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Tau(c) Merchant ships might in future be built in Federal Germage 114 of 587

or for export, without limit of type, size or speed, provided her existing capacity for shipbuilding (estimated at 280,000 tons per annum) were not increased.

(d) The production of electronic valves should continue to be controlled. (e) All other limitations upon capacity or production should be removed, thus enabling Federal Germany freely to produce aluminium, synthetic ammonia, ball-bearings, chlorine, styrene, machine tools for civilian purposes, magnesium and synthetic oil and rubber.

6. The Study Group began work in London on 26th October. It soon became apparent that the position of the United States Delegation approximated on all major issues to that of the United Kingdom Delegation, but that the instructions of the French Delegation did not provide for any early or significant revision of the Agreement. The latter were clearly apprehensive of the repercussion of a relaxation of existing restrictions on German industry upon the outcome of the negotiations on the Schuman Plan, and the supply of German solid fuel to the French steel industry. Deadlock was reached when the French Delegation adopted the stand- point that no consideration should be given to modifying the Agreement until the question of German rearmament had been decided; and had not been resolved when the Study Group went into recess on 15th December.

7. Mr. Bevin drew attention to the impasse in the course of the Conference at Brussels; and on 19th December the three Foreign Ministers agreed that the Study Group should resume and complete its work on this and other tasks allotted to it.

8. The Group reassembled on 30th January, 1951, and it at once emerged that the positions of two Delegations in relation to the future of the Agreement had altered. The instructions of the United Kingdom Delegation were unchanged. The French Delegation claimed that they were ready to discuss the revision of the Agreement as a whole provided : -

(a) It was understood that they were unwilling to consider changes in the permitted level of German steel production until an acceptable solution had been found for the problem of the allocation of German solid fuel. (b) The High Commission should decide the date at which any agreed relaxa- tion should come into force; and should use their discretion in this respect as a bargaining point in their negotiations with the Germans upon a Defence contribution, and other subjects of interest to the Occupying Powers.

9. This limited disposition on the part of the French Delegation to make progress was extinguished, however, when the United States Delegation declared that the passage of time and the requirements of Atlantic Defence and Western Integration called for the immediate removal of restrictions from all sections of German industry, with the exception of the limited field prescribed in the approved report of the Military Committee of the N.A.T.O., which the Americans summarised as armaments, aircraft and atoms." Untempted by a supplementary offer to postpone the application of this sweeping policy to the German steel industry until the fate of the Schuman Plan had been decided, the French Delegation retreated to the position that no substantial revision of the Agreement could be contemplated until Federal Germany's contribution to Western Defence had been agreed.

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10. In the course of the ensuing discussions, the United Kingdom Delegation tried to effect a compromise between these extremes with a proposal that the Group should consider a revision of the Agreement to be brought into force in two phases. In the first phase, which would coincide with the present, such restrictions should be removed as the application of the New York principles would justify. The proposals made by the United Kingdom Delegation in the 1950 Session (para- graph 5 above) would constitute an appropriate content for Phase One, which would last until agreement had been reached upon a German contribution to Defence. At that point, Phase Two would begin. The relaxations to be made in each phase should be recommended by the Study Group in the course of the current review. If the work were done now, a proper balance could be achieved between the two phases; subsequent negotiation would be unnecessary; and the Occupying_Powers would have planned another advance in their policy towards Germany, Raghe lightfof8which the resulting reduction in the Page bf 4hef ligh Commission could be effected equitably and economically.

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