Trade Talks with Japan 1. Mr McEwen and Senator O'Sullivan have cabled from London suggesting very strongly the urgency of opening talks with Japan (copy of cable attached-attachment 'A'). 
2. When considering this question at recent meetings, Ministers agreed in principle that Australia's trade relