EUROPEAN ECONOMIC INTEGRATION by J. P. Reny

875 UNIVERSITY D'OTTAWA - ECOLE DES GRADUES

EUROPEAN ECONOMIC INTEGRATION

by J . P . Reny

Thesis presented to the Faculty of Social Sciences of the University of Ottawa as partial fulfillment of the requirements for the degree of Master of Arts

Ottawa, Ontario, 1961

/

UNIVERSITY OF OTTAWA - SCHOOL OF GRADUATE STUDIES

UMI Number: EC55729

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UNIVERSITE D'OTTAWA -- ECOLE DES GRADUES

TABLE OF CONTENTS

Pages

INTRODUCTION v

CHAPTER

I * BACKGROUND TO CONCEPT OP ECONOMIC INTEGRATION. 1

A. Voluntary Economic Integration 1 B. International Economic Interdependence.... 4 C. International Trade and the Classical

Approach 8 D. The International Monetary System 11 E. Breakdown of the Gold Standard 13 F. Breakdown of Multilateral Trade 16 G. The Role of the U.S 19 H. The Unemployment Problem 21 I. Attempts at Recovery 22 J, Discouraging Results 27 K. Economic Cooperation Considered 32

II - THE PROCESS OF GRADUAL INTEGRATION 36

A. Introduction 36 B. Benelux 40 C. The North Atlantic Treaty Organization.... 45 Do Organization for European Economic

Cooperation (OEEC) 50 E. European Payments Union (EPU) 58 F. European Coal and Steel Community 59

III - THE EUROPEAN ECONOMIC COMMUNITY 65

A» Introduction 65

B. The Institutions of the Community 71 1 • The Assembly 72 2. The Council of Ministers 73 3. The Commission 74 4. The Court of Justice 75 5. The Commit tees 75

UNIVERSITY OF OTTAWA SCHOOL OF GRADUATE STUDIES

UNIVERSITE D'OTTAWA - ECOLE DES GRADUES

TABLE OF CONTENTS

Pages

C. The Customs Union 76 1. Internal Trade 76 2. External Trade 78

D. The Broader Economic Community 79 1. Agriculture 79 2. Transportation 80

E. Free Movement of Persons, Services and Capital 81 Persons and Services 81 Capital 82

F» Associated Overseas Countries and Territories 82

G. Financial Provisions 84 1. The European Social Fund 84 2. The Development Fund 85 3. The European Investment Bank 85

H. Early Developments 85

I. Implications 91 1. Internal Effects 91 2. External Effec ts 97

J. European Free Trade Association 100 Views on EEC and EFTA 104

IV - IMPLICATIONS FOR CANADA 110

A. Introduction 110 B. Most Important Export Markets 113 C. Major Export Commodities 115

The United Kingdom Market 115 D. The European Economic Community 123 E. Other E.F.T.A. Countries 131 F. Future Prospects 137

CONCLUSION 146

BIBLIOGRAPHY 151

APPENDIX A 157

APPENDIX B 162



LIST OF TABLES

Pages

I.- Comparison of Imports of Manufactured Goods

to Manufacturing Activity 6

II.- Industrial Production 28

III.- Percentage Change from 1929 in a) Volume of Industrial Production, and

b) National Income 31

IV.- Economic Progress of OEEC Members 56

V.- Major Export Markets for Canadian Products... 114

VI.- Comparison of Major Canadian Exports to Selected Areas of the World 116

VII.- Breakdown of Canadian Exports to the United Kingdom 117

VIII.- Canadian Exports to Countries of the European Economic Community 124

IX.- Breakdown of Canadian Exports to the European Economic Community 126

X.- Canadian Exports to Countries of the European Free Trade Association 133

XI.- Breakdown of Canadian Exports to Norway, Sweden and Switzerland combined 134

XII.- Index of Industrial Production and Volume of Foreign Trade of EEC Countries 138

XIII.- Comparison of Selected Commodities Exported from Canada to the U.S.A. and the World During 1960 142

XIV.- Breakdown of Canadian Exports to Belgium and Luxembourg 157

XV.- Breakdown of Canadian Exports to the Netherlands 158

XVI.- Breakdown of Canadian Exports to France 159



LIST OF TABLES iv

Pages

XVII.- Breakdown of Canadian Exports to Italy.... 160

XVIII.- Breakdown of Canadian Exports to Germany.. 161

XIX.- Canadian Exports to Norway 162

XX.- Canadian Exports to Sweden 163

XXI.- Canadian Exports to Switzerland 164


UNIVERSITE D'OTTAWA ~ ECOLE DES GRADUES

INTRODUCTION

The process of economic integration presently taking

place in Europe constitutes a gigantic and revolutionary step

for this traditionally nationalistic area of the world. In

terms of the economic and political composition of Western

Europe prior to World War II, what is happening in these

countries at this time verges on the miraculous. Of equal

importance, however, are the implications which these develop

ments hold for other trading nations of the world. Canada,

as a leading world trader is understandably concerned as to

the possible effects of these developments upon its foreign

trade•

The point of this research is twofold. This study is

directed to establishing both the nature and implications of

the process of economic integration taking place in Western

Europe.

Recent developments in Europe have led to the forma

tion of two separate trading groups. The first was the

European Economic Community (EEC) which linked France, Ger

many, Italy and the Benelux countries in an economic union.

The Treaty establishing EEC provides for eventual free trade

amongst member countrie s, a common external tariff and com

plete economic unification under supra-national institutions.

In effect, when Treaty provisions become fully implemented,



INTRODUCTION vi

these countries will be only one step removed from political

confederation.

Other countries of Western Europe, while admitting

the potential benefits of economic integration, did not wish

to sacrifice much of their political and economic autonomy

as required by that economic unification. Thus, the United

Kingdom, Sweden, Norway, Austria, Switzerland, Denmark and

Portugal decided to form a free trade area known as the

European Free Trade Association (EFTA). While the EFTA calls

for the abolishment of tariffs and other impediments to free

trade amongst member countries, it does not provide for the

establishment of a common external tauiff, nor does it pro

vide for eventual economic union. Member countries will

retain their individual external tariffs for imports origina

ting outside the free trade area.

Although the introduction of EEC is looked upon as a

most significant economic, as well as political development,

the numerous preliminary undertakings in economic cooperatioi

in Europe cannot be ignored, since it is due, in great part,

to the experience derived from their successes and short

comings that this latest, and most ambitious step was made

feasible. It is therefore of great importance to study what

previous developments led to, and rendered possible, the

implementation of EEC, and which lent economic logic to the

formation of EFTA. A study of the various preparatory schemejs



INTRODUCTION v i i

i s e v i d e n t l y a p r e r e q u i s i t e to a sound u n d e r s t a n d i n g t o p r e

s e n t happenings i n Europe .

Another a s p e c t , which i s j u s t as impor tan t and

meaningful as p a s t expe r i ence i n economic c o o p e r a t i o n , i s the

e v o l u t i o n of economic t h i n k i n g , r e f l e c t e d i n government p o

l i c y , which l e d t he se c o u n t r i e s to choose economic coopera

t i o n and i n t e g r a t i o n r a t h e r t han n a t i o n a l i s m and p r o t e c t i o n i s m .

Thus, a l t hough one of t h e main p o i n t s of t h i s r e s e a r c h w i l l

be to de t e rmine the n a t u r e of EEC and EFTA, an a t t empt w i l l

a l s o be made to d i s c o v e r the n a t u r e of e a r l i e r developments ,

and t h e i r c o n t r i b u t i o n i n making t h e s e l a t e s t s t e p s a r e a l i t ;

The second p o i n t of t h i s s tudy i s to show the i m p l i

c a t i o n s of t he se t r a d i n g and economic developments i n Westert.

Europe upon Canada ' s f o r e i g n t r a d e . Since t h e s e c o u n t r i e s

c o n s t i t u t e impor tan t markets for Canadian p r o d u c t s i t follows

t h a t changes i n t r a d i n g p a t t e r n s w i l l undoubtedly have

meaningful e f f e c t s upon Canada ' s f u t u r e expor t p r o s p e c t s .

The a n a l y s i s under taken i s no t i n t ended t o s t u d y t h i s a s p e c t

of Canadian e x p o r t s on a p r o d u c t - b y - p r o d u c t b a s i s , bu t r a t h e i

i t i s i n t ended to gauge whether or not economic i n t e g r a t i o n

i n Europe w i l l prove b e n e f i c i a l i n t h e long run t o bo th

European and Canadian economic s t r e n g t h and s t a b i l i t y , and

t o world t r a d e . B r i e f l y , t h e r e f o r e , t h i s study i s i n t ended

t o p o i n t out the f u l l n a t u r e of the changes which a r e t a k i n g

p l a c e i n Western Europe and to de te rmine what b e n e f i t s may

be d e r i v e d . UNIVERSITY OF OTTAWA ~ SCHOOL OF GRADUATE STUDIES


INTRODUCTION v i i i

The approach used i n the e x p l o r a t i o n of t h e problem iii

t h r e e f o l d . The e m p i r i c a l approach i s used w i t h r e s p e c t to

the s t u d y of the e v o l u t i o n of economic t h i n k i n g tfiich g r a

d u a l l y , i n r e sponse t o the problems of a changing economic

s e t t i n g , passed through phases of f r e e t r a d e , p r o t e c t i o n i s m

and b i l a t e r a l i s m , r e g i o n a l i s m , and i n - t o d a y ' s r e f i n e d form

p r o v i d e s j u s t i f i c a t i o n for economic i n t e g r a t i o n . The second

approach i s h i s t o r i c a l , w i th r e s p e c t to the d e s c r i p t i o n of

the v a r i o u s s t e p s p r e c e d i n g the fo rma t ion of EEC and EFTA,

i n c l u d i n g the d e s c r i p t i o n of these two most r e c e n t deve lop

m e n t s . The t h i r d approach i s a n a l y t i c a l , w i t h r e s p e c t t o the

i m p l i c a t i o n s of these developments for Canada and Western

Europe .

The g e n e r a l problem of economic c o o p e r a t i o n i s n o t a

new concept f o r European c o u n t r i e s , bu t i t i s one which i n h e

r e n t l y c o n t a i n s impor tan t p o l i t i c a l c o n s i d e r a t i o n s , and t hus

h a s always r e c e i v e d much a t t e n t i o n i n t h e l i t e r a t u r e . I n the

pos twar p e r i o d c o n s i d e r a b l e body of l i t e r a t u r e , both o f f i c i a l

and i n t e r p r e t i v e , has emerged based on t h e development of

i n s t i t u t i o n s fo r c l o s e r economic c o o p e r a t i o n . However, the

main c h a r a c t e r i s t i c of t h i s l i t e r a t u r e i s t h a t i t cove r s only

one a spec t or one i n s t i t u t i o n , or a t t h e most a few, a t one

t ime , wi thou t p r o v i d i n g any r e l a t i o n s h i p between the numerous

developments i n the f i e l d of economic c o o p e r a t i o n . The

problem of economic i n t e g r a t i o n , as such, i s much more r e c e n t ,

UNIVERSITY OF OTTAWA SCHOOL OF GRADU -\TE STUDIES


INTRODUCTION ix

having been brought to the forefront by the formation of EEC,

but already the literature is voluminous. Unfortunately, the

topics are selective, some dealing with the institutions,

others with the meaning and implications for specific areas

of trade. Except for a few articles in the professional

economic literature and in government publications, the

Canadian position has not been explored. One purpose of this

study is to combine the various partial approaches to the

problems of economic cooperation and integration in Europe

and to provide, as much as possible, an overall picture of

the present state of practical developments and their impli

cations for Canada.



CHAPTER I

BACKGROUND TO CONCEPT OF ECONOMIC INTEGRATION

A. Voluntary Economic Integration

Voluntary economic i n t eg ra t i on amongst countr ies i s

a r e l a t i v e l y new economic policy concept today only inasmuch

as i t s meaning has been adapted to f i t a new set of circum

s t ances . But economic i n t eg ra t i on often fo rc ib ly imposed in

i t s wider sense i s a concept as old as wars, colonizat ions ,

annexations or confederat ions. The f r u i t s of the v i c t o r in

war have always included economic cont ro l and, i f des i red,

i n t e g r a t i o n ; the growth of the Roman Empire contained obviotjs

signs of economic i n t eg ra t i on ; the defeated country could

expect t ha t i t s economy would be in tegra ted , to some degree

a t l e a s t , with the economy of the v i c t o r s ; a successful ly

administered colony formed an i n t e g r a l p a r t of the mother

coun t ry ' s economy - the colony supplied the raw m a t e r i a l s ,

or precious metals, and provided a market for the mother

count ry ' s f in ished products . The mother country supplied

the investments, and t h e i r r i s k s could be considered almost

as safe as those involved in domestic investments, although

they usual ly were more remunerative. Annexation of one

country, or p a r t of a country, by another most obviously

includes some form of economic i n t e g r a t i o n , while in

UNIVERSITY OF OTTAWA ~ SCHOOL OF GRADUATE STUDIES


BACKGROUND TO CONCEPT OF ECONOMIC INTEGRATION 2

confederation voluntary economic integration is always one

of the basic considerations.

The rise of Germany as a great economic and poli

tical power near the end of the nineteenth century coincided

with such a process of economic and political integration.

Economic unification was achieved through the Zollverein, th 5

German customs union of 1830, which was completed by 1840.

Friedrich List, who made the major contribution to the

establishment of this customs union, conceived of economic

unification as a prerequisite to sound national economic

development. In his view, every nation should follow a

policy of free trade only until it had advanced to the point

where it could undertake manufacturing for itself. At this

stage of development, a system of protection should be

employed to allow the growth of domestic manufacturing indus

tries. When such industries had reached the stage where

they could meet foreign competition, the national policy

should revert again to free trade. Although this - his

doctrine of "stages" of economic development - was not novel

as a theoretical economic concept, the practical conclusions

he drew from it for Germany proved beneficial. He became

convinced that Germany had reached the stage where further

1 Joseph A. Schumpeter, History of Economic Analysis, New York, Oxford University Press, 1954, pp. 504-505.


UNIVERSITE D'OTTAWA « ECOLE DES GRADUES


economic progress would require the establishment of an

extended and conveniently bounded territory, together with a

vigorous expansion of manufactures and commerce throughout

the territory. The practical solution was to introduce judi •

clous protective legislation within a customs union compri

sing all German lands. The successful application of his

ideas to the formation of the German Zollverein undoubtedly

laid the necessary economic foundation to the political uni

fication of Germany in the Reich established by Bismarck in

1870.

However, despite the familiarity of the concept of

economic integration in its wider sense, the current meaning

which it connotes differentiates it from all past experien

ces. In its present day usage "economic integration" implies

voluntary cooperation of two or more countries with each

other; it excludes the sovereignty of one over the other as

in the case of conquest by war, colonization or annexation;

and it excludes any immediate political integration as in

confederation. It thus becomes a new concept whereby autono

mous nations desiring to preserve sovereignty are nonetheless

ready to integrate "economically". It is a new concept

because it implies that, although it is desirable to remain

politically independent, it is equally desirable to integrats

on a cooperative basis for economic reasons.




B. International Economic Interdependence

The recourse to economic integration as a solution

to various economic problems is supported by past interna

tional trade theories and empirical studies. It is based on

the belief that this sort of arrangement will provide both,

the advantages to be gained from free trade - at least on a

regional basis, and the benefits of increased strength vis

a-vis competitors. That economic integration is today, for

certain countries, a desirable economic goal implies of ne

cessity a changing outlook towards international economic

interdependenc e.

Adam Smith in his "Wealth of Nations" provides a

good insight into the classical approach to international

interdependence. In part he contends that " the natural

advantages which one country has over another in producing

particular commodities are sometimes so great, that it is

acknowledged by all the world to be in vain to struggle with

them".2

He accepts the economic dependence of one country

upon others as a fact and bases this dependence upon differ

ential costs. Such interdependence is quite obvious when

dealing with agricultural commodities and industrial raw

materials, since the inequalities are due to natural advantages

2 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Edwin Carman Edition, New York, The Modern Library, 1937, p. 425.




n o t e a s i l y overcome. But even i n t h e more complex i n t e r n a

t i o n a l t r a n s a c t i o n s of i n d u s t r i a l i z e d n a t i o n s , where n a t u r a l

advan tages a r e no t so e a s i l y d i s c e r n i b l e , economic i n t e r

dependence i s n o t e l i m i n a t e d . To the c o n t r a r y , t he i n t e r d e

pendence r e f l e c t e d i n the l e v e l of t r a d e amongst i n d u s t r i a l i

zed c o u n t r i e s , i n c r e a s e s wi th t h e growth i n domest ic i n d u s

t r i a l a c t i v i t y . U n t i l t h e c o l l a p s e of i n t e r n a t i o n a l t r a d e

i n t h e e a r l y 1 9 3 0 ' s , the growth of manufac tur ing s e c t o r i n

i n d u s t r i a l c o u n t r i e s f a r from r e n d e r i n g t h e s e c o u n t r i e s inde

pendent of f o r e i g n t r a d e i n manufactured a r t i c l e s , s t imu

l a t e d the import of such a r t i c l e s .

1'he growth of b o t h manufac tur ing a c t i v i t y and

impor t s of manufactured a r t i c l e s i n t h e f i v e i n d u s t r i a l i z e d

c o u n t r i e s covered by Table I i n d i c a t e s a c e r t a i n p a r a l l e l i s m

between the se two f a c t o r s . From the p e r i o d 1881-1885 t o

1911-1913 growing domest ic manufactures were g e n e r a l l y accom

pan i ed by i n c r e a s e d impor ts of manufactured p r o d u c t s i n each

one of the c o u n t r i e s cove red . The d e c l i n e i n manufac tur ing

a c t i v i t y i n France , Germany and t h e Uni ted Kingdom du r ing

the p e r i o d 1921-1925 was e q u a l l y accompanied by a f a l l i n

impor t s of manufactured p r o d u c t s i n t o t h e s e t h r e e c o u n t r i e s .

On the o t h e r hand, i n the Uni ted S t a t e s and Sweden where

domest ic manufac tur ing a c t i v i t y d id no t d e c l i n e dur ing t h i s

3 League of Nations, I n d u s t r i a l i z a t i o n and Foreign Trade, Economic, Financia l and Trans i t Department, Geneva, 1945, pp. 76 to 8 1 .


(O TABLE I

Comparison of Imports of Manufactured Goods to Manufactur ing A c t i v i t y ( Index Numbers; 1913 = 100)

France Germany U.K. U.S .A. Sweden I m p . 1 Mfg.B Imp . 1 Mfg.* I m p . 1 Mfg.2 I m p . 1 Mfg.2 Imp. 1 Mfg.2

1881-1885 1886-1890 1891-1895 1896-1900

1901-1905 1906-1910 1911-1913 1921-1925

1926-1929 1930 1931-1935 1936-1938

52 48 48 49

62 82 106 54

61 98 71 52

41 44 50 60

64 80 97 95

131 140 114 118

45 52 51 54

64 85 97 68

95 87 61 50

27 34 40 56

69 81 97 78

112 102 91 138

44 50 58 64

89 81 96 72

112 119 83 92

57 61 65 74

77 83 93 76

93 91 92

122

59 63 61 53

69 88 95 95

140 112 78 94

24 32 38 45

66 79 92

129

164 148 118 167

47 58 61 68

76 86 93

105

154 199 159 254

18 23 33 58

70 84 95 96

134 154 161 223

1 Quant i t a t ive value of imports of manufactured a r t i c l e s . 2 Quan t i t a t ive value of manufacturing a c t i v i t y .

Source: League of Nations, I n d u s t r i a l i z a t i o n and Foreign Trade, Geneva, 1945, pp . 130, 162, 163.

UNIVERSITE D'OTTAWA •• ECOLE DES GRADUES


p e r i o d , impor t s of manufactured a r t i c l e s were m a i n t a i n e d . The

1926-1929 p e r i o d shows i n c r e a s e s over the p r e v i o u s p e r i o d i n

a l l f i v e c o u n t r i e s , f o r b o t h domest ic p r o d u c t i o n and impor t s

of manufac tures , whereas t h e d e c r e a s e s expe r i enced i n 1930 by

Germany and the Uni ted S t a t e s and the i n c r e a s e s i n France and

Sweden l e n d f u r t h e r suppor t t o the e x i s t e n c e of t h i s p a r a l l e

l i s m . The exper i ence i n t h e U.K. i s the e x c e p t i o n , however,

s i nce a s l i g h t dec r ea se i n domest ic manufac tur ing i n 1930

from t h e p r e v i o u s p e r i o d , was accompanied by a s l i g h t i nc rea se

i n i m p o r t s .

I n the two s u b - p e r i o d s i n d i c a t e d by Tstbl.e.\I f o l l o w

ing t h e year 1930 the r e l a t i o n s h i p between p r o d u c t i o n and

t r a d e appears to have been severed i n those c o u n t r i e s which

took s t e p s to deve lop t h e i r manufac tur ing a t t h e expense of

i m p o r t s . The i n c r e a s e d domest ic manufac tur ing a c t i v i t y i n

France and Germany du r ing t h e p e r i o d 1931-1938 was accompa

n i ed by a dec rease i n impor t s of manufactured p r o d u c t s . I n

t h e Uni ted Kingdom, d u r i n g t h i s same p e r i o d , a r e co rd l e v e l

of domest ic manufac tu r ing a c t i v i t y was accompanied by on ly a

smal l i n c r e a s e i n i m p o r t s . The p r o t e c t i o n i s t p o l i c y of t h e

Uni ted S t a t e s i s a^asindicated d e s p i t e the growth i n impor t s

of manufactured p r o d u c t s i n t o t h a t c o u n t r y du r ing t h a t p e r i o d .

While i t s manufac tur ing a c t i v i t y was s l i g h t l y h i g h e r t h a n

the l e v e l r eached i n t h e 1926-1929 p e r i o d , t h e index of

impor t s dec reased from 140 to 94. Amongst t h e s e f i v e coun-

UN1VERSITY OF OTTAWA ~ SCHOOL OF GRADUATE STUDIES



t r i e s only Sweden con t inued the growth p a t t e r n expe r i enced

p r i o r to 1930.

I t would seem, t h e r e f o r e , t h a t t h e s e l f - s u f f i c i e n c y

which could be assumed t o grow w i t h i n d u s t r i a l i z a t i o n i s

e v i d e n t l y a f a l l a c y - u n l e s s i t i s an imposed s e l f - s u f f i c i e n c y

th rough h i g h t a r i f f s , quotas and o t h e r b a r r i e r s to t r a d e .

C. I n t e r n a t i o n a l Trade and t h e C l a s s i c a l Approach

Desp i t e t h e f a c t t h a t c e r t a i n c o u n t r i e s may have orif-

g i n a l l y sought i n d u s t r i a l i z a t i o n as a means t o i n c r e a s e d

s e l f - s u f f i c i e n c y , t h i s ve ry development l e d to i n c r e a s e d

i n t e r n a t i o n a l i n t e r d e p e n d e n c e ; and as i n t e r n a t i o n a l t r a d e

grew b o t h i n volume and i n complexi ty , c l a s s i c a l t heo ry of

i n t e r n a t i o n a l t r a d e , mainly based on R i c a r d o ' s t heo ry of coaj-

p a r a t i v e c o s t s , found i t s e l f i n c r e a s i n g l y want ing i n the

f ace of p r a c t i c a l development .

According t o c l a s s i c a l t h e o r y , f r ee t r a d e enabled

each coun t ry to s p e c i a l i z e i n the p r o d u c t i o n of those goods

which i t cou ld produce r e l a t i v e l y cheap ly and import t h o s e

i t ems which f o r e i g n c o u n t r i e s could produce a t a compara t ive

a d v a n t a g e . I n t heo ry , t h e r e f o r e , f r e e t r a d e l e d t o t h e o p t i

mum a l l o c a t i o n of r e s o u r c e s and to some form of i n t e r n a t i o n a l

4 Stephen Enke and Vi rg i l Salera, In t e rna t iona l Economics, New Jersey, Pren t ice -Hal l , 1947, pp. 201 and seq.

UNIVERSITY OF OTTAWA « SCHOOL OF GRADUATE STUDIES



economic equilibrium based on the rules of the gold standard,

In this way any international disequilibrium could be recti

fied through readjustments in the quantity of money and the

price structure in the domestic economy. Thus, stability in

the domestic economy was a secondary consideration to equi

librium in the world economy.

Classical theory of international trade assumed that

domestic considerations, such as full employment, distribu

tion of income and price stability could, in effect, be

secondary to objectives of international equilibrium. It

emphasized the role of money flows and their impact upon

corrective price adjustments, and the restoration of a compe

titive pattern of international prices and costs, while prac

tical developments placed greater emphasis on the mechanism

of income transfers and their impact upon domestic economic

activity and employment. This did not weaken the classical

views as to the effectiveness and equilibrating tendencies

of balance of payments adjustments, but it raised serious

doubts about the theoretical desirability and practical

acceptability of such mechanism wherever its main burden fel .

upon domestic economic activity and employment.

In supporting free trade, the classical approach was

increasing the vulnerability of one country to the economic

conditions of its trading partners; and this, together with

the general "laissez faire" approach to domestic activity,




provided no defense for the domestic economy against extern

ally produced instabilities. A study made by the National

Bureau of Economic Research shows the parallel movements in

business conditions in seventeen countries of the world bet-

ween 1890 and 1925. It is evident the gold standard system

linking these countries contributed a great deal to this

parallelism, through the adjustments that this system required

of each domestic economy, especially in their price struc

ture, in order to reach a position of equilibrium vis-a-vis

the rest of the world. Despite certain irregularities, a

general tendency towards parallelism in the trends of busi

ness activity - depression, recovery, prosperity and reces

sion - is conclusively demonstrated by this study. The interL-

sity, timing and importance of cyclical movements varies

from one country to another, but it is the exception rather

than the rule for any country to have remained unaffected by

major booms or depressions occurring within the economies of

its trading partners.

However, the increasing importance of domestic econ

omic considerations in the nineteen thirties necessitated

certain rigidities in internal price, cost and wage structures.

These latter factors could no longer be submitted to the

5 League of Nations, Economic Stability in the Postwar World, Department of Economics, Geneva, 1945, p. 88.




external fluctuations inherent in free trade policies under

the gold standard system. Some solution was necessary to

lessen the impact of international adjustments upon the leva,

of domestic economic activity and employment. International

trade theory could no longer concern itself strictly with

problems of trade, but had to give increasing consideration

to the problem of vulnerability of each domestic economy to

the soundness or instability of its trading partners.

D. The International Monetary System

Although the gold standard was a method of relating

the value of national currencies to each other it was, in arrangement

effect, far more than just a "world currency'/. It was a

system which provided the almost automatic co-ordination of

the multitude of national economies and national economic

policies; it was in fact the framework of an integrated worl|d

economy. Consequently, as demonstrated by the experience

of the thirties, the problems raised by its breakdown could

not be solved by monetary reforms alone.

The gold standard system had two distinctive featu

res. First, it provided a fixed value for all national cur

rencies in terms of gold. This meant that any disequilibria

in the balances of international payments could not normally

be corrected by adjustments in exchange rates, but had to be

corrected by adjustments in national price, cost, and income

levels to the fixed exchange rate3. UNIVERSITY OF OTTAWA ~ SCHOOL OF GRADUATE STUDIES



The other, perhaps even more essential, feature of

this system was its inherent relationship to a competitive

market economy within which the numerous adjustments to eco

nomic change could be absorbed. To perform its function as a

world monetary system and co-ordinating mechanism, the gold

standard required adjustments of balances of payments to

every change in volume and flow of international trade and

international capital movements;it necessitated adjustments of

national price, income and employment levels to the require

ments of equilibrium in the balance of payments; it also re

quired adjustments of the volume of production of particular

goods and services and of the amounts of capital invested

and the number of persons employed in particular industries

to meet all the aforementioned international economic

factors, such as balance of payments equilibrium.

It is apparent therefore that as long as the gold

standard functioned, the countries accepting it were, in

fact, voluntarily surrendering a substantial part of their

autonomy in determining their domestic economic policies. It

follows, therefore, that once enough countries would refuse,

even if only tacitly, to follow the "rules of the game", the

system would inevitably fall.


UNIVERSITE D'OTTAWA » ECOLE DES GRADUES


E . Breakdown of t h e Gold Standard

Although the breakdown i n m u l t i l a t e r a l f o r e i g n ex

change c o n v e r t i b i l i t y can be p a r t l y a t t r i b u t e d t o p s y c h o l o

g i c a l f a c t o r s , mainly a g e n e r a l l o s s of conf idence by more

and more c o u n t r i e s i n the e x i s t i n g system, s e v e r a l o t h e r mor|s

t a n g i b l e causes a r e a l so d i s c e r n i b l e . Gold s tocks h e l d as

f o r e i g n exchange r e s e r v e s were becoming i n c r e a s i n g l y uneven

l y d i s t r i b u t e d i n favour of the Uni ted S t a t e s . This unba

l anced d i s t r i b u t i o n was mainly due to t h e f a i l u r e of most

c o u n t r i e s a t one time or another t o obse rve , i n t h e i r i n t e r

n a l monetary p o l i c i e s , the r u l e s of t he gold s t anda rd

sys tem. Under a system of f i x e d exchange r a t e s such as the

go ld s t anda rd imposed, t h e maintenance of e q u i l i b r i u m i n the

b a l a n c e s of i n t e r n a t i o n a l payments r e q u i r e d each c o u n t r y to

a d j u s t i t s domest ic p r i c e , c o s t , income l e v e l t o t h e s t a t e

of i t s ba l ance of payments . A " s u r p l u s " c o u n t r y had t o

i n f l a t e , a " d e f i c i t " c o u n t r y to d e f l a t e , i t s domest ic c r e d i t

s t r u c t u r e . Thus, accord ing t o the r u l e s of the game, the

U.S.A. i n 1927-1929 should, i n view of h e r l a r g e s u r p l u s ,

have i n f l a t e d a t t h e r i s k of s t i m u l a t i n g s t i l l f u r t h e r the

runaway boom. Great B r i t a i n should have , a c c o r d i n g t o t h e s e

r u l e s , d u r i n g the same p e r i o d , d e f l a t e d s t i l l f u r t h e r i n o rder

6 H.W. Arndt,"The Economic Lessons of the Nineteen T h i r t i e s " , Royal I n s t i t u t e of In te rna t iona l Affa i r s , London, Oxford Univers i ty Press , 1944, p . 287.




to reduce costs, and so stimulate exports and curtail import

The fact that both countries, in common with most others,

refused to adhere rigidly to these rules automatically ren

dered the gold standard system of adjustment inoperative. In

addition, there was also the failure of the supply of gold

to increase proportionately to the growth in international

trade. The failure of Britain to increase its exports, the

tendency towards relative over-production in world agricul

ture and primary products, with its unfavourable effect on

the balance of payments position of most primary producing

countries, were also important indications of the eventual

breakdown in the world monetary system.

