UKNA: FCO 24/1636

British High Commission, Canberra, 12 September 1973

Confidential

The Australian Government and Defence

The first of my three despatches¹ of 3, 5 and 6 April about the new Australian Labour Party Government described the first phase in the degringolade which has occurred here–since they were elected–in matters of defence. I continued the story in my despatch of 4 June about the prospects for Mr. Barnard's visit to London. Further decisions have now been announced both in the Budget presented to Parliament on 21 August, and in the major statement which Mr. Barnard made to Parliament on 22 August. (The text has been sent to the Department.)

2. At 10.4 per cent of total Government expenditure, this year's defence vote shows an increase of $A32 1/2 million over last year. Given the inflation which has been going on in Australia this is in fact a reduction. Most of the extra money is accounted for by manpower costs. The proportion of the vote devoted to defence equipment has declined by 5 per cent. The outlay of $1,266 million represents about 2.9 per cent of GNP. It thus falls short of the 3.2 per cent pledged in Mr. Whitlam's pre-election policy statement.

3. This reduction in real terms of the defence vote has been accompanied by the postponement of a number of decisions about equipment, including the proposed Australian-built Light Destroyer (DDL), the new tactical fighter (which will not now be required until the late 70s) and the maritime reconnaissance aircraft which is needed to replace the ageing Neptune. Some older naval vessels (the Fleet transport HMAS Sydney, and the training ship Anzac) are to be paid off. One of the four Mirage squadrons is to be disbanded, with a consequent reduction in the RAAF's flying training effort. As a corollary, naval manpower will be reduced by 1,100, RAAF manpower by 1,200 and civilian manpower in the Defence group of departments by 4,500 (9 per cent) during 1973/74. The army's strength will be kept at 31,000. It will have to wait still longer for decisions on its proposed purchases of new tanks, guns and surface-to-air missiles. Some stock-holdings of munitions will be run down. The Cockburn Sound Naval Support Facility Project in Western Australia has been delayed. Although Mr. Barnard did not say so in Parliament, the fleet air arm has been told that the size of its flying squadrons is to be cut by 25 per cent; the navy is to cut its fuel allowance by 20 per cent; and army units are to minimise training away from the base areas. My Defence Adviser has reported in detail on these matters to the Ministry of Defence.

4. This reappraisal of the Australian force structure will lead to a contraction of the workload in the defence industrial base. There will be retrenchment in naval dockyards and supply factories, and production capabilities will be generally reduced. To satisfy the unions involved, it is likely that contraction will be achieved by normal wastage.

5. Mr. Barnard has presented all these cutbacks as sensible and realistic, given his reassessment of the strategic prospect. In a recent talk to the Service officers he said that there was no foreseeable military threat to Australia for the next 15 years. The same theme appears in his parliamentary speeches. China is seen as being preoccupied with her relations with the Soviet Union and seeking rapprochement with the US and Japan. The USSR is thought not to be very active in Australia's part of the world. Friendly relations and what are said to be substantial common interests with Indonesia are stressed; and priority, for example in training, is given to defence relations with that country. The nature of the future defence relationship with Papua New Guinea is under study, but the country is to be left to look after its own internal security after independence. Against this background the Government foresees no deterioration in the strategic environment that would involve Australian forces. On the contrary, after the defence expansion during the Viet-Nam war, it is considered quite safe to prune some activities. Mr. Barnard sees the increasing interchangeability of civilian and military skills as a reason for entrusting more military administration and policy-making to civil servants. The Government hopes to soften the blow to the Services by improvements in pay and pensions. By stressing the importance of training and exercises in the region they hope to offer some recompense for the loss of overseas service.

6. All this is in large part a rationalisation of policies already decided on, for reasons unconnected with defence needs as such. The cuts in defence spending spring fundamentally from the priority which the Government as a whole affords to its social welfare programme. The deep and long-standing ALP opposition to the Australian involvement in the Viet-Nam war, the Labour Party's support for conscription-evaders, before it came to government and abolished national service and the streak of pacifism which runs through the Party's thinking are also important underlying factors.

