80 Telegram from New Zealand High Commission in Canberra to Ministry of Foreign Affairs

Canberra, 18 January 1980

No 182. CONFIDENTIAL

A/NZ Economic Relations

The following is an attempt at a preliminary assessment of where the Australians are at on this exercise. Despite the tentative nature of all that has been said and written, it is arguable that they, and we, have come a considerable distance over the last 2-3 months.

  1. The Australians have defined their principal requirements for a new relationship clearly enough. These seem to be:
    1. To create a trading environment in which manufacturers/producers from both countries compete under approximately equal conditions-the so-called 'fair go'. This objective of equality of conditions and opportunity is very different from the 'dollar for dollar' theme of many recent NAFTA negotiations.
    2. To devise bilateral trade and economic relations which relate to Australia's general and long term plans for economic development and trade/protection policies-the 'outward looking' and 'internationally competitive' themes.
    3. To establish a freer trading environment in which the private sector is less subject to Government control and to changing Government policies, and in which it can therefore invest with greater confidence-the theme that current trade is 'over managed'.
  2. While further attempts to define a proposal, or to negotiate, will involve all these themes and others, we think it likely that (a) above, equality of opportunity, will emerge as Australia's central concern. It is almost certainly going to want equal trading conditions introduced in a purer form than does New Zealand. So the question will be, how pure?
  3. The rough shape of the answer is emerging, and it seems that the Australians are showing a fair degree of flexibility on a number of key aspects. Here are some indicators:
    1. At no stage have the Australians suggested any move towards wage equalisation. They seem to accept NZ manufacturers/producers will retain their head start with cheaper wage rates, and if that gap widens further to NZ's advantage, so be it. (We are aware that the Prime Minister virtually ruled out wage harmonisation when talking to Mr Fraser at Lusaka.) In fact they think the gap may narrow, and if it does not NZ will be bled of its skilled workers.
    2. They seem to be moving towards accepting that certain other conditions, notably taxation regimes, of an essentially domestic nature, could also be kept out of the equation (see (iv) below).
    3. They have accepted an exchange rate differential in NZ's favour. If we had a complete customs union, we would need to have some understandings about mechanisms for adjusting exchange rates but, far from suggesting some sort of parity, the Australians envisage further NZ devaluations (beyond inflation-related adjustments) to make NZ exporters more competitive. (It is perhaps worth noting here that the best study of this we have seen, NZIER paper No. 22 of 1977 shows that the exchange rate has been a primary trade creating factor over the period of NAFTA and that NZ trade has grown fastest when the difference has been widest following NZ devaluations.) The recent clarity of the Australian position on this, incidentally, negates the concerns we expressed in an earlier message.
    4. Tariffs comprise a key area and the Australians of course require comparability in a new trading relationship. A particular difficulty they focus on is the NZ manufacturers' advantage in being able to import raw and intermediate materials from third countries over very low tariffs, while Australian manufacturers must use protected domestic sources. Under a free trade area NZ would retain this advantage, and Australia would require compensating area content rules. Under a customs union, or hybrid which extended customs union principles into these areas, the Australians face real difficulties. The application of their own 'outward looking/internationally competitive' guideline clearly suggests they should lower their tariff on intermediate goods to the NZ level, and achieve equality that way. But that will be a most difficult decision and I and C officials, in particular, cannot contemplate it. They advocate the formula (now enshrined in working group II report) that the condition of a common external tariff based on the lower of the two 'would only apply to cases where an industry sector existed in both countries. Where it did not (we should adopt) a rate at that currently applying to the producing country.' However officials are not united on this and various options are being explored (see W.G. II pages 33-34 and 36-37). The main point here is that even in this critical area, the Australian position is probably negotiable.
    5. Non-tariff barriers. Australian papers assume NZ's import licensing will have to go in any FTA or CU, yet their approach is not devoid of understanding of the difficulties NZ would have over this. They see the ab0lition of licensing against Australia only as substantially redirecting NZ supply to Australian sources, and acknowledge that it may be hard to maintain licensing satisfactorily against third countries once it is removed for Australia. Some alleviating suggestions have been made (see (VIII)1 below).

      It is premature to try to define what might be negotiable in this area: we wish neither to raise any expectations of Australian softness nor spread gloom over Australian inflexibility.

    6. Export incentives and other industry assistance. This is another key area in the Australians' search for equality, but one which is at least being whittled down to size. W.G. II report focuses on the need to harmonise or eliminate export incentives, agricultural support arrangements (we will not discuss agriculture specifically in this message) and production subsidies/Government purchasing. They come close to saying that harmonisation beyond consultations may not be required for export financing arrangements, production incentives, import subsidies, tax incentives, concessional regional assistance programmes etc. On the difficult one, export incentives, they note that bilateral elimination will not work (divert trade to third countries), and acknowledge that their preferred solution to harmonisation on the basis of the least expensive scheme would be difficult for NZ.
    7. The problems of inefficient industries, adjustment assistance, safeguards etc. It is worth noting that while Australian officials at the permanent heads meeting seemed to have little time for such things, they have at least entered the vocabulary of the recent reports, and are discussed briefly.
  4. We will report separately on some other aspects between now and the next officials meeting.

[ABHS 950/Boxes1221-1226, 40/411 Part 24 Archives New Zealand/Te Whare Tohu Tuhituhinga 0 Aotearoa, Head Office, Wellington]