The historical origin of the breakdown in the inter

national gold standard, however, may well have stemmed from

France's decision in 1928 to accept nothing but gold in

settlement of the enormous surplus accruing to her from repaj-

triation of capital and from its current balance of payment

surplus.^ This move, together with the eventual introduc

tion of exchange control by Germany, to halt the depletion i|n

its already dwindling foreign exchange reserves, placed

London, the traditional financial center, under heavy pres

sure. The wide usage of the Pound Sterling in international

payments made it one of the most commonly held foreign cur

rency in most exchange reserves.

7 League of Nations, International Currency Experience, Lessons of the Inter-War Period, Geneva, 1944, p.39.




Under the heavy and anxious foreign repatriation of

gold, the U.K. government was forced to suspend the Central

Bank's obligation to sell gold in exchange for silver in

September 1931. Thus the gold exchange standard, which had

maintained convertibility of currencies, fell and was re

placed by inconvertible currency blocs, fluctuating exchange

rates and exchange controls.

As early as 1933 four groups of currency systems

were in effect. The Gold Bloc, which comprised France, Swit

zerland, the Netherlands, Italy (until 1934), Belgium and

Luxembourg (until 1935), maintaining the parity of their cur

rencies and full convertibility. These countries had to

depend mainly on high tariffs and import quotas on a large

scale in order to keep their trade in balance, since their

currencies were, for the most part, overvalued as a result

of depreciation in numerous other countries. The second

group was composed of countries maintaining an artificial

parity by means of exchange control such as Germany,and

Italy (after 1934). In these countries, quotas were supple

mented by the rationing of foreign exchange for the purchase

of imports. Exchange control was soon developed by these

countries into an instrument of further economic warfare by

minimizing the need for, and maximizing the acquisition of,

free exchange currencies. It was, in a sense, a return to

mercantilism. The third group of currency bloc was composed

UNIVERSITY OF OTTAWA « SCHOOL OF GRADUATE STUDIES



of those countries with depreciated and controlled exchanges

most Latin American countries, and some European, such as

Greece and Czechoslovakia. For this group, extreme measures

of trade restriction were not required to supplement initial

depreciation and control, while at the same time these coun

tries could pursue policies of domestic reflation, although

not all did. The fourth group of countries depreciated thei

currencies, but maintained convertibility. These included some

the U.K.,/British Dominions, the Scandinavian countries undefr

the Sterling Bloc; also the U.S., whose dollar was allowed

to depreciate in April 1933.

F. Breakdown of Multilateral Trade

With the collapse of the world monetary system and

its replacement by separate currency blocs, multilateral

trade was replaced by a general move towards bilateralism.

This move was due, not only to the impossibility of conduc

ting multilateral trade with inconvertible currencies, but

also as a means to prevent any further deterioration in do

mestic economic conditions.

The serious internal economic conditions facing most

countries demanded immediate attention. The drastically re

duced levels of production and income accompanied by mass

unemployment required that governments give increased atten

tion to domestic problems.Priorities were forcibly reversed




domestic problems had to be attended to first and foremost,

even at the sacrifice of international economic considera

tions. Any further deterioration in the internal situation

of individual countries had to be prevented to all costs.

Employment and production levels had to be revitalized, and

most countries attempted to do just this through replacement

of imports by domestic production. It therefore followed

that, since trade could not be dispensed with completely, it

should at least be controlled in a manner most advantageous

to domestic production and employment.

In this way discriminatory trading agreement became

more and more prevalent as each country sought to restrict

its trade to those countries with whom it felt some advan

tage could be gained. Such arrangements were intended to

foster a certain stability in a country's international trad^

which, in turn, would promote greater stability in domestic

production and employment levels.

In many cases, however, bilateral agreements became

instruments of commercial warfare. The degree of instability

which this move towards bilateralism produced was such that

by 1935, when the Economic Committee of the League of Nationb

was requested by the Council to examine the feasibility of ai

international agreement whereby changes in tariffs and other

restrictions would be announced one month in advance, it

reported that there was "no chance at present of achieving




such an a g r e e m e n t " . 8

B i l a t e r a l t r a d e was a l s o used i n an e f f o r t t o reduce

d e f i c i t s i n ba l ance of t r a d e . No longer suppor ted by f o r e i g n

l e n d i n g , t r a d e d e f i c i t s had t o be conver ted i n t o s u r p l u s e s or

a t l e a s t i n t o ba lanced a c c o u n t s . Thus w i t h e x p o r t s f lounderipig,

most c o u n t r i e s adopted p o l i c i e s to curb impor t s th rough wide

use of q u a n t i t a t i v e c o n t r o l s and h igh t a r i f f b a r r i e r s . Even

the Uni ted Kingdom, where the t r a d i t i o n of open c o m p e t i t i o n

and f r e e t r a d e was s t r o n g e s t , d id no t remain immune t o t h i s

move as i t adopted the Import D u t i e s Act i n February of 1 9 3 2 . 9

Of a l l B r i t i sh imports, over 80 per cent had been allowed frep

e n t r y . From then on, however, only 25 per cent of goods im

ported remained untaxed; these l a t t e r were mainly raw mate

r i a l s and a few foodstuffs .

Despite the general adoption of b i l a t e r a l agreements

and import r e s t r i c t i o n s and the increases in t a r i f f s , the

depressed s t a t e of domestic p r i c e s , production, t r ade and

employment continued to d e t e r i o r a t e , and new measures had to

be continuously introduced to prevent s t i l l fu r ther dec l ines ,

which many countr ies feared would r e s u l t i n complete economic

chaos. Quotas and exchange r e s t r i c t i o n s were increased, and

they soon overshadowed a l l previous r e s t r i c t i v e measures.

8 League of Nations, Commercial Policy in the Inter-Wu? Period, Geneva, 1942, p , 7 1 . '—

9 I b i d . , p . 72.




The speed with which this movement towards bilatera

lism, with its many accompanying barriers to trade, spread tc

almost all countries of the world, does not only prove the

anxiety of each country to find a solution to their internal

problems, but also serves to amplify the manner in which the

passive and active trade balances of each country depend upor

one another, and form only one single global trade balance

within which all countries must either stand or fall.

G. The Role of the U.S.

As discussed earlier in the chapter the problem of

international vulnerability to the spread of economic depres

sions and inflations was brought to the forefront during

these years of widespread economic depression. This fosterec

a psychological approach to the situation whereby smaller

countries readily blamed larger economies for part of their

trouble s.

The most commonly accepted premise, in this respect,

was the blame placed by Europe upon the U.S. economy as the

main cause, both for the extent and the intensity of the de

pression. Europe maintained that although a downturn in eco

nomic activity had been evident in several less industrialized

countries and in Germany between late 1927 and the middle of

1929, their collective economic weight was not sufficient to




spark a worldwide collapse.1^ It was not until the downturn

of industrial activity in the U.S. in July 1929, followed by

the stock market collapse in October of that year, that condi

tions became increasingly worse in the U.S. and in Europe.

The main consequential aspects of the U.S. depressior

for European countries were the abrupt fall in U.S. imports

and dollar investments. The level of world trade and econo

mic activity prior to 1930 had been partly supported by U.S.

purchases of foreign goods and services and by new invest

ments abroad at a level of $7.4 billion per annum for the

three years 1927 to 1929. However, by 1933 such income for

foreign countries had dropped by 68 per cent to $2.4 billion,

This drastic decline in U.S. purchases from foreign

countries, and in the world supply of dollars must rank as a

very severe disturbance directly contributing to depressing

business activity abroad and producing foreign exchange pro

blems. The level of economic activity in Europe could not be

expected to remain unaffected by such a sudden and severe

contraction in the supply of dollars, and thus the U.S. was

widely blamed for the breakdown of the international currency

system and for its devastating effects.

I® U.S. Department of Commerce, The United States in World Economy, Economic S e r i e s No. 2 3 , Washington, 1943, p . l € 9

1 1 I b i d . , P« ir74, Table 2 . Actually, i f fixed repayments are taken in to account, ne t U.S. d o l l a r payments abroac had f a l l e n by 77 per cent to $1.5 b i l l i o n .

11

the




H. The Unemployment Problem

The v a r i o u s economic measures , such as i n c r e a s e d

t a r i f f s , q u a n t i t a t i v e import r e s t r i c t i o n s , cu r rency deprec ia

t i o n s , and exchange c o n t r o l s , adopted by most c o u n t r i e s

du r ing the d e p r e s s i o n were, i t i s t r u e , i n t ended t o overcome

imbalances i n i n t e r n a t i o n a l t r a d e and payments p o s i t i o n . But

t h e y were a l s o used as means to salvage any remnant of domes

t i c economic s t a b i l i t y .

Mass unemployment p r e s e n t e d the most obvious and

overwhelming problem of economic i n s t a b i l i t y . 1 2 During the

w i n t e r of 1931-1932, the number of unemployed i n the U.K.

r eached 2 .5 m i l l i o n s , r e d u c i n g about 25 p e r c e n t of the whol<

working c l a s s p o p u l a t i o n to t h e d o l e . By 1932 some s i x t o

seven m i l l i o n German workers were unemployed. The e f f e c t s

of t h e world d e p r e s s i o n i n France were s l i g h t l y de layed by

the e x i s t i n g p r o t e c t i o n a g a i n s t f o r e i g n c o m p e t i t i o n . Gradual

l y , however, t h e French economy began t o s u f f e r , i n p a r t i c u

l a r , from d e c r e a s e s i n e x p o r t s and i n t o u r i s t r e v e n u e s . The

d e p r e s s i o n f i r s t h i t s e v e r a l l a r g e French b u s i n e s s u n d e r t a

k i n g s which i n the t h r o e s of bankruptcy had t o appea l t o the

S t a t e fo r a s s i s t a n c e . Continued expor t l o s s e s s t e a d i l y

deepened the i n d u s t r i a l d e p r e s s i o n , and l e d t o mass unemploy

ment . At the c l imax of the d e p r e s s i o n i n France 1.5 m i l l i o n

1 2 H. W. Arndt , The Economic Lessons of the Klnetesen T h i r t i e s , p . 250 . t —




were unemployed. While this figure may not appear high in

comparison to those of the U.K. and Germany, it was for this

country, who normally employed annually several hundred

thousand seasonal foreign workers, absolutely catastrophic.

Faced with such dangerous unemployment levels, most

governments viewed the curtailment of imports as a necessary

measure to prevent any further deterioration, and possibly

even bring some amelioration. The popular thesis was that

goods previously imported would now be manufactured domestic

ally. In turn this additional internal productive activity

would mean jobs for the unemployed. Of course the inadequacy

of this approach to cope with the large and overwhelming

problem of unemployment was immediately obvious. While poli

cies of protection undoubtedly brought a certain measure of

relief to the situation much more was needed.

I. Attempts at Recovery

The breakdown of the world-wide multilateral system

of settlements engendered the establishment of restricted

areas of international settlements and the introduction and

extension of discriminatory measures to insulate domestic

economies from foreign competition. Unfortunately the various

measures to restrict, control and stabilize international

trade and payments positions did not lead to the coveted

domestic economic recovery.



BACKGROUND TO CONCEPT OF ECONOMIC INTEGRATION 2 3

To lift Europe out of near economic chaos required

action from within each country affected. However, the

success of internal policies for recovery were hampered by

the division of Europe into many small markets. Taken as a

whole, Europe represented one of the greatest concentrations

of wealth and productive capacity. However, this capacity, being /dispersed among several countries, was rather inefficient.

The economic drawback resulting from the existing divisions

of markets were even more pronounced as each economy became

increasingly segregated through protectionism and duplication

of industrial development.

Nevertheless each country adopted those policies

which it believed would bring some relief to the situation.

The policies of the various European countries differed con

siderably one from another. Their only common feature, duri:ig

this period extending from 1930 to World War II, was the lacl:

of effort toward greater international economic cooperation.

Each country tried to achieve and maintain recovery through

the implementation of national policies, paying little atten

tion to considerations of international cooperation.

Most countries pursued different policies on the

basis of different theories and circumstances.13 The effects

1 3 Paul Alpert, Twentieth Century Economic History of Europe, New York, Schuman, 1951, pp. 117-165.

UNIVERSITY OF OTTAWA -- SCHOOL OF GRADUATE STUDIES



of t h e d e p r e s s i o n i n France were main ly f e l t by a g r a d u a l l y

i n c r e a s i n g s t r a i n on he r ba lance of payments, domest ic indus

t r i a l i n a c t i v i t y , and growing budget d e f i c i t s . To overcome

t h e s e d i f f i c u l t i e s every e f f o r t was made to pursue t h e then

o r thodox p o l i c y of d e f l a t i o n which, i t was hoped, would s t i

mula te r e c o v e r y e i t h e r by r e s t o r i n g p r o f i t a b i l i t y to p r i v a t e

e n t e r p r i s e or by l e a d i n g to a f a l l i n i n t e r e s t r a t e s which i i i

t u r n would encourage p r i v a t e i n v e s t m e n t .

I n t h e Uni ted Kingdom, t h e new t a r i f f of 1932 becam<

a v i t a l element i n a r ecovery based on "cheap money" and the

abandonment of t h e gold s t andard i n 1 9 3 1 . This l a t t e r measure

removed the immediate p r e s s u r e on t h e B r i t i s h ba lance of pay

ments p o s i t i o n . This , t o g e t h e r wi th the incoming flow of

f o r e i g n c a p i t a l paved t h e way f o r t h e adop t ion of a vigouroui

p o l i c y of "cheap money". However, U.K. p o l i c i e s were a s s i s t e d

by o t h e r deve lopments . The expans ion of t r a d e was ach ieved

ma in ly through d e v a l u a t i o n of the Pound S t e r l i n g and Imperia]

P r e f e r e n c e s dev i sed i n 1932 . The l a r g e r e s i d e n t i a l b u i l d i n g

boom 1*1 i c h began i n 1932, and t h e f a c t t h a t Grea t B r i t a i n

had never f u l l y shared i n the i n f l a t i o n a r y p e r i o d of t h e

t w e n t i e s , were of g r e a t a s s i s t a n c e i n d e t e r m i n i n g the success

of B r i t a i n s r e c o v e r y .

German p o l i c i e s for r ecove ry d id no t e n t a i l monetary

measures a l o n e . To the c o n t r a r y monetary measures were secon

d a r y t o innumerable d e v i c e s of p u t t i n g the unemployed




directly to work through such schemes as compulsory labour

service, a compulsory year on the land, and discrimination

against the employment of women. Such direct measures were

coupled with an expansionist monetary policy based mainly on

large scale public spending. By the end of 1934, even before

the indirect effects of public expenditures upon consumer

demand had made itself fully felt, unemployment had fallen by

more than three million and the volume of Industrial produc

tion had increased by 30 per cent. Of course the success of

the German policies was facilitated by re-armament, and

autocratic powers of control over individual economic acti

vity in the country. The series of controls over consumption

labour supply and investments which had to be implemented a-s

a result of the initial policies of recovery are only further

indications of the near impossibility of adapting such measu

res to a democratically governed economy.

The Swedish experiment,14r acclaimed as a model of

trade cycle control, was greatly assisted by favourable deve

lopments in foreign trade resulting from devaluation, "cheap

money", deficit financing and stability in world demand for

its raw materials. The recovery policies of the Labour Goverji

ment elected in 1932 did not really get under way until 1934,

•^ H. W. Arndt, The Economic Lessons of the Nineteen Thirties, p. 207.




These policies were characterized by the introduction of com

pensatory or double budgets and planned public works. In

adopting a compensatory budget the government no longer had to

balance the whole budget, but only the current items. The

capital account of the budget could be balanced over the

trade cycle as a whole. This permitted more leeway in organ

izing public works programmes Sweden already had some expe

rience with public works as a method of counteracting or alle

viating unemployment. Since 1920 it had been the practice to

create work for the unemployed rather than provide cash

relief; and in 1924 a State Unemployment Commission had been

set up to co-ordinate public works programmes. With such

administrative machinery already in existence, the task of

expanding the role of public investment to counteract the fall,

in the private sector, was facilitated to a great extent.

Whether the policies adopted by individual countries

were reflatlonary, deflationary, whether they included mone

tary measures, or public investments and works programmes,

they were all intended to provide work for the unemployed.

Although these policies were divergent they did have one

common point, they were generally accompanied by national

insulation from outside economic fluctuations. But Europe

soon realized that national planning and regulation of foreigh

trade are interdependent. Each restriction on imports required

further regulation of the industries concerned, and in th©

UNIVERSITY OF OTTAWA _ SCHOOL OF GRADUATE STUDIES



aggregate meant the control and regulation of competition,

both domestic and foreign, in order to be effective. Thus

the doctrine of full employment, monetary and credit manage

ment, price and wage controls and public investments conceived

within economic boundaries insulated from the pressures of

foreign competition could only lead to progressive dispari

ties of prices and wages, and to a constantly growing separa

tion of economies and nations, without providing any enduring

solution to the basic problems of that time.

J. Discouraging Results

Despite the serious efforts made by all countries

affected to achieve economic recovery, progress was slow and

even discouraging.

As evidenced in Table II, it was not until 1936 that

most countries in Europe reached the level of industrial

production attained in 1929. It should also be noted that in

the United States, France and the Netherlands, where the paiij

ful process of deflation and balanced budget was pursured

most assiduously, until 1936, the recovery was slower thai

in the U.K. and Sweden.

The more noticeable improvements in the U.K. and

Sweden were attributable in part to their success in main

taining a more favourable export level than in most countries

Of course, the effect of the planned budgetary deficits and




TABLE II

INDUSTRIAL PRODUCTION1

(Index Numbers; 1929 = 100)

1929 1932 1933 1934 1935 1936 1937

World

U.S.A.

U.K.

Sweden

France

Netherlands

100

100

100

100

100

100

70

53

84

89

72

84

78

63

88

91

81

91

86

68

99

110

75

93

96

79

106

123

73

90

111

94

116

135

78

91

119

103

124

149

82

103

1 Quantitative value of industrial production.

Source: League of Nations, Commercial Policy in the Interwar Period, Geneva, 1932, p# 168.




public works programme in Sweden are also evident in the

comparatively rapid growth of industrial production in that

country beginning in 1934.

During this pre-war period world trade floundered and

did not reach the level achieved in 1929, indicating that the

restrictive foreign trade policies inherent in most domestic

recovery programmes had, at least, been effective in reducing

foreign competition and aggregate volume of international

trade. But the obstacles to foreign trade were in themselves

hampering the rate of growth of domestic industrial produc

tion. This is supported by earlier statistical data in

Table I, and can be explained by the fact that domestic pro

duction mainly for the home market was of necessity at a

lower level than domestic production geared to world demand.

In addition, a lower level of production during the initial

period must have left idle means of production, which had

previously been employed in the field of exports, and even in

concurrence with a larger import market. The resulting na

tional income, the growth of which was now mainly dependent

upon internal developments, no longer supported by the inflow

of foreign capital, could not but stagnate and be unduly slow

in its recovery.

This contention, that the low level of foreign trade slowness

contributed to the / Qf recovery in most countries, is also

supported by favourable developments in the Sterling Bloc.




In this area, enjoying relative currency stability and free

dom from excessive trade restrictions, trade expanded consi

derably. This trend was accompanied by comparatively faster

recovery in industrial production in these countries than in

those countries where trade was restricted.

As can be seen from Table III, the volume of indus

trial production in the United Kingdom, Sweden, Norway and

Denmark increased regularly from 1935 to 1938, along with

increases in national income. These countries, belonging to

the Sterling Bloc experienced relative stability and growth

in their foreign trade, especially amongst themselves. The

contrasting results in the Gold Bloc countries and the

"Dollar" countries were quite remarkable. In these groups

trade was restricted by high tariffs and quantitative impedi

ments.

Thus, developments following the great depression

were partly characterized by a noticeably slower recovery in

those countries adopting protectionist policies, than in

those countries which managed to maintain a continued and

increasing flow in their foreign trade transactions. °f cours|e,

as seen earlier, other factors than foreign trade contribu

ted to the earlier recovery achieved in the United Kingdom

and Sweden. Nevertheless, this variation in the rate of re

covery between these two groups of countries, indicates that

sound policies of domestic economic recovery were assured a


TABLE III

Percentage Change from 1929 in ^ a) Volume of Industrial Production, and b) National Income

Selected Sterling Bloc

Countries

U.K. Sweden Norway Denmark

Gold Bloc

Countries

France Netherlands Belgium

Dollar

Countries

U.S.A. C anada

1935

5.6 23.0 7.6 25.0

-26.92

- 9.8 -17.8

-20.9 - 9.0

(

1936

15.8 35.0 18.2 30.0

-21.7 - 8.6 -13.3

- 6.4 2.0

a )

1937

23.6 49.0 29.6 36.0

-18.1 2.8

- 2.8

2.7 12.0

1938

15.5 46.0 29.1 36.0

-23.9 4.1

-21.3

-20.0 1.0

1935

5.5 2.5 7.4 9.5

-30.9 -26.5

-33.1 -54.3

(

1936

12.1 10.1 6.4 13.5

b )

1937

20.9 24.2 21.2 18.9

-24.0 -14.9 -24.8 -20.2

not available

-22.1 -25.6

-14.2 -15.7

1938

14.5 29.4 32.9 24.3

-9.1 -16.6

-22.9 -17.5

1 In current currency values 2 Minus signs indicate a percentage reduction.



greater measure of success by the inclusion of appropriate

foreign trade considerations. Conversely, it would appear

that domestic recovery programmes implemented at the expense

of foreign trade requirements could achieve only limited

success. To put it very briefly, outright protectionism did

not prove to be a true solution to the economic difficulties

of the nineteen thirties.

K. Economic Cooperation Considered

During this period of faltering economic activity,

the need for economic cooperation was not completely ignored.

It was felt as far back as 1930. Even before the depression

had given evidence of the overwhelming dependence of segre

gated European markets upon the economic stability and strength

of the United States,16 this idea of unifying the European

markets into a larger entity to make it more efficient, to

coordinate its inherent economic wealth and growth potential,

was being voiced. The objective was to create a European

Federal Union involving political and economic cooperation

between member states.

In May 1930, Mr. Briand, then Prime Minister of France,

elaborated his views in a memorandum to all European govern-

15 T. Balogh, "The United States in the World Economy", Bulletin of the Oxford University, Institute of Statistics, October 1946, pp. 309-325.




ments Members of the League of Nations. He referred to the

desirability of the "establishment of a common market" for th>

products of all European countries.1® At the same time he

criticized the creation of bilateral agreements with the

objective of raising trade barriers against outside countries,

This proposal received the unanimous support of forty-five

countries, but owing to the economic exigencies of the time

discussion of this broader issue was eventually sacrificed to

considerations of more immediate nature.

That economic cooperation should not have received

more practical attention at that time is quite understandable,

This was a time when economic autarky and the export of unem

ployment by raising trade barriers were the accepted means of

action for all governments to combat the evils of the depres

sion. The main concern was the revitalization of each economj,

the end to chronic unemployment and industrial stagnation.

But, despite these immediate and pressing problems, some mean3

had to be found to insure future economic stability. This

was the birth of "Keynesian" economics whereby government

participation and planning in economic activities would pro

vide the required controls for avoiding repeated significant

economic fluctuations, and provide some assurance of full

1 6 United Nations, Customs Unions, A League of Nation? Contribution to the Study of Customs Unions, Lake Success, U.N. Department of Economic Affairs, 1947, p. 38.




employment and a reasonable level of economic activity.

Growing markets, expansion of trade, economies of mass pro

duction, increasing productive efficiency and capacity were

problems of the future, and so too, therefore, was economic

cooperation. Not only did they overlook the presently

accepted tenet that economic advantages are to be found in

cooperation amongst fragmented economies such as existed in

Europe,1" but even the concept that economic unity would hav«

to preceed any "peace promising" political or military unity

was overlooked. Concerned with grave problems in their res

pective domestic markets, governments could not appreciate

that the only lasting solution would have to be found in

terms of their position and economic strength in the world

economy. Moreover, apart from economic considerations, thert

were no evident international forces such as exist today to

popularize the acceptance of cooperation and unification as

the solution to European problems.

However, the policies adopted did not prove successful,

and the economic activities of European countries in the

thirties continued at regrettably low levels. The economic

i? Today it is a widely accepted fact, especially reflected in GATT discussions and negotiations, that freeing international trade of discrimination and restrictions is an essential requirement to assure economic growth and to raise standards of living in both the industrialized and less developed economies alike. Economic integration is likewise considered as a step further in this direction.




s t a g n a t i o n which faced Europe d u r i n g most of t he p re -war

p e r i o d ampl i f i ed the drawbacks of p r o t e c t i o n i s t p o l i c i e s and

d i v i d e d m a r k e t s . The i n e q u a l i t y between t h e small and mar

g i n a l European marke t s compared t o the U . S . market l e d many

to b e l i e v e t h a t bo th g a i n s and l o s s e s would con t inue t o be

o n e - s i d e d , to t h e d i sadvan tage of Europe, a s long as t h i s

d i s p r o p o r t i o n i n p r o d u c t i v e and d i s t r i b u t i v e c a p a c i t y remained

between t h e s e two a r e a s .

The normal development and g e n e r a l acceptance of the

concept of u n i f i c a t i o n through c o o p e r a t i o n was d i s r u p t e d by

the e x i g e n c i e s of war . This c a t a s t r o p h e , a p a r t from i t s d e

v a s t a t i n g consequences , added more ev idence t o the d i s advan

t a g e s of European d i s - u n i t y . 1 ® I t a lso gave g r e a t impetus

to p u t i n t o p r a c t i s e some form of economic c o o p e r a t i o n .

18 R.G. Hawtrey, Western European Union, I m p l i c a t i o n s f o r t h e Uni ted Kingdom; Royal I n s t i t u t e of I n t e r n a t i o n a l A f f a i r s , London, 1949, p . 2 6 .



CHAPTER II

THE PROCESS OF GRADUAL INTEGRATION

A. Introduction

With the end of the hostilities, Europe's economic

problems, no longer overshadowed by matters of military ne

cessity, assumed their position of primary importance.

Europe was a devastated market, and in many instances, in

ternal economic troubles were compounded by the loss of colo -

nial dependencies. In addition, the imminence of a second

giant market, the U.S.S.R. and its satellites, represented a

potential threat militarily anieconomically to the weak and

comparatively divided Western European economies.

The desirability of some sort of unified front, to

meet both the economic and military problems of the time, thhs

became widely accepted. However, the driving force behind

economic cooperation was military. The fear of renewed war

and devastation convinced these historically individualistic

countries, that cooperation was their only hope. The first

step in this direction was taken in March 1948 when the U.K.

France and Benelux were united in the mutual defense Treaty

of Brussels. The immediate fear of renewed war gave the

desire for union an even stronger motive than exists today,

Mr. Churchill described these feelings in a speech in 1946,



THE PROCESS OF GRADUAL INTEGRATION 37

when he said in part: "What is the sovereign remedy? It is

to recreate the European Family, or as much of it as we can,

and to provide it with a structure under which it can dwell

in peace, in safety and in freedom. We must build a kind of

United States of Europe."1 At that time, however, the U.K.

had no intentions of joining such a union, but thought, in

Churchill's words, that the U.K. and the Commonwealth "must

be friends and sponsors of the New Europe, and must champion

its right to live and shine."2 At the Hague "Congress of

Europe" of 1948, the desirability of either a formal federa

tion of European States, or something not far short of it,

was contemplated. It was as a result of this, that one year

later, the Council of Europe was put into effect. Although

it did not provide European Federation, it did indicate the

desirability for economic and political cooperation in Europe ,

while at the same time recognizing that such steps would have

to be taken gradually.

While there is no doubt that Europe seriously desirec

to implement some form of united action to maximize its

efforts in dealing with its economic problems, it is equally

obvious that the strong support and encouragement it receivec

1 R.G. Hawthrey, Western European Union, Implications for the United Kingdom, London, Royal Institute of Interna-tional Affairs, 1949, p. 26.

2 Ibid., p. 27.




from the U.S. hastened the development of practical measures

towards this end. American motives in promoting European

unity were basically two-fold. First, they believed their

own history had been fundamentally changed by the union of

the States, and that any other area of the world which adopted

the same formula could look forward to the same future.

Secondly, by promoting what they firmly believed would resul ;

in a stronger economic unit in Europe, they were at the same

time promoting their own welfare in terms of a larger export

market for U.S. goods, stronger allies in military matters

and, eventually, the possibility of some relief in their lar

ger scale economic aid to less developed nations.

Economic cooperation in Western Europe became a

practical political issue as a result of General Marshall's

offer of American financial aid in the reconstruction of

Europe. This was seized and the possibility furthered by tho

Report of the Committee on European Economic Cooperation,

representing the sixteen nations which had accepted the U.S.

offer. In the more practical considerations of the Marshall

Plan, Europe realized that although the need for cooperation

was imminent, a more gradual approach than immediate poll tics.1

unification was highly preferable. Europe also realized that

it was up to them to find the best means of implementing

economic cooperation, for as Mr. Marshall had indicated in

his speech of June 5, 1947, "there must be some agreement




among the countries of Europe as to the requirements of the

situation, and the part these countries will take in order

to give proper effect to whatever action might be under

taken."3 In these words, Mr. Marshall expressed the official

U.S. view, that the initiative to introduce practical measu

res of economic cooperation would have to be originated by

Europe itself. The U.S.'s contribution would be simply to

lend support to this initiative.

The practical considerations, of re-construction and

rehabilitation of whole economies envisaged by the Marshall

Plan, led to the formation of the Organization for European

Economic Cooperation in the latter part of 1948. The sense

of urgency in these matters, however, was progressively re

placed by the European preference for gradualism. Europe

was genuinely intent on preventing any possibility of renewe<,

German military strength, and this fear was only compounded

by the growing military disparities between East and West

Europe. As hope for peaceful agreement between East and Wes ;

faded, Western Europe gradually accepted the fact that there

would be need for cooperation, not only on an economic basis

but also on a military basis.

