25 Letter from Godfrey to Scully and Flood

Canberra, 27 August 1979

CONFIDENTIAL

Australia - New Zealand Economic Relations

Following the interdepartmental meeting last Wednesday 22 August to discuss the draft report on Australia- New Zealand Economic Relations1 and the future work programme and associated procedural arrangements I thought it would be helpful to set down on paper this Department's views, both in the broad and in relation specifically to the draft report.

As I mentioned at the meeting, we are concerned about the clarity of the basic objectives of the exercise which we see reflected in the report as it stands. We see a need to give much greater precision to what are envisaged as the options. Such precision is needed, in particular, to define better the scope of Australia's national interest especially since consideration of closer economic co-operation with New Zealand goes beyond economic matters and embraces the totality of the relationship. It could well be that those other aspects of the relationship could assume a greater importance in Ministers' minds. In short, we need to develop some yardsticks against which benefit to Australia of the various options can be measured.

It is in our view most important that Ministers should be alerted as soon as possible to the nature of the political decisions which may lie ahead and, at the same time, (which the redrafted work programme is to reflect) a series of scenarios should be developed by departments relating to each option viz: Free Trade Area, Customs Union, Common Market, Economic Union, in order to clarify their relative advantages and disadvantages in terms of costs and benefits. We feel that an initial approach to Ministers could well be in the nature of an information paper. However, guidance on the question of the national interest should also be sought at an early date. This may have to await conclusion of the preliminary exploratory exchanges between senior officials, but in any event it is essential that Cabinet become involved well before the Christmas recess.

As far as the text of the draft paper is concerned we have confined our comments to the conclusions rather than the detail of the text particularly in view of this Department's earlier contributions and comments on manufacturing industry policy aspects. Apart from our general reservations about the scope and balance of the paper as discussed above, including the need for greater precision of definitions we feel that the paper might well be too pessimistic (see paras 1.11, 1.15116/17, 1.28) on the prospects for NZ manufacturing industry. The New Zealand national interest is a matter which we should not presume to judge at least at this stage, since we do not know what alternative future NZ might see for itself in the absence of closer association with Australia. Nevertheless it is conceivable that NZ might come to see such alternatives as offering worse prospects than some risk of Australia gaining more than NZ in some sectors in a closer association.

Paragraph 1.19 of the paper we feel should be deleted from the text. The point at issue is that currently under NAFTA it is these kinds of advantages (identified earlier in 1.14) for NZ industry, in addition to import licensing, that have constrained growth in freely traded goods under the Schedules. The problems therefore already exist under NAFTA and would be compounded by the introduction of (vaguely defined) full free trade conditions. We also find the reference to minimum margins of preference somewhat confusing as these exist already under the Preferences Agreement.

On the question of establishment of an appropriate quantitative analytical framework we believe it is desirable that the skills and expertise of the Bureau of Industry Economics should be drawn on in this exercise...2

I am forwarding copies of my letter to the other Departments who attended your inaugural interdepartmental meeting for their information.

[NAA: A1838, 37011/19/18, iv]