33 Australian Discussion Paper for Officials Meeting

Canberra, [25 October 1979]1


Future Trade and Economic Relations between Australia and New Zealand Australian Discussion Paper for Officials Meeting, Wellington 1-2 November 1979


This paper is in two parts. The first deals with Australia's broad trade and economic restructuring objectives and strategies while the second considers how the trans-Tasman initiative relates to them. It does not seek to prejudge in any way Australia's response to New Zealand proposals at the meeting on 1-2 November.


1. Situation and Outlook for the World Economy and International Trade

Although many of Australia's recent economic problems can be traced to domestic factors, developments in the world economy and the international trading environment can have a significant impact on Australia and, coupled with the outlook for the 1980s, underline the need for appropriate internal as well as external policies and objectives.

It is a matter of record that the world economy has experienced substantial instability and structural problems due to slow adjustments in response to changes in comparative advantage and imbalances in factor shares during the course of the 1970s. There was a marked deterioration in rates of growth as well as a marked increase in inflation in the latter part of the decade.

Approaching the 1980s, the key underlying economic problem is that of persistently high inflation and its adverse effects on growth, unemployment, exchange rates and international trade. As in 1974, these difficulties have been compounded by significant increases in OPEC crude oil prices, giving further weight to the world energy problem. More importantly in some respects is the prospect that any disruption to supply in a finely balanced market could act as a physical constraint on growth, at least in the next few years. The re-emergence of double digit inflation in the major industrial countries and the associated failure to adopt longer-term policies to overcome inflation and to deal with deeply imbedded structural problems suggests poor medium term growth prospects for the world economy.

The economic instability and structural problems experienced during the 1970s contributed to significant and growing strains in the international trading system. The rate of growth of world trade declined from an annual average increase of 8% in the period 1953-1973 to some 5% between 1973 and 1978. The adverse effects of high inflation on economic activity and employment and the emergence of significant sectoral pressures led governments to take defensive trade measures. In several cases such measures were, in part, a reaction to the emergence of the newly-industrialising developing countries (NICs) as competitive suppliers of light manufactures and labour intensive products. Rising protectionist pressures and the deteriorating trading environment added to the significance of the Multilateral Trade Negotiations and highlighted an increasing need for governments to adopt positively oriented policies of adjustment in both industry and agriculture.

The MTN negotiations probably contributed to holding the line against protectionist pressures and were reasonably successful in securing modest liberalisation of trade. However, the focus of the negotiations has been largely on industrial products. While agricultural exporters obtained some valuable concessions in the MTN, overall conditions of access to major world markets have been improved only marginally.

A major element in the final MTN package is a series of multilateral agreements and understandings on trade rules, including codes governing the use of a range of non-tariff measures. However, most of these have been geared to industrial trade and reflect the interests of the major industrialised countries. An important shortcoming from Australia's viewpoint is the absence of effective disciplines covering agricultural export subsides. This is a significant issue which was not effectively addressed in the negotiations.

The selective nature of certain trade measures adopted since the mid-1970s, in particular the increasing resort to voluntary export restraints, has contributed to the uncertainty surrounding the means by which governments might act to safeguard domestic industries against injurious competition from imports. Continuing agricultural protectionism, particularly for temperate zone products and action to restrict the growth of manufactured imports from the NICs are major problems that need to be resolved. Against this background, effective implementation of the MTN package will be vital if the role of the GATT and the rule of law in international trade are to be reaffirmed.

In summary, there is little in the present outlook for international trade and the global economy to suggest that the difficult experiences of the 1970s are past and that there will be a return to the rates of economic growth and international trade witnessed in the two previous decades. Indeed all signs point to an international trading environment which will become increasingly competitive in the years ahead. Nevertheless, it is in Australia's interests to continue to push for liberalisation of world trade conditions on a multilateral non-discriminatory basis.

2. Situation and Outlook for the Australian Economy and Trade

International economic developments have had an important influence on the Australian economy throughout the 1970s as they have in the past. The period from mid-1972 to late 1973 was characterised by a high level of economic activity, a large surplus in the balance of payments on current account, an excessive inflow of private capital and an accelerating rate of inflation. During this period there was a significant appreciation of the Australian dollar and an across the board tariff reduction. A wage explosion in 1974 and associated squeeze on profits contributed importantly to the sharp downturn in 1974 and rapid rises in prices, wages and interest rates resulted in unemployment and liquidity problems for producers which, together with a changing external environment and the earlier measures impacting on the balance of payments, contributed to a tum-around in the current account. In Australia, as in other industrial countries, high unemployment and the intensification of import competition in domestic markets generated a strong response in the manufacturing sector for increased protection.

