Agendum 483 1 November 1940

AUSTRALIA'S COMMERCIAL RELATIONS WITH JAPAN

In view of the rapid deterioration in the relations between the
British Commonwealth and Japan, a comprehensive review of the
principal outstanding problems in connection with Australian-
Japanese commercial relations has become a matter of urgency.

The following statement refers briefly to the trend of trade
between Australia and Japan since the outbreak of war and sets out
as concisely as possible the major questions which require
attention.

Total Trade with Japan
The following table shows the trade position between Japan and
Australia over the past five years, taken from the official
Australian statistics:-

Year Imports from Exports to Balance
Japan Japan
A A
1935/36 6,200,000 17,700,000 + 11,500,000
1936/37 5,000,000 9,700,000 + 4,700,000
1937/38 6,700,000 5,900,000 -800,000
1938/39 5,100,000 4,900,000 -200,000
1939/40 (preliminary) 7,200,000 6,200,000 -1,000,000
1940/41 (two months) 1,400,000 770,000 -630,000
For the past three years Australia has had an adverse balance of
trade with Japan. The increase in the value of the trade in
1939/40 is due to the upward movement in prices, rather than to
any growth in the physical volume of the goods exchanged.

Australian Exports to Japan
Principal exports to Japan in 1938/39 and 1939/40 are given
hereunder:-

1938/39 1939/40
A A
Wool 3,804,000 3,927,000
Wheat 62,000 995,000
Zinc 229,000 28,400
Zinc Concentrates 14,890 152,900
Iron Ore 51,000 Nil
Iron and Steel Scrap 283,000 300,000
Pig Lead 7,000 161,000
Hides and Skins 148,000 118,000
Casein 2,000 36,000
Wool. The release of wool to Japan is primarily a matter for the
British Government, although the detailed arrangements are made
through the Central Wool Committee in Australia. British policy
has been to release limited quantities of wool to Japan on a
monthly basis.

Wheat. The sharp increase in exports of wheat to Japan since the
outbreak of war has been largely due to bulk sales on a credit
basis. In view of the strong representations made by the British
Government against the extension of credit to Japan it is
understood that no further sales on this basis are contemplated.

Zinc. While there is at present no surplus of zinc spelter
available for export to Japan considerable quantities of zinc
concentrates from Mount Isa have been shipped to Japan since the
outbreak of war. The British Government has not, until advices
dated 19/10/40, opposed the export of the concentrates to Japan
provided the quantities were normal and the supplies were released
on a piece-meal basis. The Japanese contracts with Mount Isa
provide for shipment at the rate of 2,000 tons per month but a
request has now been made by the Mitsubishi Co. for the grant of
an export permit for 8,800 tons in one shipment and the Company
has a ship en route from Japan to Townsville specially for the
purpose.

Iron Ore. The disappearance of this item from the trade in 1939/40
is due to the general embargo on the export of iron ore.

Iron and Steel Scrap. Although there has been considerable public
opposition to the continued export of scrap iron and steel to
Japan, the policy of the Government has been to allow the
shipments to continue on the grounds that, while there was a
surplus available in Australia, there was no justification for
refusing to ship scrap to Japan.

A recent investigation has revealed that there is still an ample
supply of scrap available for export but it is necessary to review
the whole question in the light of the present situation
(particularly since both the United States and India have taken
action to cut off supplies of scrap iron and steel to Japan) and
the cabled advices from United Kingdom Government.

Pig Lead. The present control of lead exports has been instituted
solely for price control purposes. Ample supplies are available to
meet the demand of the home market as well as to fill contracts
with the British Government and producers have been granted
licences freely for the export of their surplus production. The
Australian lead producers have agreed not to enter into further
contracts to supply Japan for the time being.

Hides and Skins. The control of exports of hides and skins is also
designed for price control purposes and ample supplies are
available for export. Export prices, which rose sharply after the
outbreak of war, have since slumped and are now below the
controlled domestic prices.

Casein. The increase in exports of casein to Japan appears to be
due to the difficulties experienced by the Japanese in obtaining
supplies from Argentina. It has since been reported that a new
barter arrangement between Japan and Argentina will enable Japan
to obtain the bulk of her casein requirements from Argentina at
lower prices than those prevailing for Australian and New Zealand
casein.

Australian Imports from Japan
The principal Japanese goods imported into Australia are textiles,
yams, raw silk, apparel, crockery and fancy goods and toys.

Increases in value were recorded in practically all these items in
1939/40 as compared with the pre-war year 1938/39.

