39 Submission 521 To Cabinet By Menzies

11th August, 1953

Eighth Session of the Contracting Parties to G.A.T.T.

The Eighth Session of the Contracting Parties to G.A.T.T. is scheduled to commence in Geneva on 17th September, 1953.

2. The Advance Agenda (copy attached) contains a fairly lengthy list of items most of which do not require the attention of Ministers. The Interdepartmental Committee has prepared the attached notes on the more important items for consideration of Ministers. These items are:-

(1) United Kingdom Proposal for Release from the 'No-new- preference' Rule in the G.A.T.T.

(2) Tariff Negotiations-Article XXVIII.

(3) Balance of Payments Import Restrictions.

(4) United States Restrictions on Dairy Products.

(5) Admission of Japan to the G.A.T.T.

3. It is understood that the United States will suggest at the Eighth Session that a firm date be fixed in 1954 for a complete review of the G.A.T.T.

[matter omitted]

ADMISSION OF JAPAN TO THE GENERAL AGREEMENT ON TARIFFS AND TRADE The attached report on admission of Japan to the G.A.T.T. has been prepared following discussions in the Inter-Departmental Committee representing the following Departments:-Commerce and Agriculture, Trade and Customs, Treasury, External Affairs, National Development and Prime Minister's.

The Inter-Departmental Committee considers that the forthcoming G.A.T.T. Session represents the last opportunity to influence the conditions of Japanese accession and for that reason the report covers the issues involved at some length.

The report covers the following aspects of the problem:

(a) Background to the Japanese application including previous consideration by the Government.

(b) Implications of Japanese accession for Australia.

(c) Proposals already considered by the Contracting Parties for special procedures to meet difficulties arising from Japanese accession.

(d) Suggested instructions for the Australian delegation to the Eighth Session.

A short note is also appended on an aspect of the Japanese Peace Treaty which is relevant to the G.A.T.T. considerations.

Attachment

ADMISSION OF JAPAN TO THE GENERAL AGREEMENT ON TARIFFS AND TRADE

Section A. Background to Japanese Application Over a year ago Japan asked a group of the Contracting Parties to the G.A.T.T., including Australia, to initiate a series of tariff negotiations as a preliminary to Japanese accession to the General Agreement. Consideration of the Japanese application will be a major item at the 8th Session of the G.A.T.T. Contracting Parties to be held at Geneva in September.

2. The Agreement provides that new members may be admitted on terms agreed between that country and the existing body of Contracting Parties. The normal procedure is for the Contracting Parties to agree on a time-table for a series of tariff negotiations between the applicant and existing members. In the past these negotiations have taken place as part of a general round of tariff negotiations. Following these negotiations the results are incorporated in a protocol of accession. The protocol would also incorporate any special conditions of membership agreed upon. The new country 'accedes' when two thirds of the existing Contracting Parties support the protocol by vote.

3. The grant of membership normally means-subject to the use of Article XXXV mentioned below-not only that the newly negotiated tariff concessions become effective, but also that the new member receives and grants 'most favoured nation' (MFN) treatment, i.e.

tariff treatment not less favourable than is accorded to all other members, excluding preferences such as those exchanged between Australia and United Kingdom. In addition the rights and obligations expressed in the G.A.T.T. apply to the new member.

4. At the 7th Session in October, 1952, it became obvious that Japanese accession presented a number of difficulties. The problem was therefore referred to the G.A.T.T. Inter-sessional Committee for special study. This inter-sessional committee met in February 1953.

5. Two points emerged from the Committee's deliberations:-

(a) A majority of Contracting Parties appeared to favour Japan being given the opportunity to enter into tariff negotiations with a view to accession.

(b) It was improbable that approval could be obtained for any discriminatory safeguard to meet severe Japanese competition, i.e.

unless that safeguard were applicable under like conditions against any other Contracting Party.

6. The Committee examined the existing escape provisions of G.A.T.T. and the protection they would accord 'in the event of violent and disruptive incursions in international markets'. A draft declaration directed towards meeting such a situation was prepared for further consideration by Contracting Parties. The draft declaration is discussed in a later section. The declaration does not specifically mention Japan and if adopted it would represent a modification of the Agreement having general application irrespective of the outcome of the Japanese application.