By the end of 1948 there were two main bodies of co

operative action in Europe; the Brussels Treaty especially

3 R.G. Hawthrey, Western European Union, Implication!i for the United Kingdom, p. 29.




i n t e r e s t e d i n the c o l l e c t i v e s e l f - d e f e n s e of i t s members and

the OEEC concerned w i th economic m a t t e r s . However, i n a d d i

t i o n to t h e s e two developments , t he r e was a l s o a t t h a t t ime

ano ther p l a n for economic c o o p e r a t i o n be ing s e t i n motion i n

t h r e e European c o u n t r i e s . Although t h i s p l a n was no t Europe-

wide, i t d id c o n t a i n the seed of those very i d e a l s which the

whole of Western Europe would soon come t o a c c e p t as i t s own.

B. BENELUX

Before the concept of Europe-wide economic and p o l i

t i c a l c o o p e r a t i o n , t h r e e European c o u n t r i e s were s t r i v i n g t o

wards some form of economic i n t e g r a t i o n . The t h r e e were

Belgium, the Nether lands and Luxembourg whose endeavours qu ick

l y came to be known under the name of Benelux . Although thei:*

a s p i r a t i o n s were l e s s encompassing i n s i z e t h a n c u r r e n t p l a n s

fa r European economic i n t e g r a t i o n , they d id p rov ide the p r a c

t i c a l exper ience neces sa ry t o f a c i l i t a t e the soundness of subj-

sequen t l a r g e r u n d e r t a k i n g s .

In October of 1943 the g o v e r n m e n t s - i n - e x i l e of Belgiuji ,

t he Ne ther lands and Luxembourg, whose c o u n t r i e s were s t i l l

under German occupa t ion , s igned an agreement on monetary c o

o p e r a t i o n . This agreement was on ly the f i r s t s t ep towards

t h e Benelux Customs Convention which was s igned i n September

of 1944 i n London. 4

4 James E. Meade, N e g o t i a t i o n s fo r Benelux: An Annotat e d C h r o n i c l e , 1945-1956, P r i n c e t o n U n i v e r s i t y , S t u d i e s i n I n t e r n a t i o n a l Finance No.6, Dep t . of Economics and Soc io logy , TyOYT^ P • y . UNIVERSITY OF OTTAWA _ SCHOOL OF GRADUATE STUDIES



The 1944 Convention outlined a plan for the creation

of a customs union between these countries in several stages.

Three Councils were set up by the Convention - an Administra

tive Customs Council, with the task of proposing measures for

the unification of laws and regulations; - a Council for Eco

nomic Union, to give advice on the measures which the partner

countries proposed to take to regulate trade by quantitative

restrictions and similar measures, and for the establishment

of a common regime of trade controls and subsidies; - and a

Commercial Agreements Council, to coordinate commercial agree|-

ments with third countries. It was clearly the intention

that the common tariff and the general removal of customs

duties between the partner countries would eventually lead to

some form of full economic union.

This attempt at economic union did not signify the

immediate abandonment of past restrictionist approach to trad e

The tasks assigned to each Institution points this out very

clearly. This was not to be an outward-looking grouping, in

tent on reducing obstacles to trade on a multilateral basis.

These two countries,3 like most others had followed their OWE

national policies completely on an independent basis prior to

the war with the result that substantial divergencies in their

5 Belgium and Luxembourg were already partners in an economic union started in 1921. Therefore, for purposes of simplicity "Belgium" will be used to denote both that country and Luxembourg.




r e s p e c t i v e economies could not be evened out w i thou t e f f o r t .

The d ive rgence i n domes t ic economic, f i n a n c i a l and s o c i a l p o l i

c i e s between the p a r t n e r s themselves had t o be narrowed before

any sound and p r a c t i c a l c o n s i d e r a t i o n s i n the r ea lm of m u l t i

l a t e r a l c o m p e t i t i o n could even be e n v i s a g e d . Whether or no t

t h e f i r s t a r c h i t e c t s of Benelux had env i saged the slow and

l a b o r i o u s road ahead, exper ience soon showed t h a t any p r o g r e s s

towards complete economic union would be a g r adua l p r o c e s s . 6

One of the more immediate problems was t h e r e c u r r i n g

d e f i c i t s i n the Nether lands ba lance of payments p o s i t i o n

immediately a f t e r the war . The r e s u l t a n t i m p o s i t i o n of r e s

t r i c t i o n s on impor t s and on the movement of c a p i t a l even

w i t h i n t h e a rea f r u s t r a t e d any r e a l p r o g r e s s . I t a l s o soon

became e v i d e n t t h a t a common market fo r goods and s e r v i c e s

and f o r l abour and c a p i t a l i s much more d i f f i c u l t t o e s t a b l i s h

i n p r a c t i c e than on p a p e r . Concrete s o l u t i o n s had to be four*,

to such problems a s , d i f f e r e n c e s i n t h e r a t e of s u b s i d i e s or

t a x e s on the p r o d u c t i o n of s i m i l a r p r o d u c t s ; d i f f e r e n c e s i n

measures of p r i c e c o n t r o l over s i m i l a r p r o d u c t s ; d i f f e r e n c e s

i n the r a t e s of i n t e r e s t payable on c a p i t a l funds due t o

d i v e r g e n t n a t i o n a l monetary p o l i c i e s . 7

6 F.G. Eyck, "Benelux i n t h e b a l a n c e : problems, s h o r t comings and achievements , P o l i t i c a l Science Q u a r t e r l y , No.69, March 1954, p p . 65 t o 9 1 .

7 The Post-War Monetary P o l i c y of t h e Benelux Count r i e s and i t s e f f e c t on Fore ign Trade , A S e r i e s of L e c t u r e s on I n t e r n a t i o n a l Banking and F o r e i g n Trade d e l i v e r e d a t Oxfor<. U n i v e r s i t y i n S e p t . 1955. London. The I n s t i t u t e of Bankers . 19£5. P P . 7 2 t O 1 0 0 . UNIVERSITY OF OTTAWA ~ SCHOOL OF GRADUATE STUDIES



The difficulties inherent in the objectives which

these countries had taken upon themselves to achieve were

significantly increased by the very fact that such objective*

meant the abandonment of pre-war economic policies and a re

versal in the well-established effects of such policies. Thusi

it was not until 1948 that the common Benelux customs duties

were put into effect and that the ordinary customs duties on

trade between the member countries were abolished. This was

the first real tangible step put successfully into effect

towards full economic union. But even then, the Benelux

could not agree on the Inclusion of agriculture in the free

common market.

For the next ten years progress was gradual but en

couraging. Attention had to be focussed on the more diffi

cult problems of economic union.$ The unification of rates

of excise duties threatened not only budget revenues but als>

the future freedom of individual action by member countries

in bringing changes to such rates for budgetary or other

reasons. This involved the introduction of central adminis

trative control over the collection of such duties and over

the future alterations in the unified rates. Another most

difficult problem encountered in the early negotiations

8 Alan Valentine, "Benelux: pilot plant of economic union", Yale Review, No. 44, September 1954, pp. 23 to 32; W. Robertson, "Benelux and the Problems of Economic Integration, Oxford Economic Papers, New Series No. 8, February 1956, pp. 35 to 50.




towards economic union was the necessity for some assurance

of balance of payments equilibrium within the area. Based on

the separate domestic monetary and fiscal policies of the

partners any imbalance would have to be rectified through

the re-imposition of restrictions on trade and payments. Solu

tion to this problem was fortunately facilitated by the re

gional convertibility of most European currencies through

the facilities of the European Payments Union, and through

gradual strengthening of the Dutch balance of trade position

vis-a-vis Belgium. The Dutch were able to finance any defi

cit within the Benelux by their earnings from third countrie i

in Western Europe. With the all around strengthening of

European currencies, and with the smooth operation of the

EPU, this difficulty slowly began to disappear. Moreover,

with the participation of Benelux in the moves for the forma

tion of a European Economic Community, the real solution

would now have to be sought within this larger economic

grouping.

Having demonstrated to the world that a sound approach

to economic union must be gradual, these three countries

signed the Treaty establishing the Benelux Economic Union on

February 3, 1958. This represented the result of almost

fourteen years of negotiations. However, even after all tha ;

time, an escape clause had to be incorporated in the Treaty

which extends until 1962 the time-limit for the creation of

a common market in agriculture. UNIVERSITY OF OTTAWA - SCHOOL OF GRADUATE STUDIES



C. The North Atlantic Treaty Organization

Soon after the end of the Second World War Europe cam>

to realize that the main threat of aggressive militarism did

not lie in a renewal of German military might, but rather in

the attitude and policies of the growing "Soviet Empire", The

Treaty of Dunkirk signed in March 1947 had bound the U.K. and

France in resisting a revival of German aggression. But now

some form of military cooperation was needed for the military

consolidation of the whole of Western Europe. The serious

ness of dangers was underlined very early in 1948 by the

Communist coup d'etat in Czechoslovakia. This development

may well have hastened the signing of the Brussels Treaty in

that same year whereby the U.K., France and the Benelux were

joined together in common defense against aggression in

Europe. This move received the support of the U.S. and

Canada, and shortly after its inception talks were held in

Washington to study the possibility of more comprehensive

military cooperation under a proposed North Atlantic Regional

Pact which would include Canada and the U.S.

The creation of the North Atlantic Treaty Organizatioln

(NATO) in April 1949 was the subsequent result of these talks

and united most of Western Europe with Canada and the U.S.

under one policy of defense.9 With the realization that

9 The European members of NATO were Benelux, Denmark, France, Iceland, Italy, Norway, Portugal and the United Kingdom; Greece and Turkey joined in 1952 and Germany in 1955.




German participation in Western defense would have to be

accepted some day, France proposed the formation of a Europealn

army. The view at that time was that German rearmament would

be acceptable only on the basis of German participation in ar

integrated European army. To this end a European Defense

Community (EDC) was proposed with the objective of setting up

a supranational defense community with common institutions,

common armed forces and a common budget. Arrangements were

also being completed within NATO for an integrated force in

Europe, with fewer characteristics of supranational!ty, to be

contributed by participating governments, and to be under one

command. It may well have been that these new developments

in NATO, which minimized the need for supranational authority

while at the same time providing common defense, influenced

the outcome of EDC. With the failure to implement the EDC

Treaty, Germany was not accepted as a member of NATO until

1955. This was a practical demonstration of Europe's indeci

sion and preference for gradualism in cooperative endeavours

demanding the sacrifice of domestic autonomy. It also indi

cated that Europe still feared a Germany under arms.

With its growing military strength and stability and

the increasing recognition of the need for cooperation, NATO

did provide Europe with an immediate sense of security. But

10 Central Office of Information, Western Cooperatior A Reference Handbook, London, H.M. Stationery Office, November 1955, pp. 5 to 8.




the T r e a t y was no t s o l e l y concerned w i th d e f e n s e . In

A r t i c l e 2 of t h e Trea ty member c o u n t r i e s had endorsed t h e

concept t h a t an e f f e c t i v e p o l i c y of defense fo r t h e f r e e world

must be based on economic expansion and p r o s p e r i t y , and t h a t

i t s cohes ion depends more on c l o s e r s o c i a l and p o l i t i c a l con

t a c t s between i t s members than on s t r i c t l y m i l i t a r y " e n t e n t e s " .

Thus th© importance of c l o s e r economic c o o p e r a t i o n , t he expar -

s i o n and l i b e r a l i z a t i o n of trad© were problems which f e l l

w i t h i n the in t ended scope of NATO. Such a s p e c t s of NATO,

however, proved more d i f f i c u l t t o p u t i n t o p r a c t i c e than t h e

p u r e l y m i l i t a r y o b j e c t i v e s . In an a t t empt t o overcome t h i s

d e f i c i e n c y the M i n i s t e r i a l Meeting of December 1955 dec ided

t h a t t h e Counci l should "examine and implement" a l l measures

conducive t o c l o s e r c o o p e r a t i o n between member c o u n t r i e s , a s

env i saged i n A r t i c l e 2 of the T r e a t y . As a r e s u l t of t h e

d i s c u s s i o n fo l l owing t h a t meet ing the Counci l dec ided , i n

May 1956, t o appoin t a Committee of T h r e e 1 1 " t o adv i se t h e

Counc i l on ways and means t o improve and extend NATO c o

o p e r a t i o n i n n o n - m i l i t a r y f i e l d s " . 1 2 In commenting on t h e

work of the Spec i a l Committee Mr. Pea r son s a i d , "what A r t i c l e 2

env i saged was n o t so much the p r o d u c t i o n of t a n g i b l e r e s u l t s

1 1 Mr. Halvard Lange, Foreign Minister of Norway, Mr. Gaetano Martino, Foreign Minister of I t a l y , Mr. L.B. Pearson, Secretary of S ta te for External Affa i rs of Canada.

1 2 Department of External Affa i rs , External Affa i rs , Ottawa, Vol. 8, No. 5, p . 110.




but the creation of a frame of mind which would accustom

sovereign states to thinking of their allies in the forma

tion of their political and economic policies."13

The Report of the Committee of Three on non-military

cooperation in NATO was presented at the Paris Ministerial

Meeting in December 1956. The Report recognized the impor

tance of consultation among NATO governments and stressed

the need for members to develop common policies by full and

timely consultation on issues of common concern. This would

not require new institutional arrangements nor organizationa:,

changes but could be achieved through sustained political wi:,-

lingness to form policies through consultation. The Report

was also concerned with differences which might arise between

members and suggested procedures to facilitate the settlement

of such differences.

The Report indicated that while economic cooperation

was desirable it was also difficult to achieve in practice,

and the only tangible means it could offer was increased con

sultations amongst member countries. In an address to the

American Council on NATO in New York, in January 1957, Mr.

Pearson supported this view when he said, that unity within

1 3 Edgar Mclnnis, "Three Wise Men Look for Ways to Develop and Strengthen NATO", Canadian Business, Canadian Chamber of Commerce, Montreal, March 1957, p. 88.

14 Department of External Affairs, External Affairs, Ottawa, Vol. 9, No. 1, January 1957, p. 12.




NATO

must be based on something deeper than defence cooperation alone if it is to survive. As we wrote in our report 'there cannot be unity in defence and disunity in foreign policy'. That seems to me to be obvious, but some years of participation in international affairs have led me to the somewhat cynical conclusion that the obvious is often more difficult to implement than the obscure. 3

Thus, even today, the non-military objectives of NATO

remain secondary to military considerations.

The question of financial aid through NATO has been

the subject of divergent views, and it should at least be men

tioned here. If NATO - fundamentally a military organization

was to allocate funds for aiding the underdeveloped countries

such could be looked upon as military rather than economic,

and would imply, for propagandists at least, some form of

military "rapprochement". Such considerations have tended to

frustrate the economic initiative of NATO. But there does

exist another area of aid which NATO could properly regard as

its own without fear of adverse political propaganda. NATO's

economic aspect could be tested in its economically less fa

voured members, such as Greece and Turkey, and even in some

parts of Italy. This would benefit not only the recipient

country, but also the Organization as a whole. And in the

1 5 Department of External Affairs, External Affairs, Ottawa, Vol. 9, No. 2, p. 78.




l i g h t of the developments i n the U . S . i n t e r n a t i o n a l accoun t s

the moment would seem a p p r o p r i a t e fo r the a d o p t i o n of a p u r e

l y NATO i n t e r n a l development fund des igned t o s t r e n g t h e n the

economic s i d e of the A l l i a n c e as a whole . Th is would mere ly

be g i v i n g e x p r e s s i o n t o A r t i c l e 2 of the T r e a t y which d e a l s

w i t h s e l f - h e l p and mutual a i d .

I f s o l u t i o n s to the problem of economic a id and co

o p e r a t i o n w i t h i n NATO were l e f t want ing , t h i s O r g a n i z a t i o n

d id p rov ide a s t r o n g c o o p e r a t i v e approach to E u r o p e ' s mi l i ta r jy

p rob lems , even between Germany and France , which may we l l

have f a c i l i t a t e d the achievement of success i n o t h e r European

c o o p e r a t i v e endeavours more d i r e c t l y concerned w i th economic

m a t t e r s .

D. O r g a n i z a t i o n for European Economic Coopera t ion (OEEC)

E u r o p e ' s b a s i c problem i n 1945 was economic. Most

of E u r o p e ' s c a p i t a l equipment had been des t royed or run-down

wi th the r e s u l t t h a t p r o d u c t i v e c a p a c i t y was s t a g n a n t , and e\|en

d e t e r i o r a t i n g . Moreover many overseas i nves tmen t s had been

r e p a t r i a t e d f o r the war e f f o r t , whi le i n t e r n a t i o n a l indeb ted

n e s s had i n c r e a s e d . In a d d i t i o n , the normal sou rces of

supply of many e s s e n t i a l raw m a t e r i a l s , e s p e c i a l l y i n South-

E a s t As ia , had been s e v e r e l y d i s t u r b e d by t h e " Japanese War",

These c o n d i t i o n s were r e f l e c t e d i n low l e v e l s of p r o d u c t i o n ,

s h o r t a g e s of f u e l , i n f l a t i o n a r y p r e s s u r e s , budge t a ry d e f i c i t s




and h e a v i l y adverse t r a d e b a l a n c e s - p a r t i c u l a r l y w i th North

America, which,pending the r e h a b i l i t a t i o n of o the r p re -war s o u r

c e s , was the main s u p p l i e r of impor tan t f o o d s t u f f s and raw

m a t e r i a l s .

During t h i s p e r i o d d e f i c i t s i n payments were covered

by drawing down remaining d o l l a r r e s e r v e s , and th rough f i n a n

c i a l a i d and l o a n s , such as from the Uni ted Na t ions , Canada

and t h e U.S.A. By 1947, however, most of t hese e x c e p t i o n a l

means of f i nance were n e a r i n g e x h a u s t i o n . Europe was faced

wi th a p o s s i b l e r e d u c t i o n of s u p p l i e s of f o o d s t u f f s and raw

m a t e r i a l s t h a t could have r e v e r s e d the t r e n d towards economic

r e c o v e r y , and p r e c i p i t a t e d unemployment and acu t e s o c i a l

d i s t r e s s . 1 6

I n a d d i t i o n , the l ong - t e rm f u t i l i t y of t h i s type of

uncoo rd ina t ed a id was g r a d u a l l y r e c o g n i z e d . G r a n t i n g sepa

r a t e a s s i s t a n c e t o i n d i v i d u a l European c o u n t r i e s , whose p r o

d u c t i o n , f o r e i g n t r a d e and inves tment p o l i c i e s , not only

e n t i r e l y l acked c o o r d i n a t i o n , but were to a c o n s i d e r a b l e ex

t e n t c o m p e t i t i v e and c o n t r a d i c t o r y , was to say t h e l e a s t a

f u t i l e u n d e r t a k i n g . The need for economic c o o p e r a t i o n became

even more ev ident i n t h e face of growing dichotomy between

e a s t and west Europe . This s i t u a t i o n he lped to spur t h e U .S .

i n t o a c t i o n t o f i nd some sound s o l u t i o n to E u r o p e ' s p r e d i c a

ment .

16 Uni ted Na t ions , A Survey of the Economic S i tua t io r , and P r o s p e c t s of Europe, Lake Success , Department of Economic A f f a i r s . 1948. p p . T0T^153.




The i n t e r e s t of the U.S. i n t h e economic r ecove ry of

t h e non-communist c o u n t r i e s of Europe, which o the rwi se might

become easy p r ey to Sov ie t m i l i t a r y or economic a g g r e s s i o n ,

was more t h a n p o l i t i c a l . P o l i t i c a l mot ives were, of course ,

g iven g r e a t d i s p l a y s i n c e p u b l i c op in ion could g ra sp t he se

more e a s i l y , b u t t h e r e were a l s o very s e r i o u s economic reason*,

The gene ra l expansion of imports and r e d u c t i o n of e x p o r t s vis

a - v i s t he D o l l a r Area was c a u s i n g ever i n c r e a s i n g d e f i c i t s i n

th© merchandise t r a d e of Western Europe . While i n 1938 the

t r a d e d e f i c i t of t h i s a r e a wi th the U.S. had amounted to only

$700 m i l l i o n , i t reached $3 .5 b i l l i o n i n 1946 and #5 b i l l i o n

i n 1947. Developments i n the ba l ance of payments s i t u a t i o n

l e d t o d e f i c i t s of $4 .2 b i l l i o n i n 1946 and $ 5 . 4 b i l l i o n i n

1947, compared to $400 m i l l i o n i n 1 9 3 8 . 1 7 The problem of f i

n a n c i n g t h e s e enormous d e f i c i t s was g a i n i n g i n s e r i o u s n e s s ,

and t h e U.S. knew too w e l l t h a t c u r r e n t p o l i c i e s of a i d would

no t p rov ide the coveted recovery i n Europe . I t was t h e n f e a r id,

on the b a s i s of p a s t expe r i ence , t h a t E u r o p e ' s ch ron ic d e p r e s

sed c o n d i t i o n s would e v e n t u a l l y make i t s e l f f e l t i n a d e c l i n e

i n U.S. e x p o r t s . The i d e a of f o s t e r i n g p r o s p e r i t y i n Europe

was t h e r e f o r e grasped by the American government as a p o l i c y

of n e c e s s i t y t o i n su re con t inued U.S. economic a c t i v i t y i n

t h e f u t u r e j u s t as much as f o r p o l i t i c a l r e a s o n s .

1 7 Pau l A l p o r t , Twent ie th Century Economic H i s t o r y of E u r o p e , p p . 3 7 0 - 3 7 1 .




On June 5, 1947, the Secretary of State of the U.S.,

General Marshall, made a historic speech at Harvard Universit

in which he invited European nations to join in detailing

their common needs for consideration by Congress. European

governments responded by setting up a "Committee of European

Economic Cooperation" to determine their needs. Although suc]Ji

response was welcomed it had not really been expected by the

U.S. The proposal formulated by Mr. Marshall applied to the

whole of Europe, both East and West, and it had been expected

that the newly established U.N. Economic Commission for Europo

would provide the technical and administrative machinery for fche

implementation of the Marshall Plan. The Soviet Union, how

ever, refused to accept the Marshall offer and forced all

18 countries under her control to do likewise. With the Sovie

refusal, the plan became the natural basis of the Western Bio

Sixteen countries of Europe19 set to work on a plan for

European reconstruction, which led to the response from the

"Committee", and in effect made it impossible for the U.S. to

pursue its aid plan through U.N. facilities.

The aim of the plan was to raise industrial and agri

cultural production, on the assumption of American aid over a

1 8 Poland and Czechoslovakie first accepted the Marshall offer, but subsequently refused it.

19 Austria, Belgium, Denmark, France, Germany, Greece Iceland, Italy, Luxembourg, Netherlands, Norway, Portugal, Switzerland, Sweden, Turkey and the United Kingdom.




f o u r - y e a r p e r i o d . A j o i n t r e p o r t by th© s i x t e e n n a t i o n s was

p r e s e n t e d t o the U.S. government i n September 1947. Outs ide

of be ing a remarkable p o l i t i c a l and economic achievement i n

i t s e l f , t h i s r e p o r t a l s o d i s p l a y e d E u r o p e ' s new b e l i e f i n th<

soundness and n e c e s s i t y for economic c o o p e r a t i o n . While the

U .S . p r epa red i t s machinery t o a d m i n i s t e r t h i s p l a n and t o

d i s t r i b u t e the f u n d s , 2 ^ Europe pursued i t s e f f o r t s , which cu!.

minated i n the s i g n a t u r e of a m u l t i l a t e r a l conven t ion between

the p a r t i c i p a t i n g c o u n t r i e s and the s e t t i n g up of th© Organ

i z a t i o n f o r European Coopera t ion on A p r i l 16, 1948 . Subse

q u e n t l y , the U.S. Economic Coopera t ion A d m i n i s t r a t i o n (ECA)

e s t a b l i s h e d l o c a l m i s s i o n s i n each of t h e p a r t i c i p a t i n g coun

t r i e s r e c e i v i n g d o l l a r a id , and b i l a t e r a l agreements were

s igned between the government of each of t h e s e c o u n t r i e s and

t h e U .S . government. Europe had thus o f f i c i a l l y e n t e r e d the

e r a of p r a c t i c a l economic c o o p e r a t i o n .

Although, a t f i r s t , the OEEC was looked upon mainly

as a means to f a c i l i t a t e the a d m i n i s t r a t i o n and d i s t r i b u t i o n

of American a i d , i t soon showed i t s e l f t o be much more. The

g r a d u a l development of OEEC i n t o something more t han a

" d i s t r i b u t i o n agency" l e d to i n c r e a s i n g c o o p e r a t i o n i n near ly

a l l f i e l d s of economics.

2 0 On Apri l 3, 1948, President Truman signed the U.S Foreign Assistance Act. This embodied the Economic Cooperat i o n Act, which authorized j u s t over $5 b i l l i o n in aid to Europe in th© f i r s t year .




OEEC became the agency th rough which the c o u n t r i e s of

Western Europe took th© i n i t i a t i v e i n s o l v i n g t h e i r r e s p e c t l v >

economic d i f f i c u l t i e s . One of i t s main p r e - o c c u p a t i o n s soon

became the l i b e r a l i z a t i o n of t r a d e and payments, which i t

c o n s i d e r e d as an e s s e n t i a l c o n d i t i o n for the achievement of

i t s o b j e c t i v e s of g r e a t e r p r o d u c t i o n , b e t t e r s t anda rds of

l i v i n g and sound ba lance of payments p o s i t i o n . R e l i e f was

sought through b i l a t e r a l t r a d e and payments a r rangements a t

f i r s t , and then through i n t r a - E u r o p e a n payments s c h e m e s . 1

D e s p i t e the doub t s , t h e d i f f i c u l t i e s and t h e se tbacks

which accompanied t h i s new v e n t u r e , Europe s lowly began to

demons t ra te impress ive economic g a i n s . As may be seen from

Table IV, between 1947 and 1951, OEEC c o u n t r i e s as a whole

n o t mere ly r e g a i n e d , bu t c o n s i d e r a b l y su rpassed th© pre -war

l e v e l i n most of t he main s e c t o r s of p r o d u c t i o n and t r a d e ;

a f t e r 1951 f u r t h e r p r o g r e s s con t i nued . Most of t he se coun

t r i e s a l so a t t a i n e d a much h igher degree of i n t e r n a l f i n a n c i a l ,

s t a b i l i t y .

In the p r a c t i c a l a p p l i c a t i o n of economic c o o p e r a t i o n

Europe r e a l i z e d i t s many b e n e f i c i a l e f f e c t s . Q u a n t i t a t i v e

r e s t r i c t i o n s were s lowly d i sman t l ed , t r a d e i n c r e a s e d and most

c o u n t r i e s invo lved soon recogn ized t h a t th© p r o g r e s s ach ieved

had been g r e a t l y f a c i l i t a t e d by the new p o l i c y . Thus economi J

2 1 Rober t T r i f f i n , Europe and t h e Money Muddle, New Haven, Yale U n i v e r s i t y P r e s s , 1957, c h a p t e r s 4 and 5 .



THE PROCESS OF GRADUAL INTEGRATION

TABLE

Economic Progress

Volume index of gross national product: (1951 = 100)

Volume index of private consumption: (1951 - 100)

Index of agricultural output for consumption: (1950 . 100)

Index of industrial production: (1950 = 100)

Volume of imports: (1950 . 100)

Volume of exports: (1950 . 100)

Volume of intra-European trade: (1950 . 100)

Source: OEEC, No. 4,

* Average of years,

** 1948#

1938

83

89

91*

82

100

78

80

Statis Paris

IV

of OEEC Members

1947 1951

75 100

94 100

75 102

80** 110

81 110

52 114

48 110

1952

101

102

106

111

107

109

106

1953

106

107

115

116

114

120

119

bical Bulletins 1955, , July 1955,

1934-1938.

p. 157.

56

1954

111

112

115

127

126

132

135




cooperation was instilled in Europe as a sound and beneficial

policy from which it would be foolish to retreat. In accepting

economic cooperation as a worthwhile and workable principle,

Europe was approaching another stage in its change of atti

tude from pre-war policies. The next logical step would be

to determine the degree of intensity of economic cooperation

most beneficial to the countries concerned. Based on the

success already experienced from economic cooperation it was

then only a question of time before some country would sug

gest that even greater benefits could be theirs if they were

to accept economic integration as their new basic policy.

As events showed, however, this question, with its political

overtones, did not receive the full endorsement of all OEEC

countries as had their first less encompassing endeavour.

Nevertheless, the success of OEEC did provide the turning

point in European trade policy away from pre-war protectionism,

and, as such, marked the most important single economic develoj-

ment in Europe following the war. It paved the way and ren

dered possible the practical developments towards economic

integration taking place today in Europe. It represents the

necessary precedent and offers the required experience where

by Europe may some day be united politically as well as

economically under some form of United States of Europe.




E . European Payments Union (EPU)

The i n t e r n a t i o n a l flow of goods and s e r v i c e s i n

Europe a t the end of t h e war was s e r i o u s l y impeded by a n e t

work of q u a n t i t a t i v e r e s t r i c t i o n s and exchange c o n t r o l s . I n

o rde r to t r a d e w i th each o t h e r European c o u n t r i e s had to r e l y

on b i l a t e r a l a r rangements . However, t h e fo rma t ion of t h e OEEC

and t h e a p p l i c a t i o n of economic c o o p e r a t i o n i n o t h e r f i e l d s

l e d t o t h e i n t r o d u c t i o n of i n t r a - E u r o p e a n monetary coopera

t i o n . In 1948-1949 and 1949-1950, the In t r a -European Payments

Agreements were developed whereby c r e d i t s a r i s i n g from c u r r e n t

t r a d i n g between OEEC member c o u n t r i e s were reduced by month

l y c l e a r i n g o p e r a t i o n s . However, t h e s e payment a r rangements

were e s s e n t i a l l y b i l a t e r a l , and t h e i r drawbacks were e v e n t

u a l l y overcome on J u l y 1, 1950, when t h e European Payments

Union came i n t o o p e r a t i o n and prov ided machinery fo r a mul

t i l a t e r a l system of payments between OEEC c o u n t r i e s .

