57 Summary of Australian Studies1

Canberra, 23 January 1980

CONFIDENTIAL

Australia- New Zealand Closer Economic Co-operation

The following summarises the main points covered by Working Groups 1, 2 and 3 in the reports which will be the basis of discussions between Australia and New Zealand officials in Wellington.2

Working Group 1: Dynamic Implications for Australia and New Zealand of Various Forms of Closer Economic Association

  1. The report's main conclusion is that any form of closer association should ensure that the benefits of more general trade liberalisation are not foregone and that costs of maintaining inefficient industries are minimised.
  2. It should be remembered that the Department of Trade and Resources attacked early drafts of the report. DTR claimed that the report's theme (Treasury line) that ANZ co-operation be seen as a catalyst towards decreasing protectionism on a general (mfn) basis did not reflect the intentions of Ministers who saw trade diversion in Australia's favour as the desired result of the exercise (Mr Scully's interpretation). The Working Group's terms of reference had stressed that an outward looking approach be followed so that assurances could be given to third countries that, in any new arrangement, it would not be the intention to raise new trade barriers against them.
  3. The report found that any form of closer association would have, relatively, a much larger impact on the NZ economy-the impact on the Australian economy and Australian policies might be quite small.
  4. The Working Group believed that a 'pure' free trade area would be likely to leave the combined size of the present protected manufacturing sectors largely unaltered. However, it could lead to a shift in the distribution of sectors between the two countries. It should be noted that this would not necessarily lead to an improved industrial structure as some industries which expanded in one country might still be internationally inefficient-the sort of trade diversification effects that Mr Scully believes Australian Ministers desire.
  5. Under a customs union (CU) the Working Group found that net economic benefits would be large for NZ but small for Australia. However, the report stressed that a customs union would mean reduced flexibility for either country to decrease tariffs against third countries. In any movement towards a common external tariff at the lowest common denominator (LCD), NZ would face greater changes as its rates of protection are generally higher.
  6. The Working Group considered that a 'hybrid' or 'adjusted' free trade area might be more achievable given the substantial differences which exist between the external regimes of the two countries, and the difficulties implied in reaching agreement on an external regime satisfactory to each country. An example of a hybrid arrangement might involve the maximum degree of alignment of tariffs with each country able to determine the pace at which it lowers external trade barriers. Given the framework of the understanding reached by permanent heads, the report argued that the aim of any CU arrangement should be an eventual common external regime at the LCD.

Working Group 2: Tariff and Non-Tariff Barriers

  1. The Working Group's report was broken down into three chapters:
    1. the industrial implications of the elimination of protective devices; (ii) techniques of tariff and non-tariff barrier elimination; and
    2. administrative elements of tariff and non-tariff barrier harmonisation.
  2. Like Working Group 1, the Group found that the economic significance of closer economic co-operation would be limited by market sizes and, therefore, likely to be greater for New Zealand. While increased trade should lead to improved resource allocation there was a risk of perverse allocative effects.
  3. The report argued that there would be a number of sensitive rural sectors. There was, therefore, a need to ensure that in a free trade situation rural industries in both countries were able to compete on an equitable basis. The report found that no significant implications were envisaged for any particular minerals or for energy. In the case of manufacturing industry a free trade situation would be likely to mean the expansion of important segments of NZ industry at the expense of their Australian counterparts. The report noted that, in general, trans-Tasman industries most sensitive to competition are also highly protected and not internationally competitive. Their expansion under a free trade area would, therefore, represent an undesirable misallocation of resources. Under a customs union, with a common external tariff where intermediate goods industries were protected, there would, the report argued, be very serious implications for important segments of NZ's finished goods industries which rely on duty free access for raw materials/intermediate goods.
  4. The Working Group suggested, therefore, that progress towards closer association might only be feasible through an approach which has regard for the problems both countries would face in a free trade area and in a customs union-an oblique reference to a 'hybrid' arrangement.
  5. The report's examination of possible techniques for elimination of trade barriers found that the adjustment requirements would appear to be greater for NZ. Significantly, the Working Group thought it might be desirable to make provision for some form of safeguard action to avoid severe disruption to industry within the objective of industry rationalisation and development.
  6. In its treatment of administrative elements, the report noted that the main GATT requirements for the formation of a customs union or free trade area are that substantially all trade between member countries must be free of duties and restrictions and that with respect to third countries' duties and restrictions shall not, on the whole, be higher or more restrictive than before the formation of the new arrangements. The report cautioned that a 'hybrid' arrangement might not meet GATT requirements and may need to be undertaken within the present NAFTA framework.
  7. Concerning anti-dumping and countervailing, the report noted that current Australian legislation accords with the GATT Anti-Dumping Code to which NZ has not acceded. Significant differences exist between current practices and both countries are assessing their attributes to the revised Code of Conduct developed in the MTN. The Working Group suggested that, to overcome the problems of interpretation in areas of customs administration, the establishment of a joint consultative body of officials could be considered.

Working Group 3: Elimination or Harmonisation of Other Forms of Assistance

  1. The Working Group examined forms of assistance other than tariffs and quantitative restrictions currently provided to industries in Australia and New Zealand with a view to assessing the likely effects of:
    1. their elimination in respect of trade between the two countries; and,
    2. their harmonisation in such a way as to provide equal treatment of the industries in each country.
  2. The Working Group was guided in its approach by the Permanent Heads' Statement of Understanding3 which noted that specific arrangements for closer economic co-operation would need to provide, inter alia, for conditions of fair competition covering, to the extent practicable, the harmonisation or elimination of quantitative controls, industry assistance measures, export incentives, customs procedures, trade practices, standards and other relevant matters impinging on the cost of trade between the two countries. This is understood as the 'fair go' principle which recognises that trade across the Tasman could be impeded or distorted due to differences in the domestic supports and other assistance measures applied by each country.
  3. The report looked at measures ranging broadly from a number of financial supports and incentives for industry to various policies and practices which can, deliberately or otherwise, impede or distort conditions of competition between industries on either side of the Tasman. The Working Group found that the impact of these measures on trans-Tasman trade varied widely and was in most cases extremely difficult to determine. The Working Group was, therefore, of the opinion that no generalised conclusion could be reached regarding other forms of assistance. Rather, each measure must be considered on a case by case basis.
  4. It also proved difficult to assess the implications of harmonising or eliminating assistance. However, the report concluded that the likely effects of the elimination or harmonisation of such measures, where considered appropriate, would differ little between the two basic options of either a full free trade area and a customs union. While steps towards harmonisation or elimination appear to be called for in the cases of export incentives, agricultural support arrangements, production subsides and government purchasing as part of any move to closer economic co-operation, beyond these three forms of assistance the Working Group did not identify any other measures which impacted on trans-Tasman trade to an extent that harmonisation or elimination seemed called for.
  5. The report noted that, as a general principle, measures which applied across-the-board were neutral in terms of their impact on resource allocation.
  6. The Working Group gave some consideration to NZ's concern that any moves to harmonise or eliminate measures between the Australian (Commonwealth) and NZ Governments might lead to inequitable treatment if the Australian State Governments are not similarly constrained from providing regional assistance and certain other measures. The report suggests, therefore, that moves towards closer co-operation might desirably be accompanied by a general undertaking by the two governments in relation to the. principle of fair competition.

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