204 Minute From Jones To Durie

13th May, 1957

SECRET

CANBERRA

Japanese Trade Negotiations This morning I attended an inter-departmental discussion of the state of our negotiations with Japan for a trade agreement. The attached re-draft of our proposals [1] were received from the Japanese on Friday afternoon. You will notice that the sections on wool duties and emergency action under Article V are not covered.

The Japanese had some discussion of these two outstanding but most important points with Mr Warwick Smith on Saturday morning, and after today's meeting he circulated copies of a draft agreed minute about wool duties which Ushiba. has had handed him as being not yet confirmed by his government.

In the attached drafts, there are no substantial points of difference from our drafts except, perhaps, the relationship of the bilateral agreement to GATT, Article IV, the refusal of our request on the tariff on sugar and the scope of unfair trade practices in wheat under the agreement. In this morning's discussion, it was agreed that there would be no problem about forgoing our request on sugar and meeting the Japanese point on wheat or in re-drafting the references to GATT. This, of course, is subject to a satisfactory solution of the wool and emergency provisions.

On wool duties, the Japanese are now prepared not to vary present duty-free treatment for the period of the agreement on the understanding that Australia would consult about the full application of GATT to Japan before the expiration of the proposed three year agreement. It was agreed this morning that we should be able to find an acceptable form of words in this regard.

As to emergency action as drafted by us, this would permit both special duties and/or import licensing quotas. The Japanese do not like the quota provision and have sought the right to take retaliatory action if Article V were applied by us. They apparently could accept a unilateral special duties provision and even the extension of this to protect United Kingdom industries.

However, they certainly could not accept protection of the United Kingdom through quotas. Warwick Smith's opinion was that the Japanese would eventually accept an arrangement under which our freedom to use Article V would be limited by lists of goods and action, etc. without retaliation. Bearing in mind that the Prime Minister had himself suggested some measure of protection for the United Kingdom, Warwick Smith believed that, in most cases, goods produced in the United Kingdom which would require protection, would also be produced in Australia. In discussion, most people felt that we should be prepared to give way on the quota provision but should stick to the special duties. It was recognised that the use of this emergency power to any degree would mean the end of the agreement. If that was so, it was better to have an emergency duty power on which we could take action without retaliation than to have special duties and/or quotas available on the basis of retaliation.

Trade have arranged a plenary session with the Japanese on Tuesday morning at 11.30. This would allow the Japanese to make any formal comments on the drafts presented by them, and possibly to say something about Article V. We would aim to isolate the points of disagreement between us so that these could be referred to the ministerial committee. I said that in our view, the Prime Minister would want to be present at any worthwhile discussion by Ministers of our attitude to the agreement and that, in his present circumstances, this would not seem possible before next week.

Warwick Smith had been contemplating a meeting of Ministers, either Wednesday or Thursday of this week. He said that there would still be time for a final determination of the Government's attitude and that what he was seeking now was reference to, and consultation with, a group of Ministers. However, I felt that there was no point in Ministers meeting unless they could adopt firm attitudes, and Treasury and External Affairs agreed. Warwick Smith undertook to pass on the Prime Minister's Department view.

1 Not published.

## 205 AUSTRALIA-JAPAN TRADE NEGOTIATIONS: FIFTH PLENARY MEETING Canberra, 14 May 1957

MR WARWICK SMITH [1] suggested that the meeting should examine the position reached in the negotiations and consider what arrangements might be made to facilitate the progress of the discussions.

MR USHIBA agreed with this suggestion. Referring to the latest Japanese drafts which had been distributed, he made the following comments.

1. Agreement on Commerce. Document A.

[matter omitted] [2]

g) Article V.-Emergency Action-The Japanese point of view was:-

(1) To some extent Japan could understand the Australian view that unless Australia had some safeguard in the form of emergency measures against a sudden and large influx of Japanese goods the Australian Government could not give Japan m.f.n.

(2) If GATT applied, such safeguard would be used without discrimination, in accordance with the principle of GATT. However, so long as Australia invoked Article XXXV, it would be inevitable that safeguards would be applied in some cases against Japan only.

