207 Notes By Prime Minister's Department On Cabinet Submission 643

16th May, 1957

CANBERRA

Trade Negotiations with Japan

The Content of the Proposed Agreement It is contemplated that Australia will give Japan most-favoured- nation treatment both on tariffs and import licensing subject to our right to impose emergency duties and possibly quantitative instructions to protect Australian industries or those of our preferential partners. Japan will bind itself to continue to give us most-favoured-nation tariff treatment. To make this effective against the background of Japanese trade practices and special significance of United States' surplus disposals, we are seeking specific assurances on imports of particular commodities.

The general effect of the agreement is that each party will accord G.A.T.T. treatment to the other but the obligations and rights will lie with the parties to this agreement and not with the G.A.T.T.

Background to Negotiations Japan is our second-best customer but the only substantial trader to whom we apply general tariff rates of duty. At present, wool is admitted duty free to Japan where it is used principally for domestic consumption. However, there is some pressure for a duty on wool to encourage the use of locally produced synthetics, and also for a revenue duty or internal tax on wool. If Japan were to take some discriminatory action against wool, or against Australian imports, we would have no redress. Ministers finally faced up to a Japanese trade negotiation at the end of 1954 when Japan was seeking admission to G.A.T.T and we were under strong pressure to accord her G.A.T.T treatment, or, at least, some alternative bilateral arrangement which would reduce our present discrimination against Japan. Furthermore, the Government's general attitude on foreign policy grounds has been to foster the assimilation of Japan into the Western world and to facilitate the solution of her economic problems. All these considerations have led up to the present negotiations but it does not follow that an agreement has to be reached at any price at this time.

The Balance of Advantage under the Agreement It must not be assumed that Japan will accept more onerous obligations than we will. Most-favoured-nation treatment will be all important to them but, on the other hand, their commitments to us on commodities apart from wool might well be of short-term value. That is to say if we can look forward in a few years to a situation when the United States is no longer dumping agricultural surpluses, Australia's principal exports to Japan should be able to hold their own with their competitors. Briefly then, the advantages to Australia are likely to be short-term gains in the exports of wheat etc. with long-term advantages in the duty binding of wool only.

This agreement should enable Japan to expand exports to us but at the expense of the European countries some of whom are already complaining at the lack of balance in our trade with them. The effect upon them will of course be less in a period of relaxation of import restrictions.

Critical Issues The immediate items are: wool, wheat, emergency action.

WOOL: Japan is prepared to bind the duty free entry of wool for the three year term of the Agreement, provided that we negotiate with them within that period, with a view to the application of full G.A.T.T. treatment to Japan. G.A.T.T. treatment is, of course, the ultimate objective and the Japanese have been told that its achievement will depend upon the performance of their exporters under this Agreement. The wool provision means:

(a) The guarantee of no duty is for three years only.

(b) If we agree to full G.A.T.T. treatment later, we would have to re-negotiate the wool tariff for some tariff concession in Australia, wool is almost the only important item the Japanese can give us.

(c) If we reject G.A.T.T. application we will lose the guarantee on the wool duty.

EMERGENCY ACTION: Japan is prepared to accept the special duties provision without right of retaliation. We have only recently raised the question of quantitative restrictions in addition to special duties and the Japanese are reluctant to accept these without the right of retaliation or to agree to them being used for the benefit of the United Kingdom. The essence of Article V is that the Japanese Government will so control its exporters that the necessity for emergency action will not arise. That has been the experience in Canada.

The first alternative is to agree to some restrictions upon the use of emergency duties and quotas in return for the right to use these without retaliation; the second alternative that they give us the right to use duties without retaliation, but quotas should be subject to retaliation. Our negotiators should endeavour to achieve the first alternative, but as we are not contemplating the necessity to apply Article V it might be possible to settle for freedom to use special duties and give away the idea of quotas. A point in favour is that under the first alternative the published document would refer to Australia's rights to take emergency action, but conditions attached to that right would not be published. There could therefore be circumstances in which requests were made to the Government for emergency action but these would have to be rejected because of unpublished understanding with the Japanese.

Conclusion We support the recommendations in the Submission subject to the suggestion in the previous paragraph about emergency action.

[AA : A4926, VOLUME 26]