257 Record of Discussion between Anthony and Muldoon

Wellington, 28 October 1982

AUSTRALIAN/NEW ZEALAND EYES ONLY

ANZ/CER: Visit by Rt Hon J D Anthony:

28 October 1982

After the Prime Minister had welcomed Mr Anthony,1 referring to their previous private discussion in the Prime Minister's office, Mr Anthony said that he hoped that this would be last time Ministers of the two Governments met to discuss the CER since negotiations had been protracted. He said that good progress had been made and that there was widespread acceptance of the broad virtues of this sort of relationship by industries in Australia and New Zealand. He said that when he had last met with the Prime Minister their discussions had gone far enough for him to approach the Australian Cabinet and obtain permission to promulgate a 'draft proposal' on CER so that Australian industry reactions could be obtained. As a result of that process, overall Mr Anthony said he was quite encouraged, although the reactions had been of varied strength, including messages to the Prime Minister, Mr Fraser, from the Premiers of New South Wales and Victoria. He noted that these same Premiers had not reacted as strongly on the question of CER to the New Zealand High Commissioner as they had in their letters to the Prime Minister. There had been a particularly strong reaction from the Australian Metal Trade Industry Association which, like a number of other umbrella organisations in the private sector, was becoming progressively more cantankerous with the government generally as the Australian economy tightened. This led Mr Anthony to feel that the sooner the two governments could wrap up the CER negotiations (and start up at the earliest time) the better it would be.

Mr Anthony then said that two main points had emerged from the public consultation period in Australia:

  1. the length of the period during which import licensing would be phased out; and
  2. the remoteness of the terminal date for New Zealand's performance based export incentives.

Mr Anthony said he was aware of the commitment and declarations which the New Zealand Government had made to New Zealand industry on these points and he acknowledged that it would be difficult for the government to alter these significantly. Nonetheless he said he had been asked by the Australian Government to raise the possibility with Mr Muldoon, even though he said he could well imagine the Prime Minister's reaction. That said, Mr Anthony expressed his hope that there would nonetheless be some other areas of the existing CER proposal where changes and modifications could be made.

Mr Muldoon said that the Government felt that it still had the interested private sector parties in New Zealand 'on side'. By 'parties' principally, he meant the Manufacturers Federation, some of whose members objected totally to CER, despite which the government had publically stated it would proceed with CER. He said that the issue of the terminal dates was the breaking point with MANFED. New Zealand would, however, do what it could to meet some of the difficulties Mr Anthony had encountered short of interfering with the terminal dates.

Mr Muldoon then turned to the first Agenda item, informing Mr Anthony that on 27 October the Cabinet Economic Committee had considered and approved all the changes so far negotiated by officials to the Draft Heads of Agreement. Mr Muldoon suggested that officials should exchange lists to ensure that there were no disparities.

Mr Muldoon then turned to the question of forest products suggesting that there were no issues which need take up the time of the two ministers during the morning session of their talks. Mr Anthony observed that forestry was a difficult issue for Australia, because there were deep feelings in the Australian timber industry. He admitted he had overlooked this factor during previous Ministerial discussions but even so forestry was still an issue. New Zealand timber had become very competitive on the Australian market at a time when Australian domestic demand was declining. There were very strong views among Australian producers about New Zealand export incentives and a request had been made for the Australian Government to consider dumping and countervailing duty complaints. Mr Anthony said he sincerely hoped that Australia would not find itself having to take CVD action. This was a position he took based on his views as 'an international trader' because he recognised that such a course of action would have international ramifications. Nonetheless he was obliged to observe that a strong lobby of support was building up behind that option in Australia. He had hoped that inter-industry discussions would have fixed the problem. Now it was in the hands of officials and he hoped that pricing arrangements could be worked out to overcome the present problems in regard to paper, pulp, veneer products, fine paper and reconstituted panel boards. Mr Templeton observed that the leading powers within the New Zealand forestry industry were now involved in a further round of inter-industry discussions and their presence could help to influence those who had previously stood out from an industry-imposed solution. Mr Anthony replied that he had considerable confidence in Australian industry leaders and he was aware that they too were prepared to come to the table. Mr Templeton said that it seemed therefore that the good people on both sides were now focussed on the problems.

