346 Shaw to Department of External Affairs
Dispatch 233 (extract) TOKYO, 20 November 1948
2. At the preliminary Commonwealth talks  it was clear that no British country was particularly interested in extending M.F.N. to Japan without a much more detailed account of American economic planning for Japan than had yet been forthcoming. From the Australian point of view it was put forward that there was a substantial political difficulty in Australia in the way of announcing such favourable treatment for Japan in the light of public opinion over Japanese war conduct and over past Japanese trade practices. New Zealand and the United Kingdom expressed the same views and the United Kingdom also emphasised particularly labour conditions, unfair trade practices and dumping which had enabled Japan to trade on unduly favourable terms prior to the war. India and Ceylon did not stress these difficulties and spoke more of the need for a flow of trade between Japan and their countries. (See annexure A' for summary record of Commonwealth talks).
3. At the first meeting with representatives of the United States Government on 1st November, the American Ambassador-Mr. Douglas, appealed for a frank discussion and said he hoped that by the end of the week we might have agreed on a draft settlement. (See 'B' and 'C' for records of first two meetings and 'D' the agreed points for the agenda.) Mr. Douglas and Mr. Howard Petersen, [former Assistant] Secretary, United States Department of War, said that most-favoured-nation treatment for Japan should be extended by British Commonwealth countries so as to remove trade barriers to the expansion of Japanese exports. Both made the implied threat that, to the extent that the United States had to subsidise the Japanese economy, there was correspondingly less to be spent on European recovery. In other words, United States foreign aid all came from the same funds and if American subsidisation of Japan could be cut down the extent of aid to Europe and elsewhere would be greater.
4. It was necessary to make clear to Mr. Douglas that there was little hope of reaching a definite agreement by the end of the week and that all that we undertook was to convey to our Governments the latest American viewpoint. The Americans were asked to show in what way the extension of most-favoured-nation treatment to Japan would effect Japanese trade. The thesis put forward by the Australian and United Kingdom delegates was that sterling area trade with Japan was governed by the sterling area balancing agreement and the tariff barriers had little or no effect on the present or foreseeable flow of trade.
5. The United States officials to my mind made no satisfactory reply, to this point. In response to requests for figures and estimates as to the flow of Japanese trade they provided a forecast which is attached as the first document of Appendix 'E.' These figures are an interesting analysis of the United States estimates of trade in certain commodities but they do not purport to show how these figures depend upon tariff treatment in British countries. There did not emerge any profitable discussion on topics such as levels of industry, reparations, etc., on which I had hoped there might have been clarification.
6. A point made by the Australian Delegation was that the fixing of a stable exchange rate for the Japanese Yen was probably a more important factor in encouraging trade than the action required by the Americans. The United Kingdom expressed their concern over the granting of privileges to Japanese trade which would be in fact long term. Although the Supreme Commander for the Allied Powers could, under the occupation, guarantee the observance by the Japanese of fair trading practices yet the time would come when the Japanese were again in charge of their own affairs and it would be difficult at that stage to withdraw tariff privileges now given.