MY telegram 38 of 4th February.

Trade with Japan.

1. Proposals for trade agreement with S.C.A.P. (on lines
foreshadowed in my telegram 25 of 27th January [1]) have now been
approved as a basis for discussion in the first instance with
Australian and New Zealand Governments.

2. Main features are as follows:-

(a) As we see it the primary objective in regard to trade between
Japan and the sterling area in present circumstances should be to
ensure that S.C.A.P. buys as much as possible of his raw materials
from the sterling area, thus enabling sterling area to increase
purchases from Japan without putting account out of balance.

As you have pointed out e.g. in your telegram 343 of 16th December
last [2] under current monetary arrangements Japan remains
effectively a hard currency area and both purchases from and sales
to S.C.A.P. by the sterling area have to be kept on a strictly
limited scale in order to avoid dollar deficit or possibly bad
debts. Both S.C.A.P. and sterling area countries have much to gain
by the removal of impediments to trade and by seeking a balance at
the highest possible level. This would we hope be achieved by
conclusion of a trade agreement on as wide a sterling area basis
as possible (see further as to this in sub-paragraph (d) below).

(b) Agreement which we contemplate proposing to S.C.A.P. would be
one in which S.C.A.P. would undertake to buy from sterling area a
certain range of commodities in fairly good supply in return for
textiles, raw silk, and other Japanese goods. My immediately
following telegram contains a provisional and entirely tentative
estimate which has been prepared here as a basis for discussion
with other Commonwealth countries concerned showing the scale of
trade which would be involved on the hypothesis that the agreement
covers from the start the United Kingdom and colonies (less Hong
Kong except in regard to coal) with Australia and New Zealand and
South Africa in respect of wool sales and cotton textile
purchases. We should be grateful for your views as to how far
these figures are a correct approximation to the sales and
purchases you would expect to make within the framework of such an
agreement within its first year. In particular, we should be glad
to know your estimated requirements of cotton textiles and your
anticipated wool sales to S.C.A.P.

(c) Main provision of agreement would be
(I) It would be effective in the first instance for a period of
one year.

(II) Commodities and quantities involved on each side would be
specified in agreement on the basis of keeping account reasonably
level.

(III) Agreement would include trade carried on through both
Government and private channels, the proportions being left
flexible.

(IV) Agreement would set a minimum for trade between the
participants and Japan and not necessarily an upper limit. It
would be capable of extension by including other commodities if
that proved currently possible and desirable. Moreover there would
be outside the agreement a certain amount of private trade for
which estimates cannot easily be made.

(V) Agreement should not come into force until:

(a) The overall payments arrangements had been concluded (see my
telegram 56 (repeated as 50) of 20th February and
(b) S.C.A.P. agreed to bring cotton textiles within agreement on
sterling basis.

(d) As regards scope of agreement we feel strongly (see my
telegram 25 paragraph 4) that the most effective and useful type
of agreement would be one which was concluded on a wide sterling
area basis affording maximum degree of elasticity by enabling
comprehensive range of commodities to be included on sterling area
side. As regards Australia we are very glad to note from your
telegram of 4th February 26 [3] that you agree with us on this
point and that in your view the bilateral trade agreement [4]
which you have just made with S.C.A.P. could readily be merged in
a subsequent more comprehensive arrangement of the kind we
envisage. (In this connection we are grateful for the full
information you have sent us about your bilateral arrangement and
should be glad of any further details including e.g. texts of
memoranda exchanged with S.C.A.P.). Details of any ways in which
Australia-S.C.A.P. agreement might be modified on incorporation
e.g. by increased Australian wool sales to benefit of sterling
area as a whole will no doubt be among matters arising for
subsequent decision.

[matter omitted]