1. Further to my telegram 261. In order that the Cabinet Sub-
Committee should have fullest possible background, I am sending
supplementary notes which may be of assistance.

2. I now learn privately that decision to offer a reduction in
duties was made by the President after a bitter struggle between
Clayton and Anderson. [1] Wilgress, leader of Canadians who is
well acquainted with American political scene, whilst agreeing
that a reduction of 8 1/2 cents on 34 cents is inadequate is
clearly impressed with action United States in making a reduction
in face of recent political strife and offered view that reduction
offered plus an insurance against increases when question of
support was up for review in 1948 was of value. His further
remarks suggested, however, that in his mind position of United
States vis-a-vis United Kingdom in latter's present economic
troubles was outstanding issue. The South African Ministers who
are here will support us in any demand for higher offers but New
Zealand cannot say much pending instructions. We have told United
Kingdom of the position, but think very little can be said re
their attitude until their Ministers have been consulted. Have had
talk with Newcomen. He firmly believes [that a reduction in duties
would in the long term be of real benefit to the industry and had
hoped for the full 17 cents. He thinks, however, that] [2] we
should get what we can even if it is as low as 8 1/2cents. He will
not be consulting his organisation [3] unless asked but thinks
they would agree with him. He further fears that if nothing is
done fight for higher duties will again come up at end of 1948 and
that this time an increase might result.

3. If Americans had agreed to all our requests namely 50% cut in
wool, beef, mutton and lamb and butter we would have been pressed
to agree to a 50% reduction in preference on raisins and canned
fruits [in] Canada and United Kingdom and also to other reductions
in preferences of less importance (other major preferences meat,
sugar and butter will not come up) and to our reductions in our
own tariff. I gather that it is likely that in negotiation we
would have escaped with reductions less than 50% in dried and
canned fruits margins but that offers on our own tariffs so far
conveyed to United States would have been considered inadequate
and that to got an agreement we would [have been] pressed to
review such offers. in alternatives 2 and 3 of my 261 I referred
to following possible lines of action-
(a) To accept United States offers and to reduce our own
correspondingly so as to secure a reasonable balance;

(b) To seek some improvement in United States offers to degree
which negotiations show to be possible and to modify our own
offers correspondingly.

Below I set out two propositions corresponding to those two
alternatives and I endeavour to give an idea of price I think we
might pay in each case.

Proposition 1. To accept United States present offers namely 25%
cut on wool and beef 50% cut on mutton and lamb and 50% cut on
20,000 [tons of butter balanced by similar concessions on our
side. For this light offer I suggest we could contemplate a cut on
dried fruits from 4 cents to 3 cents in Canada and 10/6d. to 8/6d.

in U.K. and on canned fruits 15% to 12 1/2% in U.K. and small
concessions-no greater than 1 cent in Canada. We might even be
able to avoid completely a reduction in canned peaches
(politically a difficult item). Our offers on the tariff would be
lighter than in our original proposals. It is not possible to say
by how much until they have been reexamined and perhaps
negotiations commenced.

Proposition 2. To seek an increase in the offer of a cut on beef
to 50% (an important item) and a substantial increase in butter
duty quota]. (We think these advances on beef and butter not
unlikely) with no improvement or some small improvement on their
wool offer. In this case we would hope to avoid having to increase
concessions on preferences on dried fruits beyond those set out in
proposition 1 and same with canned fruits but including the
peaches. On minor preferences and on tariff our concessions would
need to be greater than for proposition.

4. Naturally these propositions refer mainly to preferences, and
detailed tariff concessions involved would have to be assessed and
would be worked out in detail as negotiations progressed. Meantime
your reactions to my suggestions on reductions we might make on
preferences would be appreciated.

5. If an agreement along lines of proposition 1 were concluded it
would be argued by those looking for concessions from United
States that gains were very small. On other hand criticism which
might be expected to arise out of tariff and preference reduction
would be lessened. Whilst a comprehensive agreement with United
States would be to our long term benefit a modified (admittedly a
much modified) agreement whilst giving less benefit might not be
any more difficult to handle politically. In fact it might well be
less difficult.

6. If Government were prepared to agree that we seek the best
United States offers on above lines and that negotiations be
opened accordingly we could then get ideas of concessions United
States would expect and report further.

[7. If this course of action commends itself to Cabinet I would
suggest that my reply to Clayton, after explaining why the offer
must be regarded as unsatisfactory, might take the following line:

(a) that in lodging our original requests and making our original
offers, we had hoped for a comprehensive worthwhile agreement.

(b) that with unsatisfactory responses from U.S.A., particularly
on wool, it was clear that such an agreement was impossible.

(c) that we were, however, prepared to enter negotiations in the
hope that a more modest agreement could be reached.

(d) that in such negotiations we would hope to secure some
improvement in present U.S. offers (including wool), but it must
be realised that our original offers were made on the basis of]
our original requests and must necessarily be reduced in light of
United States responses to those requests.