130 Submission 174 To Cabinet By Mcewen

16th May, 1956

Trade Negotiations with Japan 1. Following recent exploratory trade talks between Australian and Japanese officials in Canberra, in accordance with Cabinet's earlier approval, the way has now been cleared for trade negotiations with Japan looking toward a trade agreement. Our objective in such negotiations would be to protect our export interests by obtaining contractual benefits in Japan. In return, we would undertake commitments with the practical effect of reducing the extent to which we discriminate against imports from Japan.

Australia might seek benefits of the following kinds:

(i) in general, fair opportunity for Australian products to enter Japan;

(ii) assurances on minimum import quotas or exchange allocations for major Australian products such as wool, wheat, barley and sugar;

(iii)appropriate tariff commitments;

(iv) opportunity for prior consultation on proposed receivals by Japan of surplus primary commodities from the United States (e.g.

grains, dairy products).

Progress since November 1954 2. In November, 1954, Cabinet decided that informal trade talks would be held between Australian officials and members of the Japanese Embassy. Shortly afterwards the Japanese became pre- occupied with the question of their admission into G.A.T.T. and talks did not begin until late in 1955. They ended in February, 1956.

3. The talks were informal and purely exploratory and related mainly to the background to trade between Australia and Japan, the trade and tariff policies and practices of the two countries and mutual trade problems. The Japanese wished to raise the question of application of G.A.T.T. between Australia and Japan and also expressed a desire for a comprehensive treaty of friendship, commerce and navigation. However, these matters were considered to be outside the scope of the informal trade talks. The Japanese have been pressing in recent weeks for the commencement of trade negotiations.

Importance of the Japanese Market to Australia 4. Japan vies with France as our second most important market, and takes a greater range of major products than France, which takes almost solely wool and sheepskins. There is scope for Japan to expand as a natural market for major Australian products, particularly for wool and grains. Our exports to Japan are now running at an annual rate of 80m. compared with imports from Japan of 25m. In the eight months ended February, 1956, Japan took 17% of our wool exports, 23% of our wheat, 57% of our barley, and 12.5% of the sugar exported from Australia. Attachment A shows Australian exports to Japan in selected years.

5. Wool is licensed for importation into Japan on the basis of the needs of the woollen mills. Goods essential for Japan's export trade are subject to open licensing. Wool is not treated in that way. Japan's woollen textile exports are small, most of the raw wool imported being for home consumption. Raw wool imports are, however, one of the big debit items in Japan's trading accounts.

There is some pressure on these grounds for Japan to make herself less dependent on imports of wool by encouraging the production of synthetics and to direct her purchases of wool to countries that are prepared to provide markets for Japanese goods. Discrimination by Australia against imports from Japan gives Japan further grounds to cut imports of wool in general and to divert her purchases away from Australia, or perhaps both.

6. Australian exports of wool to Japan have recently progressed favourably. The Japanese industry prefers Australian wool and Japan has had the sterling. The Japanese Government, however, in making their approaches for a trade agreement, have been concerned that Australian discrimination against imports from Japan militates against their earning from exports to Australia, the finance necessary for their imports. Of course, if Japan limits her participation in the Australian wool auctions this does not necessarily mean we export so much less wool, but auction prices reflect the presence and degree of buying interest of major buying countries. In the auctions Japan is usually a strong competitor with Bradford, and this helps our bread and butter lines in the wool clip. Japanese buying has been a major factor in the hardening of wool prices in recent months.

7. Because her sterling situation has been favourable in recent months, Japan has been able to purchase grains in Australia. But we have no monopoly or near-monopoly of grain. U.S. surplus disposals are a constant threat to our trade and potential trade with Japan in wheat and barley. Under aid agreements signed with the U.S.A. in 1955, Japan is to receive some 800,000 tons of wheat and 170,000 tons of barley from U.S. surplus stocks. Argentina competes against us in the grain trade with Japan. Our grain exports to Japan could also be affected if the Japanese Government were to encourage rice consumption, and engage in trade deals with Asian rice-producing countries for larger rice imports. As it is, Australia could have supplied much of the wheat and barley obtained from U.S.A. and Argentina if commercial considerations only had been involved.

8. Again, in the management of her foreign exchange, Japan has bought Cuban sugar for sterling payment. She bought sugar from Australia for the first time in 1955, but the scope is there for regular trade if we can compete against Cuba and other suppliers and have the opportunity of competing against them.

