I attach a report from the Delegation on the position reached in the negotiations with the Japanese Delegation and making recommendations regarding the line to be followed in further discussions.
This report is submitted on a basis for consideration and discussion by Ministers.
TRADE NEGOTIATIONS WITH JAPAN
SUMMARY OF POSITION Considerable progress has been made in reaching tentative agreement (at the delegation level only) with the Japanese. A summary of the main points is set out below.
(i) Tariff Treatment It has been agreed that each country accord the other m.f.n.
treatment in the tariff. This means that the Australian tariffs applicable to a wide range of Japanese goods will be lower than at present. Preference with Commonwealth countries will not be affected.
Japan for her part will be committed to giving Australia no less favourable tariff treatment than she gives any other country. As matters stand, this does not involve any significant changes in duties on Australian goods but ensures there will be no future discrimination against Australia.
(ii) Licensing Treatment In import licensing matters and in the application of import or export controls generally, each country will accord the other non- discriminatory treatment. Henceforth we shall have to treat Japan in import licensing on the same basis as any other non-dollar country unless balance of payments considerations justify discrimination. Japan will in principle do the same for us, but this is qualified by the operation of her foreign exchange system and the actual treatment to be accorded on major items of Australian export interest is set out below under commodity headings.
(iii) State Trading Both sides undertake to operate their State trading enterprises export or import, in a non-discriminatory manner. This is of greater benefit to us in view of the number of such enterprises operated by Japan.
(iv) G.A. T. T. Application So far as practicable and as may be agreed between them from time to time, the two countries shall base their commercial relations upon the provisions of G.A.T.T. This does not interfere with our rights under Article XXXV of G.A.T.T. (See notes on wool in attached Summary Schedule.) (v) Duration Japan has suggested that initially the agreement run for three years, terminable after that on three months' notice. This seems acceptable.
(vi) Sugar Japan agrees to place no obstacle in the way of Australia supplying on a competitive basis, up to 40% of Japan's total imports of sugar.
(vii) Barley Japan has been importing approximately 30% of her barley requirements from Australia. They indicate formally there is no intention of changing this policy. Japan undertakes, in the event of unfair trade practices by Australia's competitors to consult with us with a view to establishing a fair share of the market for Australian exports. Prima facie the fair share would be not less than 30%.
(viii) Dried Vine Fruits Japan agrees to make licence available for up to stg.100,000 of Australian dried vine fruits (raisins, currants, sultanas) in each year of the three year period of the Agreement.
(ix) Dried Skim Milk To be admitted into Japan on a competitive and non-discriminatory basis within the global foreign exchange allocation except for imports in connection with the Japanese School Lunch Welfare Programme.
(x) Beef Tallow and Cattle Hides Australian imports to be placed on the automatic approval list.
This means licences will be issued for any quantities sold commercially.
(xi) Surplus Disposals by U.S.A. in Japan Japan has agreed to consult before concluding any agreement with U.S.A. for the importation of surplus U.S. commodities affecting Australia's export interests.
2. Attached is a summary schedule of the points outstanding.  These are:-
(i) Emergency action. (The right to impose special duties on import quotas without Japan taking counter measures.) (ii) Wool. (The assurance of duty free entry for wool is linked with later consultation regarding the application of G.A.T.T.) (iii) Wheat. (The form of commitment and especially the definition of unfair trade practices.) Of these the 'emergency action' provision, which is the safeguarding clause for Australian industry and preferential trading partners is of major importance. Full agreement has not been reached on this. A proposal has virtually been agreed on wool and may be close on wheat.
3. Whilst some of the more detailed arrangements will not be publishable, agreement is expected that the following major points will be covered in the published papers:
(a) Notwithstanding the connection between duty free entry on wool and G.A.T.T., there is no commitment to withdraw the application of Article XXXV.
(b) The assurance of continued duty free entry for wool.
(c) The greater part of the undertaking on wheat.
(d) The undertakings on barley, sugar, dried vine fruits, skim milk, tallow and hides.
(e) The provision in the Agreement for emergency action against imports from Japan.
The main points not to be published are likely to be:
(a) The Japanese commitment to buy specified quantities of Australian wheat in the first and second years of the Agreement in the absence of 'unfair trade practices', and (probably) details of the definition of unfair trade practices.
(b) Details of the understandings on action under Article ('special' or 'emergency' action).
(c) Consultation regarding acceptance of U.S. surpluses.
4. Cabinet Decision No.203 of 21st May, 1956  set out the basis on which Australia entered into the negotiations.
On the Australian export side the agreements already reached or that are now in sight will meet the requirements.
On the import side, the Cabinet decision referred to 'full freedom to safeguard Australian industry or established trade of the U.K.
or other suppliers'. The proposed arrangement for emergency action in the form of 'special duties' will retain this freedom for Australia in respect of Australian industry and, in accordance with the terms of the special duties legislation enacted last year , in respect of the trade of the U.K. and other preferential suppliers. In addition, the proposed 'emergency action' provisions will retain for Australia the right to use discriminatory import quotas to protect the interests of Australian industry.
5. In respect of the 'emergency action' provisions, the Japanese have been pressing for the right to apply 'substantial equivalent' counter measures if action is taken by Australia under those provisions. Details are set out in the Summary Schedule. Two possible approaches are seen to this question:
(a) Without any right on the part of Japan to apply counter measures, in return for a statement by the Japanese underlining and recognising the importance of the exercise of restraint at the export end over Japanese exports to Australia. Australia might state some considerations, designed to reassure the Japanese that emergency action would not lightly be taken and that a genuine effort would be made to make consultation effective. These considerations would include- (i) prior consultation with Japan in every case;
(ii) emergency action to be taken only if such consultation fails to provide a mutually acceptable alternative to the solution;
(iii) would be limited in time and extent to the acts absolutely necessary to correct the situation;
(iv) would be limited to cases where serious damage was caused or threatened.
(b) That we maintain that where emergency action is by way of special duties, Japan has no right to take counter measures; but that we agree, where emergency action takes the form of discriminatory import quotas that Japan has the right to take 'substantially equivalent' counter measures.
It is recommended that- 1. The positions outlined under points (i) to (xi) be approved.
2. In connection with the assurance of duty free entry on wool for the initial three years of the Agreement, Australia be prepared to enter into discussions with Japan within three years about the application of G.A.T.T.
3. That Australia accept the Japanese offer on wheat as regards quantities.
That the Delegation secure the best obtainable definition of price and of 'unfair trade practices'; and that the Delegation stand out for the Japanese to put on the record, confidentially if need be, that in the absence of 'unfair trade practices', they will in fact buy not less than 200,000 tons and 300,000 tons in the first and second years respectively.
4. That the delegation press for the first alternative 'emergency action' arrangement as set out in 5(a) above, but be authorised to accept the second alternative, 5(b) above, if total agreement is not likely to be reached otherwise.