186 Full Cabinet Submission by Mr E. J. Harrison, Minister for Trade and Customs

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.