Canberra, 21 September 1965

1095. Confidential

Your telegram 866.¹

We think it important that Lee should keep the Tunku informed of Indonesian approaches and about his response to them. Indirect communication e.g. through Critchley is no substitute for the kind of close consultation between Singapore and Kuala Lumpur which is necessary in working out a common stand towards Indonesia and indeed in fulfilling the obligations of the separation agreement. We hope that you can find a suitable opportunity to bring home to Lee the importance of correct dealings with Kuala Lumpur on these questions, and the desirability of ensuring that the Tunku knows of the Indonesian approaches to date.

2. How seriously do you take Lee's reference to trade with Indonesia going ahead through Pulau Sambu² e.g. is Singapore thinking of some kind of trading post in the Riau Islands?

[NAA: A1209, 1965/6571]

Barter Trade

Prior to September 1963, when Sukarno imposed economic sanctions on Malaysia, there were two forms of Indonesian trade with Singapore and the Federation of Malaya– official trade, made up of large scale trade and barter trade, and smuggling. Large scale trade comprised the large consignments of Indonesian export produce that were recorded by Singapore and Malayan customs authorities. Barter trade was the small boat shipments from the Riau Islands and northern Sumatra of rubber, copra, pepper, and other primary produce, that were exchanged for consumer goods in Singapore, and the west coast cities of Penang and Port Swettenham. This trade was largely excluded from customs statistics. The smuggling trade was similar to the barter trade but operated in a manner that avoided Indonesian foreign exchange controls.

Before confrontation, Singapore's recorded import and export trade with Indonesia amounted to approximately SUS360 million per annum, which represented around 15 per cent of Singapore s total trade. The value of barter trade with Indonesia to Singapore was estimated as being around 10 per cent of this officially recorded trade, which represented approximately 2 per cent of Singapore's total trade. Indonesian trade, including barter trade, with the west coast cities of Penang and Port Swettenham, although useful to those cities, was less important nationally to Malaya than it was to Singapore.

Following Indonesia's ban on large scale trade, barter trading continued until the Malaysian Government banned any trade with Indonesia for boats of less than 200 tons in August 1964, after consultation with a reluctant Singapore Government. The ban was imposed to hinder the infiltration of agents and arms into Singapore and to facilitate the patrolling of Singapore waters. Since that time, carefully controlled Indonesian barter trade with Tawau in Sabah had continued under special arrangements between the Central and Sabah Governments, and 'unauthorised', small-scale barter trading had proceeded in international waters off the Malaysian west coast and Singapore.

Smuggling had largely been eliminated during the period of confrontation as a result of Malaysian and Indonesian naval patrolling.

1 See footnote 2, Document 330.

2 That is, Pulau Senang (see footnote 2, Document 330).