This was felt rather strongly in Tokyo, but nevertheless it was felt that Japan would have to acquiesce, albeit reluctantly. The Japanese Government expected that in the light of the operation of this Agreement Australia would soon think fit to enter into GATT relation with Japan.

(3) The Japanese Government was concerned with the problem of how far and under what circumstances Australia intended to invoke the emergency measures. If GATT applied reference would be made to the Contracting Parties as umpire but in the absence of such an umpire, there would always be a possibility of abuse, in spite of the best intention of the parties concerned.

The Australian delegation had repeatedly stated that they regarded this safeguard as a last resort and it was not their intention to invoke it frivolously. In fact, a separate document had been suggested to record the understanding that Japan and Australia would co-operate to the best of their ability (although there was a legal and administrative limit to what the Japanese Government could do in inducing exporters to exercise restraint) to forestall a situation that might result in damage to certain Australian industries.

(4) However, the Japanese Government still felt great anxiety as to the circumstances under which such emergency measures could be invoked and the extent to which they might go, since it would be almost impossible to determine beforehand these points exactly. If the safeguards were frivolously invoked it might seriously impair or even nullify the benefits Japan expected from this Agreement.

And if the Australian Government took emergency measures exceeding the degree necessary for the protection of Australian industry, inflicting damage on the Japanese exporting industry, it was very difficult to see why Japan should not have the right to take some defensive measures to retrieve such damage.

(5) It was for these reasons that the Japanese delegation proposed para 3 of their draft, providing for certain countermeasures which might be taken in case consultation should fail or in emergency cases. This was a measure which was authorised under Article XIX of GATT, but the main purpose in proposing this paragraph was rather to use it as a powerful and effective disincentive. The Australian delegation had stated that they regarded para 3 of their draft as a powerful disincentive, and there was no reason for the Japanese delegation to disagree with the Australian view.

However, the termination of the Agreement was a serious matter and the Japanese idea was to set up a disincentive which would not lead to such a grave consequence but which might prove to be as powerful a disincentive.

MR USHIBA thought personally that the Japanese Government would have no objection to the inclusion in Article V of para 3 of the Japanese draft as well as para 3 of the Australian draft.

(6) The Japanese Government had no intention of resorting to retaliatory action whenever the Australian Government invoked emergency measures under this Article. Its purpose was primarily to provide a powerful disincentive, and counter measures would be taken only where inevitable and to the extent necessary to counterbalance the damage done to Japanese export industry.

[matter omitted]

2. Agreed Minutes The form of the Agreed Minutes, i.e. whether it would be one document or would consist of several separate documents, had not been decided and reserving this point, the Japanese view on matters of substance was as follows:

A) WOOL DUTY. The Japanese delegation had made it clear on numerous occasions that the Japanese Government considered the request for a binding of duty free entry for wool as being beyond the scope of the present negotiations.

However, since the Australian delegation had indicated that they regard this question as a prerequisite of the Agreement, the Japanese Government had, after adjusting widely different views of the various Government agencies concerned, drafted a compromise formula which tried as fairly as possible to incorporate the views and ideas expressed by the two delegations. This meant a very great sacrifice and concession on the part of the Japanese Government, paid for the sake of a mutually satisfactory Agreement.

The draft attempted to link the Japanese commitment to retain the present level of wool duty for three years with the expression of Australia's intention to endeavour to withdraw the invocation of Article XXXV within the same period of time. Although the basic idea had been cleared, the text had not yet been approved by Tokyo and herefore, should not be regarded as the final wording.

B) WHEAT. The Japanese Draft Agreed Minutes replace para 4 of the Agreed Minutes This draft was based on the idea agreed upon by the two delegations that under fair and non-discriminatory basis.

Where unfair trade practices were adopted by one of the main wheat exporters, or in the case where Japan entered into non-commercial agreement with a third country, Japan would be ready to secure for Australian wheat an equitable share in the Japanese market.

