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5. The danger in refusing to discuss Sweden's requests any further and challenging them to take the matter to the GATT is that the "creeping bilateralism" feared by Industries 1 will not be averted and that in the process Hong Kong's trade interests will be unnecessarily damaged. The matter must be judged in the light of the possible alternatives.
6. The provisions of the GATT lay down that increasing imports can be restrained by quotes only in carefully defined circumstances of balance of payments difficulties, or under the terms of the Cotton Textiles Arrangement in the special case of cotton textiles. Article XIX allows importing countries to withdraw a tariff concession on a non-discriminatory basis if increased imports cause or threaten serious injury to domestic producers. Although attempts have been made to define injury in the GATT, it is in fact the importing country which decides what injury has been caused. Hong Kong take the view, and we agree, that if they have to refuse restraints Sweden will feel. compelled to take unilateral action to restrain imports at levels much lower than could be negotiated. If we challenge their action in the GATT on Hong Kong's behalf there would not be a clear-cut ruling in Hong Kong'e favour and the door would have been opened for other importing countries to treat Hong Kong in a similar way without regard to the provisions of the GATT. Most textile importing countries do not regard Hong Kong as deserving treatment as though it were a CGATT member.
7. We do not accept that if the Swedes get voluntary restraints it will necessarily strengthen the Americans' case in obtaining an extension of the CTA to wool and man-made fibres, The Americans are interested in voluntary restraints only if this can be supported by legal powers available in an agreement like CTA. Unilateral action by the Swedes is more likely than voluntary arrangements to strengthen the Americans' arguments. The reply to the American point that only their market is open to all textiles is that the UK market does not restrict non- cotton textiles, except from Japen.
It
8. Neither are we convinced that domestic pressures for similar restraints against inports from ilong Kong would be irresistible as the result of conceding restraints to Sweden. is not clear that Hong Kong has achieved equivalent penetration of the UK market as the Swedish market and it need not follow that we would wish to act against the colony simply because Sweden has done so. A number of restraints have been in existance for a year or more and we have not found domestic pressure impossible to resist. Sweden's industry is in the process of adapting to greatly increased imports but some sections are certainly being damaged and raise a political problem forthe Swedes although the position of the industry as a whole in 1968 arrears to be improving slightly. It should be noted that the Swedes propose only a temporary extension of the restraints.
19.