In presenting his modus Vivendi proposal, Lansing implied that the American government accepted the German view that armed merchant vessels were warships; however, when the proposal was dropped by the Wilson administration, it seemed to be reverting to the British view on this question.

(A) when the proposal was dropped by the Wilson administration, it -- can't say whether 'it' stands for the proposal or the Wilson Admin.
(B) after it was dropped, the Wilson administration --'it' can stand for the proposal or for the German view

(C) by dropping the proposal, the Wilson administration -- Good God ! There is no pronoun here. The best answer.

(D) the Wilson administration dropped the proposal when it-- 'It' can stand for the proposal or the Wilson Admin. It looks as though the proposal veered towards the British view.

(E) when they dropped the proposal, the Wilson administration-- The only plural noun is warships, and it will be absurd to say the warships dropped the proposal rather than bombs
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This question has options with two pronouns – it and they.

We can quickly eliminate the answer options based on pronoun agreement. If you look closely, the second part on the right side of ‘however’ seems to be mirroring the first part, IMO. This could also be useful reinforcement.

Options A, B and D use the pronoun ‘it’ which is ambiguous because there are two entities that it can potentially refer to. For this reason, eliminate Options A, B and D.

Option E uses 'they' which cannot refer to the administration or the proposal. Because of this number mismatch, you can eliminate Option E.

You’re now left with Option C which unambiguously conveys the intended meaning without errors.
Option C is the best choice.

Hope this helps!
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In the last clause of this prompt, we have "...seemed to be reverting to .... Here, we need to know who or what is doing this reverting. Hence, the subject of this clause must be present after the comma, as a part of this clause itself. therefore, (A) and (D) can be eliminated.

In (E), we have when "they" dropped the proposal, the Wilson administration. it is not clear as to whom "they" referring to. Hence, we can eliminate (E).

In (B), we have after "it" was dropped, the Wilson administration. here, it is not clear as to what the pronoun "it" is referring to. Hence, we can eliminate (B).

(C) is the right answer choice.

daagh

Can we also drop A,D and E on the basis of the usage of when ?

When should refer to a specific time/era/year isnt it ? And the question in no way seems to indicate a year or time frame.

Thanks,
K