It is difficult to assess the effect of the import licensing
restrictions on Japanese trade. Imports from Japan of goods of a
kind which are now excluded (either by total or partial
prohibitions) amounted to some A900,000 in 1938/39. On the other
hand, the cutting off of European sources of supply has diverted
trade to Japan and, in addition, Japan has received substantial
orders for cotton cloth and canvas for defence purposes outside
the normal quotas.

Furthermore, Japan has always received sympathetic treatment in
the application of the restrictions. Imports of cotton and
artificial silk piece goods have been allowed to continue without
any cut on 1938/39 values and in many other instances
restrictions, desirable on other grounds, have been withheld
because Japan was the principal or an important supplier.

In view of the course which events have taken in recent weeks it
is worth noting that an interruption of supplies from Japan would
not have any very serious effects on the Australian economy. Some
temporary dislocation would be caused by the cutting off of
supplies of Japanese textiles. Calico for bag-making and the
materials required for the fighting services would be the most
serious problems but it is considered that all essential
requirements could be met from Britain and India. Raw silk cannot
be regarded as indispensable under present circumstances (except
perhaps such quantities as may be required for parachute
manufacture) and crockery could be obtained from Britain, although
at higher prices. Japan was formerly an important supplier of
sulphur to Australia but no imports have been recorded during the
past two years. Supplies of sulphur can be obtained from U.S.A.

Japan has a virtual monopoly of the trade in camphor. The position
of Australian stocks is not definitely known-but it is not thought
that the interruption of supplies would be a particularly serious
matter.

Method of Financing Trade with Japan
The United Kingdom Government has for some months past been
engaged in negotiations with the Japanese Government for the
purpose of arranging a comprehensive payments agreement to cover
financial transactions between Japan and the sterling area.

Briefly, the proposed agreement would take the form of a special
account arrangement between the Bank of England and the Bank of
Japan and would provide that all the sterling derived by Japan
from her exports to the sterling area should be earmarked for
Japanese purchases from the sterling area. As the balance of trade
between Japan and the sterling area would normally be favourable
to Japan, provision was made in the draft agreement for the
settlement of the balance very largely by payment in gold.

Advice has now been received from the British Government (Cable of
8/10/40) [1] that Japan has made no reply to the draft proposals
submitted more than a month ago and, in view of what has happened
since the proposals were made, the British Government no longer
feels disposed to maintain the offer to settle outstanding
balances in gold. The British Government is therefore considering
informing the Japanese Government that, unless within a relatively
brief period (say a fortnight) it is prepared to accept an
arrangement by which sterling placed at the disposal of Japan can
be used only for payments within the sterling area, the
authorities in the sterling area will feel obliged to impose
unilateral restrictions on sterling payments to Japan. To be
effective it would be necessary for the proposed restrictions to
be imposed throughout the sterling area and, before reaching a
final decision, the United Kingdom Government has asked whether
the Commonwealth Government would be prepared to co-operate in the
proposed measures.

A cable has been sent to the United Kingdom Government [2]
intimating the willingness of the Commonwealth Government to co-
operate with the British authorities along the lines suggested,
but proposing that, if it becomes necessary to impose unilateral
measures, a special account in Australian currency be set up in
Australia through which would be passed current direct
transactions between Japan and Australia.

A question which needs considering here is that, if the present
trend in trade between Australia and Japan continues, Japan would
accumulate a surplus of blocked Australian pounds in the special
account and the Japanese Government might use the existence of
these blocked balances to press for the release of strategic
materials which we might not wish to allow to be exported to
Japan. One way of preventing the accumulation of such balances
would be to tighten up the present import restrictions on Japanese
goods until the trade and other payments reach an approximate
balance.

A second question relating to the financing of commercial
transactions with Japan was raised by the United Kingdom
Government in a cable dated October 13 [3]. The Japanese have for
some months past been seeking to insist on cash payment for
exports to the sterling area while still expecting to import on
credit. As, if this policy were successful, the Japanese would be
able to minimise their losses in the event of an interruption of
trade, the United Kingdom Government suggested that the Japanese
should now be required to pay cash before shipment of exports from
the sterling area to Japan, at least if they demand this for their
exports.

A reply has been sent to the United Kingdom Government [4]
pointing out that wool is already paid for in sterling on shipment
and that future sales of wheat, flour and barley will also be for
cash on shipment. Japanese concerns seeking to obtain credit for
other exports have been informed that, as Japan has shortened her
selling terms, we must ask for payment on a sight basis for our
exports. The Commonwealth Bank is keeping a close watch on the
position and will, if necessary, stiffen the present attitude
through monetary and export control. The United Kingdom Government
has been asked whether these steps fully meet its views or whether
there are any further specific measures it desires to be taken.