7. How do the decisions affect Australia's capability? It is doubtful if a viable Australian Force could now be put together and transported if, for example, the 'external threat' clauses of the Five-Power Agreement were to be invoked. The paying-off of HMAS Sydney, and the decision not to proceed for the time being with the construction of a Fast Combat Support Ship, capable of underway replenishment of the Fleet, reflect the Government's determination to achieve what Sir Arthur Tange, the Secretary of the Department of Defence, recently referred to as 'an end to overseas excursions' by the armed forces. In the Indian Ocean the navy's capability to do much more than see off intruding fisherman has not been enhanced. If our reinforcement plans for our Pacific Dependent Territories ever had to be invoked, Australian co-operation could no longer be taken for granted, given Mr. Whitlam's strong anti-colonial stance.

8. Indeed, although he talks about Labour's policy of ensuring 'a strong and valid defence capability', the functions that Mr. Barnard seems to expect the forces to perform are strictly limited. In Opposition he attacked the Coalition's ideas of 'forward defence' and emphasised the defence of continental Australia. In his statement to the Parliament on 22 August, he said the Government would be prepared to consider the use of Australian Forces abroad in support of UN peace-keeping operations, 'if this sort of situation arose and we could make a useful contribution'. He also referred to the Services' role in search and rescue operations and in possible civil emergencies. This circumscribed view sees the Australian defence forces' main function as being to ensure Australia's territorial security through the surveillance and patrol of the environs of the Australian Continent. The navy is there, in Mr. Bernard's words, to 'deter to a great extent any minor harassment and interference with Australian sovereign control'.

9. Sir Arthur Tange has played the key role in co-ordinating the strategic review which led to the cutbacks. I think he has got some personal satisfaction from the further increase in his own power to which the process has led, and from the general increase in the power of the civilians in the Defence Departments at the expense of the military. (Many of the military would dearly like to see Sir Arthur Tange unseated.) The Government intends to combine the Defence group of departments into a single department (but will face well-entrenched resistance). It is also examining a proposal for a Tri-Service Academy, although there is no intention of going as far as the Canadians in amalgamation into a single Service. There is a possibility that Mr. Barnard may be moved to another Ministerial post (possibly Foreign Affairs, which he would like). If this happens Sir Arthur Tange's personal influence will be still further enhanced unless the new Defence Minister is a singularly determined man.

10. The new Australian defence attitude sits ill with the new Australian foreign policy. Mr. Whitlam constantly stresses Australia's new-found independence. But the Australia which, as he said in Washington last month is 'not just a large and empty space on the map, but a middle power with substantial resources', is in the process of imposing stringent limitations on its capacity to act either independently, or in concert with its friends in the region, or in the context of its major mutual defence arrangement, ANZUS. Although Mr. Whitlam has said that Australia will not withdraw from SEATO, his Government withdrew precipitately from SEATO Exercise PX 49 and will have no further part to play in military planning.

11. It is true that even under the Liberal/Country Party Coalition Government, defence against large-scale invasion would hardly have been possible given Australia's limited resources Mr. Barnard is fond of asserting that during the period of Confrontation with Indonesia (1963–66) the proportion of GNP spent on defence was only 2.6 per cent. Indeed, during the low-spending phases of Sir Robert Menzies' Premiership, it was below that now budgeted for by Mr. Barnard (2. 7 percent in 1962/63. This compared with 2.1 per cent in 1949, the end of the Labour Party's previous period in office). It is moreover arguable that some manpower cuts, especially of civilians, were overdue; and that it makes sense at this time not to buy expensive new equipment (such as tanks) whose role is primarily defensive. The previous Coalition Government would probably not have allocated as much of the Budget as it did to defence but for the prodding of the stridently anti-Communist Democratic Labour Party.

