114 Letter from Bentley to Evans

Wellington, 17 December 1980

CONFIDENTIAL

All in all, the Permanent Heads' meeting last week went very well, but there is no escaping that issues-key issues-remain to be resolved. The briefing provided by the IDC and Warren1 was invaluable; I have to admit, however, that I still found some of the proceedings quite bewildering, particularly when the experts on each side went into huddles.

For the most part discussion centred around a New Zealand draft of a Joint report from Permanent Heads to Prime Ministers and its accompanying draft Heads of Agreement. When the Permanent Heads finished up on 11 December there were a few loose ends and what I now attach is a copy of the Joint Report2 as it stood by the end of 12 December. There are still some notable gaps:

  • Agriculture support/stabilisation measures
  • Export incentives
  • Rationalisation

and a few points to be resolved in the intermediate goods and tariff areas. It is not immediately apparent from the Joint Report either that other outstanding items are the final content of Category C (the deferred list) and our reservations about import restrictions (para 2.26 and 4.01 ff refer). A New Zealand draft of the Export Incentives section is also attached.3

As always, it seems, the major gap boils down to dairy. I attach the Australian draft of the Agriculture Support/Stabilisation measures section4 of the Joint Report and an accompanying Australian draft specifically on dairy.5 These two documents warrant closer examination. You will note that much of the work foreshadowed in the latter could take some time, which in my view must put in jeopardy a timetable that envisages at least Ministerial initialling of Heads of Agreement by late March. Frankly, I have difficulty seeing how Heads of Agreement can be completed ahead of new stabilisation arrangements for the Australian dairy industry being worked out. But I could be completely wrong. For what it is worth, the New Zealanders-or at least Beath in MFA-take a more optimistic view. He believes that our side can and will come up with a viable option on dairy (see paras 2 and 3 of the Australian dairy draft) well ahead of March/April.

With 1981 and a very tight general election looming the New Zealanders are very conscious that little time is left to consummate the deal. According to Beath Prime Minister Muldoon is still anxious to meet with Mr Fraser in late February. Officials are also talking about the possibility of a further Working Party meeting in late January and another Permanent Heads' meeting in early February.

In the remaining few days before Christmas I shall attempt to get a clearer reading of the New Zealand view of the timetable. Despite all the current talk of getting on with the job, you will be well aware that between 25 December and late January everything in New Zealand will be in a state of suspended animation.

Attachment A

Export Incentives

7.016 It is agreed that significant bilateral disparities between the basis and benefits of performance based export incentive schemes or other similar support measures are inconsistent with the objectives of this agreement.

7.02 In respect of trans-Tasman performance based export incentives there shall be a joint review to be commenced before 1 July 1982. The purpose of the review would be to identify the nature and content of disparities and to quantify their effect. In the event that significant disparities were apparent it would then be determined what remedial action was required to remove them.

7.03 Any action agreed as a result of the review will form part of the new Agreement and should be completed by 1 April1985 or in any event no later than 30 June 1987.

7.04 In this context both Governments have indicated that it is their intent not to increase the real benefit of other types of export incentives (e.g. promotion incentives) applying to trans-Tasman trade.

7.05 In relation to other forms of assistance at the request of either Government, the review can be extended to consider differential fiscal measures also causing a significant bilateral trading advantage.

Attachment B

Australian DRAFT

Agricultural Support/Stabilisation Measures

6.017 For most agricultural commodities, support/stabilisation measures in either country do not hinder trans-Tasman trade. However, in the cases of wheat, citrus fruits, grapes, bananas, pineapples, peas and beans and dairy products there are a number of issues to be resolved.

Wheat

6.02 It was the Australian view that the proposed continuation of the New Zealand Wheat Board's monopoly import arrangements represented a divergence from the basic principles of a closer economic relationship. In practical trade terms, however, it was felt that the impact would be minimal.

One of the objectives of the New Zealand Wheat Board as a monopoly importer is to ensure that all domestically produced bread wheat finds a place in the domestic market. Under a CER arrangement it is agreed that for imports of wheat to meet market requirements as necessary, New Zealand will accord Australia first preferred supplier status subject to normal commercial terms. It is noted that prices to New Zealand wheat producers are approximately equal to Australian FOB prices.

