CANBERRA

Japanese-Australia Commercial Relations

MOST-FAVOURED-NATION TREATMENT

(A) Japan's Request under Peace Treaty
In cable 384, dated 30th April, 1952, the Australian Mission,
Tokyo, advised that a Note Verbale had been received from the
Japanese Ministry of Foreign Affairs seeking advice as to the
basis on which trading, maritime and other commercial relations
between Japan and Australia are to be placed with the coming into
force of the Peace Treaty (28th April). The Ministry wishes to be
informed regarding the extent to which Australia intends to accord
Japan national or m.f.n. treatment as provided for in Article 12
of the Peace Treaty, pending the conclusion of an agreement. The
note indicates Japan desires this advice as a prerequisite to
fulfilment of its obligations under Article 12(c), and that the
Japanese Government thinks commercial relations can be promoted if
mutual m.f.n. treatment is accorded.

2. Article 12 provides, inter alia:

'(a) Japan declares its readiness promptly to enter into
negotiations for the conclusion with each of the Allied Powers of
treaties or agreements to place their trading, maritime and other
commercial relations on a stable and friendly basis.

(b) Pending the conclusion of the relevant treaty or agreement,
Japan will, during a period of four years from the first coming
into force of the present Treaty:

(i) accord to each of the Allied Powers:

(i) most-favoured-nation treatment with respect to customs duties,
charges, restrictions and other regulations on or in connection
with the importation and exportation of goods...

(c) In respect to any matter, however, Japan shall be obliged to
accord to an Allied Power national treatment, or most-favoured-
nation treatment, only to the extent that the Allied Power
concerned accords Japan national treatment or most-favoured-nation
treatment, as the case may be, in respect of the same matter...'

3. It will be noted that Japan's obligation is to grant m.fn.,
pending conclusion of a Treaty or agreement, during a period of
four years from the commencement of the Peace Treaty, and then
only if, and to the extent that, the Allied Power is extending
m.f.n. to Japan.

4. Australia could, if she wished, reply to the Japanese note to
the effect that she is not at present according m.f.n. treatment
to Japan, and give no indication of her future intentions. It
would then remain to be seen whether Japan discriminated in favour
of other countries.

(B) Principal Issues

5. The question as to whether we should propose the mutual accord
of m.f.n. treatment with Japan has four sides:

1. The economic advantages and disadvantages of Australia granting
m.f.n. tariff treatment to Japanese imports;

2. The economic advantages, if any, of obtaining m.f.n. treatment
from Japan for Australian exports;

3. Political issues;

4. Related to these issues is the international aspect, e.g.

Japan's position in relation to the sterling area as a whole, and
in relation to GATT.

6. Aspect 1 is, of course, principally a matter for the Department
of Trade and Customs. It is understood that Customs are now
examining this aspect, but the main economic factors to be
considered would be:

(a) the effects on Australian industry and consumers of reduced
duties on Japanese imports;

(b) the effects on imports into Australia from British
preferential countries, mainly the UK;

(c) the present Australian import restrictions on Japanese goods;

(d) present by-law admission of Japanese goods;

(e) the question of whether Japan should be requested, if m.f.n.

were offered, to give compensatory concessions for reductions in
Australian duties already negotiated by Australia through GATT;

(f) whether it is too early to make an evaluation of the above
factors because of the present uncertainty regarding the future
status of Japanese industry and trade.

[matter omitted]

25. SUMMARY REGARDING AUSTRALIAN EXPORTS TO JAPAN
(1) Japan is apparently not discriminating in her tariff in favour
of any country at present, and no advantage for our exports could
therefore be gained at present by obtaining m.f.n. treatment from
Japan.

(2) The Japanese tariff does provide for discrimination through
'arrangements' and for punitive duties against goods from
countries which do not accord Japanese goods m.f.n. treatment. In
the future, therefore, there may be some advantages to be gained.

(3) The principal Australian exports to Japan are now admitted
duty free by that country. In view of the fact that these
commodities are in world short supply, are sought by Japan, and
are raw materials and foodstuffs, it would not be in Japan's
interests to impose higher duties on them. Despite this, a number
of our exports are subject to duty, some relatively high
(presumably mainly for revenue purposes), and Japan could grant
tariff concessions on them to other countries.

(4) Japan is an important market for Australian exports.

(5) The question arises whether, if it is decided in favour of
m.f.n. treatment, Japan should be called on to make compensatory
concessions for deductions already made in the Australian tariff.

(F) International Aspect
26. The United Kingdom is at present according Japan m.f.n. tariff
treatment. They have announced, however, that in order to
safeguard UK industry they would not enter any formal commitment
to grant Japan m.f.n. treatment.

27. The UK Government has also announced that they are unwilling
to accept Japanese participation in GATT (it was announced in the
Japanese press on 3rd June 1952, that Japan is pushing
preparations for applying for membership of GATT).

28. Some other countries, e.g. India, are making arrangements to
extend m.f.n. treatment to Japan.

29. In view of the serious imbalance of trade of the sterling area
with Japan (the accumulated deficit is now over S100m), it is
very desirable that any possible action be taken which might
improve this position.

30. If, therefore, the mutual accord of m.f.n. treatment between
Japan and Australia could improve Australia's relative trading
position, such action should be encouraged for this reason. (On
the other hand, of course, the grant of m.f.n. to Japanese imports
could increase the sterling deficit.)
31. The grant of m.f.n. might also assist Australian and sterling
area exports to Japan by the creation of goodwill in Japan. This
might tend to encourage the present trend in Japan to look more to
the sterling area, which attitude is resulting from Japan's
growing dollar deficit.

32. Any decision to withhold m.f.n. from Japan could cause her to
become antagonistic to the sterling area, and affect the direction
of her import trade.

The question of the desirability of an economically strong Japan
is also relevant.

(G) Conclusions
(a) Japan was Australia's second best market from 1929/30 to
1935/6, and is again rapidly approaching her pre-war importance.

The trade war which began in 1936 seriously affected our export
trade, and it is desirable to avoid such a position in the future.

(b) Because of the present Japanese tariff we would have little,
if anything, to gain by way of tariff concessions if Japan
accorded Australia m.f.n. treatment now, but there may be
advantages later should Japan discriminate in favour of other
countries.

(c) The mutual accord of m.f.n. treatment is desirable if it would
result in an increase of Australian exports to Japan, and a
reduction of the sterling area's imbalance.

(d) The question of mutual m.f.n. treatment is, however, mainly
dependent on the desirability of Australia granting m.f.n. on
Japanese goods imported into Australia.

(e) The question needs to be considered in relation to Japanese
entry into GATT. If it is decided to grant Japan m.f.n., it may be
better to do this through GATT so that compensatory concessions
could be obtained from Japan for reductions made in the Australian
tariff. In addition, Japanese membership of GATT would be some
assurance of Japan adhering to GATT principles.

(f) Should it not be considered desirable to grant m.f.n.

treatment to Japan at present, our reply to the Japanese note
could simply be that Australia is not granting m.f.n. to Japan at
present but that certain by-law concessions are extended to Japan,
and that the question of m.f.n. treatment will be considered:

(a) when it is clear how trade will develop between the two
countries; or
(b) when application is made by Japan for membership of GATT.

(However, this step should not be taken if it is not proposed to
make an agreement with Japan under GATT or if we intend to oppose
Japanese membership.