42 Submission 542 To Cabinet By O'sullivan

1st September, 1953

SECRET

Trade with Japan The submission on 'Further Relaxations of Import Restrictions' relates only to non-dollar, non-Japanese goods. It necessarily leads on to the question of how much should be done to ease restrictions on imports from Japan.

2. On 2nd July last Cabinet decided that the level of import licensing for Japanese goods should be raised to it 2m. c.i.f. per annum and that further relaxations should be made in the level of licensing on Japanese goods, in step with relaxations approved from time to time in regard to the non-dollar, non-Japanese Budget.

3. Cabinet has also had before it recently the question of its attitude towards the admission of Japan to GATT. It decided that, in order to safeguard the interests of certain of our own manufacturers and of certain British products in the Australian market, we should strive to maintain the right to discriminate by both tariffs and quotas against some Japanese imports.

4. As was mentioned in the Cabinet Submission in July our trade with Japan in 1952/53 was most seriously unbalanced. Our exports to Japan were valued at 84m. whilst our imports were only 4.65m.

5. Clearly, the whole question of our policy in relation to exports and imports from Japan, in both its immediate and longer term aspects, is pressing for consideration and a firm definition on the part of the Government.

6. The immediate problem acquires urgency from the fact that Japan is so short of sterling that, regardless of what the Japanese Government may or may not wish to do in the matter, they may be forced to cut down overseas purchases even of essential raw materials such as wool. Japan is now such a big customer of ours- last year and for a number of years before the war she was our second largest customer-that this situation is of very serious concern to us. Curtailment of Japanese wool purchases could have the effect of starting a general and perhaps serious decline in the wool market.

7. Japan's sterling holdings continue to decline. They fell from Stg.127m.on 30th June, 1952, to Stg.76m.on 31st December last.

On 3lst March this year, they had declined to Stg.39m. and at 30th June were down to Stg.25m. despite the fact that Japan had used dollars to buy Stg.18m.

8. When we recommenced trading with Japan after the war there was a danger that, if Japan had a favourable balance with the sterling area, she might convert this into dollars. Under the terms of the present sterling payments agreement with Japan that danger no longer exists.

9. With the cessation of hostilities in Korea, Japan's earnings of dollars and other foreign currencies from allied forces could obviously fall away rapidly. It is clear that Sterling Area countries must increase their purchases from Japan or Japan will be forced by sheer scarcity of overseas funds to buy less from us.

10. The situation however involves serious local difficulties.

There is undoubtedly a distinct risk that, despite the relatively higher level of Japanese costs today as compared with the pre-war period, their goods could still under-sell our manufacturers in the Australian market in a number of lines.

11. The limit to what we could do to assist Japanese exports would be to put Japanese goods on the same quota basis as the non-dollar goods. The Department of Trade and Customs is, however, convinced that the effects of going to that length in relaxations at this stage could be disastrous to some local industries, such as certain textiles and toys, to mention only two items. Australia is now manufacturing a much wider range of textiles than in the pre- war period so that the import of more extensive Japanese textiles could be more serious for our manufacturers today than in pre-war years.

12. Faced on the one hand with the necessity to purchase more from Japan in order to help keep her as a strong buyer in our markets, and on the other hand to safeguard local industries, the most judicious course at this stage seems to be to ease import relaxations progressively and selectively so as to determine the real strength of Japanese competition and the points at which it is likely to press hardest on local industries. If we follow such a course we will also be gaining light on the question of how much tariff protection our industries really need against Japan and also on the question of what concessions we might or might not make to Japan if we were to enter into bilateral trade negotiations with her.

13. The bulk of Japanese goods at present being licensed under administrative arrangements consists of less essentials which, under our non-dollar, non-Japanese budget, are classed as Category 'B' goods. If Japanese goods were to be licensed at an annual rate of 15m. c.i.f. this would raise Japan's share of Category 'B' imports into Australia to about 10% of total imports of these goods. Such an easing would also give Japan about 85% of the value of her imports in 1950/5 1 -the base year for import licensing purposes-as compared with 90% of base year imports as from 1st October next, for imports from all other non-dollar countries. If we are to retain the Japanese as active buyers of our wool, this would seem the minimum worthwhile relaxation.

