191 Note From Australian Delegation [1] To Japanese Embassy

15th February, 1957

CANBERRA

Australian Reply to Japanese Note of 8 February 1957 The Australian delegation has carefully considered the statement presented by the Japanese Ambassador on 8th February, 1957, recording the Japanese Government's views on the treatment which might be accorded to imports of Australian soft wheat within the framework of a trade agreement between the two countries. [2] We are impressed by the obvious sincerity of the Japanese Government in its endeavours to arrive at a mutually satisfactory solution to the Australian request on wheat and fully appreciate the value of the Japanese Ambassador's personal discussion of the problem during his recent visit to Tokyo. We feel certain that his explanation of Australia's position to Japanese Ministers will result in a better appreciation of the current situation and that this in turn will enable the two countries to reach a satisfactory conclusion to the current trade negotiations.

The Australian delegation reaffirms its desire to arrive at a basis for a mutually advantageous trade agreement as soon as possible. To date the major obstacle has been the type of assurance which can be given in regard to Japanese imports of Australian soft wheat. In effect the Australian Government is in the position of being asked to offer important and continuing tariff concessions-represented by the difference between the G.T.

and M.F.N. rates-and an assurance of complete and continuing non- discrimination in the licensing treatment accorded to Japanese goods. Under these circumstances it is essential that Australian soft wheat and other commodities should receive not only satisfactory access, but also a continuing assurance of access to the Japanese market on fair trade terms.

As we understand the position, the Japanese Government is prepared to give Australia an undertaking that equal treatment will be accorded to foreign wheat in the Food Agency's purchasing programme irrespective of the sources of supply. It is our understanding that this means that the Japanese Food Agency would call tenders for its wheat requirements on a global basis, and that purchases would then be governed by commercial considerations. This would be the situation at least for the forthcoming Japanese fiscal year commencing on 1st April, 1957, during which period the Japanese Government would not enter into any surplus agreement or conditional sales arrangement.

The Australian delegation appreciates that this represents a definite change in Japan's wheat import policy and that this development is intended to meet the Australian request for opportunity to compete in the Japanese market on commercial terms.

We recognise the difficulties confronting Japan in giving Australia any assured quota or assurances of a minimum level of imports in view of her trade agreement with Canada and her trade relations with the United States.

The Japanese Government has indicated that it may be possible to import at least 200,000 tons of soft wheat each year from Australia. Moreover the Japanese Government has stated that it desires to facilitate the import of as much Australian wheat as possible provided it is supplied on a competitive basis.

Nevertheless, the Australian Government's endeavours to market soft wheat in Japan and the Japanese Government's intention to import as much Australian soft wheat as possible on a competitive basis could be completely frustrated if Australia's soft wheat competitors resort to heavy subsidies or other unfair trade practices. In other words, Japan could administer a non- discriminatory import policy, but as a result of trade practices by competitors and against which Australia had no protection in any Trade Agreement with Japan, Australia could find herself in the position of marketing no soft wheat in Japan, or alternatively of not obtaining the share of the market which she would expect under conditions of fair competition.

The Australian Delegation re-affirms that what Australia really wants is an assurance that her wheat can compete in the Japanese market on fair trade basis and on the basis of normal commercial considerations. However, it was largely because of the United States surplus disposal and subsidy problems and the very real fear of competition from subsidised or 'special arrangement' exports that the Australian request on wheat was put in the form of a specific quota or a percentage share of the market. Given a satisfactory assurance in regard to reasonable access to the Japanese market on fair trading conditions, and recognising the Japanese difficulty with quotas, the Australian Delegation would be prepared to recommend to its Government a modification of the request for a quota of soft wheat.

Australia is willing to compete on commercial terms and under conditions of fair trade in the Japanese market with soft wheat from any country. In particular, Australia has probably least of all to fear from soft wheat imported from the U.S.A., if it were imported into Japan on other than a subsidised or dumped basis or under some special arrangement not normally regarded as complying with fair or normal trading conditions. It is quite clear that Australia could not compete with the U.S. in a battle of subsidies. It is equally clear that the potential ability of the U.S., as well as her present practice in regard to subsidies and dumping, is such that in any global tender basis which the Japanese proposals envisage, Australia would have every reason to fear that wheat from the U.S. could always be offered (irrespective of cost of production) below prices at which unsubsidised Australian wheat could be offered.

In fact, U.S. wheat carrying subsidies of as much as 50% of the Australian cost of production has already been offered in many markets in competition with Australian wheat. Quite clearly, the U.S. possesses the capacity to make its subsidy 60% or whatever percentage is necessary to compete with Australian wheat on the Japanese market.

With no subsidised or dumped wheat in the Japanese market, the Australian view is that her wheat would probably take a very large share of the Japanese soft wheat market.

