2. At the preliminary Commonwealth talks [1] 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.