16 Submission Ot/1 To Cabinet Committee [1] By Brown

3rd September, 1952

General Agreement on Tariffs and Trade The Seventh Session of the Contracting Parties to the General Agreement on Tariffs and Trade will commence in Geneva on 2nd October, 1952. An Advance Agenda for this Session has been circulated by the Executive Secretary and will be considered by the Ad Hoc Committee on Agenda and Intersessional Business (on which Australia is represented) at a meeting commencing on 4th September, 1952.

A pre-sessional meeting of Commonwealth representatives will be held in London between 23rd-27th September, 1952.

The guidance of Ministers is sought on the items likely to be discussed at the Seventh Session. Comments on the various items listed on the Advance Agenda are attached hereto. It will be noted that in a number of cases communications or reports are awaited and the nature of the discussion at the Session will depend on the contents of these reports.

Although Japan's accession to GATT is not listed on the Advance Agenda, Japan has requested accession and in accordance with established procedures this question will be discussed at the Seventh Session. A special paper on Japan is attached.

Attachment

SECRET

JAPAN AND GATT 1. The purpose of this submission is to obtain Ministerial direction regarding the attitude to be taken by the GATT Delegation to Japan's application to accede to GATT and to enter into tariff negotiations with Australia and 27 other contracting parties to GATT.

2. Article XII of the Japanese Peace Treaty In addition to the GATT application and in order to comply with Article XII of the Peace Treaty, Japan has sought advice from Australia regarding the extent to which Australia intends to accord national or most-favoured-nation treatment to Japan.

Article XII declares Japan's readiness to enter into negotiations with each of the Allied Powers for the conclusion of treaties or agreements to place their trading, maritime and other commercial relations on a stable and friendly basis. Pending such treaties or agreements, Japan undertakes to accord most-favoured-nation treatment with respect to customs duties and national treatment with respect to shipping-in both cases only to the extent that the Allied Power accords Japan national or most-favoured-nation treatment.

We have not replied to the Japanese Ministry of Foreign Affairs on this matter. The Australian Embassy was instructed 'merely to indicate to the Ministry of Foreign Affairs that the contents of the note had been forwarded to Canberra for the consideration of the Australian Government, and to make no comment, particularly as regards the possibility of extension of m.f.n. treatment.'

3. Article XXXV of GATT Should Australia desire that Japan be excluded from GATT, the formal action (assuming a sufficient number of countries were in favour to enable this stage to be reached) would be to vote against Japan's accession and to withhold signature of the Protocol of Accession. A two-thirds vote in favour would be required for Japan's accession (there are at present 34 contracting parties).

If Japan should accede to GATT, the Agreement or alternatively Article II, i.e. the Article implementing all the tariff concessions already negotiated under GATT, would not apply as between Australia and Japan if the two parties had not entered into tariff negotiations with each other and either party, at the time Japan became a contracting party, did not consent to such application.

4. Japan and GATT-Questions for Consideration Japan's application to accede to GATT raises the following primary questions for Australia:

(1) Whether Australia desires to exchange M.F.N. with Japan, and to have GATT applying as between Australia and Japan.

(2) Whether Australia proposes to enter into tariff negotiations with Japan.

5. Exchange of M.F.N. with Japan Present Position. At present Australia applies the general tariff to Japan. However, imports from Japan are restricted through import licensing measures practically to essential goods unobtainable from easier currency sources. The restrictions are so severe that present trade presents no index to the competitive position of Japan under more normal trading conditions. In Japan the same rates of duty apply to all countries, but the tariff provides for the application of penal rates of up to 100%. Imports are strictly controlled, but most of Australia's exports to Japan are of an essential character. Exports to Japan 1951/52 are provisionally stated at A47 1/2 million (predominantly wool).

Imports amounted in 1951/52 to A42 1/2 million under rigorous import licensing.

6. Difficulties in the Way of Application of GATT as between Australia and Japan (1) If Japan were accorded M.F.N. treatment, Australia would no longer be free, in general, to apply special rates higher than M.F.N. rates to Japanese goods. In many cases the M.F.N. rate would be 'bound' to another country. Whilst this difficulty might in part be overcome, in respect of protection of Australian industry, by action under the 'escape clause' or 'anti-dumping' provisions of GATT, we do not have the basic information on post- war Japanese trading position to know whether they would be appropriate or effective.

