118 Letter from Bathgate to Scott and Members of the Interdepartmental Working Party

Wellington, 22 April 1980

Australia/New Zealand Economic Relations

  1. I attach copy of an exercise on the Intermediate Goods question which throws up some interesting (even unexpected) conclusions.
  2. I think that it would be valuable to pass this over to the Australians at this stage.1 The immediate need is to verify the Department's interpretation of the effects of Australian tariff and by-law policies. However, the conclusions of the study seem helpful to our negotiating position and to the extent that the Australians can be brought to agree with the implications, might be useful in putting this matter into correct perspective before they adopt a position.

Attachment

New Zealand -Australia Economic
Relations Exercise Quantifying Disparities in Relation to Intermediate Goods

  1. The Customs Department has conducted an exercise directed at quantifying the treatment given by Australia and New Zealand to intermediate goods used for further processing.

Products and basis adopted for exercise

  1. The selection of goods for the exercise was based upon identifying products which were traded between the two countries and where the Customs Department already had information as to cost breakdowns. This latter information was acquired in the course of the Tariff Review. The product range took account also of Australian known sensitivity concerning possible benefits enjoyed by New Zealand industry in the whiteware area. A number of other products were looked at but were rejected when it was found that the value of the intermediate goods used was minor and/or the information available was insufficient to present meaningful conclusions.
  2. The products assessed were:
    • electric refrigerator
    • clothes drier
    • electric range
    • automatic washing-machine
    • loudspeaker
    • spark-plug
  3. The information compiled in respect of each of these products was tariff classification, normal and developing country rates of duty, concessionary provisions, import licensing position, cost of intermediate product, Australian tariff item, Australian General and DC rates of duty and Australian bylaw position.
  4. Since the exercise was directed at establishing the comparative advantages and disadvantages relating to each intermediate item, it was not considered necessary to identify the actual source of the items concerned-that is, whether they were, in fact, purchased from New Zealand, Australia or from third countries.
  5. It should be noted that tariff classifications were based on available information and descriptions and therefore encompass a possible margin of error. The input costs were on an into-store basis and included duty paid. In a few cases the company indicated that it enjoyed a tariff concession at the time of importation which could not, however, be verified. The calculations were, however, based on the most favourable position in that regard.

Significant factors

  1. Working papers giving a break down of the position are attached.
  2. Overall, the results of the exercise showed that in three cases there was an apparent disadvantage to the New Zealand manufacturer and in the other three cases the reverse was the case. More detailed information in this regard is contained in the Appendix.
  3. This shows that, in the cases under study, New Zealand had an apparent cost advantage of some 7.77% in the case of the refrigerator, 1.82% for the clothes drier and 1.04% in relation to the spark-plug. On the other hand, Australia had an advantage in the case of the loudspeaker (6.76%), the automatic washing­ machine (3.57%) and the electric range (1.75%).
  4. Further calculations were made to estimate the advantages/disadvantages in the event of there being no concessions/bylaws applicable-that is, if the normal (General) rates had been applied or, alternatively, both countries had applied developing country rates. The percentages of advantage/disadvantage consequential to these calculations vary. The most significant variation applies to spark-plugs, due largely to the New Zealand manufacturer being required to pay a substantive rate of 40% if the existing concession on insulators was to be cancelled.
  5. It should be noted that a substantial factor in the advantage accruing to New Zealand in the case of refrigerators stemmed from compressors where the New Zealand tariff levels were 5% (Normal) and Free (DC), (the former rate being waived by a tariff concession) whereas the Australian rates were 15% (General) and 5% (DC).
  6. A further point of significance is the extent to which the intermediate goods are subject to import licensing in New Zealand. For example, of the 49 individual items used in the manufacture of a refrigerator, some 42 are controlled by import licensing. The exercise has not been taken to the length of attempting to quantify the impact of import licensing policies. Presumably, in those cases where comparable intermediate goods are not manufactured in New Zealand, the acquisition of an import licence does not present any substantial problem. However, in those cases where the goods might be within the possible range of local manufacture, the New Zealand manufacturer is being asked to accept an additional and quantifiable cost. This could be significant and could materially influence the conclusions of the exercise.

Conclusion

  1. The exercise is recognized as having its limitations. It is based on an analysis of six individual costings. The costs provided by the companies are now outdated (originally being on a 1976 basis). However, the products have been weighted having regard to an area of known Australian concern. It can be reasonably surmised that the conclusions stemming from the analysis are unlikely to be altered in any significant detail by a much wider exercise.
  2. What has emerged from the study, therefore, can be summarised as follows:
    1. The effects of different tariff policies applied to a large and diverse range of goods present a complex picture. However, the exercise does not show (as Australia might have anticipated) that Australia is generally the disadvantaged country. This is for a number of reasons, including the offsetting factor of higher New Zealand tariff levels on a wide range of input materials (an example being in washing-machine component parts, where many items attract a normal rate of 40% in New Zealand as against 22.5% in Australia).
    2. When regard is had to the extent of 'overs' and 'unders' the actual level of disadvantage experienced by one country's manufacturers is very modest. It was anticipated before commencing the exercise that the highest level would probably be experienced in refrigeration equipment. This has proved to be so (7.7%). However, in that case much of the disadvantage is occasioned by tariff policies on one relatively high-cost intermediate product (compressor).
    3. The effects of New Zealand's import licensing policies would doubtless add an additional element of disadvantage to New Zealand manufacturers who might, in some cases, be compelled to purchase higher-cost inputs from local sources rather than source on the international market.
  3. Overall, the exercise supports a conclusion that any across-the-board approach to the intermediate goods question is not warranted. A glance at the complex tariff pattern as presented in the working papers will show the disparate nature of the respective tariff positions. When account is taken of the different results that could be achieved by, for example, using a different model from the same company, or otherwise using a model from a different manufacturer of the same goods, the problem of taking equitable action to offset relatively minor advantages is put into perspective.
  4. It would seem that if there is a fruitful course to pursue, it would be on the basis of looking at individual circumstances where: the quantity of finished goods traded presents a particular problem; there is a significant difference in tariff treatment on individual intermediate goods which in themselves represent a substantial proportion of the finished items.

[ABHS 950/Boxesl221-1226, 40/411 Part 27 Archives New Zealand!Te Whare Tohu Tuhituhinga 0 Aotearoa, Head Office, Wellington]