127 Cabinet Economic Committee Minute

Wellington, 5 August 1980

E (80) M 27 PART II. CONFIDENTIAL

Australia-New Zealand Economic Relations

There was a wide-ranging and free-flowing discussion which turned, however, on three key points. The first was the underlying rationale for the development of closer economic relations between New Zealand and Australia. The second was the timing of the discussions with the Australians. The third was the attitude being displayed by New Zealand manufacturers.

As to the first point, it was explained that New Zealand should not, whether explicitly or implicitly, develop a 'Fortress New Zealand' economic policy and foster industries just for the sake of providing employment. If this were to occur, the standard of living of New Zealanders would simply continue to decline. New Zealand had to become more involved in the international marketplace in order to make fullest use of the comparative advantage of its own and other economies. What was so often forgotten was that New Zealanders' living standards could be improved by reducing the costs of consumption goods, by increasing the volume of cheaper imports. Indeed, this would be a better method of improving living standards than nominal wage rises which fed back into the inflationary spiral, which in turn effectively negated the rises. However, increases in imports needed to be compensated for by increases in export earnings because of the balance of payments constraints the New Zealand economy had to operate under. Employment considerations also had to be taken into account such that the run-down of the inefficient import substitution industries needed to be accompanied by the start-up of more efficient export industries. This was the broad context of the drive to establish closer economic relations with Australia. The issue was not so much that New Zealand needed to have a closer relationship with a country whose economy would in all likelihood enjoy considerable expansion based on the growth of mineral production and export; rather, the issue was the maximisation of the comparative advantage of the New Zealand economy in relation to the Australian economy, and vice versa, particularly, but not exclusively, with respect to manufacturing industry. However, the goal was not to substitute 'Fortress Australasia' for 'Fortress New Zealand'; the establishment of a freer market between Australia and New Zealand was just the first step in the major enterprise of making the New Zealand economy more efficient and productive by having it play a more active role in the international economy.

The example of Finland was referred to. The Finnish economy had been highly protected for some time, but since the removal of much of that protection, its exports had grown considerably, the economy as a whole had expanded and living standards had improved significantly. The major catalyst for this change had been the close relationship established between the Finnish and Swedish economies. The Finnish case seemed a highly pertinent analogue for New Zealand.

As to the second point, there needed to be significant progress within the next year or so. The Australians had made it clear that, if New Zealand was not interested, they would seek closer economic relations with other countries in the area. However, because of their forthcoming election, probably in November or December, they would be unlikely to want Ministerial discussions before then. For a similar reason, the New Zealand Government would want to have an agreement with the Australians settled before very much of 1981 had passed. Quite apart from the latter consideration, it was necessary to maintain the momentum of the talks. The signing of a Heads of Agreement between the two Governments should be completed as soon as possible; the consequent detail, including such legislative change as might prove necessary, could be dealt with in due course. Officials assured the Committee that the electoral considerations were no bar to the continuation of discussions with the Australians at an official level. These could be completed within a 2-3 month period, such that the New Zealand Government could make the decisions on its final negotiating position around November with the view to reaching agreement with the Australian Government at meetings during the Christmas-New Year vacation period.

This timetable was to the Committee's liking, although thoroughness should not be sacrificed to speed. In this regard, officials pointed out that there was no chance that agreement could be reached with the Australians on every detail within a reasonable period. The agreement to be reached at the end of 1980 or the beginning of 1981 would necessarily have to be couched in relatively broad terms.

This brought discussion to the third point. Manufacturers had yet to be convinced as a group that closer economic relations with Australia were desirable, even though the more enterprising of them were keen at the prospect. The majority of them had become accustomed to the considerable protection they had been granted, and enjoyed the comfort it afforded; in consequence, they were apprehensive at the prospect of any change. They had shown considerable concern regarding the government's domestic economic restructuring policies, although there were indications that the recent public statements on this issue by manufacturers did not reflect their true feelings to the extent one might suppose. The Committee was concerned as to how manufacturers could be influenced to support closer economic relations with Australia; officials should perhaps be more active in feeding information to them through the Manufacturers' Federation regarding the benefits of closer economic relations with Australia. Manufacturers also needed to be more closely in touch with the issues at this stage so that the overall process could be hastened; in particular, they needed to become aware of the likelihood that trade barriers between New Zealand and Australia would be reduced at a faster pace than they at present seemed to want. A slow pace would be unacceptable to the Australians and would in all likelihood cause the process of economic integration to become bogged down in a mass of detail. On the other hand, it was pointed out that gradual progress was preferable to none at all, and it might well prove necessary to sacrifice a certain amount of speed for the sake of preserving the overall programme.

The Committee agreed, for reference to Cabinet, to:

  1. note the present position of the studies which are being carried out in the course of examining the possibility of a closer economic relationship with Australia, as outlined in the memorandum attached toE (80) 123;
  2. endorse the position, outlined in the memorandum attached to E (80) 123, which officials recommend that New Zealand take at the forthcoming meeting with Australia in Canberra on 12-13 August 1980.

[ABHS 950/Boxes1221-1226, 40/4/1 Part 28 Archives New Zealandffe Whare Tohu Tuhituhinga 0 Aotearoa, Head Office, Wellington]