As indicated in my telegram No. 107 of 20th April [1] further
consideration has been given to the question of contraband control
in the Far East in the light of your views [2] and of the replies
from His Majesty's Ambassadors at Tokyo and Washington. [3]

2. It has been decided that for the present no General Orders
shall be issued to the Commander in Chief of the China Station as
regards interception of Japanese or other neutral vessels. As the
Commonwealth Government may be aware, we have, in the exercise of
our rights as a belligerent, already intercepted 2 Soviet ships
carrying important cargoes to Vladivostock from Manila and the
American Pacific coast respectively and it is proposed that in any
similar cases of neutral vessels in regard to which there are
definitely grounds for suspecting the destination of cargoes we
should intercept, but only after prior reference to the United
Kingdom authorities and subject to the exercise of the greatest
care to avoid offence to the susceptibilities of the Japanese. In
spite of the difficulty of discrimination in favour of Japan as
against other neutrals, we do not for the present contemplate
interception of any Japanese ships.

3. The reply from His Majesty's Ambassador at Tokyo shows that
there are grounds for instituting negotiations with Japan at the
earliest possible moment since the more established vested
interests and methods of smuggling become, the greater will be the
opposition which the Japanese Government would themselves have to
meet to measures of co-operation on their part. It is further
becoming increasingly evident that more comprehensive steps than
have so far been taken are needed to deal with the Vladivostock
problem. We have reason to know that the Germans are making
efforts to import substantial quantities of strategic materials by
the way of the Trans-Siberian railway. If they succeed as may well
be possible in the absence of more effective contraband control,
the quantities thus imported would go far to neutralize the effect
of the blockade. We have also evidence to show that in certain
cases the Germans are working through Japanese Agents.

4. On the other hand, His Majesty's Ambassador feels that
negotiations with Japan need not be preceded by special
restrictions on imports of goods from British and French sources
of an order not hitherto imposed. On the whole, the atmosphere is
not unfavourable, and it is accordingly proposed in general to
confine the action on these lines to maintaining the control of
Japan in respect of certain classes of goods of which she is known
to stand in need, though it may be thought desirable temporarily
to impose rather more severe restrictions than at present on 1 or
2 items which are not however exported to Japan from Australia.

The grounds for such restriction would be our own military needs
and/or special danger of acquiring by the enemy.

5. As regards the probable attitude of America to an attempt on
our part to obtain an agreement with Japan, His Majesty's
Ambassador at Washington recommends that the U.S. authorities
should be taken fully into our confidence and that we should
impress upon them the extent to which the Open Door at
Vladivostock threatens to nullify the whole effect of our economic
pressure. [4] The possible methods of closing the door are:-

(a) A trade agreement with Soviet Russia.

(b) Much closer co-operation by the United States with us in the
economic sphere.

(c) An agreement between us and Japan.

Lord Lothian anticipates that the United States Government would
themselves strongly deprecate (a) and (b), the former on the
grounds of existing Germany Soviet relations and the recent
Russian aggression against Finland and the latter on the grounds
that United States opinion is not yet prepared to [?accept] the
fuller and more open co-operation with us. He feels that they
would therefore acquiesce in (c) as the best course for us in the
circumstances.

6. We therefore propose to make an immediate approach to the
United States Government before opening negotiations with Japan.

In so doing, it seems likely to be essential for us to reassure
them that there will be for the present no offer on our part to
relax the present restrictions on the supply to Japan of goods
included in their moral embargo list but it is not thought that
this need apply to other commodities so long as arrangements
provide for some measure of rationing and do not include specially
favourable conditions in respect of credit facilities. We consider
that as much importance should be attached to this latter point as
to the quantitative restrictions on the commodities themselves.

7. It will be for the present seen that in an attempt to make
progress in this question, we are taking fully into account with
the advice that we have received from the different angles of
Tokyo and Washington the representations of the Commonwealth
Government. The risk of irritating Japan will be avoided by the
policy for the present to be adopted in regard to Japanese ships
and by arranging that negotiations should not be preceded by any
drastic restrictions in contraband field. The extent of such
restrictions would not in the first instance go beyond the
existing rations with Japan. Further, it is proposed to make the
matter the subject of prior consultation with the United States
Government with a view to safeguarding, as far as possible, the
susceptibilities of the United States in any matter connected with
Japan, and to ensuring that the advantages which we hope will be
accredited to us from their moral embargo policy are not
sacrificed. [5]