7. The adequacy of the existing escape provisions of the G.A.T.T.

is a major consideration in relation to Japanese accession. The main provisions are contained in Articles XIX and XXIII. Following is a summary of these articles.

8. Article XIX-Emergency Action and Imports of Particular Products The purpose of the article is to give a member relief from a particular G.A.T.T. obligation or tariff concession when 'as a result of unforeseen developments ... any product is being imported ... in such increased quantities and under such conditions as to cause or threaten serious injury to domestic producers ... of like or directly competitive products'.

In those circumstances the following action is permitted:-

(i) If the situation is critical the obligation may be suspended or the tariff concession modified or withdrawn immediately for such time as is necessary to prevent or remedy the injury.

(ii) If circumstances are not critical the Contracting Parties shall be given as much warning as possible of the intended remedial action.

(iii)In either case the party affected shall consult with other Contracting Parties having a substantial interest. The objective is prior consultation but the determination of whether a situation is critical is a matter for the Contracting Party affected.

(iv) If an agreement on the proposed action cannot be reached in consultation 'the contracting party which proposes to take or continue the action shall nevertheless be free to do so', but any Contracting Party affected by the action may in turn suspend substantially equivalent obligations or concessions 'the suspension of which the Contracting Parties do not disapprove'.

(v) Subject to the same consultative and compensatory procedures the same article provides some, but very limited, scope for remedial action to protect the preferential market of another Contracting Party. In this case, remedial action is permissible only where a concession has been granted in respect of a preference. For example, at the request of the United Kingdom, Australia may withdraw a concession in cases where the reduction of a preference has led to increased imports into Australia from another Contracting Party detrimental to the Australian market of United Kingdom domestic producers.

The important points of the Article are- (i) It may only be invoked when products are being imported in increased quantities due to unforeseen developments and the obligations of the Agreement.

(ii) The Contracting Party affected must consult but is free to take whatever remedial action is thought necessary, but only to the extent and for the time necessary to remedy the injury.

(iii)Any action taken must be applied in a non-discriminatory manner.

9. Article XXIII-Nullification or Impairment The objective of this article is to provide relief from any situation, whether or not permited by the Agreement, which nullifies or impairs any benefit or impedes the attainment of any objective of the Agreement.

The affected Contracting Party is expected first to take up the matter with the offending party which is required to give sympathetic consideration to the representations.

In the absence of agreement, the matter may then be referred to the Contracting Parties for a ruling or recommendation. As distinct from Article XIX an affected Contracting Party cannot take unilateral remedial action but the Contracting Parties may authorise discriminatory action.

If an obligation or concession is suspended with the authority of the Contracting Parties, the party affected by the suspension is then free to withdraw from G.A.T.T. on sixty days notice.

10. Additionally there is the general escape provided by Article XXXV. This Article provides that the Agreement shall not apply as between any two contracting parties if (a) The two members have not entered into tariff negotiations and (b) The existing member notifies its intention to invoke this Article at the time the other member becomes a contracting party.

The Contracting Parties may, at the request of any member, review and make, recommendations on the operation of this Article.

11. As yet no such tariff negotiations have taken place with Japan so that recourse to this Article is still open to the existing contracting parties. An individual contracting party may invoke this Article even though a two-thirds majority of members approved Japanese membership. In such event the G.A.T.T. would apply only between Japan and the members not invoking the Article. It is to be noted also that a country intending to invoke Article XXXV could nevertheless still vote in favour of Japanese membership, thus permitting the G.A.T.T. to be applied between Japan and such other countries as wish to do so.

Section B. Previous Consideration by Ministers 12. Ministers have considered the problems arising from Japanese accession twice in the past 12 months-in September 1952 [1], in preparation for the Seventh Session of the Contracting Parties when the Japanese application was first considered, and again in January 1953 prior to the meeting of Intersessional Committee. On each occasion the Australian delegation was instructed to avoid any commitment. The precise brief approved for the Intersessional Committee was:-

(a) To take no action which would hinder Australia from invoking Article XXXV should this later become necessary.

(b) Not to put forward proposals in the discussions.

(c) To report fully on any proposals which might make it possible for the G.A.T.T. to apply in some limited degree between Australia and Japan, and under which it might be feasible for Australia and Japan to enter into tariff negotiations, while retaining for Australia full freedom to safeguard the interests of her industry and trade.