Each member coun t ry was t h u s p l aced i n the p o s i t i o n

of be ing ab le to ignore i t s ba lance of payments wi th each of

the o t h e r s and to c o n c e n t r a t e s o l e l y on i t s ba l ance w i t h t h e

group as a whole . EPU did no t propose t o e s t a b l i s h the u l t i

mate s o l u t i o n t o Eu rope ' s ha rd cu r rency p rob lems . I t was no t

expec ted , for i n s t a n c e , to so lve the " d o l l a r s h o r t a g e " p r o b l e n

a t t h a t t i m e . I t was merely des igned a s a temporary e x p e d i e n t

t o "permi t the maintenance of d e s i r a b l e forms of s p e c i a l i z a

t i o n i n t r a d e , whi le f a c i l i t a t i n g a r e t u r n t o f u l l




multilateral trade and ..... to the general convertibility of

22

currencies." The suspension of the former bilateral pay

ments agreements and their transformation into a multilateral

payments system were not only worthwhile achievements in them

selves but also contributed to increasing competition amongst

European countries. Thus EPU contributed to the removal of

the major instruments and financial incentives to discrimina

tion and bilateralism in Europe, and facilitated any subse

quent steps towards the creation of a common market.

In addition to its direct achievements, EPU established

a sound basis of international cooperation at the administra

tive level. Out of the numerous negotiations and the con

crete problems to be solved by the experts concerned, arose s

broader understanding of European problems. This was in con

trast to the traditional nationalistic approach quite incom

patible with successful and lasting integration at the econo

mic level.

F. European Coal and Steel Community

In the summer of 1952 Europe took a revolutionary

step towards supranational cooperation. Under a new body

called th© European Coal and Steel Community (ECSC) Benelux,

France, Germany and Italy joined together in the production

and consumption of coal and steel in Europe. A cooperative

22 OEEC, Preamble to the Agreement for the Establishment of a European Payments Union, signed on Sept.19. 1950. Paris. 1952.




©ffort such as ECSC had been sought as an economically desi

rable arrangement, but it was the political events of the

time which assured its early implementation.

In 1949 Benelux, France, U.K. and U.S.A. took over

control of the Rhur coal and steel industry as a power re

served for the Allies under the original Occupation Statute.

This controlling body was known as the International Rhur

Authority. Th© main purpose of the Authority was "that the

resources of the Rhur shall not be in future used for the pur

pose of aggression, but shall be used in the interest of

peace; that access to the coal, coke and steel of th© Rhur,

which was previously subject to the exclusive control of Ger

many, be in the future assured on an equitable basis to the

23 countries cooperating in the Common economic good "

With this purpose it combined the hope of lowering trad© bar

riers and facilitating cooperation in Europe, including a de

mocratic but controlled Germany.

Of course Germany resented this tutelage and was

seeking for a wider international regime on a basis of equal

rights and duties. Dr. Adenauer's address to th© occupying

powers, on taking office as Federal Chancellor in September

1949, expressed th© desire quite frankly: "We see another

opening for creating a positive and viable European Federatio 1

2 3 E. Strauss, Common Sense about the Common Market, London, Allen and Unwin7 1958, p. 61.



»


in the hope that the control of the Rhur region would cease

to be a unilateral arrangement and that it would gradually

grow into an organism which would embrace the basic Industrie

of the other European countries as well". 4 This suggestion,

although not very palatable to the other European countries,

corresponded very closely with a need for the harmonization o

the production and consumption of coal and steel which was

being expressed at that time in Europe. The plan for the

"pooling" of French and German coal and steel production, put

forward by France in May 1950, was the outcome of these cir

cumstances. It was also the starting point of the "Schuman

Plan", which culminated in the formation of ECSC in the summej?

of 1952. The basic purpose of the Schuman Plan, from th©

French point of view, was to keep Germany from regaining

exclusive control of the coal and steel industry. From the

political point of view ECSC promised to confer international

power on a body largely free from the vote of a single governf-

ment and equipped with powers to direct the activity and

development of two vital European industries to th© benefit

of all. From the economic point of view ECSC was to obtain

for all its members,a strengthening in the export of ste©l,

better prices to the consumer, increased efficiency in pro

duction and distribution. It would obviate the re-instatemen

2 4 Ibid., p. 62.




of p re -war c a r t e l a r rangements d e t r i m e n t a l t o c o m p e t i t i o n , tc

the p u r s u i t of e f f i c i e n c y and t o the consumer, and c o n t r i b u

t i n g to was t e fu l and uneconomic expans ion of t h e s e i n d u s t r i e s

i n seg rega ted m a r k e t s .

For such a scheme to succeed i t was n e c e s s a r y t h a t

no member should su f f e r unduly from t h e adve r se economic

e f f e c t s of f r e e c o m p e t i t i o n . On the o t h e r hand the se c o u n t r i e s

wanted t o p reven t a renewal of pre-war monopo l i s t i c and c a r

t e l a r r angemen t s . I t was t h e r e f o r e agreed t h a t , i n o rde r to

b e n e f i t from the advantages of c o m p e t i t i o n w h i l e o b v i a t i n g

i t s u n d e s i r a b l e consequences , a c o n t r o l l e d compe t i t i ve marke

should be e s t a b l i s h e d . The success of ECSC i n i n c r e a s i n g

c o m p e t i t i o n and i n f r e e i n g t h i s market from t r a d e b a r r i e r s

has been q u i t e r emarkab l e . Most of the g l a r i n g forms of

d i s c r i m i n a t i o n such as s u b s i d i e s , p r e f e r e n t i a l t a r i f f s , quo

t a s , customs d u t i e s and import and expor t l i c e n c e s have now

been e l i m i n a t e d . In a d d i t i o n dur ing the seven-year p e r i o d

1951-1957, s t e e l ou tput of member n a t i o n s i n c r e a s e d by 43 pei

c e n t , wh i l e t h e i r t r a d e i n s t e e l p roduc t s more than d o u b l e d . f 3

Whatever i t s p a r t i c u l a r achievement , ECSC did prove

economic i n t e g r a t i o n to be p r a c t i c a l . However t h e i n h e r e n t

drawback of t h i s "Plan" was t h a t i t was on ly p a r t i a l i n

s cope . The l e v e l of economic a c t i v i t y i n s t e e l and c o a l was

25 Wil l iam Diebold , J r . , The Schuman P l a n , A Study i n Economic Coopera t ion 1950-1959, P u b l i s h e d for t h e Counci l on Fo re ign R e l a t i o n s , New York, P raeger , 1959, p . 569, T a h l A TT. anrl p . R77 T » M « 1 a




obviously dependent on the overall economic conditions in

Europe, but only in that particular area was there specific

cooperative action. Being subject to the rest of the economy,

these two industries could not be guided and developed in tho

most effective manner. By its limited approach to unifica

tion, ECSC was, in itself, either an intermediate step to

more embracing integration, or a step back towards eventual

segregation of these two industries from the rest of the

European markets. But ECSC was not intended to be an end in

itself. It was hoped that from its experience there would

rise a greater spirit of economic and political cooperation

especially between France and Germany.

The parties to this "Plan" realized that a united

Europe could not be achieved within the near future, but

they hoped that it would serve as a first step, a concrete

example, which would encourage the formation of additional

pools, and even pave the way to an eventual political and

economic unification of all continental Europe. It was con

sidered to be a plan much wider in scope than the problems

of these two heavy industries to which it was initially

being applied. In the sixth Annual Report of the ECSC, it

was reported that:

Although the industries in a common market constitute a good test of the competitive ability of an economy, experience has shown that governments do not manage their general economic policy on the basis of the competitive conditions of two of their




industries, however important they may be. The effectiveness of the measures (with respect to coal and steel) have been limited. The High Authority firmly believes that economic policies will be more effectively and spontaneously coordinated as integration becomes wider, and each country's stake in integration is extended.26

This indicates that not only was wider economic

integration desired, but that it was also desirable in

order to gain the full benefits from such cooperative

efforts.

There is no doubt that the economic solidarity in

Europe which grew out of these efforts, became an efficient

means of unified action equal to the problems at hand; and

the treaty establishing the European Economic Community was

the fruit of the experience and achievements of the European

Coal and Steel Community.

2 6 High Authority of ECSC, Sixth General Report on the Activities of the Community, Luxembourg, April 1958, p. 15.



CHAPTER III

THE EUROPEAN ECONOMIC COMMUNITY

k. Introduction

Although there had been signs of interest in economic

cooperation within Europe prior to World War II, that war

gave powerful stimulus to renewed action in this direction.

The idea of economic integration is not something which swept

across Europe to be accepted without question. Rather this

concept followed logically from the success and benefits

already achieved through post-war economic cooperation dis

cussed in the previous chapter. Many of the reasons for the

remarkable degree of post-war cooperation in Europe were

equally valid in support of attempting economic integration.1

1 Subject matter covered in the "Introduction" and "The Institutions of the Community" is based mainly on information contained in, Department of External Affairs, "The Economic Integration of Western Europe", External Affairs, Vol. II, January 1959; Ibid., Vol. II, No. 2, February 1959; William Diebold, Jr,, The Schuman Plan, A Study in Economic Cooperation", p. 636-668; Committee for the Common Market and Euratom, Treaty Establishing the European Economic Community, and Connected Documents, Brussels, Secretariat for the Interin Committee for the Common Market and Eur atom, 1957, 378 p.; Royal Institute of International Affairs, "The Treaty for a European Economic Community - A Critical Analysis", The World Today, Vol. 4, No. 7, Oxford University Press, July 1958, pp. 304-315; Political and Economic Planning, European Organizations, London, Allen & Unwin, 1959, pp. 292-298; Political & Economic Planning, The Spaak Report - a summarized translation of Part I - The (Tommon Market, London, Allen & Unwin,



THE EUROPEAN ECONOMIC COMMUNITY 66

Among th© more fundamental causes had been the feeling

that the state organization of 1939, along national lines,

had failed and that a wider political grouping was necessary

in order to eliminate the intra-European animosities. There

was also the feeling that Europe was in no position to re

instate currency and trade barriers on the same basis as in

the thirties, if it was to share eventually in the technolo

gical advances, which had characterized U.S.A. growth, and

which called for a large single market at its base. There

was, as well, the favourable background of geographical

proximity within Western Europe, and the unfailing support

from the U.S.A. for all movements directed towards greater

unity in Europe.

In view of the success of the ECSC, the next logical

step was to extend the pattern it developed for coal and

steel to all trade and other economic activities. The pre

sent Treaty creating the EEC is essentially based on the

experiences of ECSC, and it testifies to the success the

latter has achieved.

At one stage in the developments towards a common marj-

ket of wider scope, it seemed as if the whole movement woulc

founder. The success of ECSC encouraged the supporters of

December 1956, 98 p.; E. Strauss, Common Sense About the Common Market, pp. 72-106; The European Economic Community, New York, Societe Generale (FrSnce), no date, approx. 1959, 46 p.; The New European Market, New York, The Chase Manhat-tan Bank, July 1958, 40 pagesT




i n t e g r a t i o n to move fur ther - but as i t turned out - with

too much h a s t e . They attempted to c rea te a European array

and a s ingle defence policy for Europe under the European

Defence Community. Work was also begun on the formation of

a European P o l i t i c a l Community. But the loss of French par

liamentary support for EDC i n 1954, brought a l l these p lans

to a more p r a c t i c a l l e v e l . Economic i n t e g r a t i o n soon came

to be accepted as a p r e r equ i s i t e to p o l i t i c a l union.

Almost immediately a f t e r the defeat of EDC, the six

countr ies now members of the Common Market, along with Brita:

provided a subs t i t u t e - Western European Union. Like EDC,

i t provided for combined defense, but i t c a l l ed only for

inter-governmental cooperation and es tab l i shed no important

supranat ional au tho r i ty . This seemed to express the p o l i

t i c a l r e a l i t y of the time - t ha t i n t e g r a t i o n of armies shoulfi.

be made only a f te r a so l id economic and p o l i t i c a l foundation

had been l a i d .

However, the blow which the defeat of EDC deal t to

the advocates of broader economic i n t e g r a t i o n was merely

stunning, not deadening. The winter of 1954-1955 was marked

by a r e v i v a l of discussions about the best approach to econ

omic i n t e g r a t i o n . Included i n such debates were a number of

plans for a European Currency Commission, a Federal Reserve

System and even a common currency. The main drive was

towards adoption of s imi la r na t iona l p o l i c i e s , eas ie r f inan-

n,




cial transactions across national frontiers and a revival of

th© cooperation of central banks. On the whole, discussions

exposed the general view that no major measures of economic

integration could succeed, if they were confined either to

particular industries or to trade alone. Even the BENELUX

governments, partisans of partial integration, shifted their

support to the broader approach early in 1955.

In the light of the many conflicting and competing

views, and because most of its members were basically inte

rested in further integration, the Assembly of the ECSC calljod

on th© foreign ministers of its member states, in May 1955,

to organize a conference to look into the possibility of

broader economic integration. Of course, th© personal

efforts and persuasive force of such men as Mr. Spaak and

Mr. Schuman contributed to the progress achieved in this

drive towards a broader approach to European economic pro

blems.

The conference of the Six in Messina, Italy, in June

1955, gave practical consideration to the feasibility of

economic integration. This conference, known as the "Messing

Conference", led to an agreement amongst the Six, that the

time had come for a new step on the road to European unity.

Serious consideration was to be given to some form of joint

action in the development of atomic energy and, ultimately,

to the establishment of a common market. During the autumn




and w i n t e r of 1955-1956 a committee under Mr. Spaak ( then the

Be lg ian fo r e ign m i n i s t e r ) examined the means f o r a c h i e v i n g

t h e s e e n d s . I n A p r i l of 1956, the "Spaak Repor t " , c o n t a i n

ing a comprehensive p l an fo r the j o i n t development of atomic

energy , and a somewhat l e s s d e t a i l e d p l an for the p r o g r e s s i v e

e s t a b l i s h m e n t of a European common market , was p u b l i s h e d .

In May, t h i s r e p o r t was endorsed by the f o r e i g n m i n i s t e r s of

the S ix as a b a s i s for t h e n e g o t i a t i o n of d e f i n i t i v e t r e a t i e s .

Two t r e a t i e s emerged from t h e s e n e g o t i a t i o n s , c r e a t i n g -

The European Atomic Community, known as Euratom, p r o v i d i n g

for the e s t a b l i s h m e n t of a common market for n u c l e a r energy

and r e l a t e d p r o d u c t s , a s w e l l as f o r j o i n t n u c l e a r deve lop

ment - and, the European Economic Community.

By autumn of 1957, a l l the p a r l i a m e n t s of t he s i x

member c o u n t r i e s of ECSC had r a t i f i e d the T r e a t y , and on

January 1, 1958, i t came i n t o f o r c e , j o i n i n g t o g e t h e r , on

an economic b a s i s , the BENELUX, France , Germany and I t a l y .

At f i r s t s i g h t , the Common Market T rea ty might we l l appear

to be a r e p l i c a of the ECSC Trea ty , but i n s p i t e of b a s i c

s i m i l a r i t y i n concept between the two, t h e r e are impor t an t

d i f f e r e n c e s of emphas is . The e x e c u t i v e body which was known

as the High Au tho r i t y under ECSC became the Commission i n

the EEC. The v a r i a t i o n was more than j u s t a change i n name.

One of t h e e s s e n t i a l f e a t u r e s of the e a r l i e r Trea ty was the

s u p r a - n a t i o n a l element which was ves t ed i n t h e High A u t h o r i t y .




The Commission in the Common Market also has important powers,

but greater importance was given to the Council of Ministers,

and the emphasis on supra-nationality was minimized. This

change in emphasis should not be interpreted as a withdrawal

from the ultimate objectives of a united Europe under common

institutions, but rather it shows that the experience gained

from ECSC and from the failure of EDC initiated a more cau

tious approach, which was well in keeping with the greater

complexities of common economic activities. The Common Market

Treaty shows a more cautious approach in its lack of details,

It is a more flexible document, leaving to the Council of

Ministers and to the Commission the task of working out de

tails.

In general, therefore, it may be said that while the

Treaty creating the European Economic Community was basically

similar in terms to the ECSC Treaty, its provisions were draim

more widely, permitting the adequate flexibility which the

much wider scope of this new undertaking required. Although

the Treaty deals mainly with economic and social integration

of its Members, the political objectives of such a union re

mained in the background. This underlying political influence

was present in the Spaak Report which was based on the pre

mise, that the ultimate purpose of this new scheme was to be

the creation of a "third force" between the United States

and the Soviet Bloc.




In formulating the more immediate purposes of the

Treaty however, political objectives came second to economic

considerations. The main purpose of the Treaty is to seek

the strength, progress, improvement and stability in the ecor

omic and social conditions of their peoples through unity of

action. It also declares that its Members are "determined tc

establish the foundations of an ever closer union among the

European peoples", and as such leaves the door open for

future political integration.

No specific and inflexible provision could ever be

drawn up which would deal adequately and efficiently with th<

numerous problems facing the administration of such a colossi1

undertaking uniting these historically segregated economies.

It was therefore a very practical approach to lay emphasis on

the requirement for a spirit of cooperation if success was t<

be secured, while concentrating mainly on the establishment

of concrete, yet flexible, provisions to be administered by

adequate and quasi-independent institutions.

B. The Institutions of the Community

In the creation of its institutions the Common Market

has recognized the need for some form of supra-national control

in cooperative undertakings of this nature, and although this

2 Preamble to Treaty Establishing the European Economic Community.




element i s only a t the nucleus s tage, i t i s a t l e a s t a f i r s t

s tep in the d i r e c t i o n of potential p o l i t i c a l un i ty , at which

time a supra-nat ional au thor i ty w i l l have slowly emanated ou

of the p r a c t i c a l developments, ready to take on the task at

hand.

Ar t i c l e 4 of the Treaty provides for the Ins t i tu t ion! !

of the Community. "The achievement of the tasks ent rus ted i n

the Community sha l l be ensured by - an Assembly , a Commission

and a Court of J u s t i c e . " "The Council and the Commission

sha l l be a s s i s t ed by an Economic and Social Commit tee. . ." .

1 . The Assembly

The Assembly, or the Parliament of the Six, forms tho

center of de l ibe ra t ion and, t o some extent , p o l i t i c a l control,

wi th in the Community. I t i s composed of de lega tes from the

par l iaments of member coun t r i e s . These delegates are, a t

p resen t , appointed by t h e i r respect ive governments. Germany,

France and I t a l y have 36 r ep re sen ta t ives each, and the BENELlfx

has 32 . One of the tasks of the Assembly cons i s t s of

drawing up proposals for the uniform procedure of e l ec t i ons

by d i r e c t un iversa l suffrage in a l l member s t a t e s .

The Assembly reviews the annual r epo r t submitted by

the Commission and can censure any a c t i v i t i e s of the Commis

sion by a two-thirds majority vo te . The Assembly may also

d i scuss , and suggest modifications to the proposals submitted

by the Council . Various provis ions in the Treaty requ i re




t h a t t he Assembly must be c o n s u l t e d be fore a c t i o n i s t a k e n by

th© Counci l or th© Commission. I t must , f o r example, be con

s u l t e d i n the e l a b o r a t i o n of the p r o v i s i o n s about a g r i c u l t u r e of b u s i n e s s and movement of l a b o u r ,

the r i g h t of e s t a b l i s h m e n l / a n d the implementa t ion of a common

t r a n s p o r t a t i o n p o l i c y .

The Assembly i s a common organ of t h e European Econo

mic Community, the European Atomic Energy Community and t h e

European Coal and S t e e l Community. I t r e p l a c e s the Common

Assembly of ECSC.

Although the a c t i v i t i e s of the Assembly appear some

what s u p e r f l u o u s , e s p e c i a l l y i n comparison t o the wide execu

t i v e powers g iven to the Counci l , i t n e v e r t h e l e s s remains a

very impor tan t i n s t i t u t i o n of the Community. I t r e p r e s e n t s

t h e nuc leus of a t r u e c e n t r a l p a r l i a m e n t which would be r e

q u i r e d to achieve p o l i t i c a l u n i f i c a t i o n , o r some form of con

f e d e r a t i o n .

2 . The Counci l of M i n i s t e r s

The Council i s the po l i cy-making body, the e x e c u t i v e ,

of t h e Community. I t i s composed of s i x r e p r e s e n t a t i v e s , one

from each member c o u n t r y . I t has impor t an t powers of decision,

and i s r e s p o n s i b l e for e n s u r i n g the c o - o r d i n a t i o n of g e n e r a l

economic and soc i a l p o l i c i e s of member c o u n t r i e s . During t h e

f i r s t s t a g e of t r a n s i t i o n most of i t s d e c i s i o n s must be t a k e n

by unanimous v o t e ; t h e r e a f t e r , p a r t i c u l a r l y when the Counci l




w i l l be ac t ing upon proposals formulated by the Commission,

a qua l i f i ed majority w i l l be s u f f i c i e n t . 3

The Council may be viewed as the most important i n s

t i t u t i o n of the Community not only because i t i s responsible

for the execution of the Treaty, but also because i t i s both

a l i n k between the Community and the s ix na t i ona l governments

and i s the p r i n c i p a l policy-making body of the Community.

3 . The Commission

In e f fec t , the Commission i s the Community's c i v i l

se rv ice , i t s adminis t ra t ive body or s e c r e t a r i a t . I t has nin«

members chosen for t h e i r general competence and independence,

with not more than two members having the n a t i o n a l i t y of the

same S t a t e . In supervising the day-to-day operat ions of th<

Community, i t works c lose ly with the Council . I t may formu

l a t e proposals for Council dec is ion; i t administers Council

dec is ions and ensures they are put in to ef fec t by a l l members

concerned.

Although, as indicated above, policy-making decision!

are the r e s p o n s i b i l i t y of the Council, the Commission exercisjes

3 To reach a qua l i f i ed majori ty, twelve votes are required and the votes of the member count r ies are usual ly weighted as fo l lows: four each for France, Germany and I t a l y , two each for Belgium and Netherlands, and one for Luxembourg In cases where the Council i s not ac t ing on a proposal of th€ Commission, the twelve votes must include at l e a s t four member s t a t e s ; the three large countr ies w i l l , therefore , have to have at l e a s t one of the Benelux count r ies i n agreement with them.




certain powers of decision of its own. The most important of

these powers relates to the use of escape clauses in a balance-

of-payments crisis, or where there are serious difficulties

likely to persist in any sector of economic activity, or dif

ficulties which might impair the economic situation in any

region. In these cases the Commission, not only authorizes

the country affected to take action, but specifies the precise

measures to be taken. Similarly, where disparities in mone

tary and commercial policies give rise to serious difficulties

in particular areas or in one country, the Commission can

authorize protective measures, specifying their nature and

duration.

4. The Court of Justice.

The Court of Justice, composed of seven judges, has

the duty of hearing complaints referred to the Commission by

member states, and of passing judgements on the legality of

the rules and decisions adopted by the Community. In brief,

its duty is to ensure the observance of law and justice in

both the interpretation and application of th© Treaty. As in

th© case of the Assembly, the Court of Justice applies to

Euratom, ECSC as well as to EEC.

5. The Committees

A continuing Economic and Social Committee with con

sultative status has been appointed by the Council. It is

composed of independent citizens of Member countries, who UNIVERSITY OF OTTAWA -- SCHOOL OF GRADUATE STUDIES



represent the interests of all economic sectors in the Commu

nity. The Committee includes specialized sections in such

fields as agriculture and transportation. To initiate speci

fied measures, as provided in the Treaty, the Council or Com

mission must consult with the Committee.

In order to promote policy co-ordination and stabili' y

in monetary matters and to study related problems, a Monetary

Committee has also been formed. It is composed of two repre

sentatives from each Member State and of two, named by the

Commission.

C. The Customs Union

The initial purpose of the European Economic Community

is the establishment of a customs union. It is on© of the

most important features of EEC since it is an immediate and

concrete commitment. The adoption of its principles by Mem

ber States will result in the abolition of customs duties an<.

all charges with equivalent effect on the exchange of goods

between themselves and the adoption of a common customs

tariff for trade with countries outside the Customs Union.

1. Internal Trade

The Treaty provides for the abolishment of customs

duties and all equivalent charges in this sphere of trade ovor

a period of at least 12 years and not more than 15 years.

Based on the duty applied in each country on the I




f i r s t of January 1957, reductions in t a r i f f s would be made ir

stages of four years each. The f i r s t stage included an i n i

t i a l reduction equal to 10 per cent, one year after the entry

into force of the Treaty, with two other reductions of 10 per

cent each to follow at 18 month intervals thereafter to achie ve

a 30 per cent to ta l reduction by the end of this four-year

period. Similar reductions would be made in the second four-

year stage. Reductions covering the remaining 40 per cent

would be carried out in the course of the third stage, with

their timing fixed by decision of the Council. The proposed

twelve-year t ransi t ion period may be altered by permissible

one-year extensions of the f i r s t stage, but, in any event,

the total t ransi t ion must not exceed fif teen years.

In order to achieve a true position of free trade bet

ween countries, not only must t a r i f f barr iers be abolished,

but also quantitative r e s t r i c t i ons . Impressive progress was

already made in reducing quantitative res t r i c t ions on trade

under OEEC arrangements. Such res t r i c t ions have now been

placed in the position of exception rather than general rule

The remaining quantitative r e s t r i c t ions will be removed over

the t rans i t ion period, eventually achieving complete aboli t ion

of these impediments to trade. As an i n i t i a l step, the Treay

specified that , in general, quotas of a b i l a t e ra l nature wil:.

be converted to Community quotas by the end of the f i r s t year.

Thus any quotas which France might apply against certain




imports from Germany would become open to all members of the

Community. Exceptional cases and individual problems such as

restrictions equivalent to quotas will receive due considera

tion by the Commission and the Council. Activities of State

monopolies will also be adjusted progressively under the gui

dance of the Commission to ensure the early abolition of dis

crimination against competitive trading.

2. External Trade

Under this section of the Treaty, Member States are

committed to negotiate adjustments in their individual tariffs

in such a way as to effect a common tariff by the end of the

transition period. In general, the basis of the tariff sche

dule which will ultimately apply will be the arithmetical

average of individual tariffs in effect on January 1, 1957,

subject to maximum rates for specified lists of goods in the

respective general categories of 3 per cent for industrial rsw

materials, 10 per cent for semi-finished goods, 15 per cent

for inorganic chemicals and 25 per cent for organic chemicals.

The difference between the basic duty of each country and the

ultimate common duty is to be adjusted by 30 per cent respect

ively during the first and second stages, with remaining adjust

ments to follow during the last stage. In addition, a more

uniform application of legislation and administration is to

be sought by Member Countries in regard to customs matters.




D. The Broader Economic Community

As the name implies, the European Economic Community

stands for much closer economic unification than the mere ere

tion of a customs union. In order to achieve the intended

broader objectives, it was necessary to realize a solid basis

of co-operation and to determine the more detailed problems

to be resolved. This called for the creation of various ins

titutions belonging to the Community to provide the required

degree of uniformity and control. It also called for deliberja

tion and the determination of principles and methods which

would ultimately integrate the segregated economic activitie

of Members into a uniform economic entity. Member Countries

recognizing the impossibility of attaining such unity through

rigid treaty provisions have limited themselves to promulga

ting general principles of approach, leaving to subsequent

negotiations and discussions the more specific solutions to

be enacted.

1. Agriculture

As might be expected, agriculture presents to the

Community a particularly difficult problem. Agriculture is

generally a Government subsidized industry, and to withdraw

such support would perhaps be politically unwise. Thus, in

their attempts to include agriculture in EEC, Member Countrie

have agreed in the Treaty to initiate a common agricultural

policy. With a view towards increasing productivity,




s t a b i l i t y and prosper i ty of the a g r i c u l t u r a l sec tor , t h i s

pol icy may embody such fea tures as pr ice con t ro l s , subs id ies ,

s t ock -p i l i ng arrangements and common import or export controlls

I t i s apparent that as fa r as t h i s area of t rade i s concerned},

the object ive wi l l be l imi ted to obtaining a uniformly pro

t ec ted market divested of d iscr iminat ion r a the r than a com

p l e t e l y f ree one.

2 . Transportat ion

The broader problems of co-ordinat ion, s tandardiza t ion

and cont ro l over t r anspor ta t ion are not provided for in de

t a i l i n the t r e a t y . The t r ea ty simply ou t l ines the objec t ives

and the means of achieving an eventual common t ranspor t policy

To t h i s end, the Council ac t ing on proposals from the Commis

sion, and af ter the Economic and Social Committee and the

Assembly have been consulted, i s to lay down common ru l e s

appl icable to t ranspor t wi thin the Six. Uniform regula t ions

are to be es tabl i shed on inter-member t r a f f i c , including con

d i t i o n s and cont ro ls under which a c a r r i e r w i l l be permit ted

to ope ra te . All d iscr iminatory r a t e s and condi t ions based or

the country of o r ig in or des t ina t ion w i l l be el iminated by

the end of the second s tage . Rates or condit ions established

for the purpose of p ro tec t ing or subsidizing a firm, or an

indus t ry , w i l l , i n general , be prohib i ted a f te r the f i r s t

s tage , unless spec i f i ca l ly authorized by the Commission. Thesje

provis ions w i l l apply to t ranspor t by r a i l , road and inland




waterways. Similar action may also be taken concerning sea

and air transport, if the Council so decides.

It is quite clear, serious attention will be given to

adjust rates, charges and subsidies applicable to internal

transportation, without difference or discrimination between

member states. However, such adjustments will be made only

if they do not result in serious economic distortions in indi

vidual countries or industries. In effect, solution to the

transportation problem will be sought with a view towards the

overall objectives to the treaty, but subject to considerable

flexibility, with immediate results limited to the reduction

of unjustifiable discriminating practices.

E. Free Movement of Persons, Services and Capital

Persons and Services

By the end of the transition period, citizens of mem

ber countries should find no discrimination or added difficul

ty in seeking gainful employment in any of the member coun

tries. Adjustments to this end will be managed by the insti

tutions of the Community and will Include progressive approxi

mation of labour laws, employment policies, social security,

even municipal laws related to this problem, and elimination

of any other impediments to the freedom of movement and

establishment of citizens. Similar rules will be devised to

effect elimination of restrictions on the free flow of servi-




ces within the Community, such as in the field of insurance,

banking, financing and the liberal professions.

Capital

During the period of transition, existing restrictions

on the movement of capital between member countries will be

removed. Should any protective measure be introduced by a

member country to restrict the freedom of capital flow, it

will require the sanction of the Council. Inasmuch as fluc

tuations in exchange rates and differences in economic poli

cies between member states will affect the freedom of capital

flow, closer cooperation in these matters will be sought, and

both the Commission and Council will take appropriate measure

to this effect.

