Dear Mr Brady,

I told Mr Aiken that I would send him a Note on the Memorandum which has been circulated to the Government about the proposed trade agreement with Britain. A copy of the Note is attached.

The Proposed Arrangement with Britain

1. The memorandum circulated to the Government² proceeds to a large extent on the assumption that the conclusion of a trade agreement with Britain will assure us the advantages stipulated for in the agreement. That assumption is not necessarily sound. The British have had already to reduce their purchases of cattle and sheep from this country, owing to the interruption of transport, distribution, and other facilities. That a similar measure has been imposed on their own producers indicates that the British action is the result of sheer physical necessity. Though one cannot be sure how things will develop in Britain, the likelihood is that, for some time at least, they will become worse rather than better. That being so, allowance must be made for the possibility that even if we made a trade agreement, physical conditions might develop in such a way as to render it wholly or largely inoperative. If, in order to get the agreement, we had had to make concessions, we might then be in the position of suffering all the disadvantages of the arrangement without reaping its advantages.

2. In the course of the discussions which preceded the drafting of the memorandum, apprehension was expressed lest our failure to conclude a trade agreement with Britain would result in strained relations, and in the withdrawal of some or all of the facilities which we at present enjoy in connection with foreign exchange, shipping, supplies, etc. From the External Affairs point of view, there is no reason to think that our failure to conclude an agreement would of itself evoke any strong political reaction. The position is rather that if, for any reason, the British Government wished to exercise pressure on us, they will find means of doing so, even if we conclude this agreement. The mere fact of their failure to negotiate an agreement on the lines suggested would only cause the British to adopt an unfriendly attitude to us if they regarded the transhipment and other facilities which they would get under the agreement as being of such importance from their point of view as to be worth the risk of a serious quarrel between the two countries.

3. The memorandum circulated to the Government throws out the suggestion that if, and when, negotiations are begun, we should try to get agreement on our demands with regard to prices, etc., and postpone discussion on the question of transhipment in the hope that, when it came to consider transhipment, we would be able to persuade the British to drop their request. From the information available to the Department of External Affairs, there is little, if any, chance of such an endeavour succeeding. One of the points strongly made by the British representatives when they handed Mr. Dulanty the proposals was that, from the British point of view, the proposed transhipment and storage facilities were an integral and essential part of any agreement and that, in fact, 'without transhipment, there can be no agreement.'

4. This being so, the position would appear to be that, unless we are prepared to meet the British on the question of transhipment, any negotiations initiated on the basis of the present proposals would be doomed to failure. Even giving full weight to the importance of a satisfactory agreement to our economic situation it would seem better, on the whole, that there should be no formal negotiations at all than that negotiations should be initiated which were certain to break down.

5. Recent developments have, no doubt, increased the British Government's interest in the question of transhipment facilities in our ports and waters. Within the last few days, the Germans have shown some tendency to extend their continuous bombing of British port facilities in the Thames Estuary, the Bristol Channel and the Mersey, to the Clyde and Belfast Lough. There can be no reasonable doubt, having regard to the prevailing circumstances, that the grant of transhipment facilities to British shipping in our ports and harbours would bring the War to our shores.