Wellington, 11 October 1979

M.WL3032 CONFIDENTIAL

Closer Economic Association between Australia and New Zealand

Attached is a copy of the joint paper of the New Zealand Manufacturers' Federation and the Confederation of Australian Industry which is to be presented at the 6th Quadrilateral NAFTA talks to be held in Christchurch on 15-16 October 1979. Apart from a useful summary of trans-Tasman trade statistics, the document contains a joint discussion paper on 'Issues and Options for Trans-Tasman Trade'. This appears to contain large slabs of Mr Coffey's paper, a copy of which was attached to our refmemo. We have already commented that the New Zealand Manufacturers' Federation document could not be construed as representing the official opinion of its members. Similarly, the joint paper is described as not being intended to be a policy document but rather aims to provide the basis for a discussion of policy. The writers go on to caution that 'the views given in this paper do not necessarily represent the policies of either the CAI or the NZMF, although it is to be hoped that discussion of the paper will permit some joint policy to be formulated'. The main points outlined by the paper are:

• The Australian and New Zealand trade relationship has reached a watershed situation. NAFTA no longer provides a satisfactory framework for further substantial trade developments between the two countries.
• The major constraints to expanded trade under NAFTA have been: i) the use of NAFTA as a tool to defend the industries' position in the event of threatened trade restrictions; ii) the aim of manufacturers and commitment by Government to maintain the firm size, no matter how small it may be, as opposed to maintaining profitability; iii) Governments have been extremely sensitive towards any harm likely to be caused to employers or employees.
• The prospects for further development of trade under the present NAFTA structure 'do not appear bright ... if matters continue as they are there can only be a growth of suspicion and deterioration in mutual trade advantage. Policy will continue to be determined by the lowest common denominator'.
• This dissolution of the formal economic relationship is not advocated. It is pointed out that many of the reciprocal trade concessions might not have occurred without the framework of NAFTA being in existence. There are 'compelling reasons' why the trading partners should endeavour to build on the strong bonds which already exist. There are good political and strategic reasons why this economic co-operation should continue.
• On the basis of static analysis NAFTA can be seen as having fostered trade diversion rather than trade creation. Trade creation has occurred under Schedule A but growth has been limited. 'The main thrust has been to the development of trade and complementary areas at the expense of third countries ...' However, current levels of protection in both countries, particularly New Zealand, give great potential for dynamic benefits (economies of scale, free movement of factors of production etc).
• Both Australian and New Zealand manufacturing sectors can offer each other a 'laboratory situation' [in] which they can test the international competitiveness. Industrial development polic[y] in both countries is at the crossroads.
  
  2. The joint paper then goes on to make some specific recommendations:
• There would be need for continuing political independence in decision-making on external protective tariff barriers and internal economic policies.
• A firm's profitability should be more important than its size. Quantitative Restrictions [QR] should be regarded as objectionable and it was essential that no further increases should be allowed.
• Adjustment assistance should be available for industries where injury is incurred as a result of expanding trade between the two countries.
• NAFTA as a document should provide an existing framework for achieving the common objective of freer trade. One option would be to establish an interim schedule similar to Schedule B¹ onto which transferral was compulsory and which provided for a phased program of dismantling tariffs and reducing QRs, so that after a pre-determined period of time the item could be transferred to Schedule A (re-defined as a Schedule covering items with unrestricted duty free trade). The paper notes that a careful use of area content would be needed to minimize trade deflection and trade diversion. Reductions in QRs would be applied across-the-board as a fixed percentage of the domestic market. Levels above that would need to be negotiated.
• A limited free trade area, full free trade area, customs union, common market, economic union, political union are all briefly discussed.

3. Comment: The writers of the above paper do not make any specific recommendation about which option should be chosen. As well, in contrast to Mr Coffey's paper there are no time frames specified nor are any specific recommendations made about area content. It would seem that given comments preceding the final analysis of various options that neither organization is particularly inclined to entertain a full customs union.

Nevertheless the overall tenor of the paper appears to be more progressive than the stated views of the powerful Auckland manufacturing group (see refmemo).

4. The Senior Trade Commissioner, Mr Gates, has seen a copy of this memo.

[NAA: A1838, 37011/19118, viii]

• 1Schedule B of the NAFTA was established in 1973 as an intermediate arrangement to provide for partial participation in free trade provisions 'by way of quotes or duty free schedules on the basis of partial reciprocity'. No obligation to transfer to Schedule A was implied. By 1979 the furniture industry was the only industry operating a Schedule B agreement.