However, we admit quite frankly that in the absence of any recent history of Australian soft wheat exports to Japan, the determination of what constitutes a fair share of the market is open to debate. Pre-war, Australia supplied 63% of Japan's total wheat imports. However, these were small and the market has since changed substantially in size and character. Under current circumstances Australia would not claim that 60% of total imports is a 'fair share' for Australian soft wheat.

Only since 1952-53 have world wheat supplies been adequate to meet world demand and have exporting countries been in a position to compete for shares of the world market on commercial terms. But the emergence of adequate supplies coincided with U.S. surplus disposal activities which have over-ridden commercial considerations. Hence there is no normal historical pattern of Japanese imports to give a real indication of the share of the market which Australia properly could expect to gain under commercial trading conditions. The Australian request for a quota of 400,000 tons of soft wheat or one-sixth of Japan's total wheat [im]ports, was therefore based on our experience of competition in other markets and our geographic position in relation to the Japanese market in comparison with our competitors. This was a figure, in fact, which we considered to be a reasonable share and yet a Much smaller share than we would get of the soft wheat market if conditions of fair trade and normal commercial practices and considerations were to apply.

Australian soft wheat sold in other markets has been competitive with United States and other soft wheat on a quality basis, and to the best of our knowledge there is no technological reason why Australian soft wheat should not be completely interchangeable with U.S. and other soft wheats. It is in Australia's interest to demonstrate this conclusively to the Japanese Food Agency, to Japanese millers and to the general public. The arrangements which the Japanese Food Agency has already made to import commercial samples from each of the main producing States should remove any doubts on this score.

However, it will be some time before this wheat is shipped and before the results of the commercial costs will be available. In the meantime, the Australian Delegation would be pleased to arrange for smaller samples to be air-freighted to Japan, if this would assist the Japanese Government to reach a conclusion on the acceptability of Australian soft wheat. In this regard the Australian Delegation notes with considerable interest that a technical expert of the Japanese Food Agency is to make an early investigation on the spot. If it would assist the Japanese Government to have wheat samples flown to Tokyo, it is suggested that the technical expert should select the samples while he is in Australia.

Once the Food Agency has investigated the quality of Australian soft wheat, the Australian Delegation has no doubt that Australia would obtain a substantial share of the Japanese market if competitors did not resort to unfair trade practices. However, Australia recognises the difficulties that Japan would face economically and politically is she refused all gift, subsidised or dumped wheat. The Australian Delegation does not wish to press Japan both to protect Australia from unfair competition in the Japanese market to the extent necessary to enable her to obtain reasonable access, and at the same time to specify a quota which would assure her of a major share of the market.

Under all the circumstances, the Australian Delegation is anxious to find an alternative solution to the problem of providing reasonable access to the Japanese market which would not be so embarrassing to Japan in her international relations as would a quota provision.

The problem, from the Australian point of view, revolves around several major issues:-

(1) If our soft wheat were given complete protection from unfair trade practices of our competitors and if all imports were made on commercial terms, it is our view that Australia would probably get the bulk of the soft wheat business in Japan.

(2) If Australian soft wheat were assured, on a continuing basis, only of entry on commercial considerations of price and quality and with no regard to unfair trade practices of competitors, it is quite possible that the subsidies, dumping and other non- commercial policies of our major competitors for soft wheat sales would leave Australia with little or no share of the market- certainly no share of the Japanese market in any way corresponding to what we would expect to obtain on the basis of fair competition.

(3) Our dilemma is that we do not wish to press for (1) above to the extreme position where our competitors have little or no place in the Japanese market, and, on the other hand, an agreement on the basis of (2) would be impossible for the Australian Government to sustain.

(4) Moreover, the Japanese compromise proposals, helpful as they are in some respects, lack the requisite degree of assurance and have little or no degree of continuity about them to match the kind of commitment Australia is asked to enter into.

To seek another way around this dilemma, apart from the original proposals of a firm quota undertaking on soft wheat amounting to either 400,000 tons or one-sixth of total wheat imports, the Australian Delegation puts forward for consideration a compromise alternative.

It is suggested that the Trade Agreement itself, in respect of wheat and perhaps other commodities, should record clearly and fully the agreed intentions of both Governments but that, where desirable, the method of implementation of these intentions be left to an 'Exchange of Notes'. For example, in the case of wheat, the following illustration will indicate what the Australian Delegation has in mind:-

(a) The Trade Agreement itself would contain inter alia:

(i) The agreed intention of the Japanese Government to admit Australian soft wheat to Japan under conditions of non- discrimination and on the basis of commercial considerations safeguarded against unfair trade practices of third parties.

