Your H333. [1]

CONTROL OF EXPORT TO COMMUNIST CONTROLLED CHINA

1. We are totally opposed to some of the basic suggestions which
have been made by United States Government and reported in your
H333.

2. We agree that no actual military or defence equipment should be
sent to Communist China, and our settled policy is to refrain from
exporting actual military equipment. Malaya was an exception
because of British Commonwealth fundamental interest.

3. Our general view on the question of control of export of
strategic materials was previously set out (see our telegram
No.315 of 10th December, 1948). This, however, dealt with the
question from the point of view of exports from the European area
to Russia.

4. We are strongly opposed to the application of these principles
to China. In the statement made in the House of Representatives,
the Minister for External Affairs, on 21st June last, pointed out
that a realistic view in relation to China was necessary if we
were not going to force Communist China completely away from her
traditional commercial channels.

5. Australia has an abiding interest in relations between Japan
and China. We see from your H333 that the United States Government
has already taken steps to control export from China and even
South Korea. We all agree that the Japanese economy must be so
developed that, without prejudice to future security interests,
reasonable living standards can be sustained. If Japan, however,
is prevented from normal trading relationships with China, Japan
will be forced to seek raw materials and markets in the south-west
Pacific and south-east Asia. If we were to pursue the United
States policy, it would seem that Japanese commercial aggression
will soon take place.

6. The policy for China must have a bearing on the financial
position in the sterling area. If Germany and Japan are prevented
from developing normal commercial relations with Eastern Europe
and Asia respectively, they will be forced to compete more
directly in the markets of the world with the United Kingdom and
other countries in the sterling area. Moreover, the Western
countries can hardly find a long-term solution to their financial
position if they are parties to an economic blockade, contrary to
past practices of trading in Eastern and Eastern European markets.

7. Therefore we trust that no encouragement whatever will be given
to any Government which believes in applying the policy of
economic blockade. On the contrary, wise policy would be to so
develop commercial trading relations that countries under Soviet
influence will gradually regain their freedom from complete
integration with any Soviet bloc.