CONFIDENTIAL
3.
We understand that you would like the Foreign Office Legal Advisers to be asked to cast their eye over paragraph 2 above, say whether they consider the line taken with Hong Kong officials to be legally sound, and indicate whether there are any additional legal points which they think we should put to the Hong Kong Delegation in the next round of consultations.
4.
As regards (c), the Hong Kong officials told us that they had already considered the possibility of constructing a tariff (they have none at present), suspending it, and then invoking it against any countries which treated Hong Kong badly, Provision would presumably have to be made, in the context of any such tariff arrangements, for the establishment of a free port area so as not to prejudice Hong Kong's role as an entrepôt, which is again growing. We see no reason why we should not press Hong Kong further on these lines.
5.
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As regards the use of Hong Kong's public purchasing policy as a bargaining counter, we have done a little preliminary research. We find that the Hong Kong Government's recurrent and capital expenditure in 1966/67, after deducting personal emoluments and pensions is estimated at nearly £79,000,000. In our consultations, the Hong Kong Delegation implied that the Hong Kong Government would be very unwilling to depart from the present practice; this is to buy in the cheapest market, and to refrain from using Government purchasing power to obtain export outlets, We do not see why, if Britain joins the E.E.C. and Hong Kong thereby suffers and cannot get redress from the enlarged Community, Hong Kong should not use such weapons as are then available to her. But it would be awkward for the British Government if Hong Kong began to discriminate between members of the enlarged Community only after Britain had joined. Britain might be requested to call the unruly Colonial Government to heel, which presumably could be done if the Colony did not enjoy tariff autonomy (see the following paragraph). It would therefore be better that Hong Kong should initiate, before Britain joins the Community, any policies which it may want to pursue after Britain joins. It seems reasonable, irrespective of Britain joining the Community, that the Hong Kong Government should direct contracts towards countries which provide good outlets for Hong Kong exports rather than towards those which impose highly restrictive quotas. We propose to pursue this with the Hong Kong Delegation.
6.
As regards (d), we shall be taking up with the Foreign office in separate correspondence the question whether political considerations really dobar us from devolving full autonomy to Hong Kong in the sanduct of her external commercial relations and thus enabling her to become a Contracting Party to the G.A.T.T. in her own right. If they did not, this would of course be well worth doing since it would solve the Hong Kong worries discussed at (d) above, probably without Hong Kong having to resort to the measures indicated at (c).
7.
I am sending copies of this letter to Denis Gildea in your Department, John Cambridge in European Economic Integration Department at the Foreign Office and Gerald Clark in Economic Relations Department at the Foreign Office; I should be grateful if the last-named would consult the Foreign Office Legal Advisers on the lines suggested in 3 above. I should also be grateful for any comments which you and the
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