COMMODITY AGREEMENTS AS A MEANS OF INCREASING THE DOLLAR EARNINGS OF THE STERLING AREA
(Summary of the Findings of the Working Party on Raw Material Prices)
Summary of Conclusions
1. This report discusses the individual primary commodities for which, on the face of it, commodity agreements might be useful as a means of increasing the sterling area dollar earnings, i.e., tin, rubber, wool, cotton, sugar, cocoa and sisal. In the case of tin, Ministers decided on 22nd July (E.P.C. (49) 29th Meeting, Minute 3), that a commodity agreement was necessary. It is proposed below that the Americans should be urged to abandon their opposition to a tin agreement and also to take certain other remedial action of a more immediate character. As regards the other commodities, the general conclusion reached is that agreements would not have the effect of increasing dollar earnings and, in most cases, would have positive disadvantages from the point of view of the United Kingdom. Even if a rubber agreement could be negotiated, a proposal for one would probably wreck our chances of securing better arrangements about the consumption of synthetics (on which specific proposals for discussion with the Americans are proposed). In the case of cotton and sugar, the dollar area itself is a large producer; commodity agreements would not increase our sales to that area and would have other disadvantages. The price of wool will probably have to fall to ensure continued large sales to the dollar area, and there is no reason to suppose that a commodity agreement would assist this process. In the case of cocoa and sisal, it seems probable that prices and quantities can be maintained at their present relatively high levels without any international arrangement.
The International Background
2. Possible commodity agreements need to be examined against the back- ground of international discussion of commodity problems and, in particular, against the general rules governing commodity agreements which are embodied in the Havana Charter for an International Trade Organisation. These rules prescribe, among other things, that there shall be adequate international study of each commodity before an agreement is considered, that an agreement shall be negotiated at a conference at which all countries may be represented, that there shall be equal representation of producers and consumers on any body administering a commodity agreement, that agreements regulating prices or limiting production shall be concluded only when a burdensome surplus of the commodity or widespread unemployment exists or is expected, and that such an agreement should provide scope for a shift from high- to low-cost producers. The United Kingdom has an interest in the trade of primary commodities both as a consumer (of food-stuffs and raw materials for manufacture) and as a producer by virtue of a common interest with the rest of the sterling area in earning dollars for primary commodities and because of our direct responsibility for the economic welfare of the Colonies, and it is therefore in our interest to observe these general rules which are designed to hold the balance fairly between producers and
consumers.
Tin
3. Estimates of production, consumption and stocks made at the meeting of the International Tin Study Group in June, 1949, show that there is likely to be a growing surplus of world production over commercial consumption in the next five years, and that the position is rapidly developing in which a commodity control agreement is required. The United States, however, does not yet admit that a burdensome surplus is in sight. The Study Group has set in hand the preparation of a statement of the case for a commodity conference together with a draft agreement and will consider them towards the end of this year. However we cannot count on such an agreement being effective in under two years from now, even if the negotiations are successful.
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4. In 1948 our dollar earnings from tin were about £15 million (29,000 tons), and about £13 million (23,000 tons) in the first half of 1949.
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PagTh38Africans recently stopped buying, hagthe grangement by which the Ministry of Supply takes all Malayan production resulted in their accumu- lating tin at the rate of 1,200 tons a week. The United States has now resumed buying, but it is clear that the commitment by the Ministry of Supply to purchase the whole Malayan output cannot continue much longer.
6. The United Kingdom has in effect been supporting the world price of tin for some time by buying up all Malayan production. In this process the Ministry of Supply has accumulated about 15,000 tons (say about £8 million at present prices) more tin than is considered commercially desirable. The Malayan Government have suggested that in order to support prices at or about their present level the United Kingdom should continue to buy all surplus Malayan tin, for stockpiling purposes. This cannot be recommended, for financial reasons and because the effect would be that the Dutch and Belgians would undercut United Kingdom resale prices and secure most of the dollar markets for them- selves. The deliberate creation of a United Kingdom strategic stockpile cannot be entirely ruled out, but there are financial objections to and no strategic justification for the stockpiling of any further significant quantities. Pre- liminary consideration has been given to two possible courses of action to deal with Chinese unemployment which would follow a falling off in demand, and are now being further discussed. These are (a) a Malayan Government scheme either to divert the discharged labour to public works or to provide unemployment benefits; (b) a form of subsidy to marginal tin producers, possibly by some alteration in the system of taxation, to keep them in production.