(2) Because under GATT preferential margins cannot be increased, raising the rate of duty (i.e. the M.F.N. rate) on a particular item imported from Japan would involve raising commensurately the B.P.T. rate on the like goods from UK, probably beyond the level at which the United Kingdom could compete in the Australian market against the Australian-made product.

(3) In tariff negotiations under GATT in 1947 and subsequently Australia has undertaken commitments, e.g. in binding rates of duty to foreign countries, which would probably not have been undertaken if Japan had full rights under GATT to those concessions. With respect to the 'escape clause', in any case where Japan had a 'substantial interest', she would be entitled, under the GATT provisions, to be consulted when a concession was being revoked, even though the concession had been negotiated with some third country.

(4) The GATT sets restraints upon Australia's freedom to impose quantitative restrictions upon imports from Japan on other than balance of payment grounds. Export restrictions could also come under scrutiny.

7. Advantages (1) Australia would be assured of M.F.N. treatment for her wool and other goods exported to Japan. There would be no question of retaliatory action by Japan. Japanese treatment of Australian exports would be subject to the common code of rules set forth in GATT. Australia would enjoy any tariff concessions made by Japan in favour of other countries on commodities exported by Australia.

(2) Japan, in her international trade practices, would be subject to the provisions of GATT and the scrutiny of the Contracting Parties as a whole. It would be open to any Contracting Party to raise a particular issue in the GATT forum.

8. International Political Considerations With the conclusion of the Peace Treaty, Japan has sought and gained admission to all UN agencies with the exception of I.C.A.O.

which she has not yet sought to join. Her admittance to GATT would be in accordance with the principle of Japan's reentry into international organisations in her own right as a sovereign nation.

Japan's participation in these international organisations is desirable with a view to her alignment with the non-Communist world and also because of the possible attitude of other countries of South and South East Asia.

It is essential that Japan be given opportunity to develop and maintain a viable economy. The pre-war factors of population pressures and limited resources still determine the nature of the Japanese economy, to which extensive foreign trade is vital.

Japan's exclusion from GATT would deprive her of the advantages to be gained from trading with the greater part of the free world on terms generally as favourable as other major trading nations and would give her strong inducements to redirect her trade towards the USSR and China. It might also lead to undesirable concentration on trade with South East Asian countries. If Japan's future trade pattern is on a global basis and not dependent on any one area, the less reason will she have to use political pressures in order to find markets for her exports.

Opposition to Japan's entry might well result in an unfavourable reaction from other South and South East Asian countries which are parties to GATT, i.e. Ceylon, India, Indonesia and Pakistan. On the economic plane at least, there has been growing recognition by the countries of South and South East Asia over recent years that Japan has an important role in the area as a supplier of capital goods and essential consumer goods such as textiles. Japan was recently admitted to the Economic Commission for Asia and the Far East, a U.N. regional organisation which the countries of South and South East Asia control.

Japan has already been admitted to the I.L.O. and I.M.F.; these agencies seek to impose on members an internationally recognised discipline in relation to the fields that they cover-labour conditions and national currencies. On the score that the GATT tends to impose a discipline in relation to international trade it is desirable that Japan participate in rather than be excluded from General Agreement on Tariffs and Trade.

9. Attitude of Other Countries It seems that the question of Japan's accession to GATT presents a problem to a number of contracting parties, including the United Kingdom, Canada, France and New Zealand. The United Kingdom Government states that the question of Japan's accession to the GATT raises quite special difficulties for Commonwealth countries because of the no-new-preference rule. Under this rule increases in M.F.N. duty rates directed against protecting domestic industries against Japanese competition would automatically make it necessary to raise the duties on similar goods from Commonwealth countries who attach value to imperial preference.

(The United Kingdom wish to learn the views of other Commonwealth countries on this aspect of the matter).

The forthcoming GATT meetings may afford Contracting Parties an opportunity to devise a solution to the problem of Japan's accession to GATT which may be acceptable to most contracting parties and to Japan.

10. Australia's Situation On trade grounds, in view of the importance of Japan as a buyer of Australian wool, grains and other products, the best possible trading relations should be maintained with Japan. With respect to imports into Australia from Japan, however, it is necessary that Australia retain the freedom necessary to ensure adequate protection for Australian industry against excessive Japanese competition. It may also be considered desirable that Australia continue to be free to take adequate steps to safeguard United Kingdom interests in the Australian market should the occasion for such measures arise.

