Extract from a memorandum from James J. McElligott to Maurice Moynihan
(Dublin)

Observations on the Heads of Proposed Agreement with Great Britain¹

[matter omitted]

GENERAL CONSIDERATIONS

17. It is important to consider the consequences which might follow from failure to make a Trade Agreement with Great Britain particularly if the British Government went so far as to withdraw existing trading facilities outwards and inwards.

18. In 1936 home production of all goods valued exclusive of duties was £105,000,000 for the making of which there were imported materials the c.i.f.² value of which was £23,500,000, or about one-fourth of the value of production. Exports of domestic produce amounted to £21,000,000, or about one-fifth of the value of production. Imports ready for use were estimated at £16,000,000. Total visible imports are, accordingly, more than one-third of the home production. Impressive as are these figures of external trade in relation to production, they are not a complete index of the importance of such trade because a large part of this country's production could not be carried on at all without certain imports which, at normal times, might constitute only a small proportion by value of output; and in order to purchase such essential imports without making inroads into investments abroad, it is necessary to maintain visible exports.

19. In 1938, Great Britain and Northern Ireland took over £22 millions worth of Irish exports, or 92.6% of the whole, while all other countries in the world purchased less than £2 millions worth, of which about £1¼ million went to countries in Europe now shut off from trading with us. The only countries remaining with which it is conceivable that any trade could be done are the U.S.A., Canada, and some of the South American countries. Exports to all non-European countries amounted in 1938 to only £431,000. The prospect of increasing trade with any or all of these countries to such an extent as to replace in any important degree exports to Great Britain and Northern Ireland is hardly conceivable in present abnormal conditions. The type of Irish goods for which there is a demand overseas and for which an increased demand might make itself felt under favourable conditions, does not include appreciable quantities of this country's major exports of which cattle are by far the most important. A close examination of the possibility of increasing exports to these and other countries was made during the last seven years or so but at no point was there any indication that such a trade could in any conceivable circumstances be fostered. The position would appear to be that, so far as Irish domestic exports are concerned, there is, in reality, no alternative market on any scale even in normal times except Great Britain and Northern Ireland.

20. Owing to increased freight and insurance charges since the outbreak of war and the high U.S.A. tariff, there is no doubt that even under the most favourable conditions imaginable at the present time a transfer of markets to the United States for a substantial part of our exports would result in a catastrophic fall in prices. There seems to be no ground for believing that such a transfer is practicable at all.

21. In 1938, 50.5% of this country's imports originated in Great Britain and Northern Ireland, and of the rest about 17% came from European countries with which trade has practically been stopped by the war. Of the remaining imports the bulk is made up of cereals, feeding stuffs, timber and oil, which still come from the overseas countries which formerly supplied them. The greater part of our imports which normally came from Great Britain, Northern Ireland or certain European countries were made up of a certain proportion of finished goods but a still larger proportion of raw and semi-manufactured materials for home industry. The continuance of a supply of industrial materials is almost as vital to the economic life of the country as is the assurance of a market for domestic exports as almost every branch of industrial production is absolutely dependent to a major degree on a continuance of imports.

22. Apart from substantially increased cost, the principal difficulty in the way of switching over the purchases of raw and semi-manufactured materials for industry to Canada or the U.S.A. is that the quantities required by our industries are comparatively small. This constitutes a difficulty in respect of shipping and times of arrival even if the problem of financing larger scale purchases in order to obviate this difficulty could be solved. Further, want of knowledge of sources of supply and of American standards of quality, etc., would be embarrassing and involve delay. If it became necessary to obtain essential imports from the U.S.A. in substitution for those formerly obtained from the United Kingdom and other European countries in which there could be no increased demand for our visible exports, it would be necessary (in the absence of our existing facilities for obtaining foreign exchange) to consider how such imports could be paid for by our invisible exports, by liquidation of our external assets or by the raising of dollar credits or loans. In present circumstances it would be impossible without the cooperation of the U.K. Government to dispose of any substantial part of our sterling holdings for dollars or other non-sterling currencies. The prospect of raising a dollar loan would also be remote.