Section C. Implications of Japanese Accession 13. If Japanese accession is approved-which now seems most likely- all members not invoking Article XXXV will be required to extend most favoured nation tariff treatment to Japan. That means that Japanese products cannot be subjected to higher tariffs than those applied to any other member country-British preferences excluded.

For Australia this would require an immediate lowering of tariffs over a wide range of potential Japanese imports as Japan is the only country of any trading significance whose products do not receive m.f.n. rates, i.e. they are subject to the Australian General Tariff rate. The accession procedures take some time to carry through and it would be at least 12 months and probably longer before the obligation to grant m.f.n. became effective.

Trade and Customs representatives maintain that this problem lies essentially in Japan's low-cost structure and its past use in concentrated attacks on particular markets. In considering imports from Japan it is essential to consider the position of textiles which account for almost 40% of Japanese exports. These are mainly subject to fixed rate duties whose incidence depreciates with the rise in Australian costs. The effect of according m.f.n. treatment to Japan cannot be assessed with confidence but the consequences are likely to be serious for both Australian and U.K. industry.

14. While G.A.T.T. contains a number of escape clauses, any remedial action must, except in special cases, observe the m.f.n.

principle and be applied in a nondiscriminatory manner. If it became necessary to take advantage of these provisions and increase the rates against Japanese goods, the foreign and preference tariff rates as they apply to all other countries would also have to be raised by the amount necessary to overcome Japanese competition. Where rates are bound by previous negotiations at their present levels it would be necessary to negotiate those increases in consultation with Contracting Parties principally concerned. (Some modification of the non- discriminatory rule is contemplated in the draft declaration (see below) put forward for discussion by the Inter-Sessional Committee.)

15. The consequences of m.f.n. treatment can of course be avoided by invoking Article XXXV but such action is not necessarily a solution to the problem of Australia's trade relations with Japan.

The Commerce Department believes that major issue in these relations (inside or outside G.A.T.T.) is Japan's readiness and ability to take retaliatory action against any special measures directed by Australia at imports from Japan.

16. The Commerce Department attaches importance to Japan as:-

(a) The second largest buyer of wool in 1952/53.

(b) A significant market for barley and a few other products.

With respect to wool, Japan competes directly with Bradford on the bread-and-butter wool lines in the Australian auctions and could adversely affect prices by the timing of her purchases even if the total purchased did not decline.

Japan consumes most of her imported wool domestically hence any cut in wool imports could be passed on to the domestic population, thus effecting a direct and commensurate saving of foreign exchange. Moreover, the spinning and weaving machines could without difficulty be converted to the use of synthetic fibres.

Plans for gradual substitution of wool by nylon, etc., are already reported to be in hand.

17. Other aspects of Japanese accession are:-

(a) Effect on United Kingdom trade. Potential Japanese exports are competitive with U.K. exports-e.g. textile and engineering products. Japanese export gains could be at U.K expense. This aspect undoubtedly will be a major topic at the Commonwealth pre- sessional talks in London.

(b) Although with the loss of pre-war Asian sources of raw materials the Japanese cost structure appears higher relative to the pre-war situation there are still uncertainties and until the situation is more settled tariff negotiations would present a major problem.

(c) Japan is already in difficulties in obtaining food and raw materials and in finding export markets. Admission of Japan at G.A.T.T. would be consistent with the general objective of the Western countries of assisting Japan to maintain a viable economy without undue dependence on trade with China.

Section D. Discussions at the Inter-sessional Committee 18. The Inter-Sessional Committee at its meeting in February concerned itself mainly with the adequacy of the existing escape provisions and the possibility of devising some generally acceptable formula which would overcome the fears of member countries for whom Japanese accession presented serious problems and which, at the same time, would not do violence to the basic G.A.T.T. principles.

