The attached papers, consisting of messages WA 34881 and WA 3489 of December 23, 1949, from Washington, and our EX 12 of January 4 t in reply, relate to recent developments in our negotiations with the United States to facilitate Canadian military procurement from the U.S. Military Establishment under the M.D.A.A. They refer, in particular, to the problems we are meeting in procuring F.86 aircraft components.

2. There are still two obstacles to overcome before the procurement contracts required by the Department of National Defence can be placed. These are:

(a) the nature of the agreement, if any, which may be required to initiate procurement under the M.D.A.A., and

(b) the method of payment which would satisfy the provision that the full cost shall be made available before any contracts may be placed with the U.S. Military Establishment by any foreign nation.

3. As regards (a) above, there seems to be good grounds for optimism that no formal agreement on procurement will have to be concluded between the two countries. The State Department's political officers now feel that Canada U.S: procurement arrangements should flow naturally from existing mutual defence assistance arrangements of long standing which predate the M.D.A.A., although they are meeting some resistance on this point from their Department's legal experts who maintain that some sort of inter Governmental agreement may be necessary, even though it would be a much briefer document than the bilateral agreements being concluded with the European beneficiaries under the Act.

4. With regard to (b), you will see from message WA 3489 that the Ambassador proposes to address a note to the Secretary of State suggesting that the "full cost in advance" provision of the Act could be met, in our opinion, by extending to the U.S. Military Establishment an irrevocable Letter of Credit, which would have the status of cash but which, in fact, would only be drawn upon in accordance with normal progress and delivery payments, so as not to tie up unnecessarily large amounts of U.S. dollars. The text of the note, contained in WA 3489, has now been approved by National Defence, Finance and Trade and Commerce. It emphasizes the necessity for an early conclusion of this arrangement so that the procurement of F.86 components and other items may be expedited.

5. As we have pointed out to Mr. Wrong in our EX 12, we have a special interest in pressing the U.S. authorities to agree with our Letter of Credit proposal as soon as possible. We understand that the Canadair Company are having difficulty in continuing production of the F.86 without the items which the R.C.A.F. must obtain for them from the United States. The Department of National Defence may, therefore, feel obliged to comply with the provisions of the M.D.A.A. as it now stands and to put up the full cash requirement for the items which they must have very soon if Canadair is to continue production of the F.86 without interruption. On the other hand, you will readily appreciate the difficulty in which Mr. Wrong would find himself in continuing the negotiations with any hope of success if it were necessary to give way on certain M.D.A.A. items before we had allowed a reasonable time for the U.S. authorities to reply to our Letter of Credit proposal which would, of course, be a very much better financial arrangement from the Canadian point of view and which, we understand informally from U.S. officials, has a good chance of being accepted. Mr. Wrong will, I am sure, do everything he can to obtain the earliest reply from the U.S. authorities. In the meantime, I sincerely hope it will not be found necessary to prejudice his negotiations by complying with the present unsatisfactory terms of the M.D.A.A.

A.D.P. H[EENEY]

I Voir DREC, volume 15, document 937./See DCER, Volume 15, Document 937.