The process of recovery in Australia since 1974 has been gradual though uneven. Slower growth has been accentuated by certain relatively short-term imbalances which had their origins in wage and price inflation. The subdued growth has also uncovered in a very stark way the most uncompetitive areas in the economy.

Between 1972-73 and 1974-75 real wages increased at a rate significantly above that of productivity and the share of wages, salaries and supplements in GDP (at factor cost) increased from 59.8% in 1972-73 to 65.9% in 1974-75. The corollary of this was a decline in the profits share of GDP (at factor cost) from 16.1% to 13.3% over the same period. There has been little change in profits share to 1978-79 but the wages share has fallen somewhat. In 1974 Australia's balance of payments returned from surplus to its more normal deficit position consistent with Australia's position as a net importer of foreign capital. The current account deficit in 1978-79 comprised an estimated 3.1% of GDP compared with the long run average of 2.5% but the relative size of the deficit declined significantly during the course of the year and may be around the long run average in 1979-80. The increase in Australia's current account deficit between 1974-75 and 1978-79 was symptomatic, primarily, of the economic problems arising from the imbalances which occurred in the 1970s. International competitiveness was markedly eroded in the middle years of the decade as a result of wage and price pressures. This was exacerbated by the decline in world trade generally and a weakening in prices for many primary products led to a decline in export growth and a significant deterioration in Australia's terms of trade. Following the excessive inflow of private capital in the early 1970s, investment funds entering Australia in the middle of the decade declined significantly in the face of falling profitability, a belief that the exchange rate was overvalued and a view among many foreign businessmen and financiers that Australia had become a less favourable place in which to invest.

Recent policy has been directed to reducing inflation, restoring external balance and reducing real unit labour costs to provide a climate for balanced growth. The main elements of policy have been: reduction in the budget deficit, monetary restraint, wage restraint and, following the 17Ih% devaluation in November 1976, an exchange rate policy that has involved much smaller but more frequent adjustments in the rate. Modest success has been achieved in the pursuit of these policies, which has enabled the economy to achieve some real growth whilst reducing the rate of inflation. Australia's average competitiveness has been returned to a position similar to that before the deterioration in 1974, and the current account deficit relative to GDP has returned to a more normal level.

Australia's trade and economic prospects will continue to be heavily influenced by international developments and its ability to adjust to domestic structural pressures. In a difficult international trading environment, Australia will be particularly dependent on effective domestic economic policies to strengthen our competitive position. Among the external factors which could constrain the growth of Australia's trade much will depend on the extent to which governments are able to preserve a relatively open international trading system. It is evident that in addition to the direct constraints which market access limitations impose, particularly on exports of agricultural commodities, much will also depend on the access enjoyed elsewhere by Australia's major trading partners. The link between Australian exports of coal and iron ore and the export performance of Japanese industry illustrates this clearly.

It is apparent that Australia is well placed to benefit from the considerable trade potential offered by the rapidly developing economies of the Asia/Pacific region, particularly South Korea, Hong Kong, Taiwan and the countries in the ASEAN group. Efforts to expand trade with countries in the region will be influenced by the extent of their further development as well as by the general climate of Australia's trade relations with these countries, including the conditions of access which they in tum enjoy in the Australian market.

In spite of the uncertainties, there is reason to expect that some Australian industries may encounter more favourable conditions for growth than in the recent past, although the importance of continued world growth in determining the demand for many raw materials should not be overlooked. In a world where energy problems are becoming acute, Australia is rich in resources and will be a net energy exporter for the foreseeable future. Australia is presently 70% self-sufficient in oil, has extensive resources of coking coal, steaming coal, uranium and natural gas, and is a major producer and exporter of iron ore, bauxite/alumina, mineral sands as well as being an important exporter of other mineral commodities. On the rural side, Australia has the physical capacity for the expansion of output of agricultural products. However, actual growth will depend on market conditions and our ability to produce at competitive prices.