12. But what is disastrously absent from the Labour Party's strategic analysis is first the determination to show a capacity to support allies if necessary (which was the theme of the previous Government's thinking), and second, any recognition of either the speed with which the situation can change or the difference between manifest and potential threats, which is a fundamental principle of the Guam Doctrine. None of the wars in which Australia has been involved since the end of World War II was predictable 15 years ahead. Given the long lead-time necessary for defence procurement and to build up skills (or, as some press comment has put it, to beat ploughshares back into swords again) there has been no lack of critics of the Government's reluctance to pay the adequate premium.

13. On the procurement side, Australia has been a fairly barren field for British defence-exporting industry ever since the time of Confrontation. The construction of two Oberon class submarines at Scott-Lithgow's yard will proceed, and the order for Sea King helicopters from Westlands has been confirmed, although my Defence Adviser has heard that consideration is being given to a small cut in the size of this order. Although the DOL project is deferred, the Government has accepted the need for the navy to acquire new destroyers to maintain its strength in the 1980s. There may be an opportunity here for British yards, if suitable 'offsets' can be offered, although competition, particularly from American and Dutch suppliers, will be strong. When speaking about replacing the Neptune maritime reconnaissance aircraft, Mr. Barnard did not mention its anti-submarine role. Hawker Siddeley, in pressing the case for the Nimrod, will no doubt note his emphasis on surface surveillance. There are signs that he may be thinking in terms of a seagoing Coastguard under civil control. If this comes about there may be opportunities for British yards to supply patrol vessels, or at least, the designs for manufacture in Australia.

14. Defence and everyone connected with it are clearly destined henceforward to receive a low priority. There has already been a discernible drop in the armed forces' spirit. Some weakening must be looked for in the persuasiveness of Australia's voice in foreign affairs, especially in her region (although this is the opposite of what Mr. Whitlam intends). Further reductions in defence expenditure can be expected. The main limitation on these will be the need to avoid giving too much ammunition to the Opposition. But major Parties, for the moment, seem to judge that the threat of inflation is more important electorally than the maintenance of defence capability. The Opposition seems unwilling to speak up and, even if it did, would not change matters. I must therefore reluctantly conclude that the effectiveness of Australia as a partner in the field of defence is likely to be impaired for some time to come.²

15. I am sending copies of this despatch to Her Majesty's Representatives in Moscow, Washington, Singapore, Kuala Lumpur, Bangkok, Jakarta, Peking and Tokyo, to the British High Commissioner in Wellington and, on a personal basis, to the Governor of Hong Kong.

Part 2 Economic relations:
Australia, Britain and the
European Economic Community,
1960–73

The Macmillan Government's turn to Europe

Economic relations between Britain and Australia during the 1960s and early 1970s were dominated by the crucial issue of British entry into the European Economic Community. Britain made three separate applications for membership of the EEC. The first two attempts, under Harold Macmillan in 1961–63 and Harold Wilson in 1967, were rebuffed by the French President Charles de Gaulle, but only after protracted diplomatic probing and (in the case of the Macmillan bid) drawn out negotiations in Brussels. It was only with the third attempt, under Edward Heath in 1970–73, that Britain finally completed successful negotiations for membership of the Community, or 'Common Market' as it was commonly known at the time.

The significance of these events for Anglo-Australian relations was nothing short of profound. Prior to the 1960s, Australia's trade ties to Britain had been based on a set of mutual expectations and obligations deriving from Australia's historical role as a source of raw materials for British industry. The concept of 'imperial preference', formulated at the Ottawa Conference in 1932, provided for a complex network of mutual tariff preferences between Britain and Commonwealth countries including Australia. This privileged access to one of the world's most important markets for food and raw materials became a mainstay of the Australian economy, accounting for nearly half of Australia's export earnings through the 1930s and 1940s, and securing the viability of a host of Australian primary industries, particularly the production of wheat, sugar, dairy goods and canned fruits (which in turn secured the livelihoods of entire communities in rural Australia). In return, Australia granted tariff preferences to British manufactured goods, which were widely regarded as the epitome of quality.

