LEVEL OF JAPANESE INDUSTRY
Your telegram 962, 8th August. 
1. Your instructions have been noted. However, New Zealand Member of F.E.C. now has instructions to accept virtually all of C2-242.
In view of this we should be glad of guidance.
2. Economic Committee has only now begun consideration of C2-242.
This Paper (sub-Committee recommendations on short-term Policy towards Japanese Industry and Shipping, sent PL 505) was recently reported to Economic Committee by a Special sub-Committee of which Australia was a Member. Do your instructions envisage complete discontinuance of consideration of this paper even at Committee level. It would in the ordinary course be a long time before this paper reached commission level. Committee consideration would inevitably be protracted, almost certainly beyond date anticipated for Peace Conference. In these circumstances Committee discussions might be useful contribution to preparations for Peace Conference.
This attitude to continued consideration could if desired be stated and statement could also explicitly avoid any implication of association of F.E.C. as such in Peace Settlement arrangements.
By recognising reality that F.E.C. will shortly be superseded as centre of policy decisions such a statement would help to foster feeling that Far Eastern Commission proper should not take any further decisions on major issues. This procedure would nevertheless avoid open repudiation of a body in which Australia has earned prominent position of leadership in Pacific questions.
3. We of course agree that 'primary principle to be considered is that security and economic well being of Japan is subordinate to this'. However, without further guidance from you, it would be difficult for following reasons for us to argue plausibly that F.E.C. should discontinue consideration C2-242 on the grounds that insufficient attention has been paid to security.
(A) Australia voted for F.E.C. 106/1 which limits Japan's standard of living to the level of 1930-34.
(B) Australia has so far supported F.E.C. 084/19 (reduction of Japanese industrial war potential). 
(C) A corollary to adoption of F.E.C. 106/1 and F.E.C. 084/19, paragraphs 5(A) and (B) and 9(B) is that F.E.C. shall prepare a short-term level of industry paper in respect of certain specified war-supporting industries. C2-242 is an attempt to apply the criteria set forth in these papers.
(D) It would seem difficult to attack C2-242 on grounds that insufficient attention has been paid to security without first attacking principles in F.E.C. 106/1 and FEC.084/19.
4. We can consistently however criticise C2-242 (and incidentally delay its in any case lengthy passage through Committee stage) along following lines- (A) While sub-Committee attempted to follow principles in F.E.C.
106/1 and F.E.C. 084/19, its conclusions were necessarily influenced by United States proposal in FEC.218.  The fact that so many of levels in FEC.218 were same as interim reparations removal programme seems more than coincidental.
(B) Sub-Committee was obliged to depend on United States for the basic information on which to calculate levels. Information available was often meagre and arguments were often presented by United States in such a fashion that sub-Committee with no other source of information at its disposal could only reach logical conclusions similar to United States levels proposed in F.E.C.
218. In any case, because of difficulties under which sub- Committee operated, some of the figures proposed are mere guesses and there is wide scope for error, and possibly security considerations suffered.
(C) Criteria when broadly stated in general principle appeared acceptable, but detailed application of these criteria involved in producing C2-242 resulted in levels which are high. These levels may not be politically acceptable (e.g. to Chinese) because the figures may leave too little for reparations and would give Japan industrial levels and economic standards higher than those of other Far Eastern countries. (Reparations from current production would, however, be a means of meeting these objections.) (D) It would probably be many weeks before C2-242 could be approved by Commission and because of imminence of the Peace Conference, we could contend either- (i) that it would be waste of effort on the part of F.E.C. to continue further study of this paper and C2-242 should therefore be filed as a preparatory study which might be useful to Member Governments in connection with the Peace Conference, (ii) as recommended above, that discussion should continue with a view to clarifying issues for the benefit of F.E.C. Member Governments as prospective parties to the Peace Settlement.
5. It should be borne in mind that United States is always in a position to issue an interim directive. If discussion were terminated at this stage there would be a risk that United States will take this action and there is good reason to believe that levels if fixed by United States would be at least as high as those proposed in C2-242. Continuance of discussion, however, would morally oblige United States to refrain from issuing interim directive.
6. We have been under instructions to vote for FEC-084/19, which will probably be voted on at the next F.E.C. Meeting. Therefore glad of early urgent advice as to whether instructions in your 962 mean that we should not now vote for this Paper.