197 Submission 593 By Mcewen To Cabinet

3rd April, 1957

CANBERRA

Trade Negotiations with Japan

1. In May, 1956, Cabinet authorised trade negotiations with Japan designed to maintain and, if possible, expand our export interests in the Japanese market. [1] Subject to safeguards for our own industry and for the exports of third countries to Australia, Cabinet was prepared to extend most-favoured-nation tariff and licensing treatment to Japanese goods entering our market. Cabinet at the same time authorised legislation to enable emergency duties to be applied to prevent serious damage to Australian industry or established patterns of trade. The legislation has been enacted.

[2]

2. The negotiations have proved unexpectedly prolonged. This has been due in part to Japanese difficulties in reconciling their present bilateral and State trading practices with our requests for complete m.f.n. treatment. In large part Japanese difficulties have derived from United States subsidy and special non-commercial trading policies. Sales at concessional prices and for Japanese currency, surplus disposals, gifts, tied loans and other variants of United States commodity arrangements are well established practices between Japan and the United States and the Japanese have come to rely upon them to a very large degree.

3. In addition political changes in Japan have made it difficult for their policy issues to be settled in reasonably short time.

4. The negotiations with Japan have now reached the stage where important decisions must be taken with a view to finality being reached. Accordingly, I wish to consult and seek the guidance of Ministers on the principal issues outstanding. The stage reached in the negotiations and the principal issues and considerations are treated under the following subject headings:

1. Proposed Form of Documents.

2. Contents of The Agreement.

3. Agreed Minutes.

4. Exchange of Notes.

5. Prospects of Reaching an Agreement with Japan.

6. Summary of Critical Issues.

Proposed Form of Documents 5. Attached are rough Drafts [3] drawn up by our Delegation in the light of the original Cabinet decision and discussions with the Japanese to date. It is proposed to have a formal Agreement (Attachment 1) plus 'Agreed Minutes' (Attachment 2) spelling out specific commodity understandings relating to our exports, plus an 'Exchange of Letters' (Attachment 3) drawing attention to our 'Special Duties' legislation and outlining special consultative measures on a continuing basis to enable the Japanese to avoid the need of our taking emergency action by themselves supervising their exports to us of goods which we classify as 'sensitive items'.

Contents of The Agreement 6. This is drawn up on the basis of reciprocal responsibilities and seems to cover adequately the kind of points Cabinet had in mind last May. It incorporates the following provisions:

Article I Complete and reciprocal m.f.n. but with adequate exceptions for existing preferences.

Article II Limits import restrictions to those maintained for balance of payments reasons and provides for their non-discriminatory application. Restrictions in connection with State trading are similarly covered.

Article III Agreement that State trading agencies in their import policy must be bound by the m.f.n. principles of the Agreement. (This is supplemented in the Agreed Minute on commodities.) Article IV General acceptance of or lip service to principles of G.A.T.T.-'so far as practicable and as may be agreed'-but with clear reservation as to the 'bilateral' nature of the consultations and substantive commitments.

Article V Emergency escape from the obligations of the Agreement to permit the use of quota restrictions, special duties or other devices to prevent serious injury to domestic producers. It also sets out the conditions under which the Agreement can be re-negotiated or terminated.

Article VI Definition of Australian territories to which Trade Agreement will apply.

Article VII Consultation provisions.

Article VIII Machinery article.

The Agreed Minutes 7. Based on the argument that Japan, because of her present trading commitments and methods and her trading policies with the United States, cannot accord us complete m.f.n., the Agreed Minutes set out minimum treatment which must be accorded certain important Australian exports. This minimum treatment in respect of individual commodities is covered under the heading 'Prospect of Reaching Agreement with Japan'.

Exchange of Notes 8. (a) These cover the following points:

(a) Reference to the Australian emergency duties legislation providing for the use of special duties to prevent injury to established trade patterns of Commonwealth countries.

(b) Records the understanding that the Japanese will endeavour to discipline their own exporters in order to avoid the necessity for us to use legislation or other measures under 'Emergency Article' (Article V) of the Agreement.

(c) Provides for consultations to assist the Japanese in exercising restraint over exports.

(d) Refers to and records the clear understanding that these may be added to during the process of consultation.

Prospects of Reaching Agreement with Japan 9. In general, there are grounds for believing the approach contained in the draft Agreement may be acceptable to the Japanese. Among other considerations it is 'dressed up'- (a) in similar terms to an earlier suggested Japanese draft;

(b) to give the appearance of reciprocal obligations even although many of the obligations are rather more onerous on the Japanese than on ourselves;

(c) to resemble the relevant G.A.T.T. doctrine in the treatment of such matters as quota restrictions, balance of payments, unfair trade concept.