(ii) An agreed statement by both Governments that, in the light of Australia's competitive position and the present and prospective requirements of soft wheat on the Japanese market, it is unlikely that under conditions of fair trade and on commercial considerations Japanese imports of Australian soft wheat would fall below . . .*tons if Australia offers this amount and the Japanese Government would use its best endeavours to assure the import of at least this quantity.

(iii)The Exchange of Notes.

It is our understanding that an Exchange of Letters implementing any Trade Agreement expressing the intentions of both Governments need not be registered nor made public.

The Exchange of Letters would contain the following:-

(1) Recognition that the post-war circumstances of Japanese imports, initially due to overall world wheat shortage and subsequently due to special U.S.A. non-commercial arrangements, do not permit a clear definition of what would constitute for Australian soft wheat a fair share of Japanese wheat imports.

(2) Recognition of the Australian view that on fair trade practices and commercial considerations a fair share for Australian soft wheat in the Japanese market would amount to not less than one-sixth of total wheat imports, i.e. on the basis of 1956 imports this would be approximately 400,000 tons.

(3) Expression by the Japanese Government that in the absence of a reasonably long period of normal competition under conditions of fair trade, it cannot agree specifically on what might be a fair share of the Japanese market for Australian soft wheat.

(4) An undertaking by the Japanese Government that if in any six months period when Australian wheat was freely offered for export to Japan, Australian exports of soft wheat should fall below one- sixth of total Japanese wheat imports under conditions where commercial considerations and fair trade practices do not apply in respect of Japanese imports of wheat from a major supplier, the Japanese Government will take such steps during the ensuing six months to enable Australian soft wheat to reach a level over the current twelve months period of not less than one-sixth of Japan's total wheat imports or, alternatively, to take measures to ensure for the succeeding twelve months that Australian soft wheat did not have to meet the competition on the Japanese market from subsidised or dumped wheat or wheat sold under special non- commercial arrangements.

This kind of an arrangement would appear to be completely compatible with Japan's international obligations on the protection of third parties against unfair trade practices. It would not appear to involve Japan in her present difficulty, particularly in regard to P.L.480, of not being able to give Australia an assurance over a continuing and long-term period, matching the kind of period for which the Australian concessions would be given. It would be a method which could operate whether or not the Japanese Government continued its present form of wheat importation.

There may well be other ways of achieving the same objective-that of finding a compromise solution to the wheat problem. As we have explained previously the problem is a serious one for Australia both practically and presentationally. If Australia is to agree to permanent and clearly demonstrable changes in her tariff and import licensing treatment of Japanese goods, she must be convinced and be able to demonstrate just as clearly that she has negotiated comparable advantages for her goods in the Japanese market. In this regard the publicity which has been given in Tokyo to the Australian request for a quota of 400,000 tons of soft wheat annually has had an important impact on the Australian public. This public knowledge of Australia's request highlights the importance which Australia must now attach to the presentational aspects of the Japanese Government's undertaking on wheat, or alternatively on the Australian requests as a whole.

Obviously the alternative suggested by the Australian Delegation represents a significant departure from the original request and from the Australian Delegation's original instructions.

Presentationally it does not offer the advantages of a quota or of an assurance as to a minimum level of purchases. In these circumstances, the Australian Delegation would need to pay particular attention to the presentational value of Japan's undertakings on other items. We are nevertheless prepared to submit such an alternative wheat arrangement to the Australian Government, but would need to be in the position to advise the Government at the same time of Japan's formal response on the other items. We would look forward to receiving this at the same time as we receive the Japanese reaction to an alternative wheat undertaking.

The Australian Delegation would hope that in reporting this formal response to the Government the basis for a formal trade arrangement conferring substantial mutual advantages would emerge.

1 The note was prepared in the Department of Trade. On 26 February Brown protested to Crawford that the Prime Minister's Department, although a member of the delegation, was neither informed of the Japanese note, nor consulted about the reply (on file AA :

A1209/23, 57/5475). In a handwritten note to Forsyth on 25 February, Tange reported that he had 'told Trade verbally that we should have been consulted not only becasue of our direct interest in trade relations with Japan, but also because of the many referrals to US commodity and trade policies', adding that 'PM's and Treasury am perturbed as well'. A reply to External Affairs, signed by Phillips for Crawford, explained that it had been intended to circulate both Suzuki's note and the draft reply to all delegation members but 'the process of drafting proved more time consuming than had been anticipated and as we were under considerable pressure from the Japanese to provide a reply by 15th February we were only able to discuss the reply with the Department of Primary Industry as the Department, other than Trade, most vitally concerned' (on file AA : A1838/283, 759/1/7, v).

2 Document 189.

* A figure to be agreed upon

[AA : A1838/283, 759/1/7, v]