With reference to Secretary of State for Dominion Affairs telegram Circular D540  and guarantees given in White Paper of 10th September, 1941 , before replying officially we desire you to submit to United Kingdom Authorities our observations and proposed assurances for their comment.
Paragraph 1. Commonwealth Government subscribes.
Export policy. Place of exports in Australian economy is so different from that in United Kingdom that assurances given by United Kingdom in Dominions Office Circular 541 will require some modification before Commonwealth Government would be in a position to express concurrence.
Australian exports consist predominantly of foodstuffs and raw materials. The resources devoted to their production in Australia are not readily transferable to war production and such transfers on a substantial scale could not be effected without serious economic and social dislocation apart from the deterioration of the productive organisation which will presumably be fully required in the post-war period. Lease-Lend materials sent to Australia must sometimes be used for export-particularly as containers. The necessity to change the character of our foodstuffs owing to scarcity of refrigerated shipping has led to the utilization of increased quantities of materials for containers, such as tin plate and timber. The usual source of supply of tin plate is no longer available. However domestic consumption and export for direct war purposes of the materials in question shall be at least equal to the amounts received under Lease-Lend.
We have however undertaken to supply United Kingdom, Empire and allied governments with a wide range of munitions, equipment, clothing and general military stores. These are however directly related to war and United States authorities would presumably regard them as being covered by exception in paragraph 2(1)(a).
Interruption of European source of supply has made Netherlands East Indies, Pacific Islands, Malaya, South Africa and India rely on Australian sources of supply. This special responsibility may involve Australian exporters entering new field although not at expense of United States exporters. Amounts of United States materials involved likely however to be negligible and more than likely would be covered by exception paragraph 2A(2) of statement of policy below.
We suggest the following statement covering Australian export policy based upon United Kingdom declaration in White Paper could if necessary be given. We would however prefer a simpler form of undertaking.
1. The maintenance of Australian exports is essential- (a) For supply of vital requirements particularly of foodstuffs, raw materials and war equipment to Empire and allied countries.
(b) For acquisition of Foreign Exchange both in sterling and in dollars to pay for essential imports and to meet overseas costs of war.
(c) To maintain in effective working condition our basic primary industries.
2. His Majesty's Government in Australia has adopted the policy summarised below-begins.
(A) No materials of a type the use of which is being restricted in the United States on grounds of short supply and of which we obtain supplies from the United States either by payment or on lease lend terms will be used in exports with the exception of the following special cases- (1) Material which is needed overseas in connection with supplies essential to the war effort for ourselves and our allies and which cannot be obtained from the United States.
(2) Small quantities of such materials needed as minor though essential components of exports which otherwise are composed of materials not in short supply in the United States.
(3) Repair parts for British machinery and plant now in use, and machinery and plant needed to complete installations now under construction, so long as they have already been contracted for.
(2)  Materials similar to those being provided to Australia under Lease-Lend which are not in short supply in the United States will not be used for export other than for direct war purposes in quantities greater than those which we ourselves produce or buy from any source or to enable Australian exporters to enter new markets at expense of United States exporters.
Steps will be taken to refuse licences for import from United States of America for goods in short supply in that country except for domestic consumption and exports for direct war purposes.
Licences to export (except to Empire and Allied Territories) such goods which do not come within the exceptions referred to in (a), (b) and (c) above will be refused also. Ends.
Lease-Lend Distribution. We find it difficult to concur fully and in detail in United Kingdom assurances in this matter.
Goods to be obtained under Lease-Lend fall into the following broad classes:-
(a) Goods in final form for the Services.
(b) Materials and equipment for the production of war goods in Government factories.
(c) Materials and equipment for the production of war goods by private contractors.
(d) Materials and equipment for the production of essential civil goods required for prosecution of war effort.
(e) Essential civil goods ready for consumption required for prosecution of war effort.
Goods in the first two classes present no distribution difficulties. The other three classes, however, must pass through non-government hands.
With probably a few exceptions, it is not practicable to set up special governmental organisations to distribute these goods. It would be costly and since most of the goods require further processing they would still have to be handled in privately owned factories. For the Government to set up its own organisations to do work now being effectively performed by private enterprise would cause diversion of manpower from war purposes.
The Government proposes therefore to base its distribution upon the following principles:-Begins- (a) Durable equipment will wherever possible be retained as Government property being leased to users at rates appropriate to commercial values and to the form of contract with the user.
(b) Materials necessary for the production of war goods will be issued to contractors and charge made at commercial rates subject to the form of contract with the user.
(c) Materials for production in dependent defence industries and for essential civil goods will be sold to manufacturers at commercial rates. Commonwealth Government will control prices at which products are sold to ensure that the remuneration will be no more than a fair return for services rendered in production and distribution.
(d) Essential civil goods ready for consumption are likely to be negligible in quantity but if necessary the Government would sell them to the normal distributors at commercial prices subject to prices to the public being controlled by the Commonwealth Government.
(e) Proceeds of sales referred to in foregoing subparagraphs above would be set off against the cost of war goods to the Government and would not appear in any published accounts. We suggest therefore the following statement to which we could adhere with certainty that we could enforce it.
The general principle followed in this matter is that remuneration received by distributors, whatever the method of distribution, is controlled and will be no more than a fair return for the services rendered in the work of distribution. The arrangements rigorously exclude any opportunity for a speculative profit by private interests from dealing in leased lent goods. Wherever possible the Commonwealth Government will retain title to durable goods. In other cases goods will in general (but subject to the concurrence of the United States authorities for each commodity) be distributed through the existing channels. The profits or commissions earned from this distribution will be subject to control by the Commonwealth Government. There will be no discrimination against United States firms. Ends.
We believe that the chief purpose of the White Paper from United States point of view is to provide an effective counter to critics of the use which is being made of Lease-Lend goods by the recipient countries. We recognise that if the United Kingdom Government were obliged to inform the United States authorities that the various Dominions had adhered to the terms of the White Paper only with certain reservations much of the political value of the adherence might be lost. We suggest therefore that if the United Kingdom authorities agree that our attitude is consistent with the principles of the White Paper, the formula suggested in Dominions Office telegram 702  for communicating the required assurance to the United States Authorities be amended to read 'adhere to the principles  of the memorandum regarding re- export and distribution to which the United Kingdom Government have subscribed'.