Whether an unfair trade practice existed or not would be determined by consultation of the two Governments, and such practice would be deemed to exist when a third country offered wheat to Japan at lower prices than those offered to other foreign markets. Such other foreign markets would be major wheat importing countries such as Great Britain, which was importing wheat from various sources on a competitive basis. Should this criterion appear unsatisfactory it might be possible for Japan to agree to a similar formula to that in the United Kingdom - Australia Trade Agreement.

c) BARLEY. The Japanese draft was intended as a substitute to para 3 of the Australian Agreed Minutes. Japan had been importing about 30% of her total barley requirements from Australia and the Australian Government had expressed its satisfaction with the Japanese barley importing policy. In view of this and the fact that Japan had no intention of changing her policy, the assurance of consultation embodied in the Japanese draft should be satisfactory to the Australian Government. The Japanese Government could go no further, considering Japan's relations with other barley exporting countries (U.S.A., Canada).

D) SUGAR. It was at present beyond the power of the Japanese Government to do anything about the sugar duty, and it would be helpful if Australia dropped this matter from this Agreement.

Japan agreed on the principle that Australian sugar would be given the opportunity to compete freely for not less than 40% of total Japanese sugar imports. The Japanese Government was quite confident that the 40% quota of free competition would be maintained and at present there was a possibility that this quota would be expanded rather than reduced. If, however, such opportunity was impeded, the Japanese Government would be ready to consult with the Australian Government. The Japanese Government was reluctant to go beyond this, as they considered the possibility of the opportunity to compete for 40% being impeded too remote to be realistic.

E) DRIED VINE FRUITS. Since Japan envisaged the term of the Agreement to be three years, with the possibility of extension, it was ready to give Australian vine fruits a yearly quota of 100,000 for three years. This kind of quota was provided usually only on a year to year basis in Japanese trade agreements with other countries, but in view of the Australian request, Japan was ready to undertake a commitment for three years. If the Agreement was extended, this matter would be the object of consultation between the two Governments considering whether Japan would continue to give quotas for dried vine fruits to other sterling area countries.

3. Exchange of Notes on Surplus Disposals (Document E) Tokyo did not like this idea of a commitment to consult on surplus receivals. There were already many clauses in the Agreement providing for consultation. The Japanese drafts on wheat and barley were framed with Australia's requirements in this respect in mind and obviously if Japan wished to enter a Surplus Disposal Agreement, she would be ready to consult with Australia with a view to securing an equitable share for Australian wheat or barley in the Japanese market. In addition to these, Articles II and VII of the Agreement provided opportunities for consultation.

Even without these provisions, the Japanese Government could not possibly reject a de facto consultation with the Australian Government if the question of Surplus Disposal Agreement was raised by the latter.

The Japanese Government had not given any similar commitment to any other country, including Canada, and it was not wished to make the matter too conspicuous. It was suggested that the matter should not be given the form of an official letter but it could be put on the official record of the meeting as shown in the Japanese draft.

4. Exchange of Notes on Safeguards The Japanese delegation would be suggesting some changes in the wording of the Australian draft but not in the sense. From Japan's point of view it would be preferable to have the matters raised in the Australian draft included in the record of the meeting rather than as a separate note.

MR WARWICK SMITH pointed out that the Australian papers handed to the Japanese delegation on the 4th April, had been delegation papers and had not been cleared with the Government. It was hoped to obtain further guidance from the Government in the next week.

In addition, the drafts submitted were still subject to review from a legal and technical point of view and even where agreement was reached the legal drafting could take some time.

[matter omitted]

ARTICLE V: The Australian delegation considered that Article V was more likely to lead to a satisfactory situation if the Australian approach was followed, and there was no provision for countermeasures. The point of too ready application of Article V was recognised and the Australian delegation was prepared to look for further assurances to increase the Japanese Government's confidence that emergency action under Article V would be restricted in range and frequency of application. It might be that an assurance of prior consultation in all cases could be given. It would of course be understood that while such an assurance would be given in all good faith there may be occasions when it would only be possible to give very short notice.

The Australian Government would be better able to strengthen its assurances to the Japanese Government if the Australian Government had greater confidence that the assurance on the part of Japan would narrow the possibility of Australia's needing to resort to emergency action under Article V.

However, it was not intended to give the impression that Article V must be entirely inoperative. The Australian delegation could not allow the position to arise where if Australia did impose emergency measures under Article V, the Japanese Government would consider it a breach of faith.