In the 1950s the pattern of trade began to change, with both Britain and Australia diversifying and taking a decreasing percentage of each other's goods. But the volume of trade was still significant, and the underlying assumptions about mutual preference remained largely intact–and were reaffirmed when the UK–Australia Trade Agreement was renegotiated in 1956.

At the same time, profound changes were taking place in the organisation of economic and commercial relations between the nation states of Western Europe. After successfully establishing a common market for European coal and steel in 19 51, the founding members of the European Coal and Steel Community (France, West Germany, Italy, the Netherlands, Belgium and Luxembourg–known collectively as 'the Six') set out to widen their cooperation to all spheres of economic activity. The fundamental idea behind the proposed European Economic Community was to establish a European customs union, with trade barriers between members progressively dismantled and replaced by a 'common external tariff' applying to goods from all non-member states. The idea was first seriously broached at a conference of European foreign ministers at Messina in 1955, and negotiations in 1956 culminated in the signature of the Treaty of Rome on 25 March 1957. The treaty allowed not only for the free movement of goods and people between member states but also for the progressive harmonisation of social policies with a view to an eventual political union.

Although Britain was originally invited to take part in this process, there were few in Britain who actively advocated membership of the new European grouping. The obstacles to British membership were obvious–the Commonwealth trade preference system was incompatible with the mutual tariff preferences of the EEC states, and the British economy was founded on cheap food and raw materials from overseas, in contrast to the tradition of agricultural protectionism in Europe. Above all, the pooling of sovereignty that was inherent in the idea of a common market was entirely at odds with the instincts and outlook of a nation with worldwide commitments and obligations. In the early 1950s, British Foreign Secretary Ernest Bevin summed up prevailing attitudes to European integration when he declared that Britain was 'not just another European country'.

With the successful completion of the EEC negotiations in 1956, however, the British Government of Anthony Eden became concerned about the prospect of Britain's exclusion from a dynamic new economic grouping, and sought ways of securing some of the commercial benefits of the new Europe without sacrificing sovereignty or Commonwealth trade preferences. The British put forward a proposal for an OEEC-wide¹ Free Trade Area (FTA) in Europe, in which members would dismantle mutual trade barriers but without erecting a system of common tariffs. The idea was for the EEC to join the FTA en bloc, which would have provided Britain with free access to an expanding European market without surrendering control over trade relations with non-European countries (with the Commonwealth particularly, but not exclusively, in mind). And to remove any tinge of the unpalatable features of the EEC, the British insisted that agriculture should be excluded from the FTA. Negotiations were conducted in Paris in 1957 and 1958, but ultimately foundered on Britain's refusal to make agricultural concessions in return for access to European markets in industrial goods. With the return to power of General de Gaulle in France in June 1958, French support for the plan was withdrawn and the negotiations collapsed.

In the wake of this breakdown, a smaller group of OEEC members, led by Britain, pressed ahead with the Free Trade Area concept, forming the smaller European Free Trade Association (EFTA) in 1960. The aim of this grouping (known as 'the Seven' after the seven founding members: Britain, Denmark, Norway, Sweden, Switzerland, Austria and Portugal) was to work collectively for a wider economic accommodation with the EEC–a strategy that was flawed from the outset due to the reluctance of the EEC Six to water down their Common Market.

By 1960, then, Europe was divided into two regional trading blocs, with little prospect that the rift might be healed. Moreover, General de Gaulle and Germany's Chancellor Adenauer, from their first meeting on 14 September 1958 at Colombey-les-deux-Eglises, began working towards a shared goal of Franco-German rapprochement, with the EEC at the core of a resurgent Europe. Impressive European economic growth, and the increasing US support for the ideal of European unity, contributed to a markedly different political landscape than that which prevailed in 1955 when Britain had declined to become a part of the new Europe.

