65 Submission 30 To Cabinet By Casey

28th July, 1954

CANBERRA

Australian Policy Towards Japan 1. Australian policy towards Japan must necessarily be directed to protecting Australia against the dangers of possible future aggression.

2. Japanese aggression in South-East Asia in the last war was dependent on control of Manchuria. Now lacking the raw materials and resources necessary to wage an aggressive war on her own, the principal danger of future Japanese aggression lies in the risk that she may form an alliance with, or come under the control of, the Communist powers. Once such an alliance were formed, the balance of power in Asia would be weighted against us. Our policy must therefore be to prevent this.

3. Since the peace treaty under which Japan regained her sovereign independence, Japan has been free to modify, and has in fact modified, many of the reforms introduced during the Occupation.

But the present Government, whilst strongly conservative in character, is pursuing a policy at home of moderation and abroad of alignment with the Western bloc.

4. Recently, the Japanese Government has faced a series of political crises, which have tended to weaken the prestige of parliamentary democracy in Japan. On the one hand, extreme right- wing nationalist groups have become more active and, on the other hand, there have been gains in numbers and influence by the Communists and their sympathisers. Parliamentary democracy has no firm roots in Japan-it might give way before an economic crisis or in the face of persistent hostility towards Japan overseas. It is of the greatest importance to Australia that Japan should continue to have a moderate and peaceful form of Government, and Australia should accordingly place as few hindrances as possible before it.

5. Anti-Japanese bitterness and fear of Japan in Australia, though understandable, could result in policies which are more likely to increase the potential dangers than to guard against them.

6. For example, if Japan is denied reasonable trading facilities and access to the food supplies and raw materials necessary to maintain her economic solvency, Communism in that country will be encouraged. Not only will Japan be obliged to trade with China on Communist terms, but the fall in living standards and growth in unemployment could greatly facilitate Communist subversion within the country. Some Japanese trade with China is inevitable; but the more Japan can develop her commercial relations with the non- Communist world, the less dependent she will be on the Communists.

7. Similarly, if reasonable Japanese overtures for friendly relations with countries such as Australia are rebuffed, the resulting frustration will encourage militant nationalism in Japan. This would help the extremists, who are a group likely to contemplate a deal with the Communists as a means of reasserting Japan's position.

8. We should therefore endeavour to avoid policies which are likely to encourage the growth of Communism or extreme nationalism in Japan. Instead, Australia should aim at encouraging a moderate Government, such as exists at present, and at helping to keep Japan in the Western camp. In practice, this approach means that, subject to our essential interests, Australia should be prepared to encourage trade with Japan and that we should bear in mind at all times the dangers of provoking Japan in ways which are likely to stimulate aggressive nationalism. As the Australian Prime Minister suggested in his 'Man to Man' broadcast on 17th March [1], Australia should behave as a 'grown-up nation which knows that the greatest stumbling block to peace is the perpetuation of enmities'.

9. Such a policy accords with the views of the United States and the United Kingdom.

10. The attitude of the United States was clearly set out in an address made by President Eisenhower on 22nd June to the National Editorial Association. He said that the preservation of a free Japan was the keystone of United States policy in South-East Asia and the Pacific. If the Kremlin and the rulers of Communist China were able to control the vast resources of Asia and give Japan the task of providing naval strength, the Pacific could become a 'Communist lake'.

11. In a paper communicated to the Australian Government on 17th June [2], the United Kingdom argued that Japan represents a potential danger to the Commonwealth and to the western world, in that, if Japan were to throw in her lot with China, the combination of Japanese technical skill, equipment, and drive with Chinese man-power, would mean a decisive shift in the world balance of power. The United Kingdom therefore considers that its cardinal aim in the Far East should be to prevent Chinese/Japanese association and that this can only be done by bolstering Western influence and proving to the Japanese that it is in their interest to cooperate with the West. In order to carry out this aim, the United Kingdom says it is prepared:

(a) to play its part in preventing economic distress which might foster Communism in Japan, by maintaining as high a level of trade between Japan and the sterling area as is consistent with the national interest; and (b) to take whatever opportunities occur to effect a change in the climate of United Kingdom opinion towards Japan so as to bring it into closer accord with the overriding requirements of the national policy and interest.

