1 Report By Department Of Commerce & Agriculture

May 1950

CANBERRA

Trading Arrangements with Japan

There were two major reasons for Australia's early action in engaging in trade with Japan after the war. First there was the moral obligation to assist SCAP in the rehabilitation of the Japanese economy in order to relieve the burden of financial assistance from the United States, and secondly the desirability of reviving Australia's market, especially for wool, in Japan.

Japan, like Great Britain, depends largely on overseas trade for her livelihood, importing raw materials and foodstuffs and exporting manufactured goods. At the very inception of the Occupation, SCAP took steps to revive this vital commerce. Sales were conducted on a Government-to-Government basis through the Japanese Board of Trade (Boeki-Cho), an official body appointed by SCAP, and through official trade representatives in Tokyo of Allied and neutral Governments. From September, 1945, to August, 1947, Japanese exports under this system of government trading, amounted to 70 millions, and imports to 170 millions, the latter being mainly United States purchases made under the special appropriations available to SCAP for supplies to prevent disease and unrest in Japan.

On August 15, 1947, Japan was formally opened to private trade.

The resumption of private trade immediately brought a number of pressing financial problems to the forefront, affecting both SCAP and the sterling area. One of SCAP's main problems was the initial financing of the raw materials required from abroad to produce manufactured goods for subsequent export, for Japan in her bankrupt condition had no reserves of foreign exchange which SCAP could use for this purpose. The great problem for the sterling area was the conservation of dollars, because trade with Japan was then on a dollar basis.

A partial solution to SCAP's problem of securing raw materials was provided by the release on loan of over a million bales of cotton from the accumulated stocks of the U.S. Commodity Credit Corporation. A second scheme to facilitate imports was the formation of the Occupied Japan Import-Export Revolving Fund, backed by a fund of $137 millions of gold and silver of Japanese ownership seized by the Allies. A further United States Government revolving fund financed shipments of cotton, wool, and other fibres of American origin for processing in Japan.

So far as the sterling area is concerned, a trade conducted on a Government-to-Government level, i.e. up to August, 1947, had been financed in dollars. Goods such as raw silk and textiles supplied to sterling countries were paid for with dollars, while SCAP paid dollars for Australian wool, Malayan rubber, and other commodities purchased in the sterling area. The resumption of private trade on August 15, 1947, emphasised the necessity for a financial agreement to enable trade with Japan to be conducted in sterling.

After a lengthy process of negotiation, an Interim Agreement for the financing of private trade in sterling was signed on November 14, 1947. This interim agreement provided that importers in the sterling area could pay for Japanese goods in sterling and SCAP would use the sterling for purchases of raw materials in the sterling area. It was expressly added, however, that if SCAP accumulated a surplus of sterling i.e. if sales exceeded purchases in the sterling area, SCAP should have the right to convert such surplus sterling into dollars at stated intervals. This convertibility clause introduced an element of uncertainty over the conservation of dollars, hence the sterling countries continued to keep Japan in the 'hard currency' category for purposes of import licensing. In the case of Australia this involved severe restrictions on Japanese goods.

The Interim Sterling Payments Agreement was intended to cover a period not to exceed six months from the date of signing, i.e., November 14, 1947, unless the terms of a final agreement should serve to supersede or nullify the provisions of the interim agreement. A final payments arrangement was subsequently agreed upon and became effective as from May 31, 1948.

Whereas the interim agreement covered private trading transactions only, the new overall agreement covered both government and private trade payments, including all Australian payments. The contingent liability of the sterling area to convert to dollars any favourable net balances owing to SCAP remained in the new agreement. The payments agreement was essentially a machinery provision for the financing of trade between the participating sterling area countries and Japan, not a trade agreement providing for the physical movement of goods. It provided for the use of sterling in current transactions, but in view of the convertibility clause still obliged the sterling area to settle any deficit trade balances in dollars.

The dollar crisis in 1947/48 greatly complicated the situation.

Australia and other sterling countries were unable to buy Japanese goods, and SCAP was unable to buy sterling area goods because adequate credits could not be obtained by exporting to sterling countries. This position was serious for both parties, for Japan normally conducts a major portion of her trade with the sterling area, and seeks raw materials from those countries as well as an outlet there for her textiles and other manufactures, while the sterling area requires Japanese goods and the Japanese market.

Australia took the initiative in attempting to break through this financial problem which was preventing any resumption of trade with Japan. The importance of stimulating trade to assist SCAP to achieve the purposes of the Occupation was realised. Also, as there was no danger of any loss of dollars by virtue of the operation of the convertibility clause in the Payments Agreement if trade were properly balanced, Australia proposed to SCAP that she would grant licences for the purchase of 2,000,000 million worth of Japanese goods provided SCAP undertook to use the whole of the proceeds of sales to Australia to buy Australian wool and other products. Australia offered further to increase her purchases if cotton textiles were made available for sterling.

SCAP accepted the A2m. proposition on February 17, 1948, and the Australian Government announced its willingness to issue import licences up to that amount for the Japanese goods specified. To enable a start to be made on wool purchases, SCAP agreed that an amount already owing (in dollars) for raw silk purchased earlier by the Commonwealth Government should be paid into SCAP sterling accounts with the Hong Kong and Chartered Banks in London.

FIRST SERIES OF STERLING AREA NEGOTIATIONS

The Australian bilateral agreement stimulated the completion of a much wider trade arrangement between SCAP and the sterling area countries. This new arrangement was concluded on the 31st November 1948 and provided for an exchange of goods on a balances basis without any limitation on the actual level of trade.

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The value of Australian trade with Japan has increased considerably during the life of the two Sterling Area trade arrangements, and the Australian bilateral arrangement which preceded them. In general, these arrangements have undoubtedly opened the way for the resumption and development of Sterling Area trade with Japan. They have served the purpose of giving SCAP a reasonable assurance that Japan could earn the sterling necessary to pay for its imports from the Sterling Area. Moreover, from the point of view of the Sterling Area countries, the arrangements have prevented Sterling Area trade with Japan from getting too far out of balance and SCAP has not had occasion to exercise his right under the Overall Payments Agreement to convert surplus sterling into dollars.

[NLA : CRAWFORD PAPERS MS4514/9/33, JAPAN-AUSTRALIA POST WAR TRADE]