23. Income from investments in the non-sterling bloc of countries (which include Canada) was in the neighbourhood of £500,000 per annum (before the war), so that our holdings in these countries may be set at about £10 millions pre-war. The value of these holdings is now probably much reduced, as is the volume of emigrants' remittances from the United States, which formerly amounted to £2¼ millions per annum. The marked depreciation of the £ sterling (and hence in the Irish £) and the increased transport charges from overseas to this country would result in a substantial increase in the c.i.f. prices which we are at present paying for our raw materials. The liquidation of our external non-sterling assets would entail a considerable loss on the pre-war value of these assets and there would, presumably, be considerable difficulty in the way of the Government's acquiring them from private holders. The proceeds would barely, if at all, pay for one year's imports.

24. On purely economic grounds there is, therefore, an unanswerable case for making every effort possible to accept such terms of any draft Agreement as are reasonable and do not endanger this country's neutrality. The terms of the draft put forward by the British Government have the attraction of preserving and, possibly, improving existing trading, shipping and financial relations. The unsatisfactory prices proposed for agricultural produce could be the subject of negotiations and might later be improved. Certain other details, e.g. the provision of shipping, the level of freights for overseas imports, facilities for insurance of cargoes and ships through the British War Risks Office and the provision of foreign exchange for our reasonable requirements also require further negotiation and clearer statement in the draft. Most of these matters could probably be settled as a result of negotiation on, at least, a fairly satisfactory basis.

TRANSHIPMENT FACILITIES

25. The outstanding difficulty would appear to be in respect of the transhipment facilities which are asked for by the British Government. In the course of a visit to the Secretary, Department of External Affairs, on 2nd November last,³ the German Minister made it plain that the development of a re-export and transhipment trade in our ports would be regarded as altering the character of our neutrality. He asked for an assurance that such a trade would not be allowed to grow up. No such assurance was given, but as a matter of internal policy steps were taken to check the development of the traffic. The provision of facilities would not constitute a breach of any established rule of international law. But no doubt such a development would have a very adverse effect on our relations with Germany. If Irish ports became unloading centres for ocean-borne cargoes intended for Britain, there is danger that German bombing and mine-laying activity would be extended to our coast and territorial waters. If such danger materialized, the British might take advantage of it to station naval units for defence in our ports. We are at present making an effort to secure that Irish ships and Irish trade with Britain will enjoy some measure of immunity from German blockade measures. Any hope there may be of achieving this object, now or in the future, would probably disappear if we were at this stage to allow our ports and waters to be used from the transhipment of British cargoes.

26. If the facilities were to be of advantage to Great Britain, the operation would become, no doubt, large-scale and the question might arise for the British Government whether, in fact, such transhipment facilities in Dublin, Cork or elsewhere would be safer or more immune from attack than port facilities in their own country.

27. Apart from the attitude of the German Government towards this country, it would seem almost certain that the arrival in Irish waters of large convoys and the transhipment of cargo from the vessels in these convoys on a large scale would lead to immediate attack by the German Forces on those vessels whether in our waters or not. In these circumstances, it would appear best, if and when actual negotiations open on the basis of the draft proposed, to postpone, if possible, discussion on the subject of transhipment facilities, and when the matter is raised to endeavour to persuade the British authorities to drop their request on the ground that it would provide no advantages from their point of view commensurate with the risks involved to us. According to the High Commissioner's reports, however, the British authorities are likely to regard the proposed transhipment facilities as an essential part of any agreement.

28. Apart from the danger of attack on British ships in Irish waters, there would appear to be definite economic advantage for this country if transhipment facilities were possible. Depending on the volume of trade handled by way of transhipment, there would be greatly increased employment of dock and allied labour and, in addition, if it were decided to rail goods from any of these ports to an eastern port for re-export, there might be increased traffic by rail.