9. In her import licensing or exchange control, Japan has not taken any action against Australian goods which could be interpreted as retaliation for our discrimination against imports from Japan. However, in the case of wheat the purchase policy of the state trading organisation has not been favourable. To the extent that Japan favours, say, Argentine grains on currency or other grounds, there is a measure of discrimination against us, but on the whole Japanese treatment of Australian exports has been relatively favourable. This is explainable in terms of Japan's present high holdings of sterling, but also it seems to have been influenced in part by the desire of the Japanese to reach an understanding with us on trade questions. In large measure the recent exploratory talks have been used to bring home to the Japanese the degree to which we are concerned at the covert discrimination that can be practised by state trading organisations and to influence official Japanese opinion against such discrimination if they wish to make much progress in trade discussions.

10. Only by giving Japan assurances that will allow her opportunities for improving her export trade with Australia, can we obtain assurances that Japan will treat our wool, grains, sugar and other products favourably. Japan's system of import controls and her pattern of imports give considerable scope for discrimination. Because of this, and because of the particular products involved, Japan could reduce substantially her purchases from Australia, if she had to do so or if she chose to do so. It is important, therefore, that we reach an understanding with Japan to protect our export interests in the Japanese market whether in respect of actions by the Japanese Government (tariff, import controls) or in respect of actions by other Governments (surplus disposals, etc.)

Concessions we might seek from Japan 11. While there would be mutual recognition that the balance of payments situation might on occasions make some discrimination in import controls unavoidable, we would seek commitments by Japan not to discriminate in exchange allocations or import licensing against Australian wool, wheat, barley, sugar, hides and skins, frozen and canned meat and a number of other commodities. We would also seek assurances as to the quantities of Australian wool, wheat, barley and sugar to be permitted importation into Japan, or the conditions on which these products are to be imported. We could also explore ways of ensuring that Japanese trade or even general economic policies would not be disadvantageous to our exports of these commodities, particularly wool. Some opportunity might also be sought for prior consultation where United States aid programs or disposal transactions involve commodities supplied by Australia.

12. Our main exports to Japan are few in number and being foodstuffs and raw materials for the most part, enter Japan duty free or at relatively low rates of duty. On the other hand, the range of Japanese exports to Australia is fairly wide and being mainly secondary products enter Australia at relatively high duties under the General Tariff. Our interest in securing a guarantee of continued most-favoured-nation tariff treatment from Japan is therefore less than her interest in obtaining most- favoured-nation treatment from us. It would however, be desirable to obtain from Japan a guarantee of most-favoured-nation tariff treatment especially to protect our wool and grain exports from possible discriminatory duties. The Japanese tariff provides for duties of 20% on wheat and 10% on barley, but these duties are usually suspended. The greater benefit to Japan of obtaining most- favoured-nation tariff treatment from us could be balanced in negotiations by the benefits to us of undertakings-additional to most-favoured-nation tariff treatment-of the sort described above.

Commitments we might accept towards Japan 13. The concessions we might seek from Japan cannot be considered apart from the reciprocal concessions Japan might seek from Australia. Here two points are relevant.

Firstly, Japan is the only significant trading country to which Australia applies the General Tariff (the highest column of duties in the Tariff), and Japan is the only country against which Australia discriminates in import licensing for other than balance of payments reasons.

Secondly, because of the importance of textiles in Japanese export trade, any agreement which did not accord at least qualified most- favoured-nation tariff treatment to Japanese cotton and rayon piecegoods and reasonable import licensing treatment for those goods would have little appeal to the Japanese.

14. In effect, the Japanese will seek the same treatment for their exports to Australia as we extend to almost all countries-in the tariff, most-favoured-nation treatment; and in import licensing, non-discriminatory treatment unless on balance of payments grounds.

15. It has been noted that textiles are the main item involved in any trade negotiations with Japan, but various other consumer goods such as crockery and toys would also be likely to raise problems of protection for Australian industries and perhaps for export industries in the United Kingdom or other major supplying countries, unless there are effective safeguards against a disruptive volume of imports from Japan. (Attachment B shows the main imports from Japan). Japan, of course, is not the only supplier of low-cost goods. Indian cotton piecegoods are in general cheaper than Japanese, and it may before long be necessary to develop safeguards against competition from low cost countries in any case, even if Japan is not now to be accorded m.f.n.

treatment.

16. The Japanese Government undoubtedly attaches weight to Japan's international trade standing, and a successful agreement with Australia would facilitate their rehabilitation as a trading nation. For these reasons, as well as because of the trade with Australia that would be at stake, the Japanese may be prepared eventually to accept an agreement which, while according them m.f.n. tariff treatment and nondiscrimination in import licensing, retains to Australia full freedom to control imports from Japan by either tariff or import licensing action if an undue volume of imports from Japan threatens serious damage to Australian industry or to the trade with Australia of established suppliers such as U.K.