Australia's stable environment, highly skilled labour force and the diversification and extent of its resource endowment provide a basis upon which to build a competitive manufacturing sector, but that will only be achieved by significant adjustments to the existing industrial structure and greater emphasis on the development of more efficient industries.

3. Strategies and Objectives

For Australia, the experience of the 1970s and the outlook for the coming decade have highlighted the need for continued or intensified application of a number of existing policies, such as rigorous adherence to an anti-inflationary strategy, the further development of exports to embrace a greater number of markets and a wider range of products, and the pursuit of more stable and predictable conditions in international commodity trade. In other areas, such as manufacturing industry and energy, changing circumstances have pointed up the need for new or modified policies.

Following the Second World War Australia's economic development followed a particularly stable path. The strategy of import replacement then being followed saw substantial diversification of the manufacturing sector, development and export of our natural resources quickened and the tertiary sector of the economy expanded strongly. The prolonged period of growth provided a plentiful supply of jobs for a growing workforce. During the early 1970s, however, the slowing in population growth, the energy crisis, rapid inflation, a wages explosion, increased import competition from newly-industrialising countries, particularly in Asia, and the world recession all contributed to substantial changes in the domestic economic environment. The more sluggish growth and the more competitive trading environment that accompanied these changes saw a relatively severe fall in manufacturing activity and employment, highlighting in part the difficulty of a fragmented and inward-looking manufacturing sector competing successfully in the new and tougher environment and the inappropriateness of continuation of the strategy of import replacement.

Taking account of these changing circumstances the White Paper on Manufacturing Industry (May 1977) set out a policy for Australian industry, the basic thrust of which is to achieve the development of a stronger more specialised, export oriented manufacturing sector which is less reliant on Government assistance than in the past.

Against this background of inevitable change in the manufacturing sector, the Government established, in September 1977, a Study Group under Sir John Crawford to examine the nature and extent of adjustment problems of Australian manufacturing industries and to advise on the essential elements of a long term policy to deal with these problems. The Study Group's Report (March 1979) endorsed the Government's objective of fostering a more competitive outward-looking manufacturing sector.

Following its consideration of the Report the Government reaffirmed that objective. The main policy instruments for achieving this objective will include:

  • — the pursuit of general economic policies aimed at controlling inflation,fostering more buoyant economic growth and improving the international competitiveness of industry
  • — direct assistance to manufacturers to become increasingly innovative, specialised and export oriented, including
  • — Export Expansion and Market Development Scheme, expenditure on which will increase from around $70 million in 1978-79 to over $100 million in 1979-80
  • — grants to encourage private research and development
  • — productivity improvement programmes
  • — recognition that tariff reductions have a role to play in the process of encouraging a more efficient manufacturing sector
  • — the Government has thus recently sent references to the Industries Assistance Commission (IAC) covering the remaining items to be considered in the tariff review programme begun in 1971
  • — it has also announced that a reference covering methods of implementing further general reductions in long-term protection will be sent to the IAC following the completion of the review
  • — individual tariff references will continue to be sent to the IAC in the normal way
  • — while recognising the efficiency and other costs associated with resisting structural change the Government believes, when economic and social disruption is threatened and employment opportunities endangered, that it is proper to be prepared to take special measures, of a recognised temporary nature, to support employment and provide time for resolution of problems or the generation of new employment opportunities
  • — while stressing that such cases are likely to be few rather than many it is also recognised that specific policies may be needed to meet the specialised problems of certain industry sectors. These currently apply to the automotive, whitegoods, textiles, clothing and footwear industries.

Domestic policies aimed at restructuring industry and achieving a more efficient export oriented economy also require the support of appropriate trade policies. Arising from and consistent with its continuing participation in the GATT and the IMF, Australia considers that a strong multilateral non-discriminatory trade and payments system provides the soundest basis for expanding world trade. The focus of Australia's recent efforts within these fora and other international trade and economic organisations such as the OECD and UNCTAD has been upon the need to establish new and sustained economic growth through a stimulation of international trade. Australia can be expected to continue to play an active role in such bodies in the post-MTN environment.

