CAB129-36 — Page 296

Sterling Area Balance of Payments with Canada

1.

The sterling area balance of payments with Canada included in our original programme for the Organisation for European Economic Co-operation (0. E. E. C.) in May is set out in Annex A. This provided for United Kingdom imports of $691 millions. Of this, $285 millions would be financed by earned Canadian dollars and $120 millions by the Canadian Credit, leaving $286 millions to be financed otherwise - either from our reserves or by dollars indirectly provided by the Economic

vid Co-operation Administration (E. C... ).

2.

On our latest estimates of earnings which provided the basis for our supplementary memorandum to 0. E. E. C. indicating a deficit with the dollar area as a whole of $1,518 millions, our net earnings of Canadian dollars are reduced from $285 millions to 8177 millions. This arises from the lower expecta- tions of earnings both by ourselves and by the other sterling area countries. This would mean that if we and the other sterling area countries made no cuts in our imports from Canada, and if the Canadian Credit remained at $120 millions, we should have to find nearly $400 millions (691 minus 177 minus 120) from our reserves or indirectly from E. C. A. financing.

3.

Ministers are aware of the complications which arise from E. C.A. financing of Canadian produce. Those are being actively discussed with E. C. is. We should like to arrange matters so that we cover the bulk of our Canadian import programme with E. C. A. finance,

finance, thus releasing some of our earnings in Canada for purchases in the United States which are ineligible for E. C. A. financing under any conditions. But at the very least we want to cover our Canadian deficit with E. C. A. finance, for otherwise the money has to be drawn direct from our reserves. It must be regarded as most unlikely, however, that E. C. A. will be able to help us effectively in this; they have legal diffi- culties with which to contend. We cannot work on the assump- tion that we shall be able to finance more than, say, $150 millions of our Canadian imports with E. C. A. finance and this would leave $250 millions to be drawn from our reserves.

4.

Ministers are now working on the basis of cuts of $400 millions in our total dollar import programme as submitted to 0. E. E. C. in May. About 100 millions of this would fall on Canada (bacon, timber, pulp, non-ferrous metals). The Colonies and the rest of the sterling area may save about $30 millions by cutting their imports. But this covers only one half of the deficit of $250 millions and it also assumes that Canada will be willing to go on allowing us to draw on the Credit in spite of the fact that we shall not be buying the goods they like to sell to us. The scale of the problem is, therefore, very large.

Payment in Sterling

5.

It has been suggested that Canada should be willing to accept unconvertible sterling in settlement for the uncovered part of the sterling area's deficit with Canada. In the short run this would have the same effect for Canada as an additional loan to us, inasmuch as for a substantial proportion of her exports to the sterling area she would receive payment in unconvertible sterling not available to finance her dollar imports. In the long run Canada ought to be able, at the cost of considerable discrimination against the United States, to use this sterPage 296 of 662ially to increase her Page 296 of 602 the United Kingdom and the rest of the sterling area; to the extent that she did so in substitution for dollar imports, the actual grant of further credit to us would be reduced.