As indicated in my telegram No. 107 of 20th April  further consideration has been given to the question of contraband control in the Far East in the light of your views  and of the replies from His Majesty's Ambassadors at Tokyo and Washington. 
2. It has been decided that for the present no General Orders shall be issued to the Commander in Chief of the China Station as regards interception of Japanese or other neutral vessels. As the Commonwealth Government may be aware, we have, in the exercise of our rights as a belligerent, already intercepted 2 Soviet ships carrying important cargoes to Vladivostock from Manila and the American Pacific coast respectively and it is proposed that in any similar cases of neutral vessels in regard to which there are definitely grounds for suspecting the destination of cargoes we should intercept, but only after prior reference to the United Kingdom authorities and subject to the exercise of the greatest care to avoid offence to the susceptibilities of the Japanese. In spite of the difficulty of discrimination in favour of Japan as against other neutrals, we do not for the present contemplate interception of any Japanese ships.
3. The reply from His Majesty's Ambassador at Tokyo shows that there are grounds for instituting negotiations with Japan at the earliest possible moment since the more established vested interests and methods of smuggling become, the greater will be the opposition which the Japanese Government would themselves have to meet to measures of co-operation on their part. It is further becoming increasingly evident that more comprehensive steps than have so far been taken are needed to deal with the Vladivostock problem. We have reason to know that the Germans are making efforts to import substantial quantities of strategic materials by the way of the Trans-Siberian railway. If they succeed as may well be possible in the absence of more effective contraband control, the quantities thus imported would go far to neutralize the effect of the blockade. We have also evidence to show that in certain cases the Germans are working through Japanese Agents.
4. On the other hand, His Majesty's Ambassador feels that negotiations with Japan need not be preceded by special restrictions on imports of goods from British and French sources of an order not hitherto imposed. On the whole, the atmosphere is not unfavourable, and it is accordingly proposed in general to confine the action on these lines to maintaining the control of Japan in respect of certain classes of goods of which she is known to stand in need, though it may be thought desirable temporarily to impose rather more severe restrictions than at present on 1 or 2 items which are not however exported to Japan from Australia.
The grounds for such restriction would be our own military needs and/or special danger of acquiring by the enemy.
5. As regards the probable attitude of America to an attempt on our part to obtain an agreement with Japan, His Majesty's Ambassador at Washington recommends that the U.S. authorities should be taken fully into our confidence and that we should impress upon them the extent to which the Open Door at Vladivostock threatens to nullify the whole effect of our economic pressure.  The possible methods of closing the door are:-
(a) A trade agreement with Soviet Russia.
(b) Much closer co-operation by the United States with us in the economic sphere.
(c) An agreement between us and Japan.
Lord Lothian anticipates that the United States Government would themselves strongly deprecate (a) and (b), the former on the grounds of existing Germany Soviet relations and the recent Russian aggression against Finland and the latter on the grounds that United States opinion is not yet prepared to [?accept] the fuller and more open co-operation with us. He feels that they would therefore acquiesce in (c) as the best course for us in the circumstances.
6. We therefore propose to make an immediate approach to the United States Government before opening negotiations with Japan.
In so doing, it seems likely to be essential for us to reassure them that there will be for the present no offer on our part to relax the present restrictions on the supply to Japan of goods included in their moral embargo list but it is not thought that this need apply to other commodities so long as arrangements provide for some measure of rationing and do not include specially favourable conditions in respect of credit facilities. We consider that as much importance should be attached to this latter point as to the quantitative restrictions on the commodities themselves.
7. It will be for the present seen that in an attempt to make progress in this question, we are taking fully into account with the advice that we have received from the different angles of Tokyo and Washington the representations of the Commonwealth Government. The risk of irritating Japan will be avoided by the policy for the present to be adopted in regard to Japanese ships and by arranging that negotiations should not be preceded by any drastic restrictions in contraband field. The extent of such restrictions would not in the first instance go beyond the existing rations with Japan. Further, it is proposed to make the matter the subject of prior consultation with the United States Government with a view to safeguarding, as far as possible, the susceptibilities of the United States in any matter connected with Japan, and to ensuring that the advantages which we hope will be accredited to us from their moral embargo policy are not sacrificed.