Within its overall multilateral trade approach Australia has over the years negotiated a number of bilateral trade agreements which have been important factors in its trade relations and trade development. These formal bilateral trade relations and marketing objectives have been adapted to meet changes in the direction and composition of Australia's trade and recent international trade and economic developments. While traditional markets remain important to Australia (the USA, Japan and the EEC together account for over 55% of exports) the greater diversification of its trading interests is reflected in the increasing number of formal bilateral contacts with countries in Asia and the Middle East in recent years.

With more than 80% of export earnings being derived from processed and unprocessed agricultural and mineral commodities Australia is heavily dependent on commodity exports. Australia's declared objective is to seek reasonable and predictable conditions of access to foreign markets and to obtain stable and remunerative prices. To this end, Australia has traditionally been a strong advocate of international commodity agreements and has participated in a wide range of multilateral commodity discussions and negotiations. Australia is a signatory to all major international commodity agreements and is also a member of bodies such as the Inter-governmental Council of Copper Exporting Countries (CIPEC), the International Bauxite Association (IBA) and the Association of Iron Ore Exporting Countries (APEF). Commodity trading problems have also been at the focus of bilateral dialogue with a number of Australia's important trading partners.

The development of a more export-oriented manufacturing sector will depend on gaining access to overseas markets and on competitive ability to hold such gains. This may depend in turn on allowing overseas producers greater access to Australian markets. If Australia is to take advantage of export opportunities in the rapidly developing economies of Asia, it may therefore be necessary to lower protection levels for some highly protected industries producing goods of export interest to those economies.

The Government is conscious of the interest and concern shown by developing countries, particularly those within the Asia/Pacific region, in seeking to further develop their exports to the Australian market. While the relatively small size of the market imposes limits on the export growth expectations which Asian countries could reasonably hold in Australia, the overall picture is such that their share of Australian imports is growing. Imports from ASEAN, for example, have increased from 2.4% ($97 million) in 1971-72 to 4.7% ($642 million) in 1978-79. The average annual rate of increase in total imports from ASEAN at 31% is significantly above the 19% increase from all sources.

Recent initiatives taken by Australia in September 1979 to improve trading opportunities for developing countries include a decision to accelerate the removal of British Preferences on 500 items of direct interest to developing countries; modification of Australia's System of Tariff Preferences (ASTP) to allow for some margin of preference to be accorded even where imports from developing countries are causing or threatening injury; and the granting of new or increased margins of preference on 66 items under the ASTP.

Australia recognises that it cannot stand apart from the world-wide concern about the energy situation, oil shortages and escalating oil prices. Although Australia is a net exporter of energy, it has to import about 30% of crude oil requirements and is dependent on imports of heavier grades to meet fuel oil requirements. Australia is also reliant on some imports of aviation gasoline and other products.

Australia's energy policy is aimed at ensuring secure and stable supplies of energy, reducing dependence on imported oil and, in the longer term, developing a diversified energy base which minimises dependence on scarce liquid fuels. Government decisions on pricing and tax policy to encourage the most efficient use of fuels, exploration and development and support major energy development projects have been directed towards the foregoing objectives. Toward the same ends, the Government has also increased its support for energy R & D, has promoted energy conservation and has been active in the area of international co-operation.

In the 1978 Budget the Government decided that all Australian produced crude oil would in future be priced to refineries at import parity levels and that consumers of petroleum products would pay prices based on world prices. This policy was aimed at encouraging conservation of scarce energy sources; promoting the use of existing alternatives such as natural gas, LPG and coal-based electricity; bringing new alternatives such as shale oil, coal liquefaction, ethanol and methanol closer to commercial viability; and providing incentive to increased oil exploration activity and maximised development of existing fields. There is evidence that some of these objectives are being achieved. Oil search and development has been revived and there has been a significant increase in economically recoverable reserves.

In a statement by the Prime Minister on 27 June 1979, the Government announced further decisions directed towards its energy policy objectives. These included certain assurances on pricing; conservation-directed decisions on motor spirit octane ratings; suspension of blanket approvals for exports of petroleum products; increased monitoring of the domestic oil market; a review of the adequacy of existing oil storage arrangements; further increases in energy R & D allocations; and various taxation incentives to encourage the use of oil substitutes.


Study of the nature and extent of the current trade and economic relationship between Australia and New Zealand and their dealings with the rest of the world provides a starting point for consideration of the relationship of the trans-Tasman initiative to the broad strategies and objectives outlined in the previous section.

