493 Department of External Affairs to Legation in Washington

Cablegram 614 CANBERRA, 21 May 1942

SECRET

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.

1 Not found. It was possibly the cablegram referred to in War Cabinet agendum 231/1942 of 14 May which recorded that on 14 April the Minister for External Affairs had asked on behalf of the U.S.

Govt whether the Commonwealth Govt proposed to go on with exploratory discussions on a trade agreement. See file AA:A2671, 231/1942.

2 Commonwealth Shipping Representative in the United States. See also Document 107, note 8.

3 Financial Counsellor at the Legation in Washington.

[AA:A989, 43/735/70/2]