The discussions between Canadian and Japanese officials regarding the proposed Agreement have now been concluded. The text which has emerged appears to be acceptable to both sides and is in conformity with the instructions which Cabinet has given from time to time to the Canadian negotiating group. After it has been reviewed in detail, a memorandum will be prepared for submission to Cabinet seeking formal approval of this text,? a copy of which is attached, prior to signature. In the meantime you may wish to have this brief note concerning the present position, especially since the Japanese Ambassador may be calling on you within the next few days and may refer to this subject in the course of his conversation.

2. Although the negotiations have taken a considerable time, there was probably no point at which either side felt that the other was deliberately stalling. Numerous technical difficulties were encountered and lengthy explanations had to be made by each side at one time or another. Apart from one unfortunate episode involving woodpulp (where certain Japanese officials appeared to have misled us - and apparently their negotiating team as well), the atmosphere surrounding the talks has been very good, and each side has shown a readiness to consider sympathetically the problems of the other. You may wish to mention to the Ambassador that the Canadian group developed a very healthy respect for the negotiating abilities of Mr. Inagaki and his colleagues.

3. The Japanese language text of the Agreement is being prepared in Tokyo and will be supplied to us shortly for our examination and approval. Mr. Inagaki returned to Tokyo last night in order to hasten this translation and also to participate in the working out of the arrangements that will be necessary for ensuring that imports of the nine commodities listed in one of the accompanying notes will take place on a competitive and non-discriminatory basis. He will also be consulting with his authorities and with our Embassy concerning the kind of information which is to be supplied to us periodically after the Agreement comes into force in order to keep us informed on how the Agreement is working.

4. Before his departure, Mr. Inagaki expressed the view that signature of the Agreement should be possible early in February and that ratification action by the Japanese Diet might be initiated in March.

5. During the last meeting with him, Mr. Inagaki referred to the possibility that Japan might receive as much as 500,000 tons of wheat from the United States under a special arrangement of the kind envisaged in the notorious Section 550 of the Mutual Security Act. ³⁷ Although the Canadian side had been informed confidentially of this possibility by the State Department some time ago (and were aware that fairly strong representations had been made to the United States on this proposal, especially with respect to the adverse effects which such a transaction might have on Canada's normal commercial sales to Japan), they did not comment too vigorously on Mr. Inagaki's rather casual reference to the matter beyond expressing the hope that the Japanese authorities would refrain from action inconsistent with the letter and spirit of the draft Agreement even in the period before the Agreement actually comes into force. It was pointed out to Mr. Inagaki that, apart from the commercial consequences for Canada of any action which might be, or appear to be, discriminatory in character, his people would doubtless wish to have in mind the psychological consequences of any such action in relation to the reception of the Agreement in Canada. Both sides obviously had an interest in creating an atmosphere which would be favourable to acceptance of an Agreement which promised to be mutually advantageous.

6. If you are talking with Mr. Iguchi concerning this draft Agreement, you may wish to re-emphasize the desirability of both countries avoiding any action at this time which could prejudice the prospects for the Agreement. You might wish to mention specifically the reports which we have had concerning the possibility of a wheat deal between Japan and the United States, and you might wish to observe that, if Japan were to procure wheat in a manner which did not provide an opportunity for Canada to compete for the business, we should regard such a transaction as contrary to the non-discriminatory provisions of our proposed Agreement. You might wish to add that such a transaction, especially if it were to be for a substantial quantity, would make it very difficult to convince the Canadian people that the Agreement when ratified would really help to maintain or increase Canada's trade with Japan. The fact that some of the U.S. wheat may be soft, whereas most of our wheat is hard - which Mr. Inagaki mentioned in his brief remarks - would seem to be quite irrelevant to the main issue. The draft Agreement envisages complete non-discrimination with respect to imports of all wheat (apart from certain exceptions specifically mentioned in the confidential note accompanying the Agreement).

7. It may be that before Mr. Iguchi sees you Mr. Howe will have had an opportunity to discuss with you the question of what might be said formally to the Japanese authorities (as well as to the United States) about this wheat deal. If you and Mr. Howe have not had an opportunity to discuss it, the remarks suggested above would seem to be reasonable and to reflect Canada's interests in the proposed transaction. While it can be represented that the supply of wheat to Japan under such special arrangements (resulting in the accumulation of yen for use by the Japanese Government) is about the only way in which the U.S. can assist the Japanese in financing their re-armament or defence expenditures, it would seem extremely doubtful that we should accept such an argument. The fact that the United States Congress may be willing to make funds available only in connection with the disposal of its surplus agricultural products would not seem to provide sufficient reason for us to acquiesce in a transaction which would be discriminatory and which would greatly reduce the value of our proposed Agreement with Japan. In the end, of course, it may be necessary as a practical matter to arrive at some compromise whereby the United States would supply a smaller quantity of wheat than that now envisaged and would ensure that the shipment of such wheat would be spread over a sufficiently long period of time to keep interference with our normal trade to a minimum. Meanwhile, however, it would seem desirable for us to let Japan (as well as the United States) know that we are concerned at the implications of the rumoured deal and regard it as discriminatory and contrary to the basic principles of our proposed Agreement.

R.A. M[ACKAY]