[matter omitted]

MR WARWICK SMITH then turned to the commodity aspects of the Agreement. He pointed out that in the original requests, Australia had sought an assurance that Japanese import licensing treatment of Australian goods would continue to be at least as favourable as at present. This request was to some extent covered by the drafting of the commitments on the various commodities but Australia would wish to make some general reference in an introductory paragraph to the agreed minutes on commodities, which minutes would preferably cover all the commodities in a single document. The introductory paragraph would include the following points:-

(i) the treatment to be accorded to particular commodities was within the general undertaking of most-favoured-nation and non- discriminatory treatment for Australian goods and represented minimum treatment.

(ii) that Japanese import licensing treatment of Australian goods would continue to be at least as favourable as at present. This would of course, be subject to the balance of payments criteria.

At the time when the original request list was presented it was thought that it might be necessary to seek particular provisions to ensure that trade and economic policies of the Japanese Government would not be aimed at reducing the import of commodities of export interest to Australia. However, it was now thought that the point would be covered by the commitment on wool and wheat and the general undertakings.

In relation to the particular commodities, Mr Warwick Smith made the following comments:-

In some products, such as confectionery and chewing gum, which had been mentioned to the Japanese, and others such as fountain pens and processed cheese, it appeared that no licences at all were available. These products had all been the subject of representation by Australian exporters in connection with these negotiations. Australia followed the principle of allowing minimum commercial imports of all commodities and it was suggested that the Japanese may be able to give some assurance that licences would be made available for minimum commercial imports of goods in this category.

WHEAT: The two sides appeared to be sufficiently close to enable an agreement to be reached. It was assumed that the general commitment that wheat and barley would be purchased on a competitive basis would apply to higher protein wheats.

BARLEY: The Japanese proposal appeared to be one which might prove acceptable in substance.

WOOL: The Australian draft on wool had provided that Japanese import restrictions on wool would only be maintained for balance of payments reasons. It was not clear whether this was acceptable to Japan.

MR USHIBA said that the point raised in connection with wool, above, appeared to be covered already in the draft Article II of the Agreement. He would check with Tokyo but he did not think that there was any objection to including some such wording as suggested in paragraph I of Article II of the Australian draft.

MR WARWICK SMITH continued with comments on commodities:-

SUGAR: Subject to consultation with the sugar industry, the Australian delegation was prepared to recommend to the Government that the tariff question be dropped.

WOOL DUTY: The Australian delegation was prepared to put the Japanese proposal concerning the wool duty and G.A.T.T. to the Government.

AGRICULTURAL SURPLUSES: The Australian Government would not be particularly worried as to the form of the undertaking but would like it clearly indicated that the assurance was for prior consultation. This was not clear from the Japanese draft.

Australia had similar undertakings from U.K. and the Federation of Rhodesia & Nyasaland and would seek similar undertakings where appropriate in all future agreements with other countries.

MR USHIBA explained that the matter of minimum commercial imports of confectionary, chewing gum etc. was one which had been argued strongly by the U.S.A. on many occasions but Japan had not given any such commitment to the U.S.A. nor could Japan undertake such a commitment to Australia.

On F.A.Q. wheat the question of a guaranteed standard might be raised again by the Food Agency.

Mr Senger said that the Wheat Board had provided comments on this matter and he felt that further discussion among the experts would solve any difficulties in this regard.

It was agreed to set up a drafting group consisting of Mr.

Corkery, Mr. Uyama, Mr. Kosugi and Mr. Nishimiya to compile a composite draft setting out the position reached to date but without any commitment on either side.

[AA : A1838/283, 759/1/7, vi]

1 The Australian delegation was led by Warwick Smith and included Farrell, Jones, Munro, Senger, Oakley, Corkery and Lind. Ushiba led the Japanese delegation of Uyama, Kajiki, Hibino, Udo and Kosugi.

2 Ushiba's comments referred to Japanese amendments to the Australian drafts of 3 April (see Documents 197 and 200).

Explanations of minor drafting changes have been omitted.

[AA : A 1209/23, 57/5475]