F, Associated Overseas Countries and Territories

The Treaty provides for the association with the

Community of the non-European countries and territories that

have special relations with Belgium, France, Italy and the

Netherlands. Before any of these countries or territories hafe

reached complete independence or special independent status,

they were: French West Africa including Senegal, the Sudan,

Guinea, the Ivory Coast, Dahomey, Mauretania, the Niger and

the Upper Volta; French Equatorial Africa including the

Middle Congo, Ubangi-Shari, Chad and Gaboon; St. Pierre et

Miquelon; the Comoro Archipelago, Madagascar and dependencies




the French Somali Coas t ; New Caledonia and Dependencies ; the

French se t t lements in Oceania; the Southern and Antarc t ic Ter-'

r i t o r i e s ; the Autonomous Republic of Togoland; the French

Trusteeship Ter r i to ry in the Cameroons; the Belgian Congo and

Ruanda-Urundu; the I t a l i a n Trusteeship Ter r i to ry i n Somaliland;

and Netherlands New Guinea.

In br ief , the provis ions for overseas t e r r i t o r i e s in

the t r e a t y foresee the opening of the Common Market to them,

and spec ia l f inanc ia l ass is tance through the Development Fund,

Eventually, any common market country should be able to inves1;

in , and trade with, any of these overseas members on the same

condi t ions as those accorded the "parent" country . Although

the complete abol i t ion of customs t a r i f f remain the ul t imate

goal , a f f i l i a t e d countr ies w i l l r e t a i n some freedom to main

t a i n du t i e s in accordance with budgetary needs and development

requirements, provided such act ion sha l l become progress ive ly

non-discr iminatory. No provis ion i s made for these countr ien

to adopt the common external t a r i f f of the Community. Conse

quently, any one of the Six may be allowed to take p ro t ec t ive

ac t ion against th© p o s s i b i l i t y of d ivers ion of trad© which

may a r i s e as a r e s u l t of the e x i s t i n g l eve l of external cus

toms du t i e s i n any of the t e r r i t o r i e s .

Recently, several of the overseas t e r r i t o r i e s men

tioned in the t r e a t y have reached independence. I t has not

yet been decided whether such independent count r ies w i l l be




permitted, or in fact will desire, to participate as affilia

tes in the Common Market.

G. Financial Provisions

An annual Community budget is drawn up to cover the

estimated revenues and expenditures of each institution, in

cluding those relating to the European Social Fund. Expendi

tures under the budget are balanced by member contributions,

fixed in accordance with two scales of percentages provided

for that purpose. One scale of contributions is intended to

meet the expenses of the European Social Fund, while the other

applies to the general expenses of the Community.

The treaty also provides that the Commission study the

possibility of replacing financial contributions of members

by the revenue eventually accruing from the establishment of

the common external tariff. This provision, if it is carried

through, would strengthen the Community inasmuch as it implies

the creation of a central body to administer and collect

duties,

1. Th© European Social Fund

Under the administrative authority of the Commission,

the European Social Fund covers fifty per cent of individual

members' expenses to ensure re-employment of displaced labour

and to facilitate labour mobility. Although the effects of

the common market upon labour will be different in each member




country, the costs of relieving financial and other difficul

ties accompanying labour displacements, will be shared propor •

tionately by all, through contributions in the annual budget.

2, The Development Fund

The Development Fund has been set up to promote social,

and economic development of overseas countries and territories.

As provided in the treaty, European States will contribute

$581 1/4 million, of which $511 l/2 million are to be set

aside for development programmes in French Territories, Fur

ther arrangements for assistance to these affiliated members

will be negotiated five years after the commencement of pre

sent assistance.

3 . The European Investment Bank

An initial capital of $1 billion is to be contributed

by member countries in to this bank. These funds will be usei

for development schemes in the less developed regions of the

Common Market area itself. They will be used for reconversio|n

schemes and for large projects of general interest in the

attainment of the overall objectives of the treaty. Member

states will also be required to supply direct loans to the

bank during the course of its activities, if such resources

are not readily available in international capital markets.

H. Early Developments

The implementation of the common market treaty gained




momentum with the c o n s o l i d a t i o n of s e v e r a l p r a c t i c a l meaa i re s

i n the e a r l y t r a n s i t i o n p e r i o d . 4 The i n i t i a l measures towards

the complete a b o l i t i o n of a l l t r a d e b a r r i e r s w i t h i n the marke

were i n t roduced on January 1, 1959. This i nc luded the f i r s t

r e d u c t i o n s i n t a r i f f s between member c o u n t r i e s and the l ibera- •

l i z a t i o n of q u o t a s . T a r i f f s on t r a d e w i t h i n the Community

were reduced by an average of 10 pe r c en t , whi le i n t h e f i e l d

of q u o t a s , the Six removed the t o t a l value of r emain ing quan

t i t a t i v e import r e s t r i c t i o n s by not l e s s than an average of

20 per c e n t .

I n c o n s o l i d a t i n g t h e s e measures l a i d down i n ttie

t r e a t y , the Six dec ided t o extend most of t he 10 per cen t t a

r i f f r e d u c t i o n s t o t h i r d c o u n t r i e s enjoying most favoured

n a t i o n t r e a t m e n t , p rov ided no i n d i v i d u a l r e d u c t i o n would brinjj;

n a t i o n a l t a r i f f s below the p r o s p e c t i v e l e v e l of the common

e x t e r n a l t a r i f f . Member c o u n t r i e s were p e r m i t t e d c o n s i d e r a b l y

d i s c r e t i o n i n c a r r y i n g out t h i s d e c i s i o n . R e l a x a t i o n s i n

q u a n t i t a t i v e r e s t r i c t i o n s were a l s o g e n e r a l l y extended to

t h i r d c o u n t r i e s , bu t i n d i v i d u a l members were allowed to r e q u i r e

r e c i p r o c i t y , or to ex tend such b e n e f i t s on a b i l a t e r a l b a s i s

o n l y .

4 Ma te r i a l on c u r r e n t developments was accumulated b a s i c a l l y from, Camps, Miriam, D i v i s i o n i n Europe, London, P .E .P = , Occas iona l Paper No. 8, June 1960, p p . 5-12 and 41-54 Department of Trade and Commerce, "European Trading Arrangement s" , Fore ign Trade. Vol . 114, No. 1, Ju ly 1960, p p . 42-46; U.K. Board of Trade, " A c c e l e r a t i o n of Common-Market Time Tab le" , Board of Trade J o u r n a l , Vol . 179, No. 3297, May 27, 1960, p p . 1142-1146.




Of p a r t i c u l a r i n t e r e s t were the developments i n the

a g r i c u l t u r a l s e c t o r . As env isaged i n t h e t r e a t y , an Agr i cu l

t u r a l Conference was he ld i n Ju ly , 1959, i n S t r e s a , I t a l y . 5

This was t o be the f i r s t s tep towards the e l a b o r a t i o n of a

common a g r i c u l t u r a l p o l i c y . In an agreed r e s o l u t i o n , t hey

s e t f o r t h t h e i r views on the most impor t an t problems connected

w i th a g r i c u l t u r e i n Europe, and r ea f f i rmed the s o c i a l impor

tance of t h i s s e c t o r . At the same t ime, they gave r e c o g n i t i c n

t o the f a c t t h a t p r o t e c t i v e measures , even i n t h i s a r ea , have

c e r t a i n l i m i t a t i o n s beyond which economic c o n s i d e r a t i o n s

should take precedence over s o c i a l o b l i g a t i o n s . The views

were expressed as a formal R e s o l u t i o n and were used , i n l a r g e

p a r t , by the Commission i n p r e s e n t i n g i t s p r o p o s a l s f o r a

common a g r i c u l t u r a l p o l i c y .

The common a g r i c u l t u r a l p o l i e y c o n t a i n s d i s c e r n a b l e

evidence of i n t e n t i o n s to ach i eve s e l f - s u f f i c i e n c y i n a g r i c u l

t u r a l p r o d u c t i o n . The bas ic t o o l of such a p o l i c y w i l l be a

p r i c i n g system aimed a t e s t a b l i s h i n g common p r i c e s f o r a l l

impor t an t a g r i c u l t u r a l p roduc t s based on cos t l e v e l s i n each

a r e a . Th is &ould r e s u l t i n h ighe r p r i c e s , p r o t e c t i o n from

lower c o s t imports th rough l e v i e s and q u o t a s , and even the

p o s s i b i l i t y of p a r t l y subs id i zed e x p o r t s t o r e l i e v e any s u r

p l u s s i t u a t i o n t h a t might a r i s e .

5 The Chase Manhattan Bank, "A European Farm P o l i c y " , Western Europe, i s sued b i -month ly by the Economic Research Department , No. 9, August-Sept ember, 1960, 4 p a g e s .




In prepara t ion for the succeeding s teps to be taken,

d iscuss ions were held during 1959, and several proposals were

put forward with a view of consol idat ing the measures already

achieved, in the be l ie f tha t such new measures would serve tc

s trengthen the in t eg ra t ion process as a whole. At the meeti ig

of the Council of Ministers held in Strasbourg i n November

of t h a t year, these various discuss ions and proposals were

ass imi la ted and put forward in the form of dec i s ions . At this

meeting i t was agreed tha t the long-term object ive should be

the complete abo l i t i on of cuotas on a world-wide b a s i s . As a

s t a r t they decided tha t the 20 per cent-quota enlargement

scheduled for January 1, 1960, would be extended t o a l l mem

bers of the GATT, at the d i s c r e t i o n of each Member who could

proceed through b i l a t e r a l arrangements i f so des i r ed . Simi

l a r l y i n the f i e ld of t a r i f f s each Member was given the r i g h ;

to decide for i t s e l f whether to extend to t h i r d countr ies thm

in t e rna l t a r i f f reduct ion of 10 per cent envisaged for

July 1, 1960.

Although the quota enlargements were general ly extended

to t h i r d countr ies as proposed, the decis ion regarding t a r i f f

cuts was superseded by the outcome of the meeting of the

Council of Ministers in Luxembourg, in May 1960. At t h i s

meeting i t was agreed tha t a shortening of the t r a n s i t i o n

period was d e s i r a b l e , and t h a t the bes t method for achieving

t h i s would be by an acce le ra t ion in the t a r i f f cu ts schedule* 1 UNIVERSITY OF OTTAWA - SCHOOL OF GRADUATE STUDIES



i n the Treaty. I t was therefore decided to supplement the

10 per cent t a r i f f reduct ion envisaged for July 1, 1960 by a

20 per cent reduct ion, although the implementation of the add.

t i o n a l 10 per cent cut could be postponed u n t i l December of

t h a t year . I t was also agreed tha t the 10 per cent t a r i f f

reduct ion scheduled for December 1961 should be increased to

20 per c e n t . This reduct ion could also be extended to t h i r d

coun t r i e s , on a most-favoured-nation b a s i s , provided no t a r i f f

were brought down below the l eve l of the proposed common

ex te rna l t a r i f f , and subject to r e c i p r o c i t y .

The Ministers also agreed to speed up the movement of

na t ional t a r i f f s towards the level of the Common Market t a r i f f

by int roducing adjustments scheduled for December 1961 on

December 31, 1960. However, many items were excepted from t h l

acce lera ted s t ep . In addi t ion i t was proposed tha t these

adjustments would be made on the bas is of the proposed common

t a r i f f reduced by 20 percent . However, t h i s move was made

subject to consol idat ion at the GATT Conference table of 1960-

1961, on the basis of r ec ip roc i ty from t h i r d coun t r i e s .

The main signif icance of these various developments i s

t ha t by the end of 1961 i n t e r n a l t a r i f f s amongst the Six wi l l

have decreased by 50 percent ins tead of by 30 percent as

scheduled in the Treaty, a l l quan t i t a t i ve r e s t r i c t i o n s w i l l

have been abolished on i n d u s t r i a l products o r ig ina t ing within

the area, and the f i r s t step in the adjustment of na t iona l




tariffs towards a common level will have taken place one year

ahead of schedule. One of the main drawbacks of this accele

ration for third countries is that it involves an earlier up

ward movement of those tariff items which are at present belof?

the proposed common tariff level. This is of special concern

to the EEC

to Canada since about 70 per cent of Canadian exports/are ab

sorbed by low tariff countries - Benelux and Germany. In add.

tion, an acceleration in the upward revision of tariff levels

will be prejudicial to the success of future attempts in

international negotiations at bringing about a significant

reduction in the overall common tariff level to be applied in

the final instance. On the whole, achievements to date indi

cate that the EEC is prepared to move swiftly and unhesitantlty"

to the successful attainment of its goal. The problem of

agriculture remains an important threat to significant libera,

developments, although protectionist views in other sectors

have, by no means, been completely abandoned. This is espe

cially true with regards to certain industrial raw materials

such as aluminum and lead. Imports of aluminum are controlled

by annual quotas and enter at a 5 per cent rate of duty, pro

vided it is processed in the country,of import. Any member

desiring to import in excess of the quota for that year must

pay a rate of duty of 10 per cent. Previously, Germany, the

main importer, and Belgium and Netherlands were admitting alu

minum free of duty. Similar quantitative arrangements have




been a r ranged for unwraught l e ad , and i n a d d i t i o n , I t a l y may

p r o h i b i t impor t s of t h i s p roduc t f o r a p e r i o d of s i x y e a r s .

However, t h e s e va r ious p r o t e c t i o n i s t p r o v i s i o n s a re c u r r e n t l y

b e i n g d i s c u s s e d a t t he 1960-1961 GATT Conference, and the

outcome of t h e s e n e g o t i a t i o n s should b r i n g t h e s e p o l i c i e s i n

b e t t e r f o c u s .

I . I m p l i c a t i o n s

1 . I n t e r n a l E f f e c t s

During the f i r s t few y e a r s of t r a n s i t i o n p r o g r e s s i v e

r e d u c t i o n s i n t a r i f f s and a b o l i t i o n of the few remain ing quan

t i t a t i v e r e s t r i c t i o n s w i l l c o n s t i t u t e the pr imary o b j e c t i v e s

As f a r as q u a n t i t a t i v e r e s t r i c t i o n s a r e concerned, the ex ten

of l i b e r a l i z a t i o n achieved under OEEC does no t l e ave much

room f o r improvement, except t h a t now i t w i l l be more d i f f i

c u l t fo r i n d i v i d u a l c o u n t r i e s to reimpose such t r a d e b a r r i e r ; !

For the remainder of the t r a n s i t i o n p e r i o d Member coun

t r i e s w i l l o b v i a t e any s e r i o u s d i s t o r t i o n s i n t h e i r economien

by r e s o r t i n g to the many "escape c l a u s e s " . C e r t a i n l y , i t

should no t be expected t h a t the t r a n s i t i o n a l pe r i od w i l l

b r i n g g r e a t geog raph i ca l d i s l o c a t i o n s of i n d u s t r i e s , r e -

a d a p t a t i o n of e x i s t i n g i n d u s t r i e s to d i f f e r e n t types of p r o

d u c t i o n , or any wi thdrawal of l a r g e e n t e r p r i s e s from t h e mar

k e t i n the name of e f f i c i e n c y . Such ad jus tments w i l l come

on ly a f t e r the Common Market becomes t r u l y common.




What may be expec ted to occur i s a p r o g r e s s i v e l y i n

c r e a s i n g flow of i n t e r n a l t r a d e , such as occur red a f t e r OEEC,

EPU and ECSC. A b a s i c de te rminan t of economic expans ion i s

the ex t en t of t h e market , fo r as the market widens so a r e the

o p p o r t u n i t i e s for g r e a t e r s p e c i a l i z a t i o n , p r o d u c t i o n t o s ca l e

and the p o t e n t i a l i t i e s f o r r i s i n g p r o d u c t i v i t y i n c r e a s e d .

These p o s s i b i l i t i e s for dynamic economic p r o g r e s s w i l l a s s u

r e d l y become a t t a i n a b l e w i t h i n the en l a rged Euromart . T rans

p o r t a t i o n c o s t s w i l l d e c l i n e and become e q u a l i z e d throughout

the a r e a . Many e n t e r p r i s e s w i l l amalgamate t o be i n a b e t t e r

p r o d u c t i v e and marke t ing p o s i t i o n . The aggrega te GNP of the

a r ea w i l l enjoy a p p r e c i a b l e i n c r e a s e s and w i l l l end s t r e n g t h

and economic s t a b i l i t y t o the whole marke t . The e f f e c t s of

i n c r e a s i n g p r o d u c t i o n w i l l g r a d u a l l y produce a h ighe r l e v e l

of i nves tmen t s and the e x i s t i n g i n d u s t r i e s w i l l add t o t h e i r

p r o d u c t i v e c a p a c i t i e s , whi le b e n e f i t i n g from the advantages

of "mass p r o d u c t i o n " .

Once the Common Market becomes a r e a l e n t i t y , t hen the

i n t e r p l a y of compe t i t i on w i l l be s t rong enough t o cause r e d i s

t r i b u t i o n and r e - a d a p t a t i o n of e n t e r p r i s e s a c c o r d i n g to econ

omic p r i n c i p l e s . And as i n c r e a s e d p r o d u c t i v i t y , e f f i c i e n t us|e

of r e s o u r c e s and r e g i o n a l s p e c i a l i z a t i o n b e g i n to show t h e i r

r e s u l t s , the Common Market should no t do o the rwise bu t achieve

g r e a t e r economic s t r e n g t h wherein l i e s the p o s s i b i l i t y fo r

i n c r e a s e d s t anda rds of l i v i n g .




Of course, the process will be slow and many hardships

will have to be overcome to achieve such results, but given

the present desire for unification and the economic principles

upheld by the majority of its leaders, Europe should succeed

in the long run.

No drastic change in investment between member countries

can be expected until the flow and level of trade proves

them to be economically warranted. Harmonization of economic

and social policies may be somewhat delayed by political impli

cations. And the real effects of political attempts at

"harmonization" will not be felt until Members of the Commu

nity come into closer contact with each other through the

freedom of movement of goods, persons and capital.

The establishment of the freedom of movement of persor.s

will not alter the Common Market in the near future. It takes

much more than a legal right to convince a labourer to move

to a different country, with a different language and cus

toms, and in some instances - a past enemy. Moreover the

first problem to be met In this respect will be the provisior.

of adequate housing to facilitate such moves to any appre

ciable degree. This same problem was not overcome during

the first five years of ECSC.

The freedom of movement of capital is not so much de

pendent on the existence of a Common Market, but rather it

depends on the strength of each Member's foreign exchange




reserves. If the establishment of EEC succeeds in strength

ening European multilateralism, as it obviously should, then

this problem should resolve itself to an even greater extent

than was achieved under EPU alone.

The Impact of the Customs Union on agriculture and on

overseas territories is the most difficult to assess in vier

of th© lack of detailed provisions in the Treaty. It does

seem, however, that both these sectors of economic integra

tion will carry greater external effects than within the area

proper. Agriculture will continue as a protected market and

it is obvious that th© process of unification will tend to

make Europe more self-sufficient in agricultural production.

However, through the use of "minimum prices" any increase in

internal trade of agricultural goods will not directly affec-;

competition or prices. Agriculture will continue to be an

economic problem with major policital and social overtones.

Special tariff and quota concessions granted to Over

seas Territories should be favourable to their economic growth

and stability. In effect, it will as SUBS them preferential

treatment in an expanding European market. Of course, Franc<

also stands to benefit from the strengthening effect such

treatment will have on its overseas dependencies. Moreover,

the provision of the Development Fund means that while French

possessions will benefit from European investments, France

will enjoy a reduction in its financial obligations vis-a-vis




its dependencies. However, the creation of, what is in effec^,

a unilateral preferential tariff area will undoubtedly hurt

the trade of many primary producing countries outside EEC,

especially producers of such staples as coffee, bananas and

cocoa and industrial raw materials such as aluminum and copper.

Overseas territories will retain their own tariff

schedules so that no direct repercussion should be felt

within EEC proper. However, to the extent that increased

imports from the territories and European investments in

these countries strengthen their economies, an increase in

exports from the Community to these territories should result

Although the Treaty does not provide for the eventual

introduction of a common monetary unit for the Community, it

does call for complete currency convertibility and stabiliza

tion of exchange rates. The implementation of exchange sta

bility excludes the resort to any other corrective techniques

except those of internal fiscal and credit policies. This

implies the harmonization of budgetary, economic and social

policies of Member Countries and the Treaty makes provision

for such developments. In effect, therefore, the economic

obstacles to be overcome in establishing currency convertibi

lity at stable exchange rates are identical with those facing

monetary unification. However, the political elements in the

problem are at variance. Monetary unification implies a popu

lar acceptance of political integration, it contains an irre-




versible character not present in a stable exchange rate, it

necessitates administrative and institutional changes and the

creation of a central monetary authority.

Although monetary unification contains many economic

advantages it is not a prerequisite for economic integration.

Monetary unification of European currencies may well be an

important aspect of any ultimate evolution of broad political

unification, but it is quite unlikely to precede it.

A very important consideration from a long run point

of view is the extent to which the Common Market will contri

bute to the desired ultimate objective of political integra

tion. In view of the traditional segregation of these coun

tries, unification at the political level may well require it 5

acceptance by a new generation of Europeans. However, this

development could occur with greater haste, given the intensi

fication of international forces towards large political bloc 5.

There is a provision in the Treaty requiring the Assembly to

put forward proposals for direct elections to be held through

out the Community's countries. If such proposals are put into

practice, there will be created a European Assembly directly

responsible to the inhabitants of the six countries themselvei 1,

and not limited to an indirect responsibility through separate

national parliaments as at present. The first step towards

political unification of Europe will then have been taken.




2, External Effects

The main effects of economic unification in Europe

upon third countries will be in the fields of trade and invest

ment, including the establishment of foreign subsidiary compaj-

nies in the area.

Foreign trade of Western Europe is very large in rela

tion to its production of goods; it is also highly diversified

both in terms of commodities and of geographical areas. Primaf-

ry products play an important part in Europe's imports and

their requirement should increase with the growth in economic

activity. However, th© preferential treatment allotted asso

ciated overseas territories will probably adversely affect

some countries dependent on European demand for the sale of

their goods, especially agricultural commodities.

The effects upon imports of manufactured products will

be dependent upon the cost structure and the degree of pro

ductive diversification which is ultimately achieved in Europ£

Western Europe trades about as much with third countries as i

does within itself, and this trade pattern seems to be highly

influenced by the availability of materials in Europe. The

effects of progressive tariff abolition in Western Europe

should not cause repercussions upon world trade to any great

extent, until the results of the larger competitive market in

Europe have shown themselves in the form of new enterprises,

greater efficiency of production and wider diversification of




i n d u s t r i e s . But during t h i s t r a n s i t i o n a l period, the r e s t

of the world wi l l have the opportunity to meet the challenge

of these gradual developments by progressive adjustments in

productive capaci ty and trade p a t t e r n . The only countr ies

which should ac tua l ly suffer from t h i s growth p a t t e r n are

those wishing to r e t a i n a s t a t i c s t a b i l i t y based on p r o t e c t i f -

n i s t p o l i c i e s . With Western European economic i n t eg ra t i on

being pursued in an atmosphere of competition and gradualism,

world t rade should not suffer s ign i f i can t ly a t the s t a r t and

should benef i t markedly in the long run by the increased

economic a c t i v i t y permissible in the l a rger s ingle market.

The increase in the l eve l of t r ade , which followed the p ro

cess of i n d u s t r i a l i z a t i o n , technical spec i a l i z a t i on and i n

come growth in countr ies which are now i n d u s t r i a l i z e d , should

a lso be an expected r e s u l t of s imi lar developments in Europe

Contrary to what might be expected from the apparent growth

in se l f - su f f i c i ency , i n d u s t r i a l i z a t i o n promotes an increase

in the quant i ty and d i v e r s i f i c a t i o n of i n t e rna t iona l t rade ifci

the same way t h a t i t promotes an increase i n income and

standard of l i v i n g . The subs t i t u t i on of any one, or even

broad groups, of products avai lable within the Common Market

for goods previously imported wi l l not necessa r i ly reduce the

t o t a l demand for imports. To accomplish the l a t t e r ob jec t ive ,

s t r ingen t curbs on the t o t a l claims on resources by

governments, businesses and consumers would be requ i red .




However, even with the maximum amount of import substitution

that is realistically conceivable and despite high tariffs, if

such should come about, the EEC's total import requirements

are likely to rise over the decades. As the economies of the

Six move progressively towards higher levels of national in

come and standards of living, new types of imports necessary

to sustain this progress will outweigh any import economies

achieved in other areas.

Th© continued protectionist approach ©xpected of

France and Italy will be counterbalanced by the more liberal

attitude of Germany and the Benelux, and may be subdued by

the political aspects of EEC. The outright adoption of French

policies would tend to place the Community at a cost disadvan

tage with respect to the rest of the world. Moreover, the

strong do not usually submit to the weak indefinitely, and it

is very unlikely that a strong and increasingly influential

Germany will renounce the gains it has earned through the pur

suit of competitive and liberal policies, internally as well

as externally, it seems quite likely that a compromise policy

will evolve from within the Community, in line with the cost

and income structure and the trade policies of the rest of th<

Western world. Thus the effects of the European Economic

Community on world trade may be expected to follow very close

ly the consequences of a compromise policy between liberalism

and protectionism in trade, closely resembling current U.S.

1-.T»»ri« p n H A J . . _ _ _ UNIVERSITY OF OTTAWA SCHOOL OF GRADUATE STUDIES



J . European Free Trade A s s o c i a t i o n

The o r i g i n a l p roposa l fo r a f r ee t r a d e a r e a i n Europe

a n t e d a t e d the s i g n a t u r e of the Rome T r e a t y . I t had i t s o r i

g i n i n the e v o l u t i o n of the n e g o t i a t i o n s , w i t h i n OEEC, which

l e d to t h e Messina Conference.

During the summer of 1956, when the p r o p o s a l s fo r a

European common market were j u s t beg inn ing t o t a k e shape, the

OEEC s e t up a s p e c i a l working p a r t y to study the p o s s i b i l i t y

of a f r e e t r a d e area embracing a l l members of OEEC, i n c l u d i n g

the S i x . 6 This move was p a r t l y des igned to p r e v e n t t h e occu r

r ence of a d i v i s i o n i n Europe, bu t i t was a l s o in tended as an

a l t e r n a t i v e i n case the Six met wi th f a i l u r e .

The r e p o r t of the s p e c i a l OEEC Committee p u b l i s h e d i n

January 1957 concluded t h a t t h e o p e r a t i o n of a f r e e t r a d e arete.

Europe was t e c h n i c a l l y p o s s i b l e . At t h a t t ime t h e r e was, o u t

ward ly a t l e a s t , g r e a t hope for the success of t h i s endeavour

Even the Uni ted Kingdom government, which t r a d i t i o n a l l y had

p r e f e r r e d to remain o u t s i d e of any s t r i c t l y European t r a d e

arrangement of t h i s t y p e , was w i l l i n g to p a r t i c i p a t e a c t i v e l y

i n the fo rma t ion of Europe-wide i n d u s t r i a l f r e e t r a d e area . ' ' '

N e g o t i a t i o n s fo r such a f ree t r a d e a rea were c a r r i e d out

6 France Roge, "Perspectives d'une p e t i t e zone de l i b r e echange", Etudes e t Conjoncture, No. 10, octobre 1959, pp . 959-980.

7 U.K. Information Office, Negotiat ions for a Europeaa f ree t rade area; documents r e l a t i n g to the negot ia t ions from July 1956 to Dec. 1958, London, H.M. Sta t ionery Office, Cmnd

"*•*•> " * i i » -1- J ^ ^ ^ J N ( V t R S l T Y M * OTTAWA SCHOOL OF GRADUATE STUDIES "



during 1957 and until the end of 1958, when they broke down

and were suspended indefinitely. The impasse was due mainly

to the impossibility of reconciling the conflicting views of

the various countries oh basic issues of commercial policy.

The Six were anxious to preserve the integrity of their new

undertaking and to avoid the erosion of the commercial advan

tages it embodied. The other European countries, and parti

cularly the U.K., were anxious to avoid trade discrimination

in Europe, but wished to retain control over their external

trading relationships.

Faced with the impossibility of achieving a Europe-

wide free trade area, seven of the European countries out

side the Common Market sought to establish free trade on a

separate regional basis. Through such an approach it was

hoped that trade among themselves would grow, thereby minimi

zing whatever trade dislocation might result from EEC. More

over, their unification in a free trade area would improve

their bargaining power for continued access to the markets oi

the Six.

Negotiations towards this end resulted in the esta

blishment of a European Free Trade Association (EFTA) in Q

November of 1959. This new r e g i o n a l g rouping , commonly

8 Convention E s t a b l i s h i n g the European Free Trade A s s o c i a t i o n , London, H.M. S t a t i o n e r y Off ice , Cmnd 906, Novembe r 1959, 55 p a g e s .


UNIVERSITY D'OTTAWA -- ECOLE DES GRADUES


called the "Outer Seven" because of its geographical location

relative to the Six, united Austria, Denmark, Norway, Portu

gal, Sweden, Switzerland and the United Kingdom in the common

purpose of gradually removing tariffs and quotas on industrial

products traded amongst themselves. Special treatment, al

though not necessarily free trade, for agricultural products

is also permissible. The initial tariff reduction of 20 per

cent was effected on July 1, 1960. This placed the level of

transition within EFTA on the same basis as that adopted by

EEC. The remainder of the transitional period follows roughly

the same schedule as in the EEC, and should be completed by

1970.

In other respects, however, there are marked differ

ences between EFTA and EEC. Fundamentally, EFTA is endea

vouring to promote free trade among its members with a minimum

of commitments on their part regarding domestic economic and

financial policies. Most important, EFTA allows members to

retain their individual tariffs toward outsiders, change then

at will, and independently conduct commercial negotiations

with other nations. This is in marked contrast with EEC pro

visions, and the issue of external tariffs was one of the main

reasons for the failure of negotiations for a Europe-wide

free trade area.

The retention of individual external tariffs presen

ted the possibility of "deflection of trade" within the Sever,


UNIVERSITY D'OTTAWA - ECOLE DES GRADUES


theoretically imports from third countries could enter EFTA

via one of its members with a low external tariff, for tran

shipment (eventually free of duty) to another member with a

higher external tariff. To mitigate such "deflections of

trade", certain "rules of origin" were agreed upon in the

Convention. In general, goods not wholly produced within the

free trade area enjoy area tariff treatment only on one of

two conditions: if less than 50 per cent of the value of such

goods consist of materials imported from outside, or if they

are produced within the area by specified processes.

Since EFTA does not envisage formal economic integra

tion, but simply closer economic co-operation and trade libe

ralization, it follows that its institutional organization

should be less encompassing than that for EEC. It has only

one formal body, The Council, which is composed of one repre

sentative from each member country. Each representative has

only one vote. The Council is charged with the task of imple

menting the Convention and considering whatever further actioja

should be taken to promote the objectives of the Association.

