Cablegram 71 LONDON, 4 March 1948, 7.40 p.m.
IMMEDIATE SECRET
MY telegram 38 of 4th February.
Trade with Japan.
1. Proposals for trade agreement with S.C.A.P. (on lines foreshadowed in my telegram 25 of 27th January [1]) have now been approved as a basis for discussion in the first instance with Australian and New Zealand Governments.
2. Main features are as follows:-
(a) As we see it the primary objective in regard to trade between Japan and the sterling area in present circumstances should be to ensure that S.C.A.P. buys as much as possible of his raw materials from the sterling area, thus enabling sterling area to increase purchases from Japan without putting account out of balance.
As you have pointed out e.g. in your telegram 343 of 16th December last [2] under current monetary arrangements Japan remains effectively a hard currency area and both purchases from and sales to S.C.A.P. by the sterling area have to be kept on a strictly limited scale in order to avoid dollar deficit or possibly bad debts. Both S.C.A.P. and sterling area countries have much to gain by the removal of impediments to trade and by seeking a balance at the highest possible level. This would we hope be achieved by conclusion of a trade agreement on as wide a sterling area basis as possible (see further as to this in sub-paragraph (d) below).
(b) Agreement which we contemplate proposing to S.C.A.P. would be one in which S.C.A.P. would undertake to buy from sterling area a certain range of commodities in fairly good supply in return for textiles, raw silk, and other Japanese goods. My immediately following telegram contains a provisional and entirely tentative estimate which has been prepared here as a basis for discussion with other Commonwealth countries concerned showing the scale of trade which would be involved on the hypothesis that the agreement covers from the start the United Kingdom and colonies (less Hong Kong except in regard to coal) with Australia and New Zealand and South Africa in respect of wool sales and cotton textile purchases. We should be grateful for your views as to how far these figures are a correct approximation to the sales and purchases you would expect to make within the framework of such an agreement within its first year. In particular, we should be glad to know your estimated requirements of cotton textiles and your anticipated wool sales to S.C.A.P.
(c) Main provision of agreement would be (I) It would be effective in the first instance for a period of one year.
(II) Commodities and quantities involved on each side would be specified in agreement on the basis of keeping account reasonably level.
(III) Agreement would include trade carried on through both Government and private channels, the proportions being left flexible.
(IV) Agreement would set a minimum for trade between the participants and Japan and not necessarily an upper limit. It would be capable of extension by including other commodities if that proved currently possible and desirable. Moreover there would be outside the agreement a certain amount of private trade for which estimates cannot easily be made.
(V) Agreement should not come into force until:
(a) The overall payments arrangements had been concluded (see my telegram 56 (repeated as 50) of 20th February and (b) S.C.A.P. agreed to bring cotton textiles within agreement on sterling basis.
(d) As regards scope of agreement we feel strongly (see my telegram 25 paragraph 4) that the most effective and useful type of agreement would be one which was concluded on a wide sterling area basis affording maximum degree of elasticity by enabling comprehensive range of commodities to be included on sterling area side. As regards Australia we are very glad to note from your telegram of 4th February 26 [3] that you agree with us on this point and that in your view the bilateral trade agreement [4] which you have just made with S.C.A.P. could readily be merged in a subsequent more comprehensive arrangement of the kind we envisage. (In this connection we are grateful for the full information you have sent us about your bilateral arrangement and should be glad of any further details including e.g. texts of memoranda exchanged with S.C.A.P.). Details of any ways in which Australia-S.C.A.P. agreement might be modified on incorporation e.g. by increased Australian wool sales to benefit of sterling area as a whole will no doubt be among matters arising for subsequent decision.
[matter omitted]
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1 Document 369.
2 Volume 12, Document 427.
3 Document 370.
4 Document 371.
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[AA:A1838/278, 479/1/1, ii]