Bilateral trade between Australia and New Zealand was valued in excess of $1 100 million in 1978-79. New Zealand's exports to Australia have increased nine-fold from $47 million in 1964-65 to $424 million in 1978-79. Australia's exports to New Zealand have grown from $158 million to $750 million over the same period.

There has been some decline in the share of Australia's total exports going to New Zealand compared with the period before NAFTA. This reflects to some extent the increasing importance of minerals in Australia's total exports. Australia has, in fact, secured a slightly greater share of the New Zealand import market in recent years.

While New Zealand is Australia's third largest export market, it represents the major market for manufactured goods. However, Australian exports of several non-resource based categories of manufactures have declined in real terms over the last three years. Such items include textiles, apparel, motor vehicles and parts, pigments, paints and varnishes, cutlery, insulated wire and cable, communications equipment, earthenware, cement, china and glassware. The trend has thus been for a greater proportion of Australia's exports to New Zealand to be made up of petroleum products and other inputs for New Zealand industry.

Imports from New Zealand in recent years have shown steady growth in value terms for all but a few items such as medicinal and pharmaceutical goods. There has been significant growth in the value of imports of food preparations, paper products, textile yarn, fabrics and made-up articles, furniture, non-electric machinery and other miscellaneous manufactures.

Some two-thirds of trans-Tasman trade is currently covered by NAFTA schedules. Until 1974-75 equal growth had occurred in Schedule A and non-Schedule A trade and the proportion of Schedule A goods in trans-Tasman trade was around 50%. In 1974-75 the percentage of Schedule A trade rose strongly to about 60% and has remained at between 60% and 70% since.

Interpretation of this increase needs to have regard for the significant influence of increased prices for petroleum products included on Schedule A and be balanced by the movement in exports outside the Schedule, e.g. motor vehicles and wheat.

Since Schedule A was initially introduced in 1966 the movement of goods into the Schedule has been slow. Of the estimated A$623m of total trade in both directions under the Schedule in 1977-78 some A$500m (about 80%) consisted of goods which were in the original schedule. From 1974 to 1977 very few goods were added.

In spite of the importance of bilateral trade and the fact that Australia and New Zealand represent each other's major market for manufactured goods, analysis of the pattern and composition of trade by the two countries reveals that, in most respects, they are each more dependent on trade with the rest of the world.

The economies of Australia and New Zealand, whilst obviously of considerable importance to each other, are not closely integrated. Rather they are broadly parallel. This can be attributed to the fact that Australia and New Zealand are both distant from the major markets of the EEC, US and Japan, exporting a broadly similar basket of commodities, being influenced in much the same ways by trends in world commodity markets, and having a broadly similar country distribution of their export markets and sources of imports.

The economic futures of both Australia and New Zealand are thus closely bound up with the health of the world economy, related developments in the international trading environment and, more importantly in many ways, their domestic policies. The export and import competing sectors of both economies can be expected to face increasing international competition in the 1980s. This, along with the shared interests of Australia and New Zealand as exporters of temperate agricultural products, the fact that only modest improvements in access have been achieved in the MTN and the trend towards increased bilateralism in international trade, has served to sharpen the focus on the trans-Tasman relationship.

Against this background, a question to be considered is how Australia's objective of developing a stronger, more specialised export-oriented manufacturing sector which is less reliant on government assistance aligns with the possibilities for closer trade and economic co-operation with New Zealand.

Increased trade between Australia and New Zealand based on a more competitive environment could provide incentive for industry restructuring and may possibly contribute to increased efficiency beneficial to both countries in the wider field of international trade. The possible benefits and costs would depend on the specific arrangements to increase trade. In any case, the scope for increased efficiency based on greater competition and market enlargement needs to be seen in perspective. A move to unite the two markets means a joint market of 17 million, growing to say 22 million by the turn of the century. In terms of potential increase in economies of scale of production and compared with the growth in the ASEAN countries, this of itself would not be sufficient to ensure that Australian and New Zealand industries could become competitive in international terms.

As will be known, potential liberalisation of trans-Tasman trade, and the instruments by which this might be achieved, directs attention towards problems arising from differing levels of tariffs and other forms of industry assistance, customs procedures, lack of harmonisation of standards, trade practices, and the nature of export incentive schemes.