Mr Muldoon turned to the second part of the agenda item-canned fruits- another product area where agreement appeared to be close between the two sides but had not yet been fully achieved and where further work by officials looked promising. He said that the New Zealand Government's final decision on the Industry Development Commission's report would not be unfavourable to Australia. On the basis of the IDC's final report which had been a split decision, he noted that the majority view of the Commissioners which was the more generous, would not be unfavourable to Australia. There had been no Ministerial decisions yet, he said, but as far as CER was concerned he could foresee no problems from the New Zealand side in meeting a commitment on quality of access for Australia. Mr Anthony said so far as he was concerned it was a question of working out how the assurance the Prime Minister had given him just then (and earlier in writing) was going to apply in practice. He thought he might need to look at the IDC report and assess it in light of the position of the Australian industry. Mr Muldoon said they had seen it already in confidence. Mr Templeton said that he expected the report would be approved for public release and consultation with New Zealand industry on 2 November.

On synthetic carpet, the Prime Minister said that the New Zealand carpet industry had reacted unfavourably to the latest Australian proposal noting that while the quantity of carpet that would be covered in two-way exports was the same it would amount to 5% of the New Zealand carpet market but only 1% or less of the Australian carpet market. The New Zealand industry, he said, would rather abandon the present inter-industry agreement than accept the proposition put forward by Australia. He then suggested that perhaps officials should attempt to progress this issue further, repeating that the government had had no success with the New Zealand industry on the proposition put forward by Australia in its present form.

On Government purchasing, Mr Muldoon said that in essence the New Zealand Government had accepted the new drafting required by Australia. The situation overall was untidy and not especially satisfactory given New Zealand's original objectives. There was little New Zealand could do about the positions taken by individual states at this point in time. Mr Templeton added that the Government had come under quite a degree of pressure on this issue from New Zealand manufacturers. It had been able to 'hold the line' on the basis that the matter could best be progressed as a second generation CER issue. Mr Anthony observed that New Zealand had made progress towards reciprocity of preferences with some States.

On the modified (deferred) category2 Mr Muldoon said officials had made some progress. Mr Anthony agreed but noted that there was still 'something to be done' on copper products. Mr Muldoon agreed, observing that New Zealand's willingness to remove this item from the modified category had a condition (regarding the scrap embargo) attached to it which New Zealand officials could discuss with their Australian counterparts. He noted that the loss of deferred status would not be well received by the New Zealand producer concerned. He then confirmed that the decision reached by officials on aluminium products and on taps, cocks and valves was acceptable. On ceramic sanitaryware he noted that the deferral would be maintained.

On the question of the allocation of exclusive Australian licences, Mr Muldoon and Mr Anthony agreed that the revision of the guidelines undertaken by officials was getting to an acceptable level.

Export Incentives

Mr Muldoon noted that the New Zealand Government was conducting a general review of its export incentives schemes. He noted that the Government had encountered opposition from the Manufacturers Federation to any suggestion of bringing forward the 1987 terminal date and therefore his discussion with Mr Anthony had to focus on the question of phasing. He suggested that perhaps there was some concession in this regard that could assist Mr Anthony. Mr Anthony replied that it was very important for him to be able to show some progress on removal of export incentives as a result of this meeting. He recalled that as a result of the previous Ministerial discussions Australia had accepted the 1987 terminal date with phasing to commence in 1985. Following the public consultation period in Australia a number of proposals had been made in regard to that phasing including one for a 75% cut in 1985. In his view that was a harsh proposal and he would prefer to be able to promote a 50%-25%-25% phasing alternative so that it could be claimed in public that within a year or so of the commencement of phasing New Zealand's incentives would be three-quarters gone. Mr Muldoon replied that although it would require some effort by the Government to 'sell' such proposal he could accept it. Mr Anthony observed that this issue had become more sensitive since their last meeting because of the decision taken by the Australian Government to abolish its comparable schemes from May 1983. If the New Zealand schemes were only to last 18 months beyond that time he felt he would be able to press the viewpoint on Australian industry that within such a time frame they ought not get too cantankerous about the apparent differences.