7. The following points should be put to the Americans :--
(a) It should be stressed that Malaya is in the front line of the cold war and that its stability is essential for all of us, including the United States. A stable and adequate price for tin is of the first. importance to Malaya. A drastic fall in the price would mainly affect the Chinese producers whose costs are higher because they work ground which cannot be worked by dredgers, and might throw out of employment as many as 10,000 Chinese who might well find their way into the Communist forces. Moreover, it would involve a loss of revenue, since 16 per cent. of the revenues of the Federation are derived from ad valorem duties on tin and there is no other way of getting this revenue. (b) Sales of tin are of great importance to the sterling area. The Americans themselves cannot escape some responsibility for the present precarious position, since until recently they have been pressing for increase in production and maintaining that their stockpile would take care of any surplus over the next four years. Now they have announced that their stockpiling requirement for four years is 104,000 tons (which is considerably less than the anticipated surplus).
(c) The Americans should be urged-
(i) to lift all their internal controls on the end use of tin immediately (they are believed to intend this and may have done so by September); (ii) to conclude the bilateral agreements for stockpiling without delay (if they have not already been concluded). Negotiations are at present suspended owing to difficulties in Congress about appropriations. (iii) to consider urgently the possibility of increasing stockpiling pur- chases of tin metal. under these bilateral agreements substantially above the figure of 104,000 tons at present contemplated.
(iv) To enter into discussion with ourselves, the Dutch and the Belgians, without further delay, about the date on which inter- national tin allocation is to cease, the length of warning to be given and the methods by which tin will be dealt with there- after.
(v) To change their attitude towards the need for a Commodity Page 385 of Agreement, and support any reaagrable5proposals which may
emerge.
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(d) The Americans are suggesting that when allocation ceases supplies of tin should still Be denied to the Russians. The fine should be
sufff82
taken
very strongly that if the Americans are not prepared to absorb the surplus, all producers must be free to sell where they like.
(e) We have been and are at the present time taking action to support prices through Ministry of Supply purchases (see beginning of paragraph 6 above). (When decisions have been taken on the proposals mentioned at the end of paragraph 6 above the Americans should be told what we have in mind.)
Rubber
8. Rubber is one of the most important dollar earners.
Unlike almost every other commodity, natural rubber is now very nearly back to a pre-war price level (having fallen in the last year from 22.80 cents a pound to 16.50 cents as com- pared with pre-war 15.50 cents), in spite of increased costs of production: This has a serious effect in Malaya which is even more dependent on rubber than tin. The Commonwealth produces 57 per cent. of world supplies (mostly in Malaya), the United States takes 45 per cent. of world supplies. Last year rubber earned $200 million; this year earnings are running at about two-thirds of that. The reasons for this fall are--
(a) A drop in the price of rubber (30 per cent. of the loss).
(b) A fall in United States imports (15 per cent. of the loss).
(c) Relative decline in United States imports from the sterling area in com- parison with Indonesia and Siam (accounting for 55 per cent. of the loss).
As regards the last cause action must be taken elsewhere than in Washington, since the Americans buy in a free market, but the United States Government could take action in regard to the synthetic rubber industry which would help to counteract the first two causes.
9. The origin of the synthetic industry was strategic, and it is still regarded as having strategic importance. The United States Rubber Act requires the President to ensure a minimum annual consumption of 225,000 tons. But last year the United States consumed 442,000 tons of synthetic in addition to 627,000 tons of natural rubber. The Act expires next June. It is not recommended that His Majesty's Government should seek to influence future action as regards the Act itself, but it is proposed that they should attempt to persuade the Administra- tion to alter the regulations under the Act. The present regulations (known as Order R. 1) make the use of specified proportions of synthetic rubber mandatory in the manufacture of tyres and tubes, but not for any other purpose. Even in this limited section of the industry the regulation is unnecessarily drastic, since mandatory consumption on tyres and tubes in 1948 was more than 50,000 tons in excess of the 225,000 tons required by the Act. In addition, there was a voluntary usage of 166,000 tons for other purposes. Logically, therefore, it would seem that the Americans could reduce the amount required to be used in tyres and tubes to the difference between the 225,000 tons specified in the Act and the actual voluntary usage. This would widen very considerably the field for natural rubber and thus strengthen the price. Only a moderate increase in price can be hoped for, since synthetic is selling for 18-5 cents a pound and it is doubt- ful whether natural rubber will obtain a higher price, though we might hope that it will obtain as much. The Americans should be urged to go as far in this direction as they can. Reference might be made to the view recently expressed by Mr. Shafer (a Republican who is considered the outstanding Congressional authority on rubber) in the House of Representatives that either Order R. 1 should immediately be suspended entirely, or that the amount required for mandatory consumption should be substantially reduced. Our object should be to persuade the Administration to permit the maximum competition between natural and synthetic rubber that their legislation permits. Effective action on this might make a material difference to our dollar earnings over the next few months.
10. It would also be of assistance if the Americans could maintain their purchases of natural rubber for their stockpile at a steady and high rate during this period, particularly if some assurance could be given that stocks would not be reduced without consultation with the producers of natural rubber.
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