10. On the other hand, they may have great difficulty in accepting one or two points or in meeting requests which are important to us. Accordingly, I have summarised the present position the Delegation has taken (contained in the draft Agreed Minutes referred to in para. 7 so far as the commodities are concerned) and have indicated where appropriate the reactions of the Japanese.

(a) Wool 11. In the Agreed Minutes we have suggested the following undertakings:

(i) Provision that no more than ten per cent (existing level) of Japanese imports can be other than under a 'global-quota'.

(ii) Foreign exchange allocations to be determined solely by total balance of payments situation.

(iii)Binding of free entry for period of Agreement.

12. The Japanese are still resisting our request to obtain a binding of duty free entry on wool on the grounds that this is not a tariff negotiation. Our delegation is pressing the following points:-

(i) In obtaining m.f.n. on the Australian market, Japan is in fact immediately obtaining tariff concessions represented by the difference between the general tariff rate and the m.f.n. rate.

This concession covers 80% of Japan's trade with Australia in 1955-56.

(ii) Japan is obtaining the benefit of bindings which we have already made of our duties to other m.f.n. countries and relating to goods which comprise 50% of those which Japan would expect to be selling to this market.

(iii)In addition, we have publicly stated and intend to press on with a further reduction of the m.f.n. duties to whatever extent the Australian Government considers it can take advantage of its recently negotiated right to reduce preferences. [4]

(iv) Australia receives no such direct or indirect tariff benefits from the Agreement proposed with Japan and for this reason and also because Japan is really only according 90% m.f.n. treatment in regard to wool, a binding of the present duty free entry would be no more than equitable and would be essential presentationally in Australia and yet capable of reasonable explanation presentationally in Japan.

13. Without being too sanguine that Japan will accept a free entry binding on wool, I would nevertheless propose to hold out for this concession for some considerable period. In the final analysis, if this is unobtainable, I would feel that in respect of wool we would gain quite a bit from an Agreement which went as far as possible to ensure that wool allocations were not guided by motives or considerations other than the balance of payments position of Japan and that at least 90% of wool was purchased on a non-discriminatory and commercial basis giving the Japanese importer the right to buy where he wants to.

14. Nevertheless on the wool duty issue there are alternative approaches to the bold request for a binding of duty free entry which we should consider:

(i) a declaration by Australia that, if the duty on wool was increased during the operation of the Agreement, Australia would reserve the right to re-negotiate all provisions of the Agreement;

(ii) as the Japanese claim that tariff concessions are excluded from the present negotiations, Australia confine its offers to non-tariff concessions (this would exclude m.f.n. tariff treatment for imports from Japan);

(iii) giving them m.f.n. at present m.f.n. tariff rates, but withholding from Japan any further reductions in the m.f.n. rates;

(iv) an undertaking not to raise the duty on wool above a percentage to be determined.

15. Desirable as a binding of duty free entry would be presentationally, failure to achieve such an undertaking should not swing the balance against any agreement at all, if satisfactory progress is made on other items.

(b) Wheat 16. In the Agreed Minutes we have suggested that wheat should be admitted on a competitive and non-discriminatory basis subject to the following provisos:

(i) So far as Australian soft wheat is concerned Japan should be prepared to buy an amount equal to at least 12 1/2% of total imported millable wheat in the first year of the Agreement and at least 16 2/3% in the second year;

(ii) thereafter, should Japan enter into a special non-commercial wheat import arrangement or take subsidised, dumped, gift or 'special arrangement' wheat, she must buy Australian soft wheat to the amount of not less than 16 2/3% of total millable wheat imports by volume;

(iii) hard and semi-hard wheats to be purchased in accordance with normal commercial considerations over and above the minimum soft wheat figures given above.

17. An undertaking along the above lines should provide an adequate entry to the Japanese market for Australian wheat whilst Japan continues to admit wheat under U.S. concessional arrangements or unfair trade practices. In the event of no dumped or special arrangement soft wheat being imported from the U.S. or elsewhere the market should be open to the Argentine and Australia who would presumably share it on the basis of their supply and competitive position.

18. When it is realised that in the post-war period Australia has sold virtually no soft wheat to Japan, an achievement of anything like the percentages we are currently asking and the conditions that should apply thereafter would be a tremendous improvement in respect of the export prospects for this commodity.

