85 Submission to Cabinet Economic Committee

Wellington, 29 February 1980

No E (80) 31. SECRET

Australia/New Zealand Economic Relations

Background

  1. On 19 February the Committee considered a report(1) on Australia/New Zealand economic relations. The Committee noted the stage reached in various studies, and directed officials to continue discussions with Australia, with a view to developing and defining the elements that might be considered in a balanced and pragmatic approach to a new relationship based on an adjusted free trade area, giving due weight to New Zealand's broader economic policies (E (80) 23 refers).
  2. The three papers attached emerged from these discussions and are:
    1. report of Australia/New Zealand Permanent Heads(2) summarising the conclusions reached on the main questions;
    2. a draft declaration by the two Prime Ministers(3) which, if accepted and refined, could provide a framework for continuing review and development of Australia/New Zealand economic relationships. This draft has been reviewed by Permanent Heads;
    3. a draft communique which outlines a possible presentation by the two Prime Ministers of the course outlined. This draft has had only cursory discussions so far.

The Present Position

  1. Discussions were held in Canberra on 24-25 February at Permanent Head level and the attached report summarises the position in specific areas. The broad outcome of the talks was that Permanent Heads agreed, after reviewing the reports of the working parties on the implications, that an appropriately structured closer economic relationship would provide economic and social benefits to both countries. An arrangement would obviously have to provide balance and advantages to both sides. A more definitive assessment of the prospects for achieving a balanced agreement can only take place as a detailed structure is developed, but at this stage the outlook appears favourable.
  2. Discussions were held in Canberra on 24-25 February at Permanent Head level and the attached report summarises the position in specific areas. The broad outcome of the talks was that Permanent Heads agreed, after reviewing the reports of the working parties on the implications, that an appropriately structured closer economic relationship would provide economic and social benefits to both countries. An arrangement would obviously have to provide balance and advantages to both sides. A more definitive assessment of the prospects for achieving a balanced agreement can only take place as a detailed structure is developed, but at this stage the outlook appears favourable.

Tariffs

  1. It was agreed that further detailed studies were needed to establish additional areas where it would be possible to move quickly to free trade and where there would be problems. Permanent Heads agreed that six years should be the limit for duty phase-out except in problem areas. The problem category could include particularly sensitive industries, and areas where an industry study was currently under way by either Government or advisory bodies. It was agreed that this should be as small as possible. The general approach would be to aim for the smallest possible list of ultimate exceptions to free trade. In difficult areas the joint approach or the phasing elements should be used to ease transition.
  2. There could be some difficult negotiations on inclusions in the sensitive list of industry areas. In some cases, e.g. motor vehicles and steel, New Zealand's 'sensitive' areas could be those of most trade interest to Australia and vice versa.

Import Licensing

  1. The initial Australian position on import licensing was that it should be abolished for Australia, even if such abolition was phased in over quite a long period. The proposal finally agreed in the report was put forward by Australia after New Zealand rejection of such an approach. The revised proposition obviously aims at establishing 'reasonable' initial levels of access with guaranteed increases in real terms. The ultimate effect would in fact be exemption (licence on demand) for Australia in areas of interest to it, but this would take many years. The time that this would take would however depend on the size of the initial allocation in relation to the New Zealand market size.
  2. Further detailed work is necessary in this area and it is likely that arrangements on access for Australia will be the major element for negotiation in any final package. Access for Australia leading ultimately to exemption is a major negotiating concession and New Zealand will have to use this as a key element in obtaining a final balanced package.

Agricolture

  1. Australian Permanent Heads indicated that they saw all agricultural products being included. At the same time it was clear that dairying was an area of great sensitivity and Australia saw a need to ensure that New Zealand did not have 'unfair' advantages. The further studies mentioned in the report are aimed at identifying whether there are real or imagined problems, and examining possible ways of harmonising or equalising the impact. The timing of those studies and the time limit on exchanging exemption lists should ensure that we have a clearer idea of the Australian position on agriculture in three months.

Intermediate Goods

  1. Australia's concern about its intermediate goods industry remains strong. As indicated in earlier reports this is the central reason for Australia's preference for a customs union and Australia kept referring to this during the discussions as though it were some final objective. New Zealand officials indicated that New Zealand did not want to accept the disadvantages of having to use higher priced Australian inputs, either now or in the future. The matter was left on the basis of Australia studying the problem in greater depth and trying to establish the real significance of the problem. This is an advance, from the New Zealand point of view, but it will be necessary to watch the possible impact of any moves Australia may later seek, on New Zealand exports and the balance of the overall arrangement.

Export Incentives

  1. It was accepted that both sides have incentive schemes and commitments to maintain these for a time. Australia would prefer some form of harmonisation; possibly a new scheme to be applied by both countries to trans-Tasman trade. The New Zealand side made it clear that Government had announced a scheme operating to a specified date and that any change before that date would present us with great difficulty. Further work is to be done in this area.

Other Elements

  1. Other areas which would be relevant in the context of negotiating a balanced arrangement are tariff preferences, Government purchasing and financial issues. It was agreed that the Agreement on Tariffs and Tariff Preferences would be extended for one year beyond its 1980 expiry date. Significant in a general economic sense are tourism and energy. These, and other more administrative aspects, are mentioned in the report. Most of them need further detailed investigation and exploration.

Conclusion

  1. In general the outcome of the discussions was favourable to New Zealand. Australian officials appeared to be keen to find a way forward taking account of New Zealand's position. They were also very well aware of the greater implications for New Zealand of a closer economic relationship. Overall, as evidenced by the rapid change in their position on import licensing, the Australian side appeared to be conciliatory and willing to 'downplay' some of the areas of concern they had identified earlier, e.g. the 'fair go' and intermediate goods. The final position however obviously depends on further detailed work and negotiation in these areas.
  2. At this stage it is necessary to assess whether there is sufficient scope for an arrangement beneficial to New Zealand, and whether Prime Ministers can endorse an approach to a new relationship at the meeting proposed for 21 March 1980. In the view of the Permanent Heads delegation there are potential benefits to New Zealand and more detailed investigation and negotiation should proceed in order to establish a total package with balance and advantage to both sides.

Reccomendation

  1. It is recommended that the Committee:
    1. note the attached report of Australia/New Zealand Permanent Heads on their meeting in Canberra on 25-26 February 1980;
    2. agree in principle that a general declaration would provide an appropriate framework in which to proceed with the more detailed work and negotiations mentioned in this report;
    3. note the draft texts of the declaration and communique attached to this report;
    4. agree that the meeting of Australian and New Zealand Prime Ministers scheduled to take place on 21 March 1980 should proceed as planned;
    5. agree that officials proceed with preparations for this meeting.

[matter omitted](4)

[ABHS 950/Boxes1221-1226, 40/4/1 Part 25 Archives New Zealand/Te Whare Tohu Tuhituhinga 0 Aotearoa, Head Office, Wellington]