Wool-economic warfare.

Discussion referred to in my telegram 10th February [1] now
advancing. Although known here that Germany is trying to purchase
wool through Japanese agencies we agreed that if wool supplied to
Japan is restricted to the extent contemplated no serious danger
of material quantities-if any-reaching Germany. Real point is
possible reaction in the United States of America. Consideration
here is not confined to United Kingdom's desire to limit exports
of raw material to Japan because of danger of supplies thus
indirectly reaching Germany, but includes attitude of the United
States of America cutting off vital supplies from Japan as
aggressor in the Sino-Japanese war at present expressed by moral
embargo. Proposals now before Congress may result in imposition
actual embargo.

In accordance with the United Kingdom Government's policy of co-
operation with United States in Far East question supply of vital
requirements to Japan has been subject of close private contacts
between United Kingdom and United States resulting in some cases
in agreed action practically to cut off supplies for time being
pending fuller discussion policy to be adopted e.g. nickel, in
which case Canada is co-operating.

In these circumstances United Kingdom most anxious to avoid
getting off side with United States by entering into future
commitments to meet Japan's requirements in respect to wool. [This
and not the] [2] danger supplies filtering through to Germany is
basis United Kingdom attitude.

This situation ... it ought to be difficult for [3] Australia in
that on one side we have our individual political relations with
Japan and future wellbeing of Australian wool industry to
consider, on the other we have our paramount interest maintenance
of closest co-operation with United States on all questions
concerning Far East.

Between the two, our decision I assume must be in favour latter.

From practical standpoint our course seems clear, namely to mark
time and wait on events.

We have now obtained United Kingdom assent to an arrangement with
Japan till the end of April. United Kingdom and French
representatives are leaving for United States this week to discuss
contraband and other difficulties arising out of economic warfare
and also, although nothing will be published on this point, even
question of supplies to Japan and Russia. (See Dominions Office
telegram 28 of 3rd February). [4] Their instructions will be to
advocate, particularly as regards Japan, restriction of supplies
to normal peacetime consumption rather than complete embargo which
United States prefer. Discussion hitherto has related to metals
but may be extended to other raw materials.

I am writing fully to Casey [5] giving him the whole position and
he will be able to put our point of view during discussions in
Washington.

By the time further negotiations have been undertaken with Japan
position should be clarified if not resolved.

Required matter is being handled very privately through Purvis,
head of Anglo-French Purchasing Board in the United States, and
Morgenthau [6] as representing President [7], and not through
State Department and Lothian [8], although he is kept fully
informed, suggest I handle Casey.

Above most confidential and every care to preserve secrecy
imperative.

BRUCE