Countervailing Duty Actions

Mr Muldoon said it was New Zealand's understanding that there was certain binding obligation upon the Australian Government arising from domestic legislation. He accepted that there was not much New Zealand could do to circumvent CVD problems in light of that fact. However, he said, New Zealand remained concerned that CVD action should not become a common practice on the part of Australian industries because it would be contrary to the whole spirit of CER. Constant recourse to the CVD option would cut across the CER, he said. The New Zealand Government would be faced with a reaction from the New Zealand business community which would say that the Government had made a deal (on export incentives), but an entirely new factor in the form of CVD action had been subsequently introduced. Mr Muldoon said he did not know what type of solution would be possible to meet both the Australian and New Zealand points of view. Mr Anthony said that the possibility of CVD action 'cut both ways'; it was a normal provision in the commercial law of all countries where a real need for it could be demonstrated. He felt that the area of prime risk in this regard lay in the two years between 1983 and 1985 and both governments should seek solutions as quickly as possible on a case by case basis when the risk occurred. Mr Muldoon referred to the work done by officials on an Explanatory Note in this regard and suggested that perhaps the two governments could do no more than take the steps covered in that note. Mr Anthony then described the Australian position by reference to the Australian version of the draft Explanatory Note. Mr Muldoon said that from the New Zealand side some additional drafting was desirable.

Initial Access

Mr Muldoon said this was the other major question for these talks. Despite the obvious problems, he said he recognised that New Zealand had to be 'somewhat flexible'. The problem was that there was a wide variation in the impact of any changes New Zealand might accept on particular industries. They range from negligible to major, whether in terms of the market share base of the cash base and where the problems were serious the New Zealand Government would encounter real difficulties.

Mr Anthony said that following the Australian consultation period it had been pointed out by officials that by 1995, as a result of starting from a low access base, in many cases Australian penetration of the New Zealand market would reach no more than 16%. He suggested that the system should be so designed that by the time of the 1988 review of CER the rate of access could be changed, wherever possible, in order that by 1995 most products were either Licence-on-Demand or would require only one small further step to achieve unrestricted access to the New Zealand market. Mr Anthony added that there had been widespread criticism of the CER in Australia on the grounds that it allowed New Zealand to protect its domestic market for an unduly long time. Given the fact that there could be no bringing forward of the 1995 terminal date Australia had been forced to tum its attention to the possibilities of opening up the New Zealand market faster in the early years. He said that with a low initial access base increasing by only 10% per annum, access would still be at a low level by 1995, especially where there was growth in the New Zealand market for the product concerned. The $200,000 minimum base was an unrealistic starting point not only because it did not represent a worthwhile opportunity commercially but also because the market share percentage to which it equated was so low that the phased increase in it appeared farcical. Accordingly Australian officials had been instructed to promote a doubling of the base from $200,000 to $400,000 or 10% market share, while maintaining the 10% growth factor. Also, Australia wanted a doubling of the growth rate to 20% for those items where initial access base was between $400,000 and $1 million. (This covered, in practice, product groups where trade was already taking place.) Mr Muldoon said he felt more at ease with the latter proposal than with the former. Even so he said that in the $400,000 to $1 million category New Zealand had four sensitive item codes where it would be necessary to maintain the growth rate at the existing 10% per annum (real). Mr Anthony said that he could accept that there should be some way of identifying these sensitive items. Four from a total of fifty did not look too problematical. Mr Muldoon said that the items concerned were ceramic tableware: tubes and pipes of copper and of aluminium and locks and padlocks. Mr Anthony confirmed that Australia would seek a way to meet the sensitivity described by the Prime Minister and added that provided it could be established that Australia was obtaining a fair share of the global trade in these products he could not foresee any problems.

Mr Muldoon said that in regard to Mr Anthony's first proposal New Zealand was yery worried about doubling the bad reaction amongst Australian industry. Mr Clark recalled that during the New Zealand public consultation period officials had explained the CER on the grounds that $200,000 would be the minimum base. Those New Zealand industries-about 30 to 35-which responded that $200,000 represented significantly more than 5% of their market had been dealt with by reverting to the 5% option. New Zealand officials could not predict how many more industries would claim that with a $400,000 cash base, that they preferred to be categorized by fixing a percentage share of their market. Mr Anthony said that it was vital for him to be able to say in Australia that some movement had been made in this area. Mr Muldoon asked Mr Anthony whether New Zealand's acceptance of a 20% growth rate in the second category he had sought to introduce did not represent some 'help' to Mr Anthony when taken together with the acceptance of a doubling of the cash base to $400,000 in the first category. Mr Anthony replied that he did not think he could obtain Cabinet approval for the CER on that basis. Some of his Ministerial colleagues would laugh at the CER unless there was some movement on the market share base. He said he was happy for New Zealand officials to itemise specific problem areas but in general terms he would have to be able to say that in 1988 reasonable progress had been made towards the phasing out of import licensing.

