60 Minute from Santer to Gate

Canberra, 12 February 1980

Australia - New Zealand Economic Relations-The View of Australian Industry

In view of the need to have Australian industry's concurrence to new developments in Australia's economic relations with New Zealand (regular discussions between the two countries' industry associations and officials-the 'Quadrilaterals'-are an integral part of the consultative process established under NAFTA and applications for the inclusion of products on the various NAFTA schedules are channelled initially through the industry associations) it would be worthwhile to include in the Secretary's brief for his discussions at the Permanent Heads meeting a section on the attitudes of Australian industry, as expressed by their delegates to the most recent Quadrilaterals meeting.

  1. The Australian industry representatives have two major areas of complaint. Firstly, they are dissatisfied with NAFTA because it allows the establishment of safeguards for the protection of inefficient industries and does not prevent the imposition of non-tariff barriers to trade. In both cases New Zealand is the beneficiary-in the first case because most of its industries are more inefficient and they can, and have, resorted to the existence of exclusion clauses to ensure that Australian competitors are denied access to he New Zealand market; and in the second case because, in spite of the existence in NAFTA of a schedule (Schedule A) allowing for duty-free trade between the two countries, Australian exports to New Zealand are subject to an import licensing system for their products. The import licensing system is one of the major devices used by New.Zealand to protect its industry.
  2. Secondly, Australian industry representatives point to the institutional support provided to New Zealand industry by their Government, which gives some New Zealand industries a competitive edge unrelated to efficiency of production in third country markets and even in Australia. The major examples of this support are the export incentives scheme, the New Zealand scheme being five times more generous than ours, and the provision in New Zealand for duty-free entry into New Zealand of raw materials and components provided they are processed further by New Zealand industry. Australian industry must pay normal tariffs for raw materials and components. As a result a significant number of Australian companies have moved offshore to New Zealand where they can obtain their imports duty-free and then export to Australia taking advantage of the duty-free provisions of NAFTA.
  3. The trade ratio between the two countries is currently 1.4:1 which, while still being in Australia's favour, is progressively moving New Zealand's way and is much lower than would occur if there was completely free trade both ways and Australia's more efficient industries were allowed to compete openly.
  4. Australian businessmen therefore see NAFTA as being excessively biased in favour of New Zealand. At the 1978 NAFTA industry associations' meeting the matter came to a head, the Australian side arguing that in its present form NAFTA was no longer acceptable to Australian industry. At that time the New Zealand delegation, although somewhat surprised by the strong Australian feeling, seemed to accept the need for the revision of NAFTA and agreed to form a joint working party to canvass the various options available in the formation of a new economic association.
  5. The working party prepared a paper which was submitted to both delegations prior to the 1979 meeting in Christchurch last October. At the meeting the Australian delegation repeated that, as far as Australia was concerned, NAFTA was no longer viable and proposed that a customs union-a free trade area with a common external tariff-be phased in, becoming fully effective when NAFTA expired in seven years time. In private meetings some Australian delegates argued that it should be presented as a 'take it or leave it' proposal and that, if the New Zealand side refused to accept it, Australia should scrap NAFTA and both countries should go their separate ways.
  6. In reply, the New Zealand delegation, which was again taken aback by this further bout of Australian radicalism, argued that the two countries should adopt a 'NAFTA-plus' scheme whereby all goods currently not on Schedule A be entered onto Schedule B-a so. far little used schedule under NAFTA allowing for the trading of goods on an industry wide basis subject to duties and limitations (quotas, licensing etc.) as may be agreed by each country-with a definite timetable established for their move to Schedule A. The Australian side found this proposal to be completely unacceptable since it enshrined the abovementioned inequities existing under NAFTA.
  7. Both sides therefore agreed to put each other's proposals to further study by the joint working party to examine their implications for the two countries' industries. The October meeting set a deadline of February 1980 for the working party to report back to the two industry associations, so that a joint view could be submitted to the two Governments in time for the planned meeting between the Prime Ministers.
  8. The Australian approach to the working party discussions was constructive. Realising that the New Zealanders would not agree to a customs union under any current circumstances and believing that the main problems for Australian industry could be overcome if certain concessions which treated each problem in tum were made, the Australians went to the joint working party meeting (held in December 1979) prepared to back off from the customs union proposal in favour of one allowing for a free trade agreement with high area content and the harmonisation of the two export incentive schemes. Te high area content provision was felt to be necessary to ensure that, by the establishment of a large locally-sourced proportion of total duty-free inputs, the unfair competitive edge currently given to New Zealand manufacturers would be eliminated. At the same time the New Zealand objection to the common external tariff provisions of a customs union (assuming that the c.e.t. would be set at the lower Australian levels) would be overcome. There was, therefore, a mood of compromise on the Australian side.
  9. This mood was not, however, shared by the New Zealanders. Instead they regressed from the October meeting, saying in effect that there could be no agreement on the total package presented by the Australian side until each of the elements plus one other-the relative effects on each country's industry of their respective Governments' fiscal policies-was put to thorough study. The working party is now dormant and the Australian side, at least, is wondering where the negotiations will go next. It believes that this situation is what the New Zealanders want, since they are doing very well out of the status quo. Australian industry, however, if the delegates' views are any guide to industry's thinking, is not prepared to support the maintenance of the status quo. It would prefer to see NAFTA scrapped entirely and it believes that the New Zealand side should be so informed. It does not accept the New Zealand argument that, since New Zealand is Australia's largest market for manufactures, Australia needs New Zealand as much as New Zealand does Australia. It points out that, largely due to NAFTA, New Zealand buys only those Australian manufactures which it does not itself produce on a lowest world price basis and that Australian competitiveness on those terms would be little changed if NAFTA were to go. The same would not apply to New Zealand manufactured exports, however, (Australia is also New Zealand's largest market for manufactured exports) since New Zealand would otherwise be subject to the normal Australian tariff provisions.
  10. In short, the Australian industry representatives argue that the time for the tabling of imaginative proposals by Australia has passed-the New Zealanders are well aware of what we want. It is now time for Australia to put before the New Zealanders some hard economic and political facts and some worst-case scenarios which could result from their intransigence. They point out that the New Zealand manufacturers have much greater influence over government policy than do their counterparts in Australia and that the current New Zealand Government opposition (as expressed by Muldoon and Adams-Schneider) to further substantive progress towards closer economic ties results directly from the power which a relatively small clique of (generally older) businessmen have over the Government. They therefore argue that the New Zealand case needs a detailed rebuttal pointing out why each of their arguments is wrong in terms of both sides' interests and how, overall, the New Zealand economy will be better off under a customs union or even a genuine free trade agreement. They also say that the debate, at least on the New Zealand side, has generally been conducted in a vacuum, without attempting to relate to the two sides' proposals to the current world economic situation. All these trends need to be drawn together if we are to convince the New Zealanders where their best interests lie.
  11. Having been a witness to the above events, I would endorse their views.

[NAA: A1838, 370/1119/18, xv]