certain offers entailed the elimination of our preferences.

The hon. Gentleman suggested that there was not likely to be another general round of this kind in the near future. I am not sure that he is correct. However, even if that should be the case and such a round does not occur within the next year or two, it is clear that there will eventually be multilateral rounds of the kind that have occurred in the past and that these will continue to have an effect on the value of Commonwealth preferences.

Another factor is that, in adapting their tariffs to give the protection which they regard as necessary for domestic production, some countries have raised their rates of duty, at the same time often reducing our margins of preference. Two 1708 Commonwealth countries, Malaysia and Singapore, have abolished the preferential rates of duty on nearly all their imports from Britain.

Another development which has a bearing on Commonwealth preference is the establishment of regional trading groups such as the United States-Canada Automotive Pact, the Caribbean Free Trade Area and the New Zealand-Australia Free Trade area. All these have exemplified this process of the erosion of preferences.

Some Commonwealth countries have entered into free trade groups, such as the European Free Trade Association, of which Britain is a member. These too reduce the value of preferences to non-members of those associations. The Commonwealth preference relationship with the Irish Republic has been largely superseded by the Anglo-Irish Free Trade Agreement.

Then there are tariff arrangements such as those which the hon. Gentleman mentioned. For example, Kenya, Uganda and Tanzania have entered into an Association Agreement which entails giving certain preferences to the E.E.C. at the expense of Britain. Britain gives benefits to some Commonwealth countries outside the tariff preference system, and this includes products like sugar—under the International Sugar Agreement—bananas, cigars and rum. There are, therefore, a number of developments of this kind which have the effect of reducing the value of preferences.

There is increasing discussion of a generalised preference system, and this will have a strong bearing on the arrangements now made under the various preference systems, particularly within the Commonwealth and Community systems. There is a great deal of discussion about the replacement of these various systems by a generalised system for all developing countries. If this develops, and there is considerable support for it, it will have a big effect on the value of existing Commonwealth preference arrangements.

What of the future? The figures I gave earlier will not change overnight should we go into the E.E.C. Of course, they will redispose themselves as the transitional period for our adaptation to Community tariffs and systems proceeds. This is not the occasion to speculate on 1709 that adaptation, its extent, or its implementation. But even at the end of the period we shall still have major trading business with the Comonwealth countries and they with us. This of itself will establish a new and important relationship for the enlarged Community, and the Commonwealth will have as much to gain from increased trade with the Community as we may have.

Indeed, even without our entry, important new relationships may be established between the Community and developing Members of the Commonwealth as a result of the proposals for a generalised preference scheme in U.N.C.T.A.D. A unanimous resolution was passed at the Second United Nations Conference on Trade and Development in 1968 supporting the establishment of a non-reciprocal, non-discriminatory generalised preference scheme.

Since then the donor countries have been seeking to work out in O.E.C.D. an acceptable scheme; and last November illustrative submissions and lists of products which the donor countries had tabled were sent to U.N.C.T.A.D. to facilitate discussion. Work is continuing in O.E.C.D. A satisfactory scheme will give developing Commonwealth countries preferences in other countries in exchange for agreeing to share their preferences here. Throughout the discussions in O.E.C.D. we have stipulated that the developing Commonwealth countries should secure sufficient new advantages in other markets to compensate them for sharing their preferences in the United Kingdom. We have also made it clear that we must obtain the consent of those Commonwealth Preference Area countries with whom we have trade agreements before we can grant generalised preferences on products on which they have contractual rights to preferences in our market.

I submit that this is not a time to strike a gloomy note, either about the future of Commonwealth preferences in general or about the value of trade by the Commonwealth countries, either with this country or elsewhere. I have given some reasons why they may gain in 1710 other markets anything that they might finally lose in our market.

I also wish to make it clear that we have throughout, in approaching our negotiations with the Common Market, insisted on the need for satisfactory arrangements for certain Commonwealth countries. The hon. Gentleman will be aware that in the earlier White Paper on this subject, reproducing the speech which my right hon. Friend the Member for Belper (Mr. George Brown) made in 1967, there are a number of paragraphs, notably paragraphs 32 to 39, setting out the special arrangements that we wish to make for the Commonwealth countries, some of them relating to particular products, such as sugar and butter, and some relating to the position of the Commonwealth generally; expressing, for example, the hope that we may be able to reach an agreement similar to the Yaounde Convention Commonwealth countries.

The Commonwealth trading link could be said to be rooted not merely in the Preference Area but in the fact that each one of its members is heavily dependent on international trade, not merely with each other but with the whole world trading community. We have a deep interest in ensuring the highest levels of all our partners' prosperity. If the prosperity of individual members is enhanced by trading outside the preferential system, then each of us has in turn a more prosperous customer to do business with. At the end of the day this may prove an even more buoyant impulse for our exports to the Commonwealth in the coming decade and their exports to us than tariff margins fixed against the industrial trading backgrounds of four or more decades ago, a system which, in any case, must now be superseded by something more relevant to the needs of every member of the Commonwealth.