17. It is not impossible that the Japanese authorities would co- operate in supervising the price or volume of Japanese exports to Australia. Their supervision would put a brake upon any tendency to flood the Australian market. We would nevertheless need to retain freedom to keep imports within reasonable bounds in the interests of our own producers or, in special cases, in the interests of the United Kingdom, or other established suppliers to Australia. This would require an escape clause in the trade agreement enabling Australia to impose additional or special customs duties or to apply special import quotas in certain specified circumstances.

18. There would have to be some understanding worked out with the Japanese regarding the circumstances in which Australia would apply these safeguards and one basis of the arrangement might be that the Japanese exporters themselves, under supervision of their Government, would control either the price or the volume of their exports to Australia so as to make special action by Australia unnecessary. The important thing, however, would be that Australia retained freedom to impose special duties or quotas to prevent serious damage to Australian industries or to the trade of established suppliers to the Australian market like the United Kingdom.

19. The proposed special duties safeguard would provide a selective method of dealing with low-cost consignments by one or two exporters. In this connection, however, legislative action would be necessary, e.g. by amendment of the Customs Tariff (Industries Preservation) Act, to enable these special duties to be applied speedily and effectively.

20. The basis of the special or emergency duty would be that whenever imports threaten or cause serious damage to Australian industry or disruption of the trade of established suppliers like the U.K., special duty should be payable which would bring the cost up to the cost of the comparable product imported from other countries. An essential feature would be to ensure that such duties could be applied swiftly and certainly. The details would need to be worked out by the departments concerned. They would include such matters as the criteria to be employed in the assessment of the duty, the role of the Tariff Board, the period for which the emergency duty could apply, and procedural aspects.

21. The power to impose special duties could be very valuable in our dealings with the U.K. or for that matter with other important supplying countries. It would be a policy issue whether we resorted to it to protect the interests of U.K. or other countries in particular cases in return for an adequate quid pro quo.

Requests from the other country for action along these lines would be handled in a similar manner to requests for special duties to safeguard domestic industry and the amended legislation would be framed to provide for this.

22. These new provisions would need to be of general application- i.e. they would not appear to relate to Japan alone-and they would be permissive, not mandatory. On that basis, the adoption of the legislation would not itself bring any conflict with G.A.T.T. nor would application of the special duty to a non-G.A.T.T. country raise any questions in G.A.T.T. Application of the special duty to a G.A.T.T. country would be quite compatible with G.A.T.T. if on the grounds of protecting the Australian industry, and fairly well

defensible, though not conclusively so, if on the grounds of protecting the established pattern of trade.

23. It should be noted that the proposed negotiations with Japan have no immediate connection from Australia's point of view with the question of the application of G.A.T.T. to trade relations between Australia and Japan.

24. For presentational purposes any escape provision in the trade agreement would probably need to confer equal rights on Japan and Australia, but this would have no real effect for Australian exports which, because of their character as primary products, do not raise this kind of problem for Japan. However, Japan may seek her own kind of escape clause to balance the one sought by Australia.

25. Other possible bases for trade negotiations with Japan have been examined. Of these the main one has been that we should give Japan most-favoured-nation tariff treatment, but should have a list of exceptions, i.e., goods to which that most-favoured-nation commitment would not apply.

The main reasons for rejecting this approach have been:-

(a) It would be difficult to justify to Australian manufacturers leaving some items off the list of exceptions when other items were in the list.

(b) Such a 'partial m.f.n.' commitment would be bound to be much reduced in value to the Japanese, as a trade agreement benefit, because we would almost certainly exclude some of her key items of trade. Also it would have very much less value to Japan from a trading prestige point of view.

(c) It would invite the Japanese to make similar exceptions on their side in their treatment of Australian goods. Making treatment of this kind reciprocal would be much more to our disadvantage than having the escape clause now proposed apply reciprocally (see para 24).

26. Japan's principal exports are 'B' category goods for purposes of import licensing. As 'B' category goods from all sources are now restricted to 30% of 1950/51 imports, the impact of Japanese competition on local industries generally would be cushioned. The present time is therefore as favourable as any for according most- favoured-nation treatment to Japan.

United Kingdom Interests 27. Japan might be brought to agree to special provision for the protection of the interests of third countries in the Australian market against low cost commercial competition (as distinct from dumping) which would violently disrupt production in these countries. They said as much in Geneva in 1953 in connection with the report of the G.A.T.T. Intersessional Committee on the question of adequate safeguards against Japanese competition, although their statement then was connected with their admission to G.A.T.T. and not with any bilateral agreement. At all events, something on these lines could be pressed for in the negotiations.