19. I have little doubt that we could get a commitment for the lower percentage (12 1/2% of total wheat imports or 250,000 tons- 6,500,000 on the basis of last year's imports) but would press for the higher figure of 16 2/3% (350,000 tons-9,000,000) and would willingly recommend acceptance of the lower figure or any figure in between.

(c) Barley 20. We have suggested in the Agreed Minutes that barley should be admitted on a competitive and non-discriminatory basis, except that if Japan should enter into a special quota arrangement with another country or should receive subsidised, gift or special arrangement barley, she should buy from Australia not less than 30% of total imports.

21. Japanese imports of Australian barley (varying from 25% to 30% of total imports in the last three years) have been very satisfactory in the post-war period. Japan has, in fact, constituted our major market. I would like to see us get the assurance of 30% of her total imports in the eventuality of unfair trade practices or special U.S. disposal arrangement, but do not regard such an assurance as having anything like the same importance as it would have for wheat. 22. Should the Japanese object to 30% and be willing to settle for 25%, I would think this would be quite satisfactory.

(d) Sugar 23. In the Agreed Minutes we have requested the following undertakings on sugar:

(i) To be accorded opportunity to compete on a normal commercial basis for not less than 40% of total exchange allocations for sugar.

(ii) In the event of unfair trade practices by competitors Japan should be prepared to import 100,000 tons from Australia.

(iii)To admit Australian raw sugar at the lower rate of duty applying to raw sugar from other sources when it is purchased by Japanese refiners.

24. The Japanese have indicated that it would be economically and politically difficult for them to consider any adjustment to the rate of duty applicable to Australian sugar. At present Australian sugar qualifies for a higher rate of duty than most other sugar imported because it is a higher polarisation raw sugar.

(e) Other Commodities 25. In respect of other commodities where we do not receive m.f.n.

treatment the draft Agreed Minutes provide:

(i) Beef Tallow and Cattle Hides To be put on open-general licence qualifying for automatic exchange approval.

(ii) Dried Skim Milk Opportunity to compete on a competitive and non-discriminatory basis within a global foreign exchange allocation except for imports from the United States for welfare programmes.

(iii)Dried Fruits Guarantee of not less than 100,000 per annum.

(f) Elimination of Discrimination in Import Restrictions 26. The draft Agreement itself provides for the accord of most- favoured-nation treatment in respect of quantitative restrictions (as well as on the tariff), which are only to be applied on balance of payment grounds. This means that we shall no longer discriminate against Japan in our import licensing and Japan would be required to accord similar treatment to Australia.

27. I think the Japanese should be expected to accede to our suggestions in this regard. We are under pretty strict obligation in G.A.T.T. to be able to defend our import restrictions in terms of our balance of payments position. In the proposed Agreement with Japan we undertake no greater responsibility than this and at the same time seek to get a similar undertaking from her. This is particularly important in the case of Japan, where a great deal of her arrangements for exchange allocation and commodity imports is drawn up in terms of country quotas or country allocations and

where her State trading activities make it so easy for her import policies to be dictated by other than commercial considerations.

(g) Protection of Australian industry 28. A major provision in Cabinet's Decision of last May, authorising trade negotiations with Japan, was that Australia should retain full freedom to safeguard Australian industry or the established trade of the U.K. or other suppliers to Australia from a disruptive volume of imports from Japan.

29. So far as the Agreement with Japan is concerned, the attached Drafts provide quite clearly that Australia, in the event of her industry being threatened, can, to the extent necessary, be relieved of all obligations in the trade agreement to accord m.f.n. and non-discriminatory treatment to Japanese goods. In practice, this would mean that Australia could impose import restrictions specifically against Japan and, if necessary, to a greater extent than restrictions currently being imposed against imports generally.

30. Additionally, Australia could impose special emergency duties which, in the opinion of the Government, would be sufficient to restrict imports of Japanese goods to the point where they would not represent a threat to Australian industry or would cease to cause Australian industry serious damage.

31. I am quite certain that at least the textile industry in Australia would regard any attempt whatsoever to normalise our trade relations with Japan as something which represented a serious challenge to this industry. I am also certain that even although we are armed with the ability to use special duties and special quota restrictions in the case of imports from Japan, some sections of Australian industry will be very vocal in their opposition to any trade agreement and will proclaim loudly they are hurt even before they are hurt.

32. I don't think any device or safeguard can be contrived which removes either the possibility of hurt or, in practice, the probability of some pinches to Australian industry. Politically, this is something that this Government will have to stand up to and it will not necessarily be easy.