United Kingdom Proposal-Extension of Article XIX 19. The United Kingdom contemplated a proposal which in effect amounted to an extension of Article XIX but so as to enable discriminatory action directed specifically at Japan. It was proposed that the protocol of Japanese accession would clearly provide that terms under which contracting parties agree to Japan provisionally acceding to G.A.T.T. would allow any contracting party to take action against imports from Japan (and to discriminate against imports from Japan) in the following circumstances:-

(a) If any product is being imported from Japan into the territory of a contracting party in such quantities and under such conditions as to cause or threaten serious injury to domestic producers in the territory of like or directly competitive products of a contracting party, or (b) If any product is being imported from Japan into the territory of a contracting party in such quantities and under such conditions as to cause or threaten serious injury to production of like or directly competitive products in another territory within the same preferential area (provided a contracting party in whose territory producers are located requests that action to be taken).

20. United States opposed the proposal and it appeared that a majority of the Contracting Parties represented would not support a proposal that did not have general application to all Contracting Parties. The U.K did not proceed with its proposal at the Inter-Sessional Committee but there is a possibility of revival for the Eighth Session.

Fair Labour Standards 21. The U.S.A. proposed that the Agreement be amended to incorporate a Fair Labour Standards clause but it received no significant support. It was agreed by the majority of delegates that such an approach did not get to the root of the problem and offered no substantial advantage. The U.S. appears to have dropped this idea.

22. Declaration-Article XXIII The Executive Secretary initiated a compromise proposal directed towards meeting the majority objection to:-

(a) Any amendment of the G.A.T.T.; and (b) any proposal applying to Japan alone.

23. The view was put forward that Article XXIII already provided the necessary protection and that violent and disruptive competition would be a situation 'impeding the attainment of the objectives of the Agreement' and therefore allowing remedial action under Article XXIII. The Inter-sessional Committee subsequently agreed on a report which referred to member Governments for consideration the following draft declaration.

'THE CONTRACTING PARTIES DECLARE (a) that according to their interpretation of paragraph 1 of Article XXIII, a situation in which goods are exported by a contracting party in such circumstances as to produce or threaten violent disruption of trading conditions affecting a significant sector or sectors of production of one or more other contracting parties and where no preventive measures consistent with the General Agreement and its objectives can be found which seem likely to be effective, would be deemed to impede the attainment of objectives of the General Agreement;

(b) that, accordingly, in such a situation a contracting party, into a territory of which the goods are being imported*, could have recourse to Article XXIII within the terms of paragraph 1(c) of that Article for the purpose of arriving at satisfactory adjustment or, alternatively, appropriate relief in accordance with paragraph 2 of that Article; and (c) that, if such a situation is so referred to the CONTRACTING PARTIES and if the CONTRACTING PARTIES, in critical circumstances where delay would cause damage which it would be difficult to repair, fail within 30 days of such reference to reach a final decision on or adjustment of the matter or to authorize appropriate provisional measures to prevent such damage, a contracting party, into a territory of which the goods are being imported*, may thereafter apply such provisional measures not otherwise permitted under the Agreement as the situation may require pending a final decision or adjustment by the CONTRACTING PARTIES in accordance with Article XXIII.

*Alternatively, this phrase might read:

'...a contracting party, into a territory of which the goods are being imported and which is directly affected,'

24. If adopted, this declaration would have the effect of amplifying Article XXIII. It will be noted that when considered with that Article any remedial action proposed must- (a) be approved by the Contracting Parties (b) such approval must be obtained in advance unless, in critical circumstances, the Contracting Parties fail to reach a decision within 30 days of such a situation being referred to their notice.

Interim Arrangement-Japanese Proposal 25. It has been suggested that a proposal will be made that the Contracting Parties grant Japan provisional membership, and extend m.f.n. treatment, but without any continuing commitment and preserving the rights of all countries to invoke Article XXXV. It is reported that Japan will shortly submit a proposal on these lines to the Contracting Parties. The provisional membership would apply for a specified limited period. Very little information is yet available but the proposal raises such obvious difficulties, especially in the immediate grant of m.f.n. that it does not seem to offer a practicable approach to meeting Australia's difficulties.

26. Section E-Instruction for Australian Delegation The information available suggests that at this Session Japan's eventual accession will be put beyond doubt. It also seems that the draft Declaration represents the only kind of modification of the Agreement which the majority will accept but in any case the 8th Session is likely to be the last opportunity to influence the conditions of Japanese accession. However it must be emphasized that actual accession is still a long way off- 12 months at least.