12. At present, the development of Australian/Japanese relations is bound up with a number of outstanding issues, brief details [3] on which are attached to this submission. They are:

Trade with Japan Japanese Defence Forces Pearl Fisheries Dispute Compensation for Former Prisoners of War of the Japanese Japanese Violation of Australian Territorial Waters Japanese Class 'A' War Criminals Japanese Class 'B' and 'C' War Criminals Criminal Jurisdiction over UN Forces in Japan B.C.O.F. Diverted Stocks Account Japanese War Dead in Australian Territories Japan and the Colombo Plan Inclusion of Japan in S.E.A.T.O.

Japanese Activity in New Guinea.

13. It is recommended that, in handling issues involving our relations with Japan, Australia should give special attention to the need to prevent the formation of a close alliance between Japan and Communist China; and Australia should be guided by the principle of allowing Japan, through cooperation with non- communist nations, to have reasonable facilities for taking a part in her own defence, for meeting her economic difficulties by expanding her export trade, and for developing her political and economic life and institutions in a way that will strengthen Japan's association with the West.

Appendix A

SECRET

AUSTRALIAN TRADE WITH JAPAN

Postwar Changes in the Japanese economy 1. Today Japan's exports are only 30% of what they were before the war.

2. Japan has lost her pre-war revenue from shipping and investments abroad. She has been cut off from her pre-war sources of cheap foodstuffs and raw materials (cotton, coal, iron ore, metals, etc.) in her former overseas possessions, Manchuria and North China; and has lost these formerly important outlets for her exports.

3. Her industrial costs have been further increased by the higher transport costs (compared with the previous sources) from the USA and other sources of essential imports; by heavy inflation within Japan itself, and by the social reforms instituted during the occupation period resulting in higher wage costs.

4. Apart from the increased costs of her exports Japan's export trade has suffered from an over-concentration of Japanese production in certain directions, notably in the iron and steel, chemical and textile industries. Moreover, until recently most countries discriminated against Japanese goods (as some still do including Australia) through import restrictions and the application of higher rates of duty than those generally levied.

5. Further difficulties are caused by the rapid increase in population.

Balance of Trade 6. Japanese trade from 1949 to 1953 was as follows:-

Exports Imports Trade Deficit US $m. US $m. US $m.

1949 509.7 904.8 395.1 1950 820.1 974.3 154.2 1951 1354.5 1995.0 640.5 1952 1272.9 2028.0 755.1 1953 1029.1 1962.8 933.7 (10 months)

Financing of Payments Deficit 7. Total Japanese external payments from l945 to 1952 were $8.4 billion, but only $5.5 billion were covered by export receipts.

The deficit plus an accumulation in reserves of about $1.0 billion at the end of May, 1953, were covered by US aid imports and other forms of relief, and later by special procurement for, and expenditures of, the US armed forces. Between the end of the war and March, 1953, extraordinary financing received by Japan amounted to $4016 million. Without this the Japanese economy could not have recovered even to present levels. A continuation of US aid, on a substantial scale, will be necessary for some time until Japan can rectify the position through more efficient and cheaper production and by a considerable increase in exports. At present the Japanese economy is not self-sustaining.

The future pattern of trade 8. Japan is at present seeking to expand her exports throughout the world by securing accession to the GATT and by other avenues of trade promotion.

9. While there are substantial pressures from Japanese manufacturing and trading interests to restore some of Japan's pre-war import and export trade with China, this is limited by two factors:

(i) The strategic controls at present enforced by the majority of countries over exports to China, covering a wide range of goods.

(ii) An appreciation in informed quarters in Japan that, since China has launched upon a comprehensive programme of industrialization, a large-scale resumption of trade with Japan is unlikely, either in imports from China of raw materials or in exports of cotton fabrics. However, at some future time some exchange of Japanese capital goods for foodstuffs must be expected.

10. Japan has also been cultivating South-East Asia as a source of raw materials (e.g. iron ore) and as a potentially large market for capital equipment and for textiles and other consumption goods. Up to the present, this drive has not been very successful, due in part to the slow process of Asian industrialization, and in part to competition from European suppliers. Disputes with countries such as Indonesia and the Philippines over reparations have also retarded Japanese trade.

Effects of failure in Japan's export objectives 11. Up to the present Japan's economy has been maintained by American assistance. With this assistance, Japan has been able steadily to increase production, maintain a high level of employment, and cover her payments deficit. If U.S. assistance were to decline, and were not offset by some increase in trade with other countries, the internal consequences in Japan would be serious. Growing unemployment, food shortages, and other economic difficulties, following upon a further deterioration of the trade position or a diminution of aid, could complicate the internal political situation in Japan and create opportunities for labour troubles and Communist pressures, or to an extreme nationalist group coming to power and ready to do a deal with its communist neighbours.