14. At the Cabinet meeting on 13th August it was considered that it might be possible at a later stage to enter into bilateral negotiations with Japan as an alternative to granting her m.f.n.

treatment, if and when she enters GATT. If the Japanese should complain that we are not meeting reasonable requests for entry of their goods into Australia, we might offer to negotiate with them on current trade policy.

15. If, however, a freer admission of Japanese goods into Australia results in too intense competition with our own manufacturers and British imports, we should be free to establish maximum quotas for the affected items.

Summary 16. To sum up:

(a) The Government is faced with the problem posed by huge purchases of our wool by Japan and our relatively small purchases of her products.

(b) Japan is acutely short of sterling and there are no currency or balance of payments objections to a further relaxation of our restrictions on her imports.

(c) Australia's trade policy towards Japan should take account of the political objectives of making her economically viable without undue reliance upon trade with China and of keeping her in the non-Communist world.

(d) In pre-war years Australia used both tariff and, in the case of textiles, quantitative import restrictions to protect not only our own manufacturers, but also British interests against Japanese imports. Largely as a result our exports dropped sharply and our favourable trade balance disappeared.

(e) Following the resumption of trade with Japan, in the post-war period, Japanese imports have been subject to strict administrative control. Little is known of the Japanese cost structure and her export potential.

(f) The extent to which we would wish to retain freedom to vary our tariff and apply quotas against Japanese goods, whether or not Japan becomes a member of GATT, can only be decided after we have the current measure of Japanese competition. Since 1939, average Japanese prices have risen more than prices in Australia, but we are now producing ourselves a wider range of goods likely to suffer from Japanese competition. The United Kingdom and certain European countries have also expressed concern lest we admit Japanese imports at a rate which would damage their interests in our market.

(g) We could accord Japan licensing treatment similar to that given to other non-dollar countries. Importers holding non-dollar import licences would then be free to switch any of their permitted purchases to Japan. This could well be disastrous for Australian manufacturers and British exporters. (h) An alternative is to continue to control Japanese imports on an administrative basis, but to raise the ceiling on permitted imports and to widen their range. An approach along these lines would appear to be the more satisfactory.

(i) As from 1st October next the annual rate at which licences for Japanese imports will be issued might be raised from 12m. c.i.f.

to 15m. c.i.f. This would allow Japan to supply about 10 per cent of all Category 'B' type imports.

(j) Such a relaxation would not be inconsistent with the instructions issued to our GATT delegation to press our right to use tariffs and quotas to protect our essential interests.

Recommendations It is recommended:

(a) That Cabinet consider the question posed by our large favourable balance with Japan, the threat to our exports by the known trade difficulties of that country and the appropriate import policy under these conditions.

(b) In this regard and in view of the discriminatory nature of our import controls on Japanese goods, Cabinet might consider the advisability of increasing the level of licensing of Japanese imports from l2m. c.i.f. per annum to possibly 15m. c.i.f. per annum as from 1st October next, and (c) That the range of permitted imports within this higher ceiling be widened to enable us to obtain a better picture of the strength of present-day Japanese competition. [1]

1 An unsigned note attached to the submission and presumably written in the Prime Minister's Department read: 'It seemed to me as I read the submission that a valid case was being put for something mildly courageous but the final recommendation does not live up to that.' The strength of Japanese competition could not be assessed on the basis of a 3 million increase; the probable removal of general import restrictions in 1954 would make it difficult to justify severe restrictions on Japan; a likely upsurge in the economy would help Australian manufacturers cope with competition. 'Shouldn't we be getting ourselves into a more tenable position on Japan. If we don't do it gradually we may find we have to do it suddenly ... I would go beyond 15 m. I'm not sure that I'd put on a ceiling at all. I'd put down a floor.'

[AA : A9913/1, 230]