116 Message1 from Talboys to Anthony

Wellington, 2 April 1980

No 1051. CONFIDENTIAL PRIORITY

Australia- New Zealand Economic Relations: Cheese

Our immediately preceding message refers.2 Below is the text of Mr Talboys' reply to Mr Anthony's letter of 13 March. Grateful you communicate the text to Mr Anthony immediately. The original will be forwarded by bag.

'Thank you for your letter of 13 March 1980 outlining your thoughts on the cheese issue and your proposal for limiting sendings of New Zealand cheese to Australia.

I am grateful to you for setting out so clearly the problem facing your Government. I can assure you that I have also been giving serious thought to the circumstances relating to this trade and its place in our future economic relationship. The essence of your proposal is that New Zealand should agree to a Government to Government arrangement under which our exports of cheese to Australia would be "voluntarily" restrained. An arrangement would apply initially for three years and then be reviewed. As I understand it this arrangement would stand on its own, unrelated to other issues of competition and cooperation between our two dairy industries in the context of closer economic relations between our two countries. Although I appreciate the factors which weigh with you, I consider that an approach of this kind would be most difficult to reconcile with the long term interests of both Australian and New Zealand producers. Nor, I believe, would it be helpful to the development of a closer economic relationship between our two countries.

At the time when our two governments are endeavouring to create a political and economic environment conducive to closer cooperation and more liberal trading conditions, restrictive action of the nature you have proposed would be widely interpreted as being inconsistent with our joint objectives. It would call into question the basic approach adopted by the two Prime Ministers at their meeting on 21 March which envisaged that the objective of any new arrangement would be to include all goods produced in either country.3 In this respect I think it is vital that neither the Australian nor New Zealand Governments put themselves in the position of having to circumscribe the scope of the proposed new agreement at this early stage. You will appreciate that there is considerable sensitivity on the New Zealand side in the dairy and other farming sectors-as well as in manufacturing-as to the likely balance of advantage under any arrangement.

The view I have reached after further reflection and consultation with my colleagues is that this is a matter which it should be possible for our two industries to resolve between them. This, indeed, was the position taken by both Prime Ministers at their 21 March meeting. There is already a high level of understanding of each other's view points, as well as cooperation on day to day matters between the New Zealand Dairy Board and the Australian Dairy Corporation. There have been misunderstandings in the past over issues such as pricing but these have now been resolved. Moreover, the New Zealand Dairy Board remains anxious that regular consultations take place between the Board and the Corporation at a policy level as well as on day-to-day issues. I see no reason why this should not be possible.

The Chairman of the New Zealand Dairy Board, in his letter of 8 August 1979 to the Chairman of the Australian Dairy Corporation, made certain specific undertakings on behalf of his Board, relating to New Zealand's aspirations in the Australian dairy market. This remains a true expression of New Zealand Dairy Board policy with respect to the Australian market and I have every confidence that the undertakings made by the Board will be met.

Fears expressed from time to time by Australian industry leaders, regarding potential levels of imports from New Zealand, are also misplaced. The New Zealand Dairy Board Chairman's letter of 8 August 1979, referred to above, provides an assurance that the New Zealand industry's aspirations in the Australian dairy market are based on a realistic appreciation of all political and economic considerations, as well as commercial ones. Concerns that Australia may be the recipient of large quantities of New Zealand product displaced from the European Community market are equally baseless.

It seems to me that some further development of the concept of an annual consultative process involving both our producer interests and the two governments, display[s] the most merit. Under such a consultative system the New Zealand Board would make a judgement about the market situation and the extent of its shipments of cheese to Australia for the year ahead in the full realisation of the views of the Australian representatives, against the background of the market objectives already stated by the Chairman of the New Zealand Dairy Board, and other relevant factors in the relationship between the two industries

This would be "voluntary" action in its best and purest form without direct government influence.

In the circumstances, the New Zealand Government would have the greatest difficulty in accepting that your proposals provide an appropriate basis on which a long term, balanced and stable industry relationship could be achieved. This view has been reached after the most careful consideration and with a full appreciation of the difficult position in which your Government is placed. Nevertheless, it is my earnest hope that the considerations which I have expressed, and the need for both our governments to reinforce and substantiate publicly the commitments given by our Prime Ministers on 21 March to work to establish an open and durable relationship, will weigh with you on this issue.

[ABHS 950/Boxes1221-1226, 40/4/1 Part 27 Archives New Zealandffe Whare Tohu Tuhituhinga 0 Aotearoa, Head Office, Wellington]