Mr Muldoon responded that the process of re-examining initial access levels implied difficulties for a larger number of small New Zealand industries which in practice were of little consequence individually in trans-Tasman trade but were collectively capable of presenting a strong public face against the CER in New Zealand. Mr Anthony said that from his point of view the 5% market share looked very minimal. Mr Muldoon pointed out that by agreeing to Mr Anthony's requests in regard to the second category, the larger trading enterprises had in fact been dealt with. They were the ones who 'mattered'. He suggested that there might well be very little interest in the product areas of the smaller New Zealand industries from the Australian exporters. Mr Anthony said that in that category there were potential exporters who had never had to deal with import licensing before. Mr Muldoon said that there was not a lot of trade involved. Mr Anthony replied that the issue was one of symbolic importance on both sides. Mr Muldoon repeated that while he could accept a nominal doubling of the cash base to $400,000 he remained worried about the prospect of doubling the 5% market share base. In response to Mr Templeton, who stressed the importance of gradualism for the small New Zealand manufacturer, Mr Anthony said that he could not see that there was any better form of gradualism than having only 20% of the domestic market exposed by the halfway point in the transition period. He pointed out that in order to achieve termination by 1995 it would be necessary to have a much steeper curve in liberalisation after 1988. He wondered whether that would in fact prove more difficult for New Zealand when the time came. But he concluded that officials should have a closer look at the problems that have been outlined during the discussion.

End of Morning Session.

Mr Anthony opened the afternoon session by referring to a list of outstanding issues which had been further refined by officials during the break. Summarising, he said that in the problem area of increasing the access rate, two sides were agreed in principle and that the bottom line which he could take back to Canberra and promote within Australia was the doubling of the cash base to $400,000. He said he recognised that New Zealand's problem lay in the area of sensitivity of small companies which could not tolerate a base of $400,000 and therefore looked to the market share alternative. He wondered whether officials could devise a formula which would not allow too much deviation from the bottom line but would permit some industries to be excluded, although not to the extent that it would erode the meaningfulness of the $400,000 base. Mr Galvin commented that officials had explored the possibility of retaining the option of a 5% market share together with a new $400,000 base. In all there were some 327 item codes where initial access would fall at $400,000 or below. If one assumed that the crossover point (at which a company would derive greater gradualism by opting to move to $400,000 at 10% growth rather than holding to a 5% market share base with a 20% growth rate) was $260,000 there could be about 119 codes in which the 5% route would be attractive. Mr Anthony responded that while he had few difficulties with the 35 companies which had already opted for a 5% market share (when the cash base was $200,000) his position in the Australian Cabinet would be very much weakened if that number escalated three times (from 35 to 119) under the new formula proposed.

Mr Muldoon said his difficulty was that there would be pressure on the New Zealand Government directly proportional to the number of companies which were 'dragged up' to the new $400,000 starting base. Most of the companies in this category had not given much thought to Australian competition on the New Zealand market because under NAFTA it had been minimal. Mr Anthony asked whether the doubling of the market share base to 10% was too much (in political terms). Mr Muldoon replied that New Zealand could live with $400,000 or 5% of the market (whichever was the lower) with a 20% growth rate: Mr Anthony then noted that Australian manufacturers had exposed during the consultation period 'just how puerile' the Australian penetration of the New Zealand market would be under the formula as it was in the Exposure Draft. He said he felt obliged to return to them with an adequate answer to that criticism. Mr Templeton then noted that the Government would not wish to have to receive representations during the 1983-1988 period from industry saying that a process which would offer Australia 20% of the domestic market had turned out to be too tough for them. He suggested that it was more important to bring the smaller industries along gradually. Mr Anthony replied that he had said that individual cases for exemptions could be examined and he reiterated that even with a 10% market share base (at a 10% growth rate) market penetration would only be about 16% by 1988.

