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reporting will be introduced by administrative action in respect of some classes of machine tool, with a view to checking their unauthorised export to the East.

14. The new Agreement, like the old, prohibits the production in Federal Germany, save under licence from the High Commission, of all forms of war material. The terminology of the list of prohibited commodities has been revised and clarified, but its substance remains unchanged. Agreed instructions in the following sense have been prepared for the guidance of the High Commission in the exercise of the licensing power:-

(a) The High Commission shall not permit, unless and until the Governments concerned otherwise decide, the manufacture in Germany of the items which, in accordance with the approved recommendations of the Military Committee of the N.A.T.O., should continue to be prohibited even after Germany's defence contribution has been decided. They shall continue, unless and until the Occupying Powers decide otherwise, to apply existing prohibitions on materials, facilities and equipment relating to atomic energy."

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(b) Licences may be granted at the discretion of the High Commission for a specified range of minor items ordered by N.A.T.O. countries, provided that their production does not entail the use of equipment specially designed for manufacture of munitions of war. Similar orders from non- N.A.T.O. countries may also be authorised with the prior approval of the three Governments.

(c) Pending agreement upon some alternative procedure, articles comprised in the Prohibited List and unaffected by the instructions described at (a) and (b) above, may be licensed for manufacture to the order of countries members of the N.A.T.O., or other approved countries, provided that each order is considered and approved in advance by the three Govern- ments. This arrangement will be reviewed as soon as agreement is reached upon a German contribution to Defence.

15. The instructions to the High Commission also prescribe general rules for the administration of controls over German industrial capacity, which, in the case of the steel and merchant shipbuilding industries, is defined in detail.

III. FUTURE OF SECURITY CONTROLS OVER GERMAN INDUSTRY

16. The three Governments have bound themselves by Article I of the new Agreement to review its provisions at a date not later than the last day of 1951. It can be reviewed earlier at the request of two of the signatories. This Article reflects the general sense of the three Delegations that the maintenance of Allied control over German industry must be closely related to the development of the policy of the Occupying Powers towards Federal Republic in the political field.

17. The United States Government, in particular, may be expected to embrace the first opportunity for reviewing the new Agreement. It is clear that the United States Delegation are deeply concerned and dissatisfied at what they regard as the meagre outcome of six months of negotiation. They have intimated that, once the Agreement has been signed, the United States Government will address to His Majesty's Government and the French Government, through the diplomatic channel, a note rehearsing their conviction that it is inconsistent with the agreed decisions of the Brussels Conference to maintain restrictions upon any sections of German industry save those named in the report of the Military Committee of N.A.T.O. and one or two others, e.g., civil aircraft. It is probable, too, that in any note of this nature, the United States Government would reiterate their desire to remove from the German steel industry all restrictions maintained upon it by the new Agreement, as soon as this can be done without prejudice to the adoption of the Schuman Plan. (There is some indication that the French Government would be prepared to concur in the removal of these restrictions as soon as the Schuman Plan had been ratified by participating Governments.) Recipient Governments would be under no obligation to reply to this Note; and the advisability of doing so could be decided only in the light of its contents.

Forelag@ffice ff. 481,

March 1951.

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Circuland 28/3/57 or 80.

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