Given the need for industry to become more competitive internationally and in view of the limited size of the trans-Tasman market, it follows that a closer trade and economic relationship between Australia and New Zealand cannot be based on an inward-looking approach. A cosy relationship which saw imports from efficient third country producers diverted at the expense of high cost or less efficient imports from the Tasman partner under conditions of preferred access could serve to perpetuate the structural problems which long-term industry policy is seeking to resolve. Certain options for closer co-operation may even contribute to a situation where industries which are less efficient in world terms could expand contrary to the objectives of long-term industry policy.

Relations with third countries, in particular the developing countries of East and South East Asia, and the Pacific, provide a further reason why, in terms of Australia's overall strategies and objectives, any future trade and economic relationship with New Zealand cannot afford to be inward-looking. It will be necessary to take careful account of developing countries' legitimate trading interests and development aspirations in considering options for closer trans-Tasman co-operation. This would apply especially to Papua New Guinea and other South Pacific Forum countries with whom existing special trading links are already being expanded. Such considerations should not, however, be seen as an impediment to closer trade and economic co-operation between Australia and New Zealand. Indeed, it could be claimed that by assisting each other to make positive adjustments within their economies, Australia and New Zealand will be better placed to accommodate the interests and aspirations of neighbouring developing countries.

The emphasis which the foregoing places on the industry policy implications of closer economic association between Australia and New Zealand is not to suggest that Australia views the 'trans-Tasman initiative' in a narrow sense. There are other potential areas of increased co-operation including such aspects as agriculture, raw material processing, energy, transport, technology and investment.

In agriculture, the direct effects of closer economic .co-operation on the Australian industry are for the most part likely to be small. The major rural industries in Australia and New Zealand are oriented to export markets and contribute significantly to total export receipts. For some important agricultural products there is strong competition between the two countries in third country markets.

Trade in agricultural commodities between Australia and New Zealand has been minimal and this situation is unlikely to alter significantly with closer economic integration. An important exception could be the diary industry and some vegetable producing industries where the principal question will be how to accommodate the New Zealand desire for free trade while at the same time safeguarding the Australian producer from substantial economic damage. Such issues already have the attention of government and industry.

The large degree of common interest between Australia and New Zealand in the export of agricultural commodities adds a further dimension to the possibilities for closer co-operation. Among issues which might be explored in this regard are the scope for co-operation or co-ordination of commercial policies towards third countries, both bilaterally and in multilateral fora, and in trade promotion and marketing. Such aspects of co-operation need not be confined to agricultural commodities. This is already evidenced in the Nareen Statement2 of March 1978 which listed some eleven suggested areas where closer co-operation could take place between Australia and New Zealand. That list reflected the importance which both countries attach to issues affecting agricultural trade and protectionism, adjustment policies, the emergence of NICs and regional trade and economic questions.

The increased attention which both countries are giving to energy questions and the need to consider options for future energy resource development highlight another area where co-operation between Australia and New Zealand might be extended. There is at present an informal arrangement between the two countries to co-operate in exchanging information and views on energy policies and activities, particularly those related to research and development and conservation. Emphasis is being placed on research into the production of liquid fuels from coal and natural gas, reflecting the common objectives of Australia and New Zealand to increase energy self-sufficiency and reduce reliance on imported oil, particularly in the transport sector.

The tertiary sector covers important elements of the trade and economic relationship between Australia and New Zealand and will have a significant bearing on the extent to which both countries are able to benefit from closer association. Transport is a case in point. The two governments have for some time been concerned about the cost and adequacy of trans-Tasman shipping services which, as confirmed by recent studies, are seen by industry on both sides as major factors inhibiting two-way trade. It is clear that if the potential for further development of trade between Australia and New Zealand is to be fully realised, this area will need to be kept under constant review and opportunities to secure improvements in shipping services fully explored.

It would be possible to develop and describe in greater detail the relationship of the trans-Tasman initiative to Australia's basic trade and economic strategies and objectives. However, the broad issues canvassed in this section illustrate both the importance which Australia attaches to bilateral links with New Zealand and their relevance in the light of the thought being given to options for the future direction of the Australian economy.

[NAA: A1838, 37011119/18, ANNEX 5]