On the whole, except mainly for the provisions con

cerning tariffs, quotas and rules of origin, the immediate

form and provisions of the Convention establishing EFTA have

been kept simple, and the way left open for substantial modi

fications in the nature of the arrangements. This is in

keeping with the very nature of this regional trade grouping




which does no t f o r e s e e economic i n t e g r a t i o n as i t s o b j e c t i v e s

On the o the r hand i t i s a l s o an i n d i c a t i o n of t h e t a c i t r e a l -

a l i z a t i o n t h a t t h e i r A s s o c i a t i o n w i l l need t o adapt i t s e l f to

the t r a d e and economic c l ima te r e s u l t i n g from t h e u l t i m a t e

achievements of t h e i r c l o s e l y i n t e g r a t e d c o m p e t i t o r s w i t h i n

EEC.

Views on EEC and EFTA

Whereas EEC c o n s t i t u t e s a l o g i c a l a s s o c i a t i o n of coun

t r i e s from the p o i n t of view of geography, t r a d e and economic

c o m p a r a b i l i t y , the same cannot be s a id of EFTA.

EEC c o u n t r i e s a re g e o g r a p h i c a l l y w e l l l o c a t e d i n r e l a

t i o n t o one another and form one common boundary w i t h o u t s i d e

c o u n t r i e s . EFTA c o u n t r i e s a re more or l e s s d o t t e d throughout

Europe, i n many cases s epa ra t ed by l and or s e a .

The e s t a b l i s h e d t r a d i n g p a t t e r n w i t h i n EEC i s f a v o u r

ab le to economic i n t e g r a t i o n . EEC n a t i o n s t r a d e l e s s w i th

EFTA c o u n t r i e s than wi th one ano ther , and l e s s than h a l f of

t h e i r e x p o r t s go t o c o u n t r i e s o u t s i d e E u r o p e . 9 I n c o n t r a s t ,

EFTA c o u n t r i e s s e l l more t o the Common Market than to one

a n o t h e r , and send some t h r e e - f i f t h s of t h e i r e x p o r t s to non-

European m a r k e t s . With in these two r e s p e c t i v e t r a d i n g a r e a s ,

9 France Roge, "L'Associat ion Europ6enne de Libre Echange", Etudes et Conjoncture, No. 10, Octobre 1960, pp.871 884.




the element of competition is different. In view of the U.K,

relatively collossal capacity for imports compared to other

EFTA countries, the element of competitive trading would

appear to be smaller in this group. The existence of this onb

large importer provides a much better scope for shifting the

trade pattern of the area as a whole. By switching its

imports away from third countries, the U.K. is in a position

to increase sizeably the exports of its EFTA partners. In

turn, this would strengthen the area as a whole by placing

the partners in a better position for increasing their importjs

from the U.K. The U.K.'s trade deficit alone is equivalent

to nearly 50 per cent of total exports from the rest of EFTA.

Thus, by switching its imports by a value equivalent to its

trade deficit, the U.K. would increase significantly, and

rather easily, the total exports of the rest of the area. No

individual country within EEC has such relative strength vis

a-vis its trading partners. They are more equally balanced

and thus more conscious of competition. Moreover, within

the EEC, the largest importer, also has the largest favourablb

trade balance, so that any increase in its imports from withip

the Six would affect its international trade balance more

significantly than for the U.K. who is already running a high

trade deficit.

Comparisons between these two groups from the point

of view of population and economic strength also indicate




basic differences. The total population of the Six is about

170 million with a G.N.P. equivalent to approximately $160

billion. In addition the individual countries within the Six,

(taking Benelux as one country, and except for the south of

Italy) are all closely equivalent in terms of standard of

living and industrial strength. Total EFTA population is

about 90 million, with a G.N.P. for the area as a whole equi

valent to approximately $100 billion. The disparities in eco|i

omic strength between its members are more obvious, such as

between the U.K., Switzerland and Sweden, who have reached

the higher levels of standard of living and Portugal and

Austria who can, by no means, be called strong economic enti

ties.

The various differences between EEC and EFTA point to

the fact that the initial relative economic position of indi

vidual countries within the Common Market were more favourable

to co-operation and integration at the economic, and possibly

even political level. On the other hand the disparities bet

ween partners in EFTA indicate It would be difficult to go

farther than the objectives of free trade, into economic intef

gration. This also confirms that this latter grouping was

motivated not only by the positive desire to increase trade

between themselves but also with the Common Market and on a

broader international front.

The puzzling question emanating from the interplay of




these two groups, is whether a Europe devoted to liberalism,

or one imbued with protectionism will evolve. Certain provi

sions in the Treaty establishing EEC lend evidence of protec

tionist tendencies - for example the eventual commorai tariff

to be established will be higher than exists now in most cour

tries - the inclusion of overseas territories introduces a

new preferential trading system - the provisions for harmoni

zation of economic policies will bring social security costs

to the level of the highest cost country.

On the other hand, since Common Market countries are

also important world traders, the existence of a successful

free trade area right at its doorstep should encourage Europe

to pursue more liberal policies. By its very existence, and

the traditionally liberal trading policies of most of its

members, it will undoubtedly instill a keener sense of compe

tition in intra-European trade.

However, the influence of the free trade area coun

tries upon trade policies adopted by the Six will depend on

the success of EFTA itself. The technical difficulties in a

plan such as EFTA place it at a disadvantage with EEC insofar

as efficient and successful administration is concerned. In

EEC the task of administration is simplified by the fact that

each member relinquishes a certain amount of its national

autonomy to the community's institutions. In EFTA, supra

national authority has been avoided. Problems such as the



THE EUR OPEAN ECONOMIC COMMUNITY 108

determination of origin of goods, proper usage of escape clau

ses, deflections in trade, present quite a difficult adminis

trative challenge in themselves - a task nearly impossible to

accomplish, on an efficient and permanent basis, under the

loose control of an international authority. A co-operative

scheme of this sort is basically dependent on the goodwill of

its members, and seems destined to become only a temporary

arrangement, until some basic disagreement between the part

ners arises and renders the continuation of the project impos

sible, under any other form but one with supranational author |-

ity. Thus, outside the direct economic effects it will have

upon its members, and the indirect effects upon the Common

Market, EFTA can be interpreted as an intermediate step towards

some form of economic community.

Since it is unlikely, the establishment of some form

of economic community will be possible within EFTA, It seems

that the end result will be the accession of individual EFTA

countries to the EEC. One of the most important countries,

in considering this possibility, is the United Kingdom. It

would appear from recent speeches made by Mr. MacMillan that

the U.K. is destined to join the Common Market.1^ How many

1 0 On February 27, 1961, the United Kingdom informed the E.E.C. that Britain was now willing to accept a common or harmonized external tariff on non-farm goods as part of a settlement with E.E.C. The ministers of the Western European Union composing the U.K. and the six countries of the E.E.C. are to meet before the end of May for a more detailed discussion on the matter.- Canadian Manufacturers Association, "New DftVfllonments - European Trade Areas". Industrial Canada. Ani-1 1961, P. 52. UNIVERSITY OF OTTAWA .. SCHOOL OF GRADUATE STUDIES



of the countries of EFTA will follow suit is difficult to

say, although it is unlikely Switzerland will sacrifice its

traditional position of neutrality to some form of supra

national institution. The Scandinavian countries may well

attempt to join EEC as a unit.

Whatever the outcome, it is obvious that EFTA without

the U.K. could never be successful, but it is equally appa

rent that the U.K. would not abandon its partners without ob

taining special concessions or fair treatment from EEC on

their behalf.

The outlook, therefore, is for an extension of free

trade to encompass larger groupings in Europe. The larger

single market thus created will lend support to the extension

of liberalization. It will reduce the influence of the few

highly protectionist countries, by its larger membership.

Moreover, it will introduce a greater degree of competition

within its own boundaries and a greater potentiality for in

vestment and growth. This should minimize the need for pro

tection, even from a point of view motivated by enlightened

self-interest. It seems evident that a united Western Europe

within EEC, or under some other scheme adapted to meet EEC

requirements, will stand a much better chance of achieving

a liberal economic policy, to the same degree that the Unitec.

States and other world traders are willing to pursue.



CHAPTER IV

IMPLICATIONS FOR CANADA

A. I n t r o d u c t i o n

I n t e r n a t i o n a l t r ade i s very impor tan t t o the Canadiar

economy. Canada i s amongst the f i v e l e a d i n g world t r a d e r s ,

and i t s dependence on e x p o r t s i s g e n e r a l l y r ecogn ized as an

Impor tan t element i n overcoming the drawbacks of i t s small

and d e - c e n t r a l i z e d p o p u l a t i o n . Large manufac tur ing opera t ior j s

i n t h i s c o u n t r y r e q u i r e sus tenance from an expor t market ,

j u s t as does any l a r g e s c a l e development of Canadian n a t u r a l

r e s o u r c e s . The Canadian market , because of i t s s i z e , o r , i n

some c a s e s , because i t i s not s u f f i c i e n t l y c o n c e n t r a t e d , can

n o t j u s t i f y l a r g e s c a l e u n d e r t a k i n g s on an economica l ly sounc

b a s i s . And so, Canadian e x t r a c t i v e and manufac tur ing i n d u s

t r i e s must depend on e x p o r t s t o expand and, i n some i n s t a n

c e s , t o e x i s t .

Th© importance of e x p o r t s to Canadian i n d u s t r i e s i s

w e l l r e f l e c t e d by developments i n the o i l , uranium and

n i c k e l i n d u s t r i e s . The p r e s e n t supply of crude o i l i n Canadt,

s u r p a s s e s the c u r r e n t domestic consumption. This i s p a r t l y

due t o the f a c t t h a t wes te rn o i l i s , i n the main, unable t o

compete I n e a s t e r n Canada w i th o i l of f o r e i g n o r i g i n . This

h a s n e c e s s i t a t e d c u r t a i l m e n t of Canadian o i l p r o d u c t i o n , and



IMPLICATIONS FOR CANADA 111

on February 1, 1961, Mr. Hees, the M i n i s t e r of Trade and Com

merce , pu t forward what he termed "a n a t i o n a l o i l p o l i c y " . 1

The purpose of t h i s p o l i c y i s t o i n c r e a s e t h e usage of Cana

d i a n o i l i n domest ic marke ts west of the Ottawa v a l l e y . I n

h i s words, "The growth i n domest ic use i s p r e d i c a t e d i n p a r t i

c u l a r on s u b s t i t u t i n g i n Onta r io m a r k e t s , west of t he Ottawa

v a l l e y , p r o d u c t s r e f i n e d from Canadian crude fo r t h e s e now

supp l i ed from f o r e i g n c r u d e " . The need for government i n t e r

v e n t i o n i n t h i s i n d u s t r y shows the d i s advan t ages of geogra

p h i c a l d i s p e r s a l of p o p u l a t i o n and markets w i t h i n Canada ' s

b o u n d a r i e s .

I n the f i e l d of uranium, the e f f e c t s of a c o n t r a c t i o r

of e x p o r t s were q u i t e obvious , even i f d e p l o r a b l e , i n the

town of E l l i o t Lake, O n t a r i o . Subsequent announcement of a

Un i t ed Kingdom i n t e n t i o n to purchase l a r g e q u a n t i t i e s of t h i s

m e t a l p rov ided some a l l e v i a t i o n , but the Canadian uranium

i n d u s t r y w i l l no t be out of t r o u b l e u n t i l a d d i t i o n a l e x p o r t

marke t s a re found.

On the o the r hand, the n i c k e l i n d u s t r y c o n t r i b u t e s as

one of Canada ' s l e a d i n g expor t i n d u s t r i e s , and as a r e s u l t ,

i t has exper i enced growth and p r o f i t a b i l i t y .

The c o n t r a s t i n economic c o n d i t i o n s between the farm

implements and t e x t i l e s i n d u s t r i e s i s a l s o an i n d i c a t i o n of

1 Hansard, February 1, 1961, Volume 105, Number 38 , p p . 1640-164§T




t h e importance of e x p o r t s i n the development of Canadian mam;

f a c t u r i n g i n d u s t r i e s . The Canadian farm implements i n d u s t r y

i s a c l a s s i c a l example of i n d u s t r i a l growth and expans ion

based on f o r e i g n t r a d e . The development of t h i s i n d u s t r y was

achieved th rough a h igh l e v e l of e x p o r t s . The h igh volume of

p r o d u c t i o n war ran ted by the domestic and expo r t marke ts p e r

m i t t e d t h i s Canadian i n d u s t r y t o a t t a i n an e n v i a b l e compet i

t i v e p o s i t i o n , bo th d o m e s t i c a l l y and i n world m a r k e t s . I n

c o n t r a s t , Canada ' s t e x t i l e i n d u s t r y , unsucces s fu l In the

esqport f i e l d , i s we l l r e c o g n i z e d as being i n c o n s t a n t d i f f i

c u l t i e s d e s p i t e the t a r i f f p r o t e c t i o n i t has acqu i r ed i n th©

domest ic f i e l d .

I t would appear , t h e r e f o r e , t h a t i n a number of la rge

s c a l e u n d e r t a k i n g s , t he Canadian market , of i t s e l f , i s no t

s u f f i c i e n t l y l a r g e , or too d i s p e r s e d , t o p rov ide a sound

b a s i s for an economic volume of p r o d u c t i o n .

In view of t h e importance of expor t markets fo r the

development and growth of Canadian i n d u s t r i e s , i t f o l lows

t h a t the i m p l i c a t i o n s of European t r a d i n g ar rangements and

economic i n t e g r a t i o n a re of s p e c i a l s i g n i f i c a n c e to t h i s cour-

t r y ' s economic f u t u r e . However, developments i n Europe, and

t h e i r i m p l i c a t i o n s for Canadian expor t p r o s p e c t s must be

p l a c e d i n t h e i r p roper p e r s p e c t i v e i f a t r u e assessment i s to

be ach i eved . One of the f i r s t s t e p s i n t h i s d i r e c t i o n i s t o

e s t a b l i s h the r e l a t i v e importance of i n d i v i d u a l marke t s and




i n d i v i d u a l commodities or groups of p r o d u c t s i n Canada ' s c u r

r e n t expo r t volume.

B . Most Impor tan t Export Markets

Canadian s a l e s abroad have a wide and v a r i e d d i s t r i b u

t i o n . N e v e r t h e l e s s , of Canada ' s t o t a l e x p o r t s , approximate ly

85 per cen t a r e absorbed by the U.S .A. , t he Uni ted Kingdom,

EEC c o u n t r i e s and o the r EFTA c o u n t r i e s . These markets a r e

the most s i g n i f i c a n t i f any immediate changes i n t r a d i n g p a t

t e r n s should o c c u r .

A f u r t h e r breakdown w i l l , however, p rov ide a c l e a r e r

i n s i g h t i n t o the r e l a t i v e importance of t h e s e m a r k e t s . As can

be seen from Table V, Canadian e x p o r t s t o the U.S.A. over the

p a s t four y e a r s have accounted for approximate ly 60 p e r c e n t

of Canada ' s t o t a l s a l e s abroad . During t h i s same p e r i o d of

t i m e , U.K. pu rchase s from Canada reached a y e a r l y t o t a l of

16 per cen t of Canadian e x p o r t s t o the world, whi le EEC coun

t r i e s bought 8 p e r cen t of Canada ' s t o t a l y e a r l y s a l e s abroad.

Sine© 1957, EEC and a l l EFTA c o u n t r i e s combined have purchased

s l i g h t l y more than 25 pe r cent annua l ly of Canada ' s t o t a l

e x p o r t s a l e s . I t i s c l e a r , t h e r e f o r e , t h a t t h e s e European

marke t s a re of v i t a l importance t o Canada ' s expo r t t r a d e . Of

s p e c i a l impor tance , i s the f a c t t h a t the Uni ted Kingdom r e p r e

s e n t s by f a r the l a r g e s t i n d i v i d u a l market i n Europe fo r

Canadian p r o d u c t s .




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C. Major Export Commodities

A few i n d i v i d u a l commodities and groups of commodi

t i e s account for approximately 80 per c e n t of t o t a l Canadian

e x p o r t s . As i n d i c a t e d i n Table VI, t he se e x p o r t s c u r r e n t l y

c o n s i s t of a g r i c u l t u r a l p r o d u c t s , woodpulp and lumber, news

p r i n t , crude me ta l s and chemicals and a l l i e d p r o d u c t s . The

Uni ted S t a t e s market accounts for more than one h a l f of t h e s b

e x p o r t s , whereas the Uni ted Kingdom and t h e EEC purchase abou

15 p e r cent and 5 pe r c e n t r e s p e c t i v e l y .

These major i t ems r e p r e s e n t more t han 80 p e r cen t of

t o t a l Canadian e x p o r t s to th© Uni ted Kingdom; for t h e EEC thi |s

p r o p o r t i o n i s c l o s e r to 85 per cent» The importance of t h i s

group of e x p o r t s i n Canada 's t r a d e wi th the U.K. and t h e EEC

canno t , t h e r e f o r e , be u n d e r r a t e d . I t i s e q u a l l y t r u e , howeveb,

t h a t t h e importance of t h e s e same e x p o r t s to the U.K. and the

EEC should not be o v e r r a t e d , s i n c e they r e p r e s e n t l e s s t h a n

20 pe r cen t of t o t a l Canadian s a l e s abroad . I n c o n t r a s t ,

s a l e s of t h e s e same major i tems to the U . S . r e p r e s e n t about

45 pe r cent of t o t a l Canadian e x p o r t s .

The Uni ted Kingdom Market

The Uni ted Kingdom i s Canada 's second l a r g e s t expor t

m a r k e t . I t pu rchase s more t h a n 15 p e r c e n t of t o t a l Canadian

e x p o r t s - mainly a g r i c u l t u r a l p r o d u c t s and i n d u s t r i a l raw

m a t e r i a l s .

As i n d i c a t e d i n Table VII , t h e t h r e e most Impor tan t




TABLE VI

Comparison of Major Canadian Exports to Selected Areas of the World

($ million)

Commodities or Groups of Commodities

Wheat

Other A g r i c u l t u r a l P r o d u c t s

Animals and Animal P r o d u c t s

Lumber

Woodpulp

Newsprint Paper

I r o n Ore

Farm Machinery and Implements

Aluminum

Copper

Nicke l - Crude

Uranium

Asbes tos & P r o d u c t s

Chemicals and A l l i e d Produc t s

TOTAL - Major Expor t s

1959

U.K.

147

133

48

26

24

52

22

-

68

48

37

33

9

27

674

EEC

97

26

16

2

10

-

13

-

33

17

12

-

20

22

268

U.S.A.

17

178

229

2 7 1

252

617

119

91

80

82

114

279

45

86

2,460

1960

U.K.

135

133

35

52

31

60

28

-

8 0

68

55

26

9

34

746

EEC

108

30

15

4

12

-

27

*»

54

27

32

-

25

37

371

U.S.A

17

174

205

270

256

631

102

75

54

75

88

237

54

92

2,330

Source: Dominion Bureau of Statistics, Trade of Canada.




TABLE VII

Breakdown of Canadian Exports to the United Kingdom ($ million)

Commodities or Groups of Commodities 1957 1958 1959 1960

Wheat Barley Flour of wheat Flaxseed Tobacco Soya Bean, Oil Cake and Meal Other Agricultural Products Animals and Animal Products Lumber Woodpulp

Newsprint Paper Other Wood and Wood Products Iron Or© Steel Billets, Ingots, Blooms Other Iron and Iron Products Aluminum Copper Nickel - Crude Nickel - Fine

Platinum Lead Uranium Other Non-ferrous Metals& Products 30 Asbestos and Products Chemicals and Al l ied Products Other Exports

127 20 20 22 16 15 22 21 40 29

44 29 24 1 18 79 58 39 6

17 9 -

3 30 8 28 15a

146 47 23 18 14 6 29 40 34 25

46 28 16 -

9 68 45 43 10

15 7 13 25 8 36 25b

147 36 23 18 20 14 22 48 26 24

52 30 22 •

10 68 48 37 9

12 6 33 25 9

27 200

135 29 23 21 21 14 25 35 52 31

60 36 28 18 27 80 68 55 12

15 8 26 33 9 34 20d

Grand Total 737 776 786 915

Source: Dominion Bureau of S t a t i s t i c s , Trade of Canada.

a.

b.

c

d.

Includes Crude Electrodes -

Includes Crude Electrodes -

Includes Crude Ships - $11 million.

Includes Cotton Fabrics, $4 million; Fused Alumina minerals n.o,?

Artificial Abrasives & Carbon Graphite $6 million. Artificial Abrasives & Carbon Graphite $7 million; also Ships - §11 million. Artificial Abrasives - $3 million; also

million; Synthetic Fibres, «*«««.*«», $3 million; and non-metalli< &3 million.




groups of commodities which Canada e x p o r t s to th© Uni ted King

dom are a g r i c u l t u r a l p r o d u c t s , n o n - f e r r o u s m e t a l s and wood

p r o d u c t s . Since 1957 these i tems have accounted for w e l l over

70 per c e n t of t o t a l Canadian s a l e s to t h e U.K. C e r t a i n i n d i

v i d u a l commodities a re a l so of major impor tance , and f o r t h e

p a s t t h r e e y e a r s the same seven i n d i v i d u a l p r o d u c t s have r e

p r e s e n t e d more than one h a l f of t o t a l Canadian e x p o r t s t o the

U.K. In 1960, t h e s e were as f o l l o w s : wheat - $135 m i l l i o n ;

b a r l e y - $29 m i l l i o n ; newspr in t - $60 m i l l i o n ; aluminum - $80

m i l l i o n ; copper - $68 m i l l i o n ; n i c k e l - $67 m i l l i o n ; and

lumber - $52 m i l l i o n .

Other impor tan t Canadian e x p o r t s t o t h e U.K. i n c l u d e

woodpulp, canned salmon and c h e m i c a l s . Canadian e x p o r t s of

chemica l s and a l l i e d p r o d u c t s , which t o t a l l e d $34 m i l l i o n i n

1960, a re of p a r t i c u l a r importance s ince the t r e n d i n the U.K.

market has i n d i c a t e d growing demand fo r such p r o d u c t s , and

because these a r e p r o d u c t s from Canada ' s secondary manufactu

r i n g i n d u s t r i e s .

The e f f e c t of U . K . ' a p a r t i c i p a t i o n i n EFTA upon Cana

d i a n e x p o r t s a r e not d i s c o u r a g i n g . Only two s i g n i f i c a n t

a r e a s of p robab le l o s s e s emanate from th© p r o v i s i o n s of t h e

EFTA Convent ion . Maintenance of Canadian s a l e s of wood, wood

p r o d u c t s and paper w i l l r e q u i r e a growing U.K. market capab le

of abso rb ing both Canadian and Scandinav ian s u p p l i e s . Expec

t a t i o n s of growing s a l e s of manufactured p r o d u c t s and chemica l s




to this market will now be dependent on increasing Canadian

competitiveness due to the loss of tariff preferences, and

in some cases such as synthetic textiles and fibres, the

introduction of reverse preferences.2 However, in accordance

with existing U.K. preferences for Canadian products, any setf-

back due to losses of these preferences will be concentrated

In a sector of trade which accounts for less than 15 per cent

of Canadian exports to the U.K. - mainly canned salmon, cer

tain wood products, synthetic textiles, chemicals and other

manufactured products. However, such are the ahort-run expec|-

tations, and it is quite likely that in the longer run these

very same products will benefit from increased demand, not

only in the U.K. itself, but In the EFTA market as a whole.

The implication of the U.K.'s possible membership in

th© EEC are obviously quite difficult to assess. It is clear

at the moment, that the U.K. will seek special arrangements,

if not concessions, in its bid to join the EEC. However, a

brief study of the volume and type of products which the

United Kingdom imports from Canada is sufficient to indicate

that no drastic change in this trading pattern will occur in

the near future.

2 The introduction of "reverse preferences" means that not only will certain Canadian products lose their preferential tariff treatment, but in addition, they will eventually b© at a tariff disadvantage vis-a-vis other EFTA products entering the U.K. market.




Of the seven major export items, accounting for more

than 50 per cent of Canadian exports to the U.K., not one of

these is in great danger of competition from European sources

of supply. Although it is expected th© U.K. will negotiate

reservations on farm products presently entering that market

free of duty, the imposition of tariffs on farm products

would mainly affect U.K. consumer prices but would not have a

direct bearing on British demand for such products. Europe

cannot meet completely th© U.K. requirements for farm pro

ducts, and Canadian farm products should be able to compete

successfully with other foreign suppliers.

Th© loss of tariff preference for those Canadian pro

ducts enjoying such a preference is of course a very signifi

cant aspect of Britain's possible membership in the EEC. Hoi-

ever, th© following breakdown of Canadian exports to the

United Kingdom indicates quite clearly that the effects of

such a loss should not be overrated. In addition to the

seven major Canadian commodities which constitute more than

50 per cent of Canadian exports to the U.K., and which enter

that market without significant tariff preference, there is

another 25 per cent of Canadian sales to th© U.K. on which

th© preference is very small - 5 per cent or less. On a

sizeable part of the remaining 25 per cent, th© loss of pre

ference should not affect drastically the flow of trade. For

example, canned salmon, a fairly large individual trade item,




has a preference of 5 per cent, but sells mainly on a quality

basis. Canadian barley, flour and flaxseed have a 10 per cen;

duty preference but sell mostly according to market require

ments rather than price. Really significant preferences -

over 20 per cent - apply to less than 3 per cent of exports,

mainly manufactured products. Of some concern, might be th©

loss of th© 10 per cent preference for medicinal preparations

and synthetic rubber, and the 20 per cent preference on

building board and some paper products. These individual

items above account for no more than 5 per cent of Canadian

exports to the U.K.

The loss of tariff preferences may, therefore, be

detrimental to some exports to the U.K., but severe deterio

ration should not be expected. Canada might, for instance,

experience initial losses In such products as medicinal prepaf-

ration, synthetic rubber, building products, some paper pro

ducts and chemicals. These are the important items most likelly

to suffer if U.K. demand for such products remains static. On

the whole, there is clear indication a decline in exports du©

to the loss of tariff preferences should not exceed 10 per

cent, at the very most, of current Canadian sales to the U.K.

Of course certain individual items, as indicated above, may

suffer more than others, but such changes in trading patterns

are a normal occurrence in international trade, unless intro

duced suddenly. And it is almost certain that any withdrawal




of p r e f e r e n c e w i l l be spread ou t over a p e r i o d of y e a r s , p r o

v i d i n g ample o p p o r t u n i t y fo r Canadian i n d u s t r i e s t o adap t thejn

s e l v e s t o t h e new c i r c u m s t a n c e s .

Th i s maximum p o s s i b l e r e d u c t i o n of 10 p e r c e n t i n

Canadian e x p o r t s to the U.K., would r e p r e s e n t l e s s t han a

2 p e r c e n t d e c l i n e i n terms of Canada 's t o t a l e x p o r t s . This

p o s s i b l e l o s s , however, should be viewed i n th© l i g h t of p r e

s e n t economic c o n d i t i o n s i n t h e U.K. Pos t -war economic deve

lopments i n the U.K. have no t been as f avourab le as i n o the r

European c o u n t r i e s . The f a i l u r e of t h e B r i t i s h economy to

ach ieve a s u f f i c i e n t l y h igh r a t e of growth, and i t s cont inued

ba l ance of payments d i f f i c u l t i e s , have a l r e a d y r e s u l t e d i n

government measures in tended to reduce i m p o r t s . And i t i s

expec ted t h a t such " b e l t - t i g h t e n i n g " measures w i l l con t inue

t o be n e c e s s a r y i n t h e U.K. a t l e a s t i n the near f u t u r e . I n

such c i r cums tances , the ou t look for growing Canadian e x p o r t s

t o t h a t market i s c e r t a i n l y not f a v o u r a b l e .

In the face of these r e c u r r i n g economic d i f f i c u l t i e s ,

the U.K. has come t o the conc lu s ion t h a t i t might b© to i t s

advantage t o j o i n th© EEC. B r i t a i n e x p e c t s t h a t by i t s membe^

sh ip i n th© EEC th© s o l u t i o n t o many of i t s i n t e r n a l economic

problems w i l l be f a c i l i t a t e d . I t i s e x p e c t e d , f o r example,

t h a t w i t h i n the EEC, the U.K. w i l l be a b l e to achieve a more

f avourab l e r a t e of growth i n i n d u s t r i a l p r o d u c t i o n , and t h a t

i t w i l l a t t r a c t much of the f o r e i g n i nves tmen t s c u r r e n t l y

d i r e c t e d t o EEC c o u n t r i e s . UNIVERSITY OF OTTAWA SCHOOL OF GRADUATE STUDIES



I n t h e long r u n , membership of t h i s h i g h l y p roduc t ive

and c o m p e t i t i v e i s l a n d i n t h i s wide common market should p r o

duce f a v o u r a b l e r e s u l t s on i t s r a t e of economic growth and or

i t s i n t e r n a t i o n a l ba lance of payments p o s i t i o n . The ou t look

should be for i n c r e a s e d demand fo r Canadian p r o d u c t s , and grejater

p o s s i b i l i t y for d i v e r s i f i c a t i o n i n t h e types of goods which

th© Uni ted Kingdom w i l l be able t o a f fo rd t o buy from Canada

D. The European Economic Community

The European Economic Community i s Canada ' s t h i r d

l a r g e s t and, a t the moment, f a s t e s t growing expor t marke t .

Table V I I I shows t h a t s ince 1950, Canadian e x p o r t s t o th©

EEC have more than ts&pxL-ed. I n 1960, Canadian s a l e s t o t a l l e c

$436 m i l l i o n compared t o $117 m i l l i o n i n 1950.

