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2.
4.
The prospects for 1974 were for a continuation of this process of adjustment and recovery with a similar or greater rate of growth. But the oil crisis may have changed this outlook, not because Hong Kong is likely to be directly hurt (apart from inconvenience) but because of the possible effect on the level of demand in Hong Kong's markets abroad, on the supply and prices of raw materials, and on availability of shipping and aircraft. We are giving a great deal
of thought to what the Government could do if 1974 sees these unpleasant possibilities materialise. Since we are committed to major programmes of social improvement which assume revenue based on continued growth, there could be some hard decisions to take.
5.
Two other problems have been the subject of difficulty and some acrimony during the year: discrimination against Hong Kong's products particularly in some UNCTAD preferences, and the sterling guarantee agreement covering the Colony's sterling reserves.
Trade negotiations.
6.
With considerable help from H.M.G. and the Embassy, real progress has been made over discrimination in Japan. With regard to discrimi- nation against Hong Kong in the E.E.C., the possibility of progress in 1975, and the firm statements made by H.M. Ministers, have blunted resentment at the prospect of the United Kingdom in 1974 discriminating against her own Colony, but trouble may be expected if nothing can be achieved in 1975.
7.
The Colony was also encouraged by the outcome of the negotiations of the Textile Group of GATT. The principles governing control of the textile trade are vital for Hong Kong, and the Colony could live with those agreed in Geneva. It of course remains to be seen how they will be applied.
Sterling balances.
8.
The year saw a substantial
relaxation of the proportion of the Coony's total
CONFIDENTIAL