Following an intermission Mr Anthony summarised to the effect that the discussions had concentrated on New Zealand's concern about offering a 10% market share as an alternative to a $400,000 cash access base. He said it had been suggested that those who opted for a market share (below $400,000) would attract a 20% growth rate. He then suggested the alternative of putting all trade below the ceiling of $1 million on a 20% growth rate except for the 35 'sensitive' industries which had already opted for the 5% market share. Mr Muldoon replied that the other option was to set a 10% growth rate for all those who opted for $400,000 base but a 20% rate if the 5% market share base was invoked. This was the option he had already advanced. By contrast, Mr Anthony's proposal was for a 20% growth rate regardless. He said he had the feeling that the burden being placed on New Zealand to sell such an approach to manufacturers outweighed the gains it would bring to Australia. It would mean that the Government would have to say that the outcome of the negotiations had been to move in Australia's direction on all points and New Zealand industry had received very little consideration. Mr Anthony commented that the public perception could well be that the Prime Minister had been adamant about not shifting the terminal date and people would realise that the only alternative then available to Australia was to 'open it up' at the initial access 'end'. Mr Muldoon reminded Mr Anthony that the Exposure Draft was perceived as the consequence of agreement being reached between them and that what had followed in subsequent negotiations, might well appear to be a watering down from a point agreed several months ago. He said he thought that even though improved initial access for Australia was now accepted by the New Zealand public in general terms, Mr Anthony's new proposal for initial access went too far. Mr Anthony said he had in fact offered the option of holding onto a 5% market share for some industries in order to accommodate the New Zealand position and that his proposal for an across-the-board 20% growth rate when presented had the sort of simplicity he would require in presenting the issue in public in Australia. Mr Muldoon said that the negotiating mandate approved by the Cabinet Economic Committee did not extend to that point and it would be necessary for him to take the matter up at Cabinet level. Mr Anthony said that he imagined that the retention of the option of a 5% market share in some cases would help to meet Mr Templeton's feeling for the apprehensions of the small New Zealand manufacturer about Australian market penetration under CER. However he also had a problem. Australian industry had not proved to be as cooperative as he might have hoped. Initial access was a major selling point for CER in Australia and some presentational improvements were required. Mr Clark commented that to isolate the number of companies which would wish to opt for a 5% share of the market rather than a $400,000 cash base would not be easy. It would require consultation with the industries likely to be concerned. He emphasised that the 119 item codes mentioned previously was an imprecise estimate. As a result of consultations with industry that number could shrink or it could grow. Mr Anthony responded that with the 5% base option the 119 codes would be covered.

Other Issues

Mr Muldoon reopened discussion on the question of synthetic carpet by repeating that the New Zealand industry was not willing to accept the latest Australian proposals. Mr Scully noted that officials had arrived at the point of an approach which fitted the bill in principle but was unsatisfactory in regard to precise calculations of market share. That suggested to him that officials ought to do further work in that area of calculation, leading to further exchanges, if necessary, between the Prime Minister and Mr Anthony. Mr Templeton commented that the New Zealand problem was one of equality of access in terms of market share. Mr Anthony then raised the question of the allocation of exclusive Australian licenses within the item code covering tomatoes, capsicums and some other vegetables. He asked whether, given the size of the New Zealand market, the initial access level for tomatoes could not be set at 50% of a $400,000 base for the code. Mr Muldoon commented that this could present problems for New Zealand because of its SPARTECA obligations to Tonga. He said that he would not wish to compromise such obligations for a relatively minor CER item although he did not rule out that the access level could be raised a little in the context of an open market but with monitoring of sendings by individual exporting countries.

The meeting broke off at this point. Ministers instructed officials to do further work on the question of the initial access base in the below $400,000 category for further discussion by the Ministers during the dinner for Mr Anthony at the Prime Minister's residence in the evening. As a result of discussions by the Ministers over dinner, compromise solutions were agreed for Cabinet consideration in both countries in regard to initial access. Ministers also reached agreement on a level of access for tomatoes for the New Zealand market.

On the $1m (NZ) phasing change point, it was acknowledged by Australian officials that that sum was understood to be in dollar rather than real terms.

[AALR 873, W4446/Boxes 312-313, 61/Aus/2/2/1 Part 3 Archives New Zealand/Te Whare Tohu Tuhituhinga 0 Aotearoa, Head Office, Wellington]

Following the Muldoon/Anthony talks on 28 October, in which Mr Anthony had sounded a note of warning on the subject of forest products, relations between the Australian and New Zealand forest industries had deteriorated and, under industry pressure, Australian ministers had initiated action against imports of New Zealand forest products. The following two messages set out New Zealand's response.