1. Dr. Evatt's cable No.600 [1]-Trade Negotiations. Following for
McCarthy. [2]

2. Consideration of further instructions to you has brought out
close relation between current trade negotiations and Article 7 of
Mutual Aid Agreement.

3. Government's tentative views on general possibilities of a
trade agreement are as follows:-

(a) Briefly, the present United States proposals require that
Australia should:

(i) Consent to give up some of her preferential position in Empire
markets;

(ii) Put certain limits on her industrial expansion. In return,
United States offers an improved position for certain important
Australian exports on the American market.

(b) In a world of expanding trade, and as our contribution towards
it, a substantial agreement on these lines might well be made in
the long-term interests of Australia. But unless positive action
is taken to promote world trade, we should be left with the loss
of an assured market for exports, while the benefit we would
receive in the American market appears very uncertain. At the
close of the war our position would be very precarious.

(c) Australia, as well as the United Kingdom, must expect to have
at the close of the war an acute exchange problem and an acute
employment problem. Because of the first, she cannot freely use
internal expansionary policy as a defence against the second. To
maintain both employment and international solvency she would have
either to depreciate her currency, or set an arbitrary ceiling to
imports or fall back on her trade defences or tariffs, quotas and
preferences. All these equally defeat the prime object of
expanding world trade, but the choice between them would be forced
on Australia.

(d) The only escape possible will be through the United States
taking on the full responsibility of a creditor country to make
the economic machine work. This means that she must take imports
freely and not attempt to maintain uneconomic exports. She must
plan to have a substantial excess of imports or finance her own
exports by external investments or a peace time adaptation of the
Lend Lease principle. Her employment problem must be solved by
internal expansion, which, because of her heavily creditor
position, she can undertake with safety. Only on this foundation
can world consumption and world trade be maintained and expanded.

(e) These seem to be the necessary conditions for an expansion of
world trade. Active measures to promote it will also be necessary.

Until discussions on these points have developed on satisfactory
lines, any possible Trade Agreement must have a very limited
scope.

(f) One general observation on the expansion of Australian
industry is necessary. Australia will desire to avoid the setting
up of uneconomic industries. We cannot however accept a pre-war
standard for what are likely to be economic industries. Under
stress of war needs we have made great advances in technical
proficiency. The scope of our post-war industry must be determined
by our industrial ability at the time. We cannot accept any
blanket negation of new industries. It is possible that we may
agree to refrain from some industry for which we have the
technical qualifications, but only as part of a specific agreement
for the mutual planning of production. 4. Above considerations
lead to conclusion that Australia could offer greater concessions
if United States was to give concurrently a bold lead in the
promotion of favourable conditions for expanding international
trade. In this connection Article 7 contemplated agreed action to
achieve the expansion of international trade by the expansion of
production employment and exchange and consumption of goods and by
the reduction of trade barriers.

5. Article 7, however, envisaged conversations between United
Kingdom and United States to determine best means of attaining the
stated objectives and we have assumed that 'fulfilment of
conditions' of Article 7 will await outcome of these
conversations.

6. Accordingly Government has had to consider whether-
(a) We should seek to defer ensuing stages of trade discussions
and urge instead the initiation now of conversations under Article
7, or
(b) Resume trade negotiations independently of Article 7
conversations.

7. Course (a) would involve prolonged negotiations and would not
meet the United States desire for an early agreement. Nor have we
yet had any indication that the other parties concerned are any
more ready than we are to give full and proper consideration at
this time to the questions of cardinal importance which such
discussions would entail.

8. In all the circumstances the Government has decided to follow
course (b) above, and you are, therefore, authorized to resume
exploratory discussions with United States officials and to
commence discussions with United Kingdom and Canadian
representatives. We are communicating with Canadian and United
Kingdom Governments accordingly.

9. At the same time having regard to our earlier endorsement of
Article 7 and to considerations set out in paragraph 3 you should
immediately sound out United Kingdom representatives and ascertain
whether they propose now or at some early date to raise the broad
issues associated with Article 7 in the expectation that such a
course would pave the way for more satisfactory trade talks. If
considered appropriate in light of United Kingdom reactions other
Dominions may also be sounded. Brigden [3] should be closely
associated with discussions on this aspect.

10. Detailed questions raised by you are now being examined by
Cabinet Sub-Committee and instructions will be forwarded in few
days. In meantime desire you to follow up at once our request in
paragraph 9 and advise results as early as possible.