Last night Clayton made an offer of a reduction of 25% in the existing wool duty. 
I expressed my profound surprise and disappointment and informed him that personally I could not see in such an offer the basis for a satisfactory agreement between Australia and United States of America. I emphasised that Australia was being asked to make reductions over a wide range of its protective tariff and to accept loss of some preferential margins enjoyed in other Commonwealth markets and that it was politically impossible to justify such sacrifices in absence of a satisfactory offer on wool. I stated also that with passage of recent wool price support bill, maintenance of duty was no longer necessary to protect United States domestic producer.
Clayton replied along following lines- 1. That this offer represented an act of great political courage by United States administration and represented absolute limit to which they were prepared go.
2. That it had to be considered against background of recent wool bill controversy, i.e. that as a result of administration's efforts we were being offered a 25% reduction instead of a substantial increase or an import quota.
3. That it should not be considered in isolation from general United States offers and that Australia would benefit from general expansion of imports into United States and from resultant increase in available dollars.
4. That if this offer were rejected United States administration would have no incentive to oppose pressure from wool interests for increased duties and that when present price support measure ran out next year such an increase would certainly be sought by wool interest.
5. That if Australia rejected this offer it would have to take responsibility for breakdown which if it spread would do harm not merely to Australia but to other Commonwealth countries particularly United Kingdom and to world generally.
To this I replied that we appreciated the effort that they had made but the fact was that the offer was inadequate on economic grounds and no answer to our own political problems. So far as responsibility was concerned this must lie with the party which had failed to make a reasonable offer but we would accept responsibility for any decision we made.
Clayton then asked whether he could take it that we were not prepared to negotiate on basis of their offers including the wool reduction now proposed. I replied that such a decision was clearly one for the Government and I would communicate with you immediately but that personally I could hold out little hope that we would be able to find a satisfactory basis for an agreement on these offers.
Our impression was that the offer represented the limit of Clayton's authority and that he genuinely thought it a good offer.
The immediate question is what reply shall I make to Clayton's offer on behalf of the Government. Alternatives seem to be as follows-
Alternative 1 To reject the offer and face the fact that it might mean a breaking off of negotiations. This could be very readily considered under normal conditions but I fear we have to face the fact that conditions are not normal. The following factors have to be considered- (A) It would detrimentally affect work on the Charter.
(B) It must, because of preferences, affect trade agreement negotiations between United States of America on one hand and United Kingdom and Canada on the other.
Difficult position of United Kingdom with her commitments re preferences under loan agreement and importance she attaches to an agreement with United States of America would have to be taken into account.
(C) If nothing is done, the present 34 cents remains and remains unbound. When the matter of price support is up for review at end 1948, duty might be increased.
Alternative 2 To accept offer and seek to work out an agreement in which offers made by us, and reductions in margins of preference, would be sufficiently light to be commensurate with low wool offer, i.e. to make a much less significant agreement than that contemplated. On face of it, bilateral agreement between Australia and United States of America in which concessions on both sides (including reductions of preferences enjoyed by us in United Kingdom and Canada) are light seems feasible. Here the main difficulty is that we are required to adopt principle of limiting the preferential system. This might be attacked more than the actual reductions which would, under the circumstances, be minor individual commodities. In answering criticism on principle it would be difficult to sustain the case that compensating advantages were being obtained in International field when American wool duties remained as high as 25 1/2 cents although actual loss from accepting this limitation may not be great.
Alternative 3 To make a counter offer to theirs asking for something greater than 8 1/2 cents, but something less than 17 cents (say 12 to 14 cents) and also asking for improved offers on beef and butter.
This alternative would have advantage that it would put next move back with United States of America and if a break came it could be claimed that it was because United States America would not accept a reasonable proposal from us. If this alternative is adopted I would require to be advised as to minimum reduction acceptable to Australia.
Alternative 4 To sound them out on other alternatives such as 8 1/2 cents now and further reductions during next two or three years and i[n] association with such an arrangement to make an agreement between Commodity Credit Corporation and Joint Organ[isation]  for reserve prices (to operate on present J.O. principles or something specially provided) for two years after present price supply ceases in December, 1948. Meantime to consider a long term international wool scheme. Other possibilities could be explored including replacement of a specific rate by an ad valorem rate though such a replacement would have to be given careful examination before we put it forward. It is difficult to say how they would react to such a proposal as our impression is that their whole concern is at present based on politics and anything devised would have to present a clear cut proposition to their growers. The growers want duties because they think they will hold-they fear subsidies will not. Any plan therefore would have to provide security they see in duties.
My feeling is that reply to Clayton should be along lines of alternative 3, but that I should leave way open to explore possibilities envisaged in alternative 4. I should be glad have your advice on this.
If you wish to give serious consideration to alternative 1 I think it would be valuable for me to discuss implications of it with Sir Stafford Cripps in London before the final decision is taken.