Accession must be preceded by tariff negotiations. In view of the recent U.S. announcement that it is not intended to enter into any major tariff negotiations during the one-year renewal of the Reciprocal Trade Agreement Act and while U.S. external trade policy is under review, it is generally conceded that a precise time table for tariff negotiations cannot be formulated at this Session. At the same time the U.S. Government is reported to have re-affirmed its desire to see formal Japanese accession to the G.A.T.T. The following paragraphs attempt to show the issues involved for the Australian Delegation.

27. In present circumstances can Australia participate with Japan in G.A.T.T.-as it now stands or subject to any modification or special conditions agreed at Geneva? The major implications for Australia of Japanese accession are mentioned in Section C above.

On the Government's assessment of those implications will depend the answers to this question. There is a choice of answers- (i) Australia does contemplate such participation (ii) Under no circumstances can such participation be contemplated and Australia should therefore retain full freedom to invoke Article XXXV at the appropriate time thereby relieving Australia of the obligation to extend the G.A.T.T. to Japan.

(iii)Adopt a 'wait and see' attitude retaining freedom to invoke Article XXXV or to apply the Agreement according to the circumstances prevailing when specific proposals for tariff negotiations are made-i.e., in about 12 months time at the earliest.

28. In the light of the answers to the preceding question what attitude is the Australian Delegation to take in discussions at the 8th Session.

(i) If extension of G.A.T.T. to Japan is contemplated, and on the assumption that no modification of G.A.T.T. other than of the Draft Declaration type is acceptable to the majority, then the Australian delegation could join with other delegations faced with problems similar to Australia, to achieve the form[s] of modification which go further to meeting Australian difficulties.

(ii) If participation with Japan is ruled out, and a firm decision is taken now to invoke Article XXXV at the appropriate time, then no purpose is served by participating in any active way in the discussions on this matter.

(iii)If freedom is to be retained to invoke Article XXXV or apply the G.A.T.T. according to the circumstances prevailing when a decision on that Article can no longer be deferred then the Australian delegation could usefully participate in Geneva discussions with a view to achieving conditions of accession providing maximum protection to Australia. If this course is adopted it is difficult to suggest at this stage what might be achieved. The Commonwealth discussions in London should throw some light on the possibilities. One suggestion is to eliminate the 30 day provision from the Draft Declaration and so permit immediate recourse to Article XXIII, as modified by the Draft Declaration, without any prior consultations. The U.K., in view of previous proposals, would no doubt support such a move. If the U.K.

proposal on Article XIX is revived, and of those discussed it goes closest to meeting Australia's problems, [it] could be supported without committing Australia in any way.

Section F-Conclusion 29. The Interdepartmental Committee concludes the Australian Delegation could be instructed as follows:-

(i) The proposals so far considered do not overcome all of the Australian difficulties which extension of G.A.T.T. by Australia to Japan would give rise to and therefore full freedom to invoke Article XXXV must be retained.

(ii) Nevertheless there are sufficient reasons in favour of such extension to make it worthwhile examining any new proposals which may come out of the Commonwealth pre-sessional talks [or] the discussions in Geneva.

(iii)The Delegation should report fully and promptly on those discussions and is authorised at both London and Geneva to take part in discussions with other Contracting Parties, on the lines suggested in paragraph 28(iii) with a view to achieving possible modifications of the conditions of Japanese accession, but without commitment to Australia.

Section G.-Japanese Peace Treaty 30. Under the Japanese Peace Treaty Japan is obliged to extend general m.f.n. treatment including m.f.n. tariff treatment to all Peace Treaty signatories granting such treatment to Japan. At present Australia receives m.f.n. treatment from Japan but in tariff matters at least Australia does not reciprocate. Some time ago Japan asked for a statement of our intentions to enable her to comply with the Peace Treaty obligations.

31. No reply has gone to Japan other than acknowledgment of the request. The answer is of course dependent on the essential decision on the G.A.T.T. issue. The Japanese request might be interpreted as an indication that in the face of continued tariff discrimination by Australia Japan is contemplating withdrawal of present m.f.n. tariff treatment, which the Peace Treaty allows.

However, such action is unlikely while the G.A.T.T. question is unresolved. This matter is mentioned here as providing relevant background to the G.A.T.T. issues but the Interdepartmental Committee considers that for the present a specific reply to Japan is not needed.

1 See Document 16.

[AA : A4905/1]