427 Australian Government to Noel-Baker, Embassy in Washington and Mission in Tokyo

Cablegrams 343, 1449, 718 CANBERRA, 16 December 1947

SECRET

Your telegrams 226 and 227 [1]-Trade with Japan.

1. Conclusion of Interim Sterling Payments Agreement will provide banking machinery for settlement of private trading transactions between Japan and those parts of the Sterling Area which are parties to the Agreement but it appears to us that, unless the Interim Agreement is followed up by positive steps to promote a reasonable exchange of goods, little actual trade is likely to result.

2. We understand that, because of S.C.A.P's insistence on the inclusion of a convertibility clause in the Interim Agreement you still consider it necessary to treat Japan as a 'hard' currency country for import licensing purposes.

3. If this is to be interpreted as meaning that Japan is to be treated as a 'dollar' country, the possibilities of trade will be severely limited. Because of the growing gravity of the dollar crisis, restrictions on dollar imports have recently been greatly intensified and, on present standards of screening, few, if any, licences would be granted to Australian importers to purchase goods from Japan. We presume the position would be similar in other sterling countries party to the Interim Agreement (with the exception of South Africa).

4. However, unless Japan is permitted to develop a reasonable level of exports to the sterling area, the Japanese will be unable to finance purchases of the raw materials they need from sterling sources of supply and no revival of trade will be possible.

5. Restoration of trade between the sterling area and Japan appears to us to be indispensable to the economic rehabilitation of Japan. Further delays in reviving trade must inevitably add to the burden on the Allied powers. On the other hand, as Japan is clearly in need of substantial imports of raw materials from the sterling area we feel that it should be possible to develop the exchange of goods with Japan on a basis which would leave no margin of sterling balances for conversion into dollars and would enable Japan to be developed as a source of supply of items which might otherwise be available only from hard currency sources.

6. S.C.A.P. Officials have recently informed our representatives in Tokyo that they cannot visualise that S.C.A.P.'s interim sterling account will at any time have a surplus for conversion into dollars. The S.C.A.P. view is that during the term of the interim agreement the raw materials required and obtainable only from the sterling area will exceed considerably the sale of manufactured goods to that area.

7. This view does not seem to us to be unreasonable and position would be safeguarded to some extent by Gentleman's agreement about conversion referred to in your 246 on which you apparently feel you can place some reliance. [2]

8. For the foregoing reasons we feel that the interim sterling payments arrangement should look forward to some loosening of import restrictions against Japanese goods throughout the sterling area generally with the object of promoting a greater volume of two-way trade.

9. If Japan is not to be permitted to earn sterling by exporting to the sterling area the only alternative method by which her essential imports of sterling raw materials could be financed would be by obtaining sterling credits. Extension of credits to Japan would be objectionable and in any event it would be paradoxical to extend credits to a country and at the same time to refuse to take payment in the form of exports of useful goods.

10. We should be grateful if you would let us have an early expression of your views on this whole question which we feel to be of considerable importance.

11. Please see also our separate telegrams of today's date on the mechanics of the Interim Agreement and on the contract between Scott and English and the Japanese Board of Trade.

1 These cablegrams, of 24 October, sought confirmation that Australia wished to be covered by interim sterling payments arrangements proposed for private trade with Japan. Confirmation was given on 29 October.

2 The agreement provided for SCAP to convert to dollars any surplus sterling held as the result of trade. Concerning sterling balances required to cover funds owed to sterling area countries under short term credit arrangements, Cablegram 246 (22 November) suggested 'we could rely on the gentleman's agreement about conversion... to protect us'. This was a reference to an informal understanding reached in January that conversion into dollars would not be undertaken with a view to diverting trade to the dollar area, but only if Japan had a surplus balance of trade with the sterling area which there was no reasonable prospect of adjusting (Cablegram 19, 17 January).

[AA : A1068, ER47/31/13]