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effective this argument may be.
Defence and Aid
8
In the course of paragraphs 5 and 6 of the first draft we take up the Unofficials' references to defence and aid. We must be careful not to confuse (as the Unofficials certainly do) defence and aid.
We should draw a distinction between defence where expenditure is incurred in the interests of the Colony and for which the recipient should pay when he is in a position so to do, and aid where the limited amount we can afford to provide goes in the main to countries whose economic need is greatest - and for which Hong Kong certainly does not qualify. Furthermore we should also point out that the major part of our overseas economic aid is in the form of loan, not grants. I think this should be got across clearly in the formal reply. If, as regards defence, Hong Kong has HMG's military presence in Singapore (as part of the Five Power defence arrangements) in mind, the Governor can again point out that Singapore is spending nearly 5% of her GNP on her own defence.
9
We do not object to the thinking in the second and third sentences of paragraph 5. The Governor, may of course wish to contrast our tax rates with Hong Kong's which I imagine are far lower.
10 Another general point which the Governor can surely make (eg on the earlier part of paragraph 9 of the Memorandum) is that if the UK derives financial/commercial benefits from Hong Kong, the corresponding benefits which Hong Kong derives from the UK are far greater.
Devaluation of the Pound
11 If the Governor wishes to comment on this he should do so on the lines of:
"It is true that Hong Kong suffered a loss when the pound was devalued in 1967; but so of course did every other overseas holder of sterling. It was as a consequence of this that arrangements were subsequently agreed with the Hong Kong Government whereby virtually 90% of her officially held sterling now enjoys a dollar value guarantee, so that in the event of a further sterling devaluation Hong Kong would suffer very little, almost the whole of the adverse effect being borne by the UK. The potential loss from this cause is therefore not a serious factor to be taken into account today in assessing the defence contribution.
12 The above takes the line of ignoring as past history the loss in 1967 and of concentrating on the future which is covered by the Sterling Agreement until at least September 1973. The Governor could
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