Table VI I I a l s o i n d i c a t e s t h a t Canadian e x p o r t s t o

i n d i v i d u a l EEC c o u n t r i e s have i n c r e a s e d very f avourab ly since

1950, excep t i n Belgium-Luxembourg. Even i n France and

I t a l y , where p r o t e c t i o n i s t import p o l i c i e s have been p reva le r j t ,

s a l e s of Canadian p roduc t s have more than doubled s i n c e 1950,

The growth of Canadian e x p o r t s to t h e Ne the r l ands dur ing t h e

same p e r i o d has been no more f avourab le t han the i n c r e a s e i n

Canada ' s s a l e s to France and I t a l y . And y e t , t h e Netherlands-

has been c o n s i d e r e d by Canada as hav ing mor© l i b e r a l t r a d i n g

p o l i c i e s t han France and I t a l y . The i n c r e a s e I n Canadian

e x p o r t s t o Germany has obv ious ly been tremendous - from




TABLE VIII

Canadian Exports to Countries of the European Economic Community

($ million)

Belgium Year Luxembourg France Germany Italy Netherlands TOTAL

1950

1951

1952

1953

1954

1955

1956

1957

1958

1959

1960

66

94

104

69

55

53

58

60

70

56

69

18

46

48

32

34

42

53

57

45

43

73

9

37

95

84

87

91

142

152

202

129

165

15

49

53

33

24

28

38

63

30

32

66

9

26

41

42

40

48

55

70

75

54

63

117

252

341

260

240

262

346

402

422

314

436


UNIVERSITY OF OTTAWA - SCHOOL OF GRADUATE STUDIES _ J



m i l l i o n i n 1950 to $165 m i l l i o n i n 1960. I n p a r t , t h i s r e

f l e c t s the f a c t t h a t t h e German economy has expe r i enced t h e

most r a p i d r a t e of growth of t h e S ix , e s p e c i a l l y s i nce 1954.

Thus, i t would appear t h a t t h e growth i n Canadian

e x p o r t s t o I n d i v i d u a l c o u n t r i e s of t h e Six s ince t h e war, has

been a f f e c t e d more by the r a t e of growth i n t h e s e economies

r a t h e r than by t h e i r t r a d i n g p o l i c i e s . I f t h e o p p o s i t e were

t r u e , Canada ' s s a l e s t o Belgium-Luxembourg and t o the Nether

l a n d s would have outpaced the growth i n Canadian e x p o r t s t o

France and I t a l y . Th i s has not happened, i n d i c a t i n g t h a t

Canadian e x p o r t s t o the EEC w i l l most l i k e l y i n c r e a s e i n

accordance w i th the r a t e of economic growth and i n d u s t r i a l

expans ion i n the Common Market, i r r e s p e c t i v e of the o v e r a l l

h i g h e r r a t e s of duty imposed by t h e common e x t e r n a l t a r i f f of

t h e S ix .

For a number of t r a d i t i o n a l Canadian expor t p r o d u c t s ,

t h e Common Market i s of major s i g n i f i c a n c e . Of Canada ' s t o t a | l

s a l e s of wheat , 30 p e r cent h a s been purchased by c o u n t r i e s

of t h e S i x . As i n d i c a t e d i n Table IX, Canadian e x p o r t s of

a s b e s t o s , s y n t h e t i c rubber , pulpwood and f l a x s e e d a re a l s o of

major Impor tance . Of Canada ' s t o t a l e x p o r t s of the fo rego ing

p r o d u c t s , approximate ly 25 pe r cen t i s so ld t o t h e S i x .

S i m i l a r l y , the Common Market pu rchases about 10 per cent of

3 Appendix A contains f ive t a b l e s showing a breakdown of Canadian exports to individual EEC count r ies for the years 1957 to 1960.




TABLE IX

Breakdown of Canadian Exports tc th© European Economic Community


Wheat

Flaxseed

Rapeseed

Other Agricultural Products

Animals and Animal Products

Wood and Products

Iron Or©

Aluminum

Copper

Nickel - Crude

Lead

Other Non-ferrous Metals and Products

Asbestos and Products

Chemicals and Allied Products

Other Exports

Total Exports

Source: Dominion Trade of

1957

112

27

11

23

10

22

46

18

10

9

4

10

23

28

49

402

Bureau Canada

t

$ million 1958

101

18

10

17

8

16

23

20

27

13

5

7

16

27

114

422

1959

97

11

6

9

16

12

13

33

17

12

4

8

20

22

34

314

of Statisticsr

126

i960

108

12

4

14

15

22

27

54

27

32

4

11

25

37

44

436




Canada ' s t o t a l e x p o r t s of b a r l e y , i r o n o r e , n i c k e l , tobacco

and aluminum.

Table IX f u r t h e r i n d i c a t e s t h a t th© g r e a t e r p o r t i o n

of Canadian e x p o r t s to th© Community - about 80 p©r c e n t -

c o n s i s t s of a g r i c u l t u r a l p r o d u c t s and i n d u s t r i a l raw mate r i a l | s

S i x major expor t i t ems account f o r more than 60 per c e n t of

Canadian e x p o r t s to t h e EEC. In 1960, t h e s e were : wheat -

$108 m i l l i o n ; aluminum - $54 m i l l i o n ; copper - $27 m i l l i o n ;

n i c k e l - $32 m i l l i o n ; a s b e s t o s - $25 m i l l i o n , and, chemica ls

and a l l i e d p r o d u c t s - $37 m i l l i o n .

The common EEC t a r i f f which should e v e n t u a l l y apply

t o t h e s e commodities ar© as f o l l o w s : wheat - 20 pe r c e n t ;

aluminum - 10 per c e n t to 20 per c e n t ; copper - z e r o ; n i c k e l -

z e r o ; a s b e s t o s - z e r o ; and chemicals and a l l i e d p r o d u c t s -

zero to 34 p e r c e n t .

The 20 per cent d u t y on wheat i s s i g n i f i c a n t s i n c e

b o t h th© Ne the r l ands and Germany, the major EEC customers for

Canadian wheat , have i n th© p a s t l e v i e d no d u t y on such imporjt

Of even g r e a t e r concern than the t a r i f f l e v e l , however, i s

the l i k e l i h o o d t h a t v a r i o u s n o n - t a r i f f measures such as s t a t e 4

t r a d i n g , mixing r e g u l a t i o n s , common p r o t e c t i v e marke t ing

ar rangements and minimum p r i c e s w i l l be pu t i n t o e f f e c t .

Although the demand f o r Canadian ha rd wheat i s s t r ong , and i s

4 Th© propor t ion of hard wheat to soft wheat i n b read .




based on quality rather than price, millers* and consumers'

preferences could be changed over time through government

intervention. There is also the possibility of increased

production of hard wheat within the Common Market as a result

of government support, mainly in France. But, in view of the

volume of Canadian wheat sold in the EEC, it is more likely

that any losses, should they occur, will be felt more In

respect of th© rate of growth of Canadian sales of wheat in

that market rather than in terms of absolute decline in volunje.

Such a prospect does not suggest any significant hardship for

Canada, especially to the Canadian employment situation.

Except for the Benelux countries, the rate of duty or

aluminum In the Six has always been high - between 10 per

cent and 30 per cent. However, duty free quotas were allowec

to meet individual needs. A similar pattern of quotas at

reduced rates of duty from the common tariff level has also

been extended as a result of negotiations amongst the Six.

Thus any losses in Canadian exports of aluminum must be pre

mised on a static European market obtaining its aluminum

requirements from within. This is an unlikely development.

Any effects on exports of aluminum should therefore be expectjed

only In the long run rather than in the immediate future

which, in fact, holds promise of growing demand not satiable

within the boundaries of the Six. In any event, this heal thy

Canadian industry should certainly b© able to adapt itself in




t h e l ong run to whatever changes i n t r a d i n g p a t t e r n s ar© i n

s t o r e . Th© s i g n i f i c a n t g a i n s In Canadian e x p o r t s of aluminun

to t h e Common Market s i n c e 1957 a r e no t expec ted t o be l o s t ,

b u t any f u t u r e growth could we l l b© a t a lower r a t e due t o

p o s s i b l e c o m p e t i t i o n from i n t e r n a l s o u r c e s .

The zero t a r i f f on copper , n i c k e l and a s b e s t o s shoulc

c e r t a i n l y no t impede Canadian e x p o r t s of t h e s e p r o d u c t s . I n

f a c t , growing demand f o r such p r o d u c t s by EEC c o u n t r i e s should

favour an expans ion i n t h i s a r e a of Canadian t rad©.

Canadian s a l e s of chemicals and a l l i e d p r o d u c t s con

s t i t u t e an element of t r a d e of s p e c i a l importance s i n c e they

r e p r e s e n t o u t p u t from Canadian secondary manufac tur ing indus

t r i e s . With r e s p e c t to t h e h igh common t a r i f f on some of

t h e s e p r o d u c t s , i t i s s i g n i f i c a n t to no te t h a t a l though France

h a s had some of t h e h i g h e s t i n d i v i d u a l t a r i f f r a t e s on che

m i c a l s and a l l i e d p r o d u c t s , t h i s same c o u n t r y has been by f a r ,

Canada ' s b e s t EEC customer i n t h i s f i e l d for the p a s t four

y e a r s . I t would appear l i k e l y , t h e r e f o r e , t h a t the growth i r

Canadian e x p o r t s of chemica l s and a l l i e d p r o d u c t s w i l l be

more dependent on th© i n h e r e n t q u a l i t i e s , c o m p e t i t i v e n e s s and

s p e c i a l i z a t i o n of such Canadian p r o d u c t s , r a t h e r t h a n on the

ra t© of d u t y .

Thus for those p r o d u c t s which make up more than 60 p e r

c e n t of Canadian e x p o r t s t o t h e Common Market no d r a s t i c l o s

s e s , and i n many c a s e s s u b s t a n t i a l ga in s should be th© outcone




of th© implementa t ion of th© Rome T r e a t y . A few o t h e r I n d i v i

dua l p r o d u c t s ar© of s p e c i a l impor tance , such as woodpulp,

i r o n or©, f l a x s e e d , r apeseed and b a r l e y . These i t e m s , t o g e

t h e r w i th o t h e r m i s c e l l a n e o u s a g r i c u l t u r a l p r o d u c t s r e p r e s e n t

approx imate ly 15 pe r c e n t of t o t a l Canadian e x p o r t s t o t h e

EEC. The p o s i t i o n of t h e s e p r imary p r o d u c t s i n f u t u r e t radi r jg

p a t t e r n s wi th t h e EEC i s d i f f i c u l t t o a s s e s s . P r o s p e c t s fo r

Canadian e x p o r t s of t h e s e p roduc t s w i l l b© hampered by gene

r a l l y h i g h e r t a r i f f s , and s ince t h e i r i n d i v i d u a l volumes are

no t exceed ing ly h igh i t i s f eas ib l© some of them could be

r e p l a c e d by p r o d u c t s of EEC o r i g i n . However, of t hese p r o

d u c t s , on ly b a r l e y w i l l r e c e i v e what might b© termed as a

r e s t r i c t i v e t a r i f f . The common t a r i f f f o r b a r l e y w i l l b© 13

pe r c e n t . For f l a x s e e d , r apeseed and woodpulp the ra t© w i l l

b© z e r o , ©xcept on woodpulp fo r pape r making, which w i l l earrjy

a 6 p e r c e n t l e v y . Th© ra t© of duty on i r o n or© h a s been set

under the European Coal and S t e e l Community a t from 3 per eerjt

t o 10 p e r e e n t , and sine© most of Canada ' s i r o n or© e x p o r t s

a r e of a type d u t i a b l e around 5 p e r c e n t , t h e t a r i f f f a c t o r

should no t have any adverse e f f e c t s .

I t i s i n t h e remain ing s e c t o r of Canada ' s e x p o r t s to

the EEC t h a t mor© s i g n i f i c a n t e f f e c t s may be f e l t - mainly or

s emi -p rocessed and manufactured i t e m s . While Canada ' s e x p o r t s

of such p r o d u c t s to t h e S ix may not dec rease i n volume, i t

seems quit© l i k e l y some changes w i l l occur i n t h e t ypes of




p r o d u c t s expor t ed i n the f u t u r e . However, t h i s group r e p r e

s e n t s l e s s t h a n 3 per cen t of Canada ' s t o t a l e x p o r t s , and i t

i s i n c o n c e i v a b l e , except i n the case of o u t r i g h t impor t p r o

h i b i t i o n , t h a t more t han one h a l f of t h e s e e x p o r t s would be

d r i v e n out of t he Common Market . I n such an u n l i k e l y even t ,

Canada would s tand t o l o s e s l i g h t l y more than 1 per cen t of I t s

e x p o r t t r a d e i n exchange f o r the o t h e r b e n e f i t s t o be der ivec

from the economic u n i f i c a t i o n of Europe . Such an i n i t i a l l o s s

would soon be r e p l a c e d by t h e many p o t e n t i a l g a i n s i n o the r

a r e a s of t r a d e s .

I t t h e r e f o r e appears t h a t the g radua l impact of the

Common Market might r e q u i r e ad jus tments i n Canada ' s expor t

compos i t ion , mainly i n some a g r i c u l t u r a l p r o d u c t s such as

wheat and b a r l e y and i n i t s v a r i o u s smal l manufactured I tems.

But the long r u n e f f e c t s of t h e p r e s e n t European Economic

Community a r e , by f a r , more advantageous t o Canada ' s expor t

p r o s p e c t s than t h e immediate drawbacks i t might p r e s e n t a t 11 s

i n c e p t i o n , and Canada w i l l s u r e l y b e n e f i t from t h e success oi

t h i s economic u n d e r t a k i n g .

E . Other E .F .T .A, C o u n t r i e s

Al though the United Kingdom o f f e r s , by f a r , the l a r

g e s t market for Canadian e x p o r t s i n the E . F . T . A . , a n x i e t i e s

a l s o a r i s e i n r e s p e c t of Canada ' s i n t e r e s t s i n o t h e r E.F.T.A.

c o u n t r i e s . Canada has a c o n s i d e r a b l e s t ake I n i t s e x p o r t s




of a g r i c u l t u r a l p r o d u c t s , v a r i o u s me ta l s and a few manufac

t u r e d goods, mainly chemica ls and a l l i e d p r o d u c t s , t o th©

o t h e r E .F .T .A . c o u n t r i e s .

As i n d i c a t e d i n Table X, Canadian s a l e s to E .F . T.A.

c o u n t r i e s , exc lud ing the Uni ted Kingdom, t o t a l l e d $133 m i l l i o n

i n 1960. Of t h i s t o t a l , Norway, Sweden and Swi t ze r l and p u r -

chased $117 m i l l i o n , or more t h a n 80 p e r c e n t . Norway a lone

accoun t s f o r more than one h a l f of Canadian e x p o r t s t o E .F .T .A.

c o u n t r i e s exc lud ing the U.K. In a d d i t i o n , s i n c e 1950 s a l e s

t o Norway have I n c r e a s e d more than t h r e e f o l d , from $19 m i l l i c n

t o $70 m i l l i o n i n 1960. 5

Table XI, c o n t a i n s a breakdown of the major Canadlar

p r o d u c t s expor t ed t o Norway, Sweden and Swi tze r l and combined,

fo r the p a s t four y e a r s . These f i g u r e s show t h a t the major

i t ems which Canada has expor t ed to t h e s e t h r e e E .F .T.A. coun

t r i e s have been n i c k e l , copper , wheat and aluminum. During

1960 Canadian e x p o r t s of these four i n d i v i d u a l p r o d u c t s to

Norway, Sweden and Swi t ze r l and amounted to $89 m i l l i o n , o r

more than 60 p e r cen t of Canada 's t o t a l ©xports t o a l l E .F .T .A.

c o u n t r i e s e x c l u d i n g the United Kingdom.

The type of p roduc t s involved i n t h i s major p o r t i o n

of Canada ' s s a l e s t o t h e E .F .T.A. c o u n t r i e s should n o t be

3 Appendix B c o n t a i n s t h r e e t a b l e s showing a b reak down of Canadian e x p o r t s t o i n d i v i d u a l EJP.T.A. c o u n t r i e s for th© y e a r s 1957 to 1960.


TABLE X

Canadian Exports to Countries of th© European Free Trade Association

($ million)

Year

1950 1951 1952 1953

1954 1955 1956

1957 1958 1959 1960

Austria

2 2 5 5

3 6 5

7 7 8 8

Denmark

1 6 10 6

3 3 3

4 5 5 5

Norway

19 32 39 37

44 47 58

56 56 62 70

Portugal

6 5 4 4

2 2 2

3 2 3 3

Source: Dominion Bureau of Stati

Sweden

4 12 12 5

4 8 8

12 11 15 21

sties,

Switz.

26 25 27 30

27 26 33

25 29 26 26

Trade of

U.K.

470 631 746 665

653 769 813

737 776 786 915

Canada.

Total

528 713 843 752

736 861 922

844 886 905 1048

O

•a H O CO

3 So

o 6 6 >



TABLE XI

Breakdown of Canadian Exports to Norway, Sweden and Switzerland combined

C ommoditi © s

Wheat

Aluminum

Copper

Nickel

Chemicals

Other Exports

1957

16

3

13

35

3

23

($ million) 1958

25

3

10

38

4

16

1959

16

6

11

45

7

18

1960

17

7

15

51

4

23

Total 93 96 103 117

Source: Dominion Bureau of Statistics* Trade of Canada.




a f f e c t e d a d v e r s e l y . Ra ther i t may be expec t ed t h a t a growing

need for t h e s e p r o d u c t s w i l l favour Canadian e x p o r t s . Should

Norway and Sweden dec ide to j o i n t h e E . E . C , Canadian ©xports

of copper , n i c k e l and aluminum may w e l l be favoured by t h e

p o t e n t i a l i n t e n s i f i c a t i o n of economic a c t i v i t y E .E.C. member

s h i p w i l l have on t h e s e c o u n t r i e s . The e f f e c t of such a

development on Canada ' s wheat s a l e s i n E .F .T .A. should be a l l e

v i a t e d by the f a c t t h a t Swi t ze r l and , Canada 's l a r g e s t and

most r e g u l a r wheat customer i n E .F .T .A . , i s not l i k e l y to

j o i n any t r a d i n g u n i t such as E.E.C. s i n c e the p o l i t i c a l i m p l i

c a t i o n s i n E .E.C. would r e q u i r e t h e abandonment of i t s t r a d i

t i o n a l n e u t r a l pos i t i o n .

Thus, f o r a t l e a s t 60 per c e n t of Canada ' s e x p o r t s tc

o t h e r E .F .T .A. c o u n t r i e s no s e r i o u s se tback should be expectejd,

whether or not two of the t h r e e c o u n t r i e s invo lved dec ide t o

j o i n t h e Common Market.

I n c o n s i d e r i n g the ba lance of Canada ' s e x p o r t s t o a l l

E .F .T .A . c o u n t r i e s exc lud ing the Uni ted Kingdom, p o s s i b l e

l o s s e s should no t be g iven exaggera ted impor t ance . Canada 's

s a l e s t o many of t he se c o u n t r i e s have exper i enced e r r a t i c

f l u c t u a t i o n s fo r a t l e a s t the l a s t t e n y e a r s . Canadian exporfts

t o t a l l i n g $10 m i l l i o n to Denmark i n 1952, f e l l t o $3 m i l l i o n

i n 1956 and a r e c u r r e n t l y i n the o rder of $5 m i l l i o n . Similar | -

l y , P o r t u g a l purchased $6 m i l l i o n worth of Canadian p r o d u c t s

i n 1950, $2 m i l l i o n i n 1954 and $3 m i l l i o n i n 1960. Sweden




purchased $12 m i l l i o n of Canada ' s e x p o r t s i n 1952, $4 m i l l i o n

i n 1954 and $21 m i l l i o n i n 1960. F l u c t u a t i o n s would n o t ,

t h e r e f o r e , be a new element i n Canada ' s s a l e s to t h e s e coun

t r i e s . The most s t a b l e market fo r Canadian e x p o r t s , amongst

t h e s e c o u n t r i e s , has been Swi t ze r l and - about $25 to $30

m i l l i o n a n n u a l l y s i n c e 1950, Of c o u r s e , i t would be i d e a l i f

a l l had shown r a t e s of growth as i n A u s t r i a - from $2 m i l l i o r

i n 1950 t o $8 m i l l i o n i n 1960, and Norway - from $19 m i l l i o n

i n 1950 t o $70 m i l l i o n i n 1960.

I t would appear t h e r e f o r e t h a t any f l u c t u a t i o n s i n

Canadian e x p o r t s , e i t h e r upwards or downwards, w i l l be d i f f i

c u l t t o a t t r i b u t e to developments i n E .F .T .A. i t s e l f or to

the d e c i s i o n of some of i t s members t o j o i n the E.E.C. Never

t h e l e s s i t i s l o g i c a l to expect t h a t l o s s e s or g a i n s i n these

marke t s w i l l fo l low the same t r e n d s as i n o the r European

marke t s , and w i l l depend to a g r e a t e x t e n t on the u l t i m a t e

t r a d i n g arrangements between E .F .T .A. and E .E .C.

I n any event Canada 's p o t e n t i a l l o s s e s or ga in s t o

t h a t market r e p r e s e n t on ly a very minimal va lue of t o t a l

Canadian e x p o r t s . S a l e s of n i c k e l , copper , aluminum and wheajt

t o Norway, Sweden and Swi tze r land r e p r e s e n t more than 60 per

c e n t of Canada ' s ©xports to a l l E .F .T .A. c o u n t r i e s exc lud ing

th© U.K. No s e r i o u s se tback i s expec ted i n t h i s a r e a of trad|e

And i t would be f o l l y t o expect t h a t new t a r i f f a r rangements

e i t h e r w i t h i n E .F .T .A. or i n E .E .C. could d i s r u p t more than




one h a l f of th© ba l ance of Canada ' s s a l e s t o t h e s e s i x E.F.T,

c o u n t r i e s . I n terms of Canada ' s t o t a l e x p o r t s , t h i s would

mean a maximum l o s s of l e s s t h a n 1 per c e n t . Su re ly , i n the

f a c e of such a s l i g h t r i s k of l o s s , Canada can more r e a d i l y ,

and more b e n e f i c i a l l y , look to the p o s s i b l e t r a d e expanding

p o t e n t i a l i t i e s of t h i s t r a d i n g group i n Europe .

P« Fu tu re P r o s p e c t s

P o t e n t i a l b e n e f i t s from European economic u n i f i c a t i o n

must be p r o j e c t e d on t h e b a s i s of p a s t exper i ence i n s i m i l a r

a r e a s of economic developments . As such, the accuracy , or

t h e wor th , of t h e s e p r o j e c t i o n s may be somewhat wan t ing . Nevejr

t h e l e s s , t h e r e e x i s t some a r e a s of economic p r o j e c t i o n which

a r e f a i r l y dependab le . One of t h e s e a reas i s the p a r a l l e l

movements I n i n d u s t r i a l i z a t i o n and f o r e i g n t r a d e . I t has

been shown i n an e a r l i e r c h a p t e r , t h a t i n c r e a s e d f o r e i g n t r a d e

i s a normal c h a r a c t e r i s t i c of the p r o c e s s of i n d u s t r i a l i z a t i o n

Al ready , t h e growth i n inves tmen t s and i n d u s t r i a l p r o d u c t i o n

i n Europe over the p a s t few y e a r s has been accompanied by an

i n c r e a s e i n bo th e x p o r t s and i m p o r t s . As can be seen from

Table XI I , the r a t e of growth i n i n d u s t r i a l p r o d u c t i o n has

been accompanied by i n c r e a s e d l e v e l s of bo th e x p o r t s and im

p o r t s . This r e l a t i o n s h i p between i n d u s t r i a l p r o d u c t i o n and

f o r e i g n trad© has f avourab ly a f f e c t e d Canadian e x p o r t s to thelse

m a r k e t s . F rance , Germany and I t a l y have exper ienced a f a s t e r

UNIVERSITY OF OTTAWA ~ SCHOOL OF G R A D U A T E STUDIES



TABLE XII

138

Index of Industrial Production and Volume

Country

Belgium and Luxembourg

France

Germany

Italy

Netherlands

Sour

of Foreign Trad© of EEC Countries 1953 » 100

Year

1954 1957 1958 1959 1960

1954 1957 1958 1959 1960

1954 1957 1958 1959 1960

1954 1957 1958 1959 1960

1954 1957 1958 1959 1960

Industrial Production

104 119 113 117 125

109 139 145 150 168

112 146 151 162 179

109 138 143 158 182

H I 127 127 139 157

ce: OEEC, General Statisl Bullet .in, No. 4, Jul}

Imports

110 139 137 154 174

109 151 150 147 176

123 192 205 247 294

105 144 143 161 229

125 158 149 169 193

tics, OEEC r i96i;

Exports

109 133 136 154 173

115 131 137 164 192

122 188 195 222 255

112 178 189 232 280

114 136 147 165 187

Statistical

UNIVERSITY OF OTTAWA _ SCHOOL OF GRADUATE STUDIES



rat© of growth in industrial production sine© 1954 than Bel

gium and the Netherlands. Similarly Canadian exports to

France, Germany and Italy have increased much more rapidly

than Canadian sales to Belgium and the Netherlands during the

same period.

It is fair to expect that this relationship between

industrial production, imports and exports will continue to

be the general rule in European economic developments. Thus, g

it could well be that by 1975, when E.E.C. *s population may

have reached 180 million, and when its Gross National Product

could well be $280 billion, Canadian exports to that market

will total $800 million compared to the current level of

slightly more than $400 million. Such a figure will be reacted

if the ratio of imports from Canada to E.E.C.'s G.N.P. remairs

the same. Of course, a rate of growth of this magnitude would

most likely necessitate greater dependence on imported raw

materials, with the favourable result that Canada's exports

to the E.E.C. fifteen years hence could easily exceed $800

million.

One of the current drawbacks to Canada's t r ad ing pos: -

t i o n v i s - a - v i s western Europe, i s the cost d i f f e r e n t i a l

a f fec t ing i n d u s t r i a l production. $his has proven a disadvan-

6 The projected f igures for 1975 ar© based on a spec ia l study of the E.E.C. published in The F inanc ia l Post , Toronto, August 16, 1958, Volume LII , No. 32, pp. 19-22.



IMPLICATIONS FCR CANADA 140

tag© t o Canadian e x p o r t s competing i n European marke t s , or

competing a g a i n s t European p r o d u c t s i n t h i r d c o u n t r i e s . Th©

advent of i n t e n s i f i e d i n d u s t r i a l i z a t i o n and c a p i t a l i n v e s t

ments w i t h i n an economical ly u n i f i e d Europe may be expec ted

to narrow such c o s t d i s p a r i t i e s . Indeed, on© of th© long run

purposes of the Common Market i s t o r a i s e the s t anda rds of

l i v i n g i n Europe . The accompanying i n c r e a s e s i n i n d u s t r i a l

and s o c i a l c o s t s which can be expected from such an occur rence

w i l l prove b e n e f i e i a l i n c l o s i n g the gap between c o s t l e v e l s

i n Canada and Europe, t he reby ex tend ing a more compe t i t i ve

p o s i t i o n t o Canadian p r o d u c t s , e s p e c i a l l y those from secondary

manufac tu r ing . This w i l l b© h e l p f u l to Canada ' s expor t p ros

p e c t s i n Europe and i n t h i r d c o u n t r i e s , where European p r o

d u c t s a r e p r e s e n t l y lower p r i c e d .

Higher i n d u s t r i a l p r o d u c t i o n and t h e d i v e r s i f i c a t i o n

i n i n d u s t r i a l a c t i v i t y w i l l I n c r e a s e the p o t e n t i a l f low of

manufactured p r o d u c t s from Europe to Canada and t o o the r world

m a r k e t s . Such a development should b© welcomed by Canada,

for many r e a s o n s . F i r s t l y , i t w i l l pe rmi t Canada to reduce

i t s dependence on impor ts of manufactured i t e m s from th© U . S . ,

t h e r e b y p r o v i d i n g a b e t t e r d i s t r i b u t i o n i n th© compos i t ion of

Canada ' s trad© b a l a n c e . Secondly, the i n c r e a s e i n European

e x p o r t s of manufactured p r o d u c t s t o the world w i l l i n c r e a s e

E u r o p e ' s s t a k e i n i n t e r n a t i o n a l t r a d e . In t u r n , t h i s w i l l

prove a s t r o n g i n c e n t i v e for Europe t o i n c r e a s i n g l y l i b e r a l i z e




I t s p o l i c i e s towards impor t s i n o rder t o con t inue r e c e i v i n g

l i b e r a l t r e a t m e n t i n i t s access t o world m a r k e t s . T h i r d l y ,

i t i s f a i r to assume t h a t an i n c r e a s e i n Eu rope ' s economic

s t r e n g t h w i l l a f f e c t t h a t m a r k e t ' s p r o p e n s i t y to impor t , i n

the same manner t h a t such a development h a s a f f e c t e d t h e U.S .

m a r k e t . U . S . r e p r e s e n t s today t h e l a r g e s t market for t h e s a l e

of Canadian manufactured p r o d u c t s . As i n d i c a t e d i n Table XIlJI,

t he U.S . market accounts for the major p o r t i o n of Canadian

e x p o r t s of such manufactured p r o d u c t s as farm machinery, manu

f a c t u r e s of i r o n , copper tub ing and wi re , r a d i o w i r e l e s s appa

r a t u s , t e l e g r a p h and te lephone a p p a r a t u s , e l e c t r i c a l apparatus

chemical f e r t i l i z e r s and drugs and c h e m i c a l s .

And so , i t may be expected t h a t as Europe r e a c h e s a

world t r a d i n g and economic p o s i t i o n s i m i l a r to t h a t of the

U . S . , i t w i l l c o n s t i t u t e a b e t t e r market for t he s a l e of Cana

d i a n goods from secondary manufac tu r ing . This i s of s p e c i a l

impor tance t o t h e expo r t p r o s p e c t s of Canada 's secondary i n d u s

t r i e s , s i n c e t h e p r e s e n t volume and composi t ion of such Cana

d ian s a l e s abroad, r e n d e r them uncommitted i n r e s p e c t of

f u t u r e t r a d i n g developments . In view of t h e small volume of

Canada ' s e x p o r t s of manufactured p roduc t s t o Europe, any d i s

r u p t i o n s i n t h a t a r ea of t r a d e must be e q u a l l y s m a l l . On the

o t h e r hand, Canadian secondary i n d u s t r i e s , which c u r r e n t l y

have no l a r g e s c a l e inves tments d i r e c t e d t o the promot ion of

e x p o r t s a l e s , can be t r u s t e d to adapt t h e i r i nves tmen t and




TABLE XIII

Comparison of Selected Commodities Exported from Canada to the U.S.A.

and the World During 1960 ($ million)

Commodities U.S.A. World

Motor Vehicle Engines Mowing Machines and Reapers Treshers and Combines Farm Tractors Adding Machines and Parts Iron Valves

Manufactures of Iron n.o.p. Copper Tubing Copper Wire Radio Wi re l e s s Apparatus Telegraph and Telephone Apparatus E l e c t r i c a l Appara tus n . o . p .