Whatever the treatment Australia accords to imports from Japan, it is to be expected that Japan will reserve her rights to treat Australian exports to Japan similarly.

Japan is one of the most important buyers of Australian wool and her importance is increasing. In 1951/52 she bought 12% by volume of Australian greasy wool exports, Only UK, USA and France took larger quantities.

Per capita consumption of wool in Japan is still well below pre- war figures and population is rapidly increasing. Subject to general economic conditions the prospective Japanese demand for wool is strong and a rising level of purchases may be expected.

Pre-war Japan ranked second among Australia's wool customers. In the mid-thirties, however, she showed she was quite prepared in reaction to Australian policies to discriminate against Australian wool and other products. In 1935 she imported from Australia 94% of her total raw wool imports. In 1937 the figure was 38%. It is in part true that because Japan then bought more South African and New Zealand wool, other countries to the extent they were thus deprived of supplies of wool from South Africa and New Zealand, turned to Australia. Nevertheless, a marked withdrawal on the part of a normally strong bidder must weaken the market. It exposes the market, for instance, to a substantially greater shock if another important customer (e.g. UK or France) temporarily loses interest.

Japan's importance arises in part from the fact that she usually buys the 'bread and butter lines' of the Australian clip, which are also Bradford's main interest. The stiffening given to the market in these types from the presence of strong Japanese competition was particularly evident in the 1951/52 season.

Japan's reactions to any particular trade policy on the part of Australia cannot be predicted, but due regard must be paid to her importance as a market for Australian wool.

11 Suggested Approach Problems arising out of Japan's possible accession to GATT are not confined to Australia. The contracting parties may endeavour to work out arrangements under which it would be possible to apply the GATT in some modified form as between Japan and another country whereby (say in Australia's case) Australia would retain sufficient liberty of action to prevent serious prejudice to the interests of Australian industry or to interests of other Commonwealth countries enjoying preferences in the Australian markets. Whilst it is difficult to foresee what form compromise arrangements of that nature might take, the Australian representatives might usefully be authorised to consult with representatives of other Commonwealth countries and of other contracting parties as to possible compromise arrangements.

12. Tariff Negotiations with Japan The possibility of tariff negotiations with Japan cannot be fully canvassed until the conditions or limitations which might be set to Australia's obligations to Japan under GATT are known.

In the meantime it is necessary, in accordance with the terms of Article XXXV, if Australia is to reserve completely the position under GATT in respect of Japan, not to enter into tariff negotiations.

It is, therefore, suggested that this matter might be further considered when the position under the General Agreement is clearer.

13. Conclusion (1) At this stage it appears that if Australia opposed Japan's accession to GATT, accession (on some terms or other) would nevertheless take place. On this assumption, the alternatives for Australia would be either to invoke Article XXXV and thus avoid for the present the application of GATT as between Australia and Japan, even though Japan were a party to GATT, or to seek along with similarly disposed Commonwealth countries and other contracting parties, a compromise solution under which the GATT would apply, but only subject to certain qualifications which would safeguard Australia's position in certain directions.

(2) It is, therefore, submitted for Ministers' consideration that the Australian delegation be authorised to proceed as set out in paragraph 11 above, reporting back from London developments in the pre-GATT discussions among Commonwealth countries.

(3) With respect to tariff negotiations:

(a) Australia should not oppose Japan entering into tariff negotiations with other contracting parties.

(b) No action should be taken which would limit Australia's freedom to invoke Article XXXV.

(c) The question of Australia entering into negotiations with Japan should be considered later in the light of developments. [2]

1. The Cabinet Committee on Overseas Commercial Relations.

2. The Cabinet Committee expressed 'serious misgivings concerning the accession of Japan to GATT, and particularly to the grant of most-favoured-nation treatment by Australia'. It authorised the Australian Delegation, led by J.A. Tonkin, to join in discussions as suggested in paragraph I 1, instructing it to report back as suggested in paragraph 13(2) and to do nothing limiting Australia's freedom to invoke Article XXXV. In the event, no decision was made at the September meeting. The matter was referred to the GATT Intersessional Committee, of which Australia was a member and which was due to meet in Geneva on 2 February, 1953.

[AA : A4933/XMI, VOLUME 27)