CONFIDENTIAL
4. Of course there are strong reasons for doing what we can to minimise the impact of our measures upon Hong Kong, the one dependent territory to be widely severely affected (as it was by the imposition of the import surcharge in 1964) 1-
5.
(m) 98% of its trade to the United Kingdom
will be affected;
(b) Hong Kong industry regards the United
Kingdom as a substitute for the domestic market which it lacks;
(*)
(a)
After the evente of lant year, we must do nothing to damage confidence in Hong Kong, particularly confidence in the maintenance of the British connection and of British concern for the Colony;
the impact of the import deposit scheme will be hardest on the politically sensitive group of anall exporters in Hong Kong, who handle, at a rough guess, balf the trade. The big exporter will be in a better position, of course, to finance deposits.
On the other hand we see clear advantages in applying these measures without discrimination in favour of one or against the other exporting country. We are already in an exposed position over our obligations under GATT, and no doubt other trađe treaties. If we apply the measures with discrimina- tion we shall be yet more exposed, although it is arguable that if we refuse to permit overscas financing of the deposits, we turn what we are able to call at present a "transitional measure of monetary restriction" into a much more obvious interference with the volume and pattern of international trade.
6.
It would be easier to advine what immediate action, if any, we should take if we could say at this stage what was the main purpose of these measures, but it seems to me too early to decide. For least as long as the Treasury does not prevent overseas financing of deposits we may be confident that Hong Kong will manage to maintain her export trade to this country It might, therefore, be inopportune to raise the question now, But what we must, I suggest, ensure is that this policy is not changed without our being given the opportunity to deploy the very strong arguments to which I briefly refer above for mitigating the effect of these measures on Hong Kong.
(F. S. Carter)
May 1969
Copies to: Mr. Moreton
T. G. O'Brien, Financial Policy and Aid Dept.
CONFIDENTIAL