It was with these concerns in mind that, in 1960, the Macmillan Government began to consider seriously the idea of joining the EEC (Documents 121–23). While the obstacles to EEC membership remained formidable, these were increasingly examined in the light of the consequences if Britain were to remain excluded from Europe, economically and politically. In July 1960 Macmillan brought a number of keen advocates of EEC membership into key ministerial posts–Duncan Sandys as Secretary of State for Commonwealth Relations and Christopher Soames as Minister for Agriculture–and appointed the untried Edward Heath as Lord Privy Seal with special responsibilities for Europe. By the spring of 1961, Heath and his officials were actively engaged in diplomatic probings with European governments with a view to finding a basis for negotiating British membership of the EEC. The major obstacle remained the French attitude, and in particular General de Gaulle's reluctance to share the leadership of the Six with his British rivals.

The implications of these developments for Australia were obvious. The Menzies Government–and particularly the junior Coalition partner, the Country Party, led by Trade Minister Jack McEwen–had voiced early concerns about the trend towards trade protectionism among the Six, and could hardly conceive that Britain would exchange the tradition of trade preferences in the Commonwealth for new benefits in a united Europe. But in February 1961 McEwen warned the Cabinet that this seemed precisely the direction of British thinking (Document 124). He warned of the dire consequences for the Australian economy–in absolute terms and through the potentially devastating impact on particular industries and communities–should Britain move to join the EEC without securing 'derogations' from the Treaty of Rome to protect Australia's position in the British market. And it was precisely these kinds of special arrangements that the French seemed unwilling to countenance (Document 143).

This first section of documents traces the period from the initial inklings of a British turn towards Europe in 1960 to the Macmillan Government's announcement of the decision to apply for EEC membership in July 1961. The documents highlight the extent of the conflict of interest that had emerged between Britain and Australia over the EEC issue, and the early reactions of the Australian Government to the prospect of rethinking 'our whole fabric of international ties' (Document 144). Particularly significant here are British attempts to secure Australian acquiescence in opening membership negotiations with the Six, and the Australian resistance to these overtures. The circumstances surrounding the visit to Canberra of Duncan Sandys in July 1961 underlined the extent to which self-interest counted for more than sentiment in the ever-changing Anglo-Australian relationship.

In selecting these documents, with only a few exceptions, no attempt has been made to draw on the vast documentary record of Britain's dealings with the EEC member states. Rather the emphasis is on Australia's involvement in the EEC enlargement process, and particularly the bilateral Anglo–Australian difficulties that emerged. Much of the necessary detail of Britain's negotiations with the Six appears, nonetheless, second-hand in the British-Australian official record.