Drugs and Chemicals n . o . p . Nickel - F ine D e n t a l , S u r g i c a l , H o s p i t a l

Equipment S c i e n t i f i c Apparatus

TOTAL

8 6

3 0 4 2 1

4 4 3

15 4 5

27 81

2 4

10 6

32 4 4 2

6 8 5

22 7 7

48 142

3 7

200' 313 4Bfr

Source: Dominion Bureau of S t a t i s t i c s , Trade of Canada.

* Represents more than 7 per cent of t o t a l Canadian exports to the U.S.

** Represents more tiian 5 per cent of t o t a l Canadian ©xports.




development programmes to meet any growing expor t s a l e s oppor

t u n i t i e s i n t h e f u t u r e . Unl ike o t h e r c o u n t r i e s , t h i s w i l l

no t e n t a i l the abandonment of e x i s t i n g p r o d u c t i o n f a c i l i t i e s ,

b u t on ly th© development of new ones i n accordance wi th oppor

t u n i t i e s i n f o r e i g n m a r k e t s .

Those i n favour of a s t a t i c p a t t e r n of t r a d e e x p r e s s

t h e f e a r t h a t Canada w i l l l o s e i t s a g r i c u l t u r a l markets i n

Europe . I t i s agreed t h a t Europe ' s need for a g r i c u l t u r a l pre

d u c t s w i l l grow. However, the f e a r i s t h a t r e s t r i c t i v e p o l i

c i e s w i l l p reven t such i n c r e a s i n g needs from be ing f u l f i l l e d

by f o r e i g n c o u n t r i e s . At p r e s e n t , a g r i c u l t u r e i s bo th a po l j

t i c a l and economic problem i n Europe, w i t h " too many fa rmers 7

on too many smal l f a r m s " . Approximately one q u a r t e r of

E . E . C . ' s work fo r ce i s c u r r e n t l y engaged i n a g r i c u l t u r a l pro

d u c t i o n , compared t o about 8 pe r cent i n the U.S.A. Moreover

European farms a r e g e n e r a l l y smal l , family-owned e n t e r p r i s e s ,

More t h a n t w o - t h i r d s of farms in t h e Common Market - comparec

w i t h about o n e - q u a r t e r i n the U.S. - a r e l e s s t h a n 25 a c r e s

i n s i z e . The Common Market Commission's plan f o r a common

a g r i c u l t u r a l p o l i c y r e c o g n i z e s t h a t the S ix must so lve t h e i r

b a s i c a g r i c u l t u r a l problem - too many smal l f a rms , t oo many

f a rmer s , t o o much i n e f f i c i e n c y , too much p r o t e c t i o n i s m and

7 The Chase Manhattan Bank, "A European Farm P o l i c y " , Western Europe, i s s u e d b i -month ly by the Economic Resea rch Depar tment , No. 9, August-September 1960, New York.




too many government controls. As a high cost producer of foo

th© E.E.C. realizes the long run economic dividends of gra

dually shifting resources from some lines of agriculture to

Industrial production. Such a shift in the composition of thb

labour force from agriculture to industry, will be facilitateji

by the increased industrial economic activity in Europe fol

lowing the intensified capital investments in Industry which

has already begun. A shift of this type is a normal effect

of industrial growth and there is no reason why E.E.C.'s agri|-Q

c u l t u r a l s ec to r should be an exception.

These long run developments in Europe's a g r i c u l t u r a l

production w i l l r e l i eve ag r i cu l t u r a l policy-makers from preseht

p o l i t i c a l pressures in t h i s f i e l d . With fewer people direct ly-

engaged i n ag r i cu l tu r e , p o l i c i e s may be expected to be formu

l a t e d more on the bas i s of economic considera t ions r a the r t h a i

p o l i t i c a l impl ica t ions . The increases in Imports of foodstuff

which economic considerat ions wi l l suggest, w i l l , moreover, bp

supported by consumers who expect the Common Market to br ing

lower food p r i c e s ; by the importing and food processing Indus

t r i e s of Belgium and Holland, whose influence has , up to now,

been confined to the Benelux; and by an increasing number of

i n d u s t r i a l i s t s who r e a l i z e tha t Europe must l i b e r a l i z e i t s

8 Richard H. Holton and David C. Smith, "Canadian Economic Growth in the Early 1960's, The Business Quarterly, Vol. XXVI, No. 2, Summer 1961, School of Business Admlnistra-t i o n , Univers i ty of Western Ontario, London.




agricultural import policies in order to export more indus

trial goods. Thus, with the relative decline in importance

of agricultural production in the E.E.C. as a result of inten

sified industrialization, the growing demand for foodstuffs

may be expected to favour foreign suppliers, including Canads.

It seems obvious, from the foregoing, that providing

the E.E.C. achieves its goals concerning such factors as in

dustrial production, income growth and higher standards of

living, Canada stands to gain much more in the long run com

pared to whatever losses or disruptions may affect its trade

initially. The future potentialities of a united Europe

favour not only the growth in Canada's exports of agricul

tural products and industrial raw materials, but also will

provide opportunities for the development of a sound export

specialization in secondary manufacturing products. In effect,

Canada must look hopefully towards the successful attainment

of the economic and political goals of the European Economic

Community.



CONCLUSION

Canada's t rade with Europe has been shown to consis t

mainly of a g r i c u l t u r a l products and I n d u s t r i a l raw mater ia l s

with manufactured items playing a very minor r o l e . The imme

d i a t e outlook, r e s u l t i n g from t rad ing and other economic

arrangements i n Western Europe, i s for t h i s t rading p a t t e r n

to continue without any s ign i f i can t loss or d e t e r i o r a t i o n i n

any one area . I t i s i l l o g i c a l to foresee a decl ine in Cana

dian exports of i n d u s t r i a l raw mater ia l s to Western Europe

In the face of increas ing needs for such products as a resul l

of growing i n d u s t r i a l product ion. On the other hand i t i s

inconceivable t h a t Europe's a g r i c u l t u r a l requirements w i l l

subside suddenly, j u s t as i t Is inconceivable tha t foodstuffs},

such as wheat, which the U.K., Germany and Benelux purchase

in la rge volume from Canada, can be replaced by EEC or EFTA

production i n the near fu tu re .

In the f i e ld of manufactured products, Canadian

exports to Europe have been low in volume, high in p r i ce s an<.

q u a l i t y . They have had to surmount ex i s t i ng high t a r i f f

b a r r i e r s , and should not suffer from the new t a r i f f r a t e s

adopted by EEC. Moreover, Canadian manufactured products

have been i n i t i a t e d t o compete agains t the p r e f e r e n t i a l t r e a

ment extended to intra-European trade through OEEC and EPU,

a t l e a s t u n t i l 1958, so t h a t i n t e r n a l t r ad ing preferences



CONCLUSION 147

inherent in EEC and EFTA should not dislocate this trade.

It is mainly In the long run that significant posi

tive effects upon the pattern of Canadian exports to Europe

may be expected.

Just as the unifying trading and economic character!s

tics of the OEEC resulted in activating industrial production

in Europe, so too the integration aspect of the EEC is ex

pected to have similar results on the industrial growth of

its members. In turn, the parallel movements between indus

trial production and foreign trade, which have been shown as

empirically true, should also hold for future trading pros

pects with these markets. Thus it may be expected that long

run growth in Industrial production within these markets will

be accompanied by greater import requirements.

A successful European Economic Community implies the

gradual formation of an integrated market whose benefits will

consist of an increase in economic activity, a growth in

industrialization and investment, and a higher level of incomle

A united and growing population forming a single large market

with eventual income growth creating a higher level of demand

for all goods, logically means more, rather than less, trade.

Thus any tendency to replace Canadian goods by European ones

will diminish as the market grows progressively. This would

not obviate any tendency of possible reductions in imports

of particular Canadian goods, but should enhance th© possi-



CONCLUSION 148

b i l i t y of increas ing and d ivers i fy ing overa l l Canadian exportjs

to tha t market.

Of special s ignif icance i s the p o t e n t i a l i t y for

increased demand i n fu l ly manufactured produc ts . I t i s i n

t h i s area of t rade where Canada must u l t imate ly seek i t s

future expor t s . A cont inuat ion of present t rends in the pre

dominance of a g r i c u l t u r a l and raw mater ia l s exports w i l l

prove disadvantageous to the future development of the Cana

dian economy. Increas ingly more products w i l l have to be

processed domestical ly p r io r to export i f Canada i s to sus ta i r

an adequate l eve l of employment. The Common Market, as i t

grows i n economic s t rength and d i v e r s i f i c a t i o n , wi l l undoub

ted ly provide g rea te r oppor tuni t ies for Canadian secondary

manufacturing to en te r the export f i e l d . Of course, Canada's-

secondary i n d u s t r i e s w i l l have to adapt themselves to new

demands emanating from Europe, but the minor ro l e these Indus

t r i e s cur ren t ly have in Canadian exports to Europe, place

them In a very good pos i t i on to meet the changing demands of

future t rade p rospec t s .

The evolut ion of Europe in to an economic un i t compa

rable to the U.S.A. w i l l not only provide a welcome comple

mentar i ty to Canada's present t rading dependence v i s - a - v i s

the U.S . , but i t w i l l also be benef ic ia l to Canada's export

prospeets to t h i r d coun t r i e s . The increased European demand

for the products of foreign count r ies , Europe's p o t e n t i a l



CONCLUSION 149

r o l e in foreign c a p i t a l ass i s tance and investments, wi l l pro

vide more countr ies with the means whereby they can purchase

Canadian goods in g r ea t e r quan t i t i e s and v a r i e t y . Thus the

e f fec t s of the Common Market upon Canadian exports may not

so le ly be r e f l ec t ed in an increase i n sa les to t h a t market,

but a l so i n expanded purchases by countr ies who presen t ly

must r e s t r i c t the i r imports due t o a lack of foreign exchange

or low standards of l i v i n g .

Given a stronger and more economically viable Europe,

i t w i l l p a r t i c i p a t e more ac t ive ly in the f i e ld of foreign

investments, and w i l l i t s e l f a t t r a c t investments from abroad,

The benef i t s to be gained from an increasing l eve l of foreigr.

investments in Europe w i l l go further than i t s cont r ibu t ion

to i n d u s t r i a l i z a t i o n and income growth. Foreign investments

w i l l , i n f a c t , hasten the development of a la rge economic

area comparable to any other i n the world. And eventual ly

Europe w i l l become a strong c red i to r area capable of lending

important c a p i t a l ass i s tance towards the development of under

developed coun t r i e s .

Th© normal process of economic growth should permit

Europe t o enlarge i t s scale of expor ts , and i t may be expectejd

t ha t European investments in the Canadian market w i l l grow.

A g rea te r i n t e r e s t i n foreign trade combined with a p a t t e r n

of cross- inves tments w i l l , no doubt, promote the c r ea t i on of

support ing and complementary i n d u s t r i e s in each area, and



CONCLUSION 150

w i l l give r i s e to unwri t ten and se l f -enl ightened t rad ing

arrangements benef ic ia l to both EEC and Canada.

I t can therefore be concluded t h a t the gradual Impact

of the Common Market w i l l r equ i re adjustments i n Canada's

expor ts , mainly in manufactured products . But the long run

e f fec t s of present European t rading and economic arrangements

c o n s t i t u t e , by fa r , the most promising developments for the

export prospects of Canadian secondary manufacturing.

Despite the i n i t i a l drawbacks, which have yet to show

themselves, Canada must meet the chal lenge of future t rad ing

p a t t e r n s since t he re in l i e s the f e a s i b i l i t y of growing out

of i t s pos i t i on as a "hewer of wood and drawer of water" for

the American co lossus .



BIBLIOGRAPHY

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The historical study of economic conditions in the nineteen-thirties points to the fact that international economic problems and domestic economic policies cannot be divorced. While it is true that a few countries could hope to maintain prosperity and progress at home regardless of happenings in the rest of the world, it is equally true that there was little hope of achieving an ordered world economy so long as the major countries were unable to cope with their domestic economic problems.

Balogh, T., "The United States in the World Economy" Bulletin of the Oxford University, Institute of Statistics, October, 1946, pp. 309-323.

The United States is feared and blamed by many countries for numerous economic problems affecting their individual strength and stability. The author depicts in a very enlightening manner the major economic influence of th© United States on the world economy.

Bok, Derek Curtiss, The First Three Years of the Schuman Plan, International Financial Section, Department of Economics and Sociology, Princeton University, 1955, 79 p.

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BIBLIOGRAPHY 152

Caves, R ichard E . , "Europe ' s U n i f i c a t i o n and Canada's Trade" , The Canadian J o u r n a l of Economics and P o l i t i c a l S c i e n c e , Vol . 25 , No. 5 . August. 1959. p p . 249-258 .

The au thor s t u d i e s i n d e t a i l t h e p o s s i b l e impact of EEC and EFTA upon Canadian t r a d e , p r i o r to U . K . ' s a p p l i c a t i o n fo r membership i n EEC. He conc ludes t h a t Canada should n o t be a d v e r s e l y a f f e c t e d by t h e s e deve lopments .

C e n t r a l Off ice of In fo rma t ion , Free Trade i n Europe, an O f f i c i a l Account, London, H.M. S t a t i o n e r y Off ice , May, 1957, 31 p .

Why d id the U.K. choose a Free Trade Area, and how i t conceived of I t s o r g a n i z a t i o n and s t r u c t u r e . This i s an o f f i c i a l paper on the p r e l i m i n a r y views of the Uni ted Kingdon on European economic i n t e g r a t i o n .

C e n t r a l Office of In fo rmat ion , Western Co-ope ra t ion • A Reference Handbook, London, H.M. S t a t i o n e r y Off ice , 1955, 119 p .

Although d y n a s t i c r i v a l r i e s , and the r i s e of n a t i o n a l i s m d i d , i n t h e p a s t , dominate the European scene, t he n e c e s s i t y and a d v i s a b i l i t y of c o - o p e r a t i v e a c t i o n i n Western Europe e v e n t u a l l y became widely accep t ed . This book provides a c h r o n o l o g i c a l s k e t c h of the major developments i n Western c o - o p e r a t i o n , and p o i n t s out some of the economic, m i l i t a r y , p o l i t i c a l and s o c i a l f a c t o r s i n v o l v e d .

Diebold , Will iam J r . , The Schuman P lan , A Study i n Economic Co-ope ra t i on , 1950-1959, New York, F r e d e r i c k A. P r a e g e r , 1959, VII -750 p .

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Economic, F i n a n c i a l and T r a n s i t Department, I n d u s t r l a j -l i z a t i o n and Fore ign Trade, Geneva, League of Na t ions , 1945, 171 p .

The p r i n c i p a l o b j e c t of t h i s s tudy i s t o i n d i c a t e the e f f e c t s of i n d u s t r i a l i z a t i o n on f o r e i g n t r a d e . I t conc ludes



BIBLIOGRAPHY 153

t h a t the spread of i n d u s t r y , t o t h e e x t e n t t h a t i t i nvo lves an i n c r e a s e i n the w o r l d ' s wea l th , i s normal ly accompanied by a r i s e and d i v e r s i f i c a t i o n i n f o r e i g n t r a d e . Empi r i ca l a n a l y s i s i s used e x t e n s i v e l y .

Economic, F i n a n c i a l and T r a n s i t Department , I n t e r n a t i o n a l Currency Exper i ence , Lessons of the In te r -War P e r i o d , Geneva, League of N a t i o n s , 1944, 249 p .

Based on the expe r i ence of the p a s t , t h i s s tudy shows the importance of i n t e r n a t i o n a l cu r rency s t a b i l i t y i n maint a i n i n g o rder and p r o s p e r i t y i n t h e wor ld . Although t h e Importance of exchange s t a b i l i t y i s w e l l r ecognized , domest ic economic s t a b i l i t y remains a p r e r e q u i s i t e to exchange s t a b i l i t y .

GATT, The P o s s i b l e Impact of the European Economic Community, i n p a r t i c u l a r t he Common Market, upon World Trade, Trad© I n t e l l i g e n c e Paper No. 6, Geneva, 1957, 64 p .

C o n c e n t r a t e s on t h e "customs union" a spec t of the EEC, r a t h e r than the b roade r economic community. Gives a ve ry d e t a i l e d aceount of European t r a d e w i t h the world, and s e t s out impress ive p r o j e c t i o n s . This i s a m e t i c u l o u s l y p r e pa red s t u d y .

GATT, Trends i n I n t e r n a t i o n a l Trade, A Report by a P a n e l of E x p e r t s , Geneva, October, 1958, 138 p .

Mingles t heo ry wi th h i s t o r y of p a s t t r e n d s i n world t r a d e . Delves i n t o t h e developments , f l u c t u a t i o n s and p r o s p e c t s fo r wor ld t r a d e , g i v i n g a t t e n t i o n t o r e l e v a n t t r a d e p o l i c i e s . This i s a thorough s tudy of the problem, d e s p i t e i t s b r e v i t y .

H a r r i s , Seymour E . , I n t e r n a t i o n a l and I n t e r r e g i o n a l Economics, Toronto , McGraw-Hill, 1957, XI-552 p .

Th i s volume i s concerned wi th t h e theory of i n t e r n a t i o n a l economics , i n c o n n e c t i o n wi th world problems du r ing the p e r i o d 1946-1956. In p a r t i c u l a r , t he au thor s t r e s s e s t h e d i s e q u i l i b r i u m of t h i s p e r i o d and t h e r e l e v a n c e of the t h e o r y to e x p l a i n i t . The i nadequac i e s of the or thodox t h e o r y of f r e e t r a d e a re p o i n t e d ou t , and s p e c i a l emphasis i s p l a c e d upon such problems as t h e d o l l a r shor t age dur ing



BIBLIOGRAPHY 154

that period and various International institutions. This is a well presented study of developments In international and interregional trade.

Hawthrey, R. G., Western European Union - Implications for the United Kingdom, London, Royal Institute of Interna-tional Arsirs, 1949, 126 p.

This is a study of the causes, problems and implications of economic co-operation in Europe prior to the conception of the European Economic Community or the European Free Trade Association. It does not cover all the facets of European union, but rather confines itself, more or less, to the position of the United Kingdom in relation to such a union.

Lutz, Friederieh A., The Marshall Plan and European Economic Policy, Essays in International Finance No, 9, Prin ceton University* 1948, 20 p.

The author sees financial aid for Europe as merely a catalyst but not a solution. The ultimate return of European countries to multilateral trade depends on their own economic policies rather than on the volume of aid received. This is a worthwhile study of this basic problem in Europe at that time.

Meade, James E., Negotiations for Benelux; An Annotated Chronicle 1943-1956, Department of Economics and Sociology, Princeton University, 1957, 89 p.

This book describes and analyses the negotiations which took place between the Netherlands, Belgium and Luxembourg, between 1943 and 1956 in their efforts to initiate th« Benelux Economic Union. The study also outlines the general economic background against which negotiations took place. It presents a good case study of the problems and difficulties which must be overcome in the formation of an economic union.

OEEC, Report on the Possibility of Creating a Free Trade Area in Europe, Working Party No. 17 of the Council, Paris, January, 1957, 31 p.

A country by eountry study of the reasons for, and the problems to be met in establishing such unity in Europe.



BIBLIOGRAPHY 155

P r o v i d e s a good i n s i g h t of t r e n d towards i n t e n s i f i e d economic c o - o p e r a t i o n i n Europe immediately p reced ing the fo rmat ion of EEC.

Quin, Marc, The OEEC and the Common Market, P a r i s , OEEC, 1958, 32 p .

The au thor draws up a ba lance s h e e t of n e g o t i a t i o n s amongst OEEC c o u n t r i e s on the q u e s t i o n of the fo rmat ion of a f r e e t r a d e a r e a . He m a i n t a i n s t h a t t h i s p r o p o s a l was not c a l c u l a t e d t o p r e j u d i c e the success of t h e Common Market, bu1 to a s s o c i a t e w i th i t e l e v e n o t h e r c o u n t r i e s , to s t r e n g t h e n the European p o s i t i o n i n the world and to improve the l i v i n g c o n d i t i o n s of i t s p e o p l e s . The r o l e of t he Common Market i n a f r e e trad© a r e a , t o g e t h e r w i t h the v a r i o u s problems i n h e r e n t i n such a development, are g iven good a i r i n g i n t h i s s t u d y .

P a t t e r s o n , Gardner , and Edgar S. F u r n i s s , J r . , NATO -A C r i t i c a l A p p r a i s a l , Department of Economics and Socio logy, P r i n c e t o n U n i v e r s i t y , 1957, 107 p .

The a u t h o r s m a i n t a i n t h a t the economic approach to NATO h a s been sub j ec t ed to p o l i t i c a l and m i l i t a r y o b j e c t i v e s , Th is s tudy shows t h a t success i n the l a t t e r two o b j e c t i v e s i s dependen t , i n t h e long r u n , on p rope r a t t e n t i o n being g i v e n to economic problems f a c i n g NATO c o u n t r i e s .

P o l i t i c a l and Economic P l ann ing , European Organ!za-t i o n s - an o b j e c t i v e survey, London, Al len and Unwind 1959, XVI-372 p .

As the t i t l e i n d i c a t e s t h i s p u b l i c a t i o n p r o v i d e s an o b j e c t i v e survey of the c o - o p e r a t i v e o r g a n i z a t i o n s i n Europe, t h e i r o r i g i n s , i n s t i t u t i o n s and ach ievements . B r i e f consider a t i o n i s a l s o g iven to the t o t a l impact of t h e s e o r g a n i z a t i o n s i n terms of world economic developments .

S e c r e t a r i a t of t h e I n t e r i m Committee fo r the Common Market and Euratom, The Trea ty E s t a b l i s h i n g t h e European Economic Community, and connected documents, B r u s s e l s , 1957, 378 p .

This document conta ins a l l the provis ions and s t a t u t e s for th© European Economic Community. This i s a basic document, a p r e r e q u i s i t e to any study of t h i s development.



BIBLIOGRAPHY 156

S t r a u s s , E , , Common Sense about the Common Market , London, A l l e n and Unwin, 1958, 168 p .

This book surveys the p r e - h i s t o r y of the Common Mark e t a long with r e c e n t economic developments I n Europe. Much a t t e n t i o n i s devoted t o the p o l i t i c a l sphere , and p a r t i e u l a r l l y t o Germany's r e v i v a l as a l e a d i n g European power. The author| c l a ims t h a t t h e new developments a r e bound t o i n c r e a s e Germany's economic l e a d , and uses t h i s premise i n h i s c r i t i cism of European economic I n t e g r a t i o n . F i n a l l y the au thor d e a l s w i t h the cha l l enge t o the Uni ted Kingdom. This i s a sound s tudy p r o v i d i n g good background as we l l a s a n a l y t i c a l m a t e r i a l , t o c u r r e n t economic developments i n Europe.

T r i f f i n , Rober t , Europe and the Money Muddle, New Haven, Yale U n i v e r s i t y P r e s s , 1957, VI-341 p .

D e s c r i b e s and a n a l y s e s monetary problems i n Europe a f t e r th© war . Gives a sound a p p r a i s a l of economic p o l i c y i n E u r o p e ' s monetary r e c o v e r y , and d e r i v e s a number of conc l u s i o n s f o r domest ic and i n t e r n a t i o n a l monetary p o l i c y .

Un i t ed Na t ions , Gustoms Union, A League of Nat ions C o n t r i b u t i o n t o the Study of Customs Union Problems, Lake S u c c e s s , 1947, 98 p .

A conc i s e h i s t o r y of customs un ions , not only i n Europe , bu t th roughout the world, i n c l u d i n g Canadian Confed e r a t i o n . This s tudy no t only d e s c r i b e s t h e s e developments b u t a l s o d e l v e s i n t o the r e a s o n s for t h e i r downfa l l s , where a p p l i c a b l e . Pe rmi t s a good i n s i g h t i n t o the numerous problems c o n c u r r e n t w i t h t h e fo rma t ion and maintenance of s u c c e s s f u l customs u n i o n s .



APPENDIX A

TABLE XIV

Breakdown of Canadian Exports to Belgium and Luxembourg

($ million)


Wheat

Flaxseed

Other Agricultural Products

Animals and Animal Products

Wood, Wood Products and Paper

Iron Ore

Aluminum

Copper

Lead

Nickel




Other Products

Total Exports

1957

23

4

3

1

1

2

1

-

2

-

2

4

2

15*

60

Source: Dominion Bureau of of Canada

* Includes Aircraft -** Includes Aircraft -

$8.5 $20

Year 1958

23

2

3

-

2

-

4

1

3

1

1

2

1

27**

70

Statistic

million million

1959

19

2

1

3

1

2

4

2

2

6

2

4

1

7

56

s. Trade

1960

19

2

1

2

2

3

6

3

2

11

2

6

2

8

69



APPENDIX A

TABLE XV

Breakdown of C a n a d i a n E x p o r t s t o t h e N e t h e r l a n d s

($ m i l l i o n )

Commodi t i e s o r Groups of Commodi t i e s

Wheat

Rape Seed

Soya Bean O i l

F l a x Seed

O the r A g r i c u l t u r a l P r o d u c t s

A n i m a l s and Animal P r o d u c t s

Wood, Wood P r o d u c t s and P a p e r

I r o n Ore

Aluminum

Copper

O t h e r N o n - f e r r o u s M e t a l s and P r o d u c t s

A s b e s t o s and P r o d u c t s

C h e m i c a l s and A l l i e d P r o d u c t s

O t h e r E x p o r t s

T o t a l E x p o r t s

1957

24

2

1

10

4

3

3

7

2

-

2

2

3

7

7 0

Year 1958

29

5

2

7

4

3

2

7

**

5

2

2

4

3

75

S o u r c e : Dominion Bureau of S t a t i s t i c s , of C a n a d a .

1959

16

1

M

3

1

4

2

6

1

2

3

2

5

8

54

Trade

158

1960

17

-

-

5

3

4

2

8

1

4

2

3

7

7

63



APPENDIX A

TABLE XVI

Breakdown of Canadian Exp t o France

($ m i l l i o n )

Commodities or Groups of Commodities 1

Wheat

F laxseed

Other A g r i c u l t u r a l P roduc t s

Animals and Animal Produc t s

Woodpulp

Newsprint Paper

Other Wood, Wood P roduc t s and Paper

I r o n Or©

Aluminum

Copper

Nicke l

Other Non-fe r rous Metals and P r o d u c t s

Asbes tos and P roduc t s

Chemicals and A l l i e d Products

Other Expor t s

To t a l Expor t s

Sou rce : Dominion Bureau of of Canada.

957

6

6

1

1

6

3

1

2

1

7

-

1

7

11

4

57

o r t s

Year 1958

<m

7

1

m

3

2

1

1

2

10

-

«->

5

11

2

45

S t a t i s t i c s ,

1959

4

3

-

1

2

1

*•

-

9

6

1

**

5

8

3

43

Trade

159

1960

13

3

2

1

4

1

1

1

4

8

7

1

5

17

5

73



APPENDIX A

TABLE XVII

Breakdown of Canadian Expor t s to I t a l y

($ m i l l i o n )

Cr»tT)mod1 t i es or ... ... Groups of Commodities 1957

Wheat 6

F l axseed 3

Rape Seed 6

Other A g r i c u l t u r a l P roduc t s

Animals and Animal P roduc t s 2

Woodpulp 2

Other Wood, Wood Produc t s and Paper 2

I r o n Or© 18

Aluminum 5

Copper 1

N i c k e l 3

Other Non-fer rous Metals and P r o d u c t s 2

Asbes tos and Produc t s 3

Chemicals and A l l i e d P roduc t s 5

Other Expor t s 5

T o t a l Expor t s 63

Year

1958

2

-

2

1

2

2

1

4

1

3

4

1

1

3

3

30

S o u r c e : Dominion Bureau of S t a t i s t i c s , of Canada.

1959

6

~

5

1

3

2

1

-

4

1

1

1

1

3

3

32

Trade

160

1960

19

-

4

1

3

3

3

6

9

2

5

1

2

4

4

66



APPENDIX A 161

TABLE XVIII

Breakdown of Canadian Expor ts to Germany

($ m i l l i o n )

Commodities or Groups of Comm<

Wheat Rye Barley Rape Seed

Tobacco Flaxseed Other Agricultural Animals and Animal

3d! ties

Products Products

Woodpulp Other Wood, Wood Products and Paper

Iron Or©

Aluminum Copper Lead Nickel


Asbestos and Products Chemicals and Allied Products Other Exports

1957

53 1 7 3

1 4 5 3

2

2 17

9 2 2 6

3 7 7

18(a)

Year 1958

47 1 1 3

1 2 3 3

2

1 11

13 8 2 8

3 6 8 79(b)

1959

52

1

1 3 4 5

3

w

5

15 6 2 4

2 8 5 13(c)

1960

40

3

1 2 3 5

5

1 9

34 10 2 9

5 9 7, 20(d

Total Exports 152 202 129 165


(a) Includes Aircrafts and parts, $11 million. (b) Includes Aircraft engines and parts, $5 million; and

Aircraft and parts, $67 million. (c) Includes Aircraft engines and parts, $4 million; and

non-metallic minerals, $2 million. (4) Includes Aircraft engines and parts, $6 million;

steel sheets and strips, $2 million; non-metallic mi nerals, $4 million: and bookkeeping, calculating ma-

UNIVERSITY OF OTTAWA SCHOOL OF G GRADUATE STUDIES


162

APPENDIX B

TABLE XIX

Canadian Expor t s to Norway ($ m i l l i o n )

C ommodi ties 1957 1958 1959 1960

Wheat

Flaxseed

Copper

Nickel

Non-ferrous Ores

Chemicals and

Other Exports

Allied Products

4

2

8

33

5

1

3

5

2

7

36

1

1

4

5

-

9

40

-

3

5

7

«•

10

45

m

2

6





APPENDIX B

TABLE XX

163

Commodities

Aluminum

Copper

Nickel

Chemicals and

Other Exports

Canadi

Allied

an Exports to ($ million)

Products

1957

2

2

2

1

5

Sweden

Year

1958

2

-

2

2

5

1959

2

••

5

2

6

1960

3

1

6

1

10*


Source: Dominion Bureau of S t a t i s t i c s , JtMft of Canada.

* Includes , Radio and Wireless Apparatus, $2 m i l l i o n .



APPENDIX B

164

TABLE XXI

Canadian Exports to Switzerland ($ million)

Commodities

Wheat

Flaxseed

Barley

Synthetic Fibres

Aluminum

Copper



Other Exports

1957

12

1

-

-

1

3

1

1

6

Ye 1958

20

-

-

-

1

3

1

1

3

ar 1959

11

-

1

1

4

2

1

2

4

1960

10

-

1

1

4

4

1

1

4