A third question has been raised by various proposals for 'barter'
deals put forward by a number of Japanese firms (but principally
the Mitsubishi Co.). While superficially attractive, these
proposed barter transactions are objectionable on a number of
grounds. In the first instance, if for example the Mitsubishi Co.

were granted additional import licences because they offered to
make compensating purchases of Australian goods, similar benefits
would have to be extended to other firms conducting an export
business, with the result that a serious breach would be opened in
the present import restriction scheme. It is claimed on behalf of
such barter deals that they make possible additional export trade
which would not otherwise be possible but, as other countries
which have experimented with private barter deals have found, it
is usually not possible to determine in practice whether the
exports made under barter really represent additional trade or
not.

A further objection to allowing private barter transactions is
that they would cut across the clearing system which the United
Kingdom Government is proposing to set up. If this clearing system
is established there would be nothing to be gained by such barter
deals since Japan would in any case be forced to apply the
sterling she obtained for exports to purchases from the sterling
area. The Commonwealth Government has not up to the present
encouraged traders to engage in barter transactions.

Shipping. A further outstanding problem affecting commercial
relations between Australia and Japan is the question of ships'
warrants. Ships' warrants are issued to masters of vessels whose
owners or time charterers have given undertakings to comply with
the ship navicert system established by the British Government for
purposes of contraband control and enemy exports control. The
warrants entitle the holders to access to available commercial
shipping facilities such as oil, coal, ships' stores, water, and
repair and docking facilities. When the scheme is in full
operation these facilities will be withheld entirely from vessels
which are unable to produce ships' warrants. The proposal is,
however, to give effect to the scheme gradually and the United
Kingdom Government has proposed as an interim measure that
Japanese ships not producing ships' warrants should be subjected
to a routine delay of 24 hours beyond the time when they would
have otherwise been able to sail. The delay is to be attributed to
administrative reasons.

This interim procedure has not yet been adopted by the
Commonwealth Government and as an early decision is desirable a
separate minute on this question has been prepared for the
consideration of Cabinet. [5]

Proposal of United Kingdom Government for Empire-wide adoption of
economic action against Japan in collaboration with the United
States and Netherlands East Indies
Two cables, dated October 19 and 206, have been received from the
United Kingdom Government putting forward proposals for concerted
economic action against Japan by all British and Allied countries,
in collaboration if possible with the United States.

The objects of the proposed action would be:-

(1) to prevent Japan from accumulating stocks of strategic raw
materials;

(2) to weaken Japan and make her feel the effect of ranging
herself against the democracies without compelling her into any
violent reactions.

The first of these aims is of vital importance, since one of the
most effective means of keeping Japan out of the war is to stop
her from building up stocks of strategic materials which would
enable her to withstand a blockade for a considerable period.

Experience in the case of Italy suggests that to permit any such
stocking up would simply facilitate the entry of Japan into the
war.

The United Kingdom Government states that it has considerable
evidence that the Japanese Government is buying on a large scale
for immediate shipment and the efforts being made by the
Mitsubishi Co. to obtain immediate release of an unusually large
shipment of zinc concentrates from Australia fit in with this
picture.

The steps proposed by the United Kingdom Government to check these
obvious attempts at stocking up are:-

1. To ensure that each unit of the Empire has adequate machinery
to control the export of all essential materials to Japan. (In
Australia, the Customs (Overseas Exchange) Regulations, although
designed for monetary purposes, could be used to regulate the
export of all classes of goods to Japan or any other destination.

Furthermore, special export control measures have already been
applied to a number of important commodities).

2. To secure agreement that all parts of the Empire will
henceforward treat Japan as a 'dangerous destination' for export
licensing purposes. If this were agreed in principle a list could
then be drawn up of essential goods which are urgently needed by
Japan or the Axis powers and which it is therefore specially
important to control.

3. To adopt as an immediate policy, as soon as the necessary
machinery is available, the limitation by means of export
licensing of the volume of essential exports from the Empire to
Japan to the level of normal trade except where stricter embargoes
are already in force. Similar limitations would be imposed on
exports to China and Manchuria to avoid the danger of trans-
shipment.

4. To introduce gradually stricter limitations on any commodities
of strategic importance in so far as they can be controlled.

Commodities specifically mentioned as examples are jute, wool,
manganese, lead, zinc, pig iron, ilmenite, bauxite and phosphates.

Australia is not a supplier of jute, bauxite or phosphates and
over recent years there have been no exports of manganese to
Japan. A table is attached [7] showing exports from Australia to
Japan of all the other listed commodities (and also of scrap iron,
tallow and hides and skins) during the five years immediately
preceding the war and also during 1939/40.