1 In the first of these despatches, James assessed Whitlam's first four months in office. The Prime Minister was said to possess 'considerable intelligence and ability', and to be 'witty, articulate, and resourceful and a master of thinking on his own feet'. But he was not a 'warm, nor particularly frank or open man'. He was 'better at organising words than winning the hearts of people'. The High Commissioner also offered an assessment of certain aspects of defence policy under Whitlam. The omens were not favourable. On the maintenance of Australian logistic support within the ANZAC force, and the future of the US base at North West Cape, Whitlam and Barnard appeared 'scared of the extreme left within their own ranks'. Equally, however, 'Australia–and especially the younger generation of Australians–no longer feel threatened. They are a down-to-earth, materialistic people whose first duty, as they see it in 1973, is to develop still further the potential wealth of their own island-continent. Most Australians have not yet settled down to the idea that they should station soldiers abroad, in peacetime' (UKNA: FCO 32/948, James to Douglas–Home, 3 April 1973).
The second despatch assessed Whitlam's foreign policy, opening with the remark that the Prime Minister enjoyed being his own Minister for Foreign Affairs. It continued: 'Mr. Whitlam inherited the foreign affairs portfolio at a time when Australia is seeking to identify a national purpose for itself and when, as a result, there is much continuing debate (led by academics) about the future choice of its international goals. For many years much of Australia's foreign policy was derivative, being tied to the attitudes of the country's great and powerful friends, first Britain and later the U.S. Whereas Sir Robert Menzies was delighted in being British to the boot-heels, Mr Holt was prepared to go all the way with LBJ. Mr Whitlam wishes to develop clearly identifiable Australian policies and attitudes. 'In his first press conference as Prime Minister he spoke of adopting 'a more independent Australian stance in international affairs. An Australia which will be less military oriented and not open to suggestions of racism; and [an] Australia which will enjoy growing standing as a distinct, tolerant, co-operative and well-regarded nation, not only in the Asia and Pacific region but in the world at large'. The Governor-General, Sir Paul Hasluck, made much the same point in different words to Lord Carrington in February 1973, saying that he regarded the new government as a much more nationalist group of men than had governed Australia for many years past.
James then commented on Australia's relations with the US. A 'distinct chill' was said to emanate from the White House. Australia was no longer a trusted ally and Whitlam's Government was on probation. With the communist powers Australia had moved to improve relations, building on Whitlam's 1971 visit to China, by since recognising the People's Republic of China, the German Democratic Republic and North Vietnam. On the Rhodesian question, Australia no longer supported the UK at the UN and voted with the Afro-Asian group. James thought local reactions in Southeast Asia towards Whitlam's proposal for a non-military regional grouping had been cool. On colonial questions the new government seemed determined to hasten the date for Papua New Guinea's independence. Relations with France were frosty because of French nuclear tests at Mururoa Atoll. On relations with the UK, James suspected that Whitlam and some of his colleagues regarded Britain as 'some sort of elderly omni-tolerant aunt'. 'They might regard us as offering a tempting target on which they can score points at small cost to improve their standing elsewhere' Sir Keith Waller, Permanent Secretary at DFA, had advised James and Carrington that in dealing with Whitlam, Britain should exercise patience but not 'flinch' if Australian actions were deemed unfriendly. The High Commissioner thought this sound advice. The UK would have to 'get used to finding Australia less readily at our side internationally' but Britain should still explain to Whitlam 'the facts of international life'. The Prime Minister was too fond of striking poses and making gestures. He seemed to feel 'that world affairs are a stage on which all he has to do is to write a fat part for himself'. On the evidence to date, 'an uncomfortably large number of the foreign policy attitudes so far struck by the new Government lack realism and could lead Australia into unforeseen and unintended trouble' (UKNA: FCO 32/948, James to Douglas-Home, 5 April 1973).

2 K.M. Wilford, Deputy Under-Secretary of State at the Foreign and Commonwealth Office, minuted on 4 October 1973: 'This does indeed make depressing reading. Clearly there are some matters in which we can no longer count on Australian help (reinforcement of colonial situations) and others where the Australian capability is likely to dwindle to such an extent that the Aust. Forces will no longer be able to do anything other than defend their own coastline. Aerial supervision of the Indian Ocean may be one such field. The part played by Sir A. Tange is also discouraging. Time was when I think the MoD would have regarded his presence as a "plus". Now I have my doubts.' In an undated minute, Anthony Royle, Parliamentary Under-Secretary of State at the Foreign and Commonwealth Office, commented: 'Whitlam's Australia is clearly a bad ally and a bad friend & may well end up by becoming a grave liability. I agree that this is gloomy stuff' (UKNA: FCO 24/1637).

1 The Organisation for European Economic Cooperation was founded on 16 April 1948, in order to establish a permanent organisation to work on post-war reconstruction and supervise the distribution of Marshall aid. The original members were Austria, Belgium, Denmark, France, Greece, Iceland, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Sweden, Switzerland, Turkey, United Kingdom and West Germany. In September 1961 it was superseded by a worldwide body, the Organisation for Economic Co-operation and Development (OECD).