Trade policy towards Japan 12. The foregoing points to the adoption by other countries of a trade policy towards Japan in line with her own objective, namely a broadening of opportunities of trade with the 'free world'. This would have the twofold merit of not forcing her into undue reliance on trade with China, and reducing any incentive towards over-concentration of Japan's commercial activities on South-East Asia.

13. The Sterling Area could play an important role in this connexion. Japan must try to reduce her present reliance upon high cost imports from the U.S.A. To achieve this her present adverse balance of trade with the Sterling Area as a whole must be adjusted in such a way as to enable Japan to pay for her imports from non-dollar countries through increased exports to them.

Attitude of other countries 14. 23 member countries of the GATT agreed at the end of 1953 or since to apply that agreement between themselves and Japan. This means that they undertook to extend most-favoured-nation tariff treatment to imports from Japan and to accord Japanese products the same import licensing treatment as that accorded to imports from the majority of other countries. The countries concerned were:-

Austria Belgium Brazil Burma Canada Ceylon Chile Denmark Dominican Republic Finland Haiti India Italy Luxembourg Netherlands Nicaragua Norway Pakistan Sweden Turkey U.S.A.

Uruguay

15. The member countries of GATT which have declined to extend the GATT to Japan are Australia, United Kingdom, New Zealand, Federation of Southern Rhodesia and Nyasaland, France, Indonesia, Cuba and Peru. However, of these the U.K. accords m.f.n. tariff treatment to Japan de facto. The U.K. also renegotiated in January, 1954, a payments agreement with Japan, which provided despite protests from Lancashire cotton interests for imports of Japanese textiles and other goods. New Zealand recently concluded with Japan, subject to ratification, an agreement under which m.f.n. tariff treatment and soft currency licensing treatment will be accorded over a range of goods which according to Japanese reports covers about 90% of the trade.

16. Of the Commonwealth countries which face difficulties in reconciling the application of GATT with their internal problems, Canada has concluded an agreement with Japan which enables Canada to control the duty-paid price at which Japanese goods are sold in Canada. This has apparently met the fears of Canadian manufacturers while allowing Canada to apply GATT concessions to Japan.

17. Indonesia's non-compliance is believed to be due to the absence of a Peace Treaty and reparations agreement with Japan.

Apart from Australia, France is the only major trading nation which has not yet liberalised its treatment of Japanese goods, France's attitude is doubtless dictated by her own difficult economic position and high costs of production.

18. The U.S.A. has strongly and consistently supported Japan's attempts to accede to the GATT. The U.S. considers that the strengthening of Japan's trading position and making her economy self-sustaining are essential to retain Japan within the Western World; the U.S. points to the gap in the NATO alliance because of Germany's position and are anxious that this deficiency will not be repeated in Asia. U.S. efforts were responsible for the extension to Japan of the provisions of the GATT by the countries listed above. To make Japan's association with the GATT more permanent the U.S.A. has now offered to negotiate further reductions in the U.S. tariff with those countries which are willing to undertake tariff negotiations with Japan under the GATT, with a view to Japan's eventual full accession to the Agreement.

19. U.S. endeavours to assist Japan are further demonstrated by their approaches to Australia on the possibility of establishing a source of coking coal here for Japan to replace high-cost American coal.

Australia's position 20. Australia is the largest Sterling Area exporter to Japan. Our exports amounted to �84m. in 1952/53 against imports of �4.7m. We discriminate against Japan in our import licensing measures as well as by applying the General Tariff (the highest rate) to Japanese goods. Some relaxation has been made in import licensing treatment, but the present maximum permissible level of licensing is only �A21m. per annum; even so, imports for the year 1953/54 were only �A6.5m.

21. Japan has already begun to seek alternative sources for goods hitherto imported from Australia. Whereas Japan has so far been buying 90% of its wool from Australia, it will this year buy only 50% from Australia.

22. It is natural that Japan should attach great importance to an adjustment of its trade relations with Australia, and has made formal approaches to this end, which await reply. Not merely from the commercial viewpoint, but for wider considerations of international policy, it is necessary for the Australian government to re-examine the position.

1 Document 56.

2 The short paper, 'Policy of the United Kingdom Government towards Japan', given to the Department of External Affairs by the UK High Commission, is on file AA : A1838/283, 759/1/7, i.

3 Not published.

[AA : A4906/XMI, VOLUME 1]