10.
3.
There are a number of factors which may, in the end, induce the Japanese to change their minds. First, they now have a very large market for non-cotton textiles in the United States, with about 40% of imports overall. It is possible that, if trade were allowed to continue free of quota restrictions, this position would be eroded by competition from especially Taiwan and South Korea. The Japanese may feel that it is in their interests to "freeze" this position at a time when, relatively, their position is still strong. Secondly, they are now themselves open to attack as a "protectionist" country, both in terms of trade and foreign investment. They are particularly vulnerable in this respect from the United States, which points to the considerable, and increasingly unfavour- able, bilateral balance in their trade with Japan. Thirdly, there are other carrots which the Americans may be able to dangle in front of the Japanese to persuade them to be "reasonable", particularly the prospect of the return of Okinawa. Lastly, the Japanese, perhaps even more than Hong Kong, are sensitive to the losses they could suffer, not only in volume of exports but in commercial bargaining power, from the imposition of import restrictions in their biggest market. Over the years they have become experts at testing the thickness of the ice in this regard and, once they feel that import restrictions are inevitable if no other action is taken, they will try to reach a settlement. We think they recognise that they are still not in as strong a position as the European countries (and particularly the E.E.C.) to threaten retaliation and that some of the factors mentioned above weaken their bargaining position. There is a danger, however, that, if the Japanese do in the end give way, they will try to ensure that they do so in a way which is as favourable to their position as possible compared with their competitors, particularly Hong Kong.
11.
We believe that the multilateral 'CTA-type' agreement idea must be rejected because it really would carry the danger of increased pressures for similar arrangements for other products steel, footwear, etc. From Hong Kong's particular point of view it is also very undesirable because it would put cotton quotas and non-cotton quotas into watertight compart- ments. Our attitude is that, if we have to face more than a limited number of "item by item, fibre by fibre" restraints, our interests in recognising the "one market" concept and rolling in non-cotton (m.m.f.) quotas with our relatively large cotton quotas on similar items becomes paramount. In other words, we would strongly resist categorisation by fibre once non- cotton restraints became at all widespread. Wool is, of course, a different matter.
12.
We are thinking about the minimum changes that could be made in the text of the C.T.A. to give the Americans something of what they want if some degree of extension of the C.T.A. were to turn out to be the best solution available. We have not yet reached a conclusion but the possibilities (not necessarily mutually exclusive) could be along the following lines:
(a)
(b)
Some addition to Article 1 to recognise that technical change has led to cotton-type m.m.f. fibres being similar in use to cotton. This would help to preserve the sui generis nature of the Arrangement.
An amendment to Article 6(b) designed to allow substitution other than "deliberate substitution" to be recognised. The quid pro quo for this would be the removal of the provision in paragraph 12 of the "Record of Understandings" that the substitutable products must be included within the cotton limits. The roll back formula as a minimum would apply to these products as well as the original cotton products; and
the totals would be added on to the cotton limits to produce combined "rolled-in" limits.
(c)/