33. On the other hand, it is quite clear that there can be no treaty with Japan unless we are prepared to ensure full m.f.n.

treatment, subject only to the maximum safeguards which I have referred to above and which I believe exist in the present draft of the Agreement.

(h) Protection of the established trade of the U.K.

34. The special mention in the Exchange of Notes of the amendment to the Australian Industries Preservation Act clearly brings to the attention of the Japanese the fact that we will use the special duties measure to protect the established pattern of trade of Commonwealth countries. No such safeguards exist, however, in respect of the established trade of other countries. This latter is a departure from one of the provisions which Cabinet agreed to in May last year, but I believe any attempt to secure the agreement of the Japanese to protect on our market the exports of Third Countries other than Commonwealth countries would, in fact, make the conclusion of an Agreement impossible.

35. The ability to protect Australian industry and Commonwealth suppliers of goods from serious damage by imports from Japan is dependent in this approach upon the provisions of Article V and the relative exchange of notes. The Japanese have not shown any objection to the use of emergency duties to this end but the delegation has not as yet sounded them out on the proposals for the application of discriminating quantitative restrictions. The draft of Article V does not specifically refer to the use of quantitative restrictions but nevertheless the power is there. We are hopeful that the Japanese would find it easier to accept a provision in these terms rather than an open reference. However it may well be that any provision which allows the use of discriminatory quantitative restrictions, no matter how oblique, will be unacceptable to them. In this event Ministers must decide whether they consider that emergency duty powers would be sufficient, both presentationally and in practice, to give the necessary protection.

(i) General advantages of concluding an Agreement 36. On the export side, the Japanese trading system presents very many opportunities for denying a country m.f.n. in the true sense while nominally extending such treatment. Therefore, their exchange allocation system, their bilateral trading arrangements and their State trading agencies can be at the mercy of Japanese policies unless these are reasonably governed by an overall Agreement of the type contemplated.

[37.] In actual fact we are seeking more from Japan than we receive from some other countries to whom we accord most-favoured- nation treatment. Moreover if we can obtain reasonable assurances about the treatment of our exports, and the Agreement is designed to provide these assurances, there are important additional opportunities for the development of Australia's export trade.

38. Japan is now our second largest market and still a growing market for our goods. Curiously enough, the Japanese delegation already appears to accept the fact that although the original incentive for the negotiations arose from the imbalance in our favour of present trading levels, the net result of the trade arrangement-largely because of the possible increase of exports of soft wheat which would flow from it-is likely, certainly in the short term, to give a still greater imbalance to Japanese trade.

39. I don't think we can afford to give Japan grounds for irritation at the imbalance in trade by not extending m.f.n.

tariff and licensing to her. If we remove the grounds for irritation and succeed in getting an Agreement along the lines we are currently following, not only will our trading position be improved so far as Japan is concerned but the indirect benefits of this will be felt by good customer countries from whom we purchase our requirements.

40. From the point of view of the Australian economy, it is essential that we reach agreement. Politically, I think that if the terms of the agreement are anything like as favourable as I have outlined to you, the conclusion of the Agreement would be manageable.

41. So far as individual Australian industries are concerned, I believe the terms of the Agreement and our powers in respect of quota restrictions and special duties are adequate to prevent major damage but are not likely to avoid some damage to our industries at the margin.

SUMMARY OF CRITICAL ISSUES 42. At this stage the following appear to be the major issues on which we must determine our position if, in the course of subsequent negotiations, the Japanese are not prepared to meet our current requests. In other words we must indicate the extent to which we are prepared to deviate from the following approach in order to obtain an Agreement with Japan.

(i) Wool: the request for duty free entry;

(ii) Wheat: the request for firm quotas in the event of U.S.

surplus arrangements or unfair trade practices by competitors;

(iii)Other Commodities: the request for an assurance against unfair trade practices on barley and for an amendment of the tariff treatment for sugar;

(iv) Provision for Emergency Action: the right to use emergency duties and discriminatory quantitative restrictions in order to protect Australian industry and the trade of Commonwealth countries; especially the application of discriminatory quantitative restrictions.

43. Submitted for the information of Ministers in accordance with Cabinet Decision 203 of 21st May, 1956.

1 Document 135.

2 See Document 153.

3 Not published.

4 The UK-Australia Trade Agreement concluded in November 1956 allowed a substantial reduction in the margin of preference accorded British imports against foreign, thereby permitting a reduction of duties on foreign goods.

[AA : A4926, VOLUME 24]