Citrus Fruit and Grapes

6.03 The operation of New Zealand's monopoly importer arrangement, Fruit Distributors Limited (FDL) was noted and the Australian view on the basic principle of a closer economic relationship set out in 6.02 was re-expressed. It is agreed that in the case of citrus fruit and grapes Australia will be accorded preferred supplier status subject to normal commercial terms.

Bananas and Pineapples

6.04 It was noted that for New Zealand's imports of bananas and pineapples FDL accords the pacific Islands preferred supplier status. It is agreed that subject to normal commercial terms Australia will be considered to have a supplier status at least as favourable as the Pacific Islands.

Peas and Beans

6.05 It is the Australian view that the existing panel serves a useful purpose in that its monitoring and guidelines seek to even out fluctuations in trade of the disruptive kind. Accordingly Australia wishes to see these arrangements continued. New Zealand sees the guidelines as inconsistent with the principles of a liberalisation of trade under a CER and therefore they should be terminated, although New Zealand has no objection to continuing consultations.

Dairy Products

6.06 Both sides noted the report by the Australian Bureau of Agricultural Economics on the 'Comparative Efficiency in Dairy Farming between Australia and New Zealand and its Implications for Freer Trans-Tasman Trade'. The BAE study concludes that the forms of assistance to the Australian and New Zealand dairy industries differ markedly. The bulk of Australian assistance is derived from high levies on domestic production8 and consequently wholesale prices for Australian dairy products are considerably above world and New Zealand levels. In a free trade situation these relatively high Australian price levels would act as a strong incentive for a substantial increase in imports.

6.07 The BAE study pointed to possible damage to the Australian dairy industry in a situation of unrestricted duty free access to the Australian market. However, both sides agreed that such a situation would only occur if New Zealand took full advantage of such access arrangements. Except for the NAFTA 1220 tonne cheddar cheese quota unrestricted duty free access has been available to the New Zealand Dairy Board for many years. During this time the New Zealand Dairy Board has restrained its exports to Australia on a voluntary basis has co-operated closely with the Australian industry. In recent years a substantially improved climate of constructive co-operation between the two industries has developed. A Joint Industry Committee has been established and recently held its first meeting.The New Zealand Dairy Board's current marketing objective in respect to the Australian cheese market is to develop a modest place in that market and to secure reasonable growth.

6.08 Against this background and bearing in mind the possibility of further contractions in Australian production both sides agreed that there was scope in the future for reasonable growth in New Zealand-Australian dairy trade.

6.09 New Zealand believes that the most appropriate means of facilitating this growth is for the New Zealand Dairy Board to continue to exercise its own commercial judgement with regard to the level of exports to the Australian market. With regard to the existing NAFTA 1220 tonne quota for cheddar cheese it is New Zealand's view that the normal access formula should apply.

6.10 Australia on the other hand would like to see growth in New Zealand exports to the Australian market manage jointly through agreed industry-to­ industry co-operative arrangements.

Attachment C

Australian DRAFT

Australia - New Zealand-Dairy Products

Australian Permanent Heads indicated that they would be recommending that Ministers not accept the New Zealand approach involving reliance upon the New Zealand Dairy Corporation to determine the extent to which it would export to Australia under the current essentially open access arrangements with Australian producers handicapped by levies on cheese of $A500 per tonne and butter of $A710 per tonne.

However Australian Permanent Heads indicted that they would place a number of options before their Ministers in an attempt to arrive at an approach to the dairy sector which would mesh with the general thrust of a new CER arrangement but at the same time take proper account of the question of equity arising from the differences between the support arrangements of the two countries and the potential vulnerability of Australian dairy farmers in the absence of some clear understanding along the lines envisaged by Prime Ministers concerning the rate of growth of imports and the rate of adjustment.

One option which would be put to Ministers for consideration would be the negotiation of initial access levels for individual dairy products and an appropriate growth factor.

The implications of the current levy arrangements for fair trans-Tasman trade would be addressed by Australia in the coming months within the context of work on a new stabilisation arrangement for the Australian dairy industry. Work on a new arrangement should be well advanced by March/April and should be operative from 1 July, 1981.

Australian officials recognised the pivotal nature of the dairy issue in future negotiations on a CER and undertook to keep New Zealand officials fully informed of developments in their thinking.

[NAA: A1838, 370/1119/18, xx]