28. U.K. has expressed the hope that if Commonwealth countries make bilateral agreements with Japan they will provide safeguards for the interests of other Commonwealth countries. If Australia were free under a trade agreement with Japan under certain conditions to regulate imports from Japan in the interests of the U.K., this could be a very valuable consideration in our dealings with the U.K. and could be explored with the U.K. concurrently with any trade negotiations with Japan. It could have value in our dealings with other countries also (e.g. Italy, Germany).

Foreign Policy Considerations 29. Cabinet has already decided that, in handling issues involving our relations with Japan, we should be guided by the principle of allowing Japan, through co-operation with non-communist nations, to have reasonable facilities for meeting her economic difficulties by expanding her export trade and for developing her political and economic life and institutions in a way that will strengthen her association with the West. A satisfactory solution to our present trade problems with Japan would be in conformity with that policy decision.

SUMMARY 30. Under post-war conditions, Japan is in fact one of our most important markets, and is of growing importance-especially for our two major exports, wool and wheat. We apply our highest tariff rates to Japanese goods (almost only to Japanese goods) and in import licensing we discriminate on non-currency grounds against Japanese goods alone. Our exports to Japan are by no means invulnerable. We cannot assume that if the present opening of a trade agreement misfires, Japan will continue even her present treatment of Australian goods. It is important, therefore, that we reach an understanding with Japan for the protection of our trade interests now and the future improvement of our export opportunities.

31. Owing to the nature of the respective export trades most- favoured-nation tariff treatment is perhaps more important to Japan than to Australia. This disparity of benefit may be balanced by the wider assurances we seek in non-tariff matters.

32. To reach agreement with Japan it will be necessary to give the Japanese as near to normal treatment as practicable, i.e. m.f.n.

tariff treatment and non-discriminatory import licensing treatment. The essential point is that adequate safeguards be retained in order to protect Australian manufacturing interests where necessary and to protect UK interests as required. Adequate safeguards could be provided by the inclusion of appropriate escape provisions in any trade agreement with Japan and by amendment of the Customs Tariff (Industries Preservation) Act.

Recommendation (a) That trade negotiations be entered into with Japan on the basis that:-

(i) We seek commitments by Japan to safeguard our export interests in her market, e.g. in tariff treatment, import licensing treatment, her internal economic policies on major Australian commodities (wool, wheat and barley), and opportunity of prior consultation in respect of proposed receivals of aid or surplus primary commodities from U.S.A. which might prejudice Australian trade interests.

(ii) Subject to Australia's retaining full freedom to safeguard Australian industry or established trade of the U.K. or other suppliers to Australia from a disruptive volume of imports from Japan, we be prepared to consider accepting commitments to extend most-favoured-nation treatment to Japan in tariff matters, and (subject to currency considerations) the same import licensing treatment as is extended to non-dollar countries generally.

(iii)That the Customs Tariff (Industries Preservation) Act be amended to enable emergency duties to be applied to the extent necessary to control low-cost imports from Japan so as to avoid serious damage to Australian industry or established patterns of trade.

(b) That other Commonwealth countries be informed of the Government's intention to enter into negotiations with Japan and a public announcement be made at an appropriate time.

Attachment A Exports to Japan from Australia '000

Year Butter Meat Barley Wheat & Wool Other Total Flour 1950/51 55 15 3,290 2,720 51,500 3,950 61,600 1951/52 65 135 2,800 Nil 40,600 4,890 48,500 1952/53 801 39 8,730 2,140 66,700 5,570 84,000 1953/54 358 275 6,260 275 43,700 4,840 55,700 1954/55 108 307 3,420 1,460 46,100 7,200 58,600 Nine months 1955/56 49 107 3,140 6,530 42,700 6,660 59,200

Attachment B Imports from Japan into Australia '000

Commodity 1950/51 1951/52 1952/53 1953/54 1954/55 1955/56 9 months Piecegoods (mainly 3,120 8,730 752 4,410 7,050 6,230 cotton and rayon) Iron and Steel (sheet, 8,900 23,800 1,840 70 3,032 5,900 plate, rod, wire, etc.) Non-Ferrous Metals 2,220 2,400 120 121 1,008 320 and Manufactures (mainly copper and aluminium) Plywood 181 1,810 2 18 95 50 Portland Cement 161 1,410 310 130 120 - Porcelain and Earthen- 155 363 88 94 549 781 ware (mainly high tension insulators and household crockery) Raw Silk 288 129 29 73 57 5 Sodium Salts (mainly 11 75 36 119 88 5 Mono Sodium Glutamate) Toys - 7 - 62 258 211 Sulphur - - 1,200 328 109 14

Other 564 4,855 319 1,121 782 4,400 Total 15,600 43,600 4,700 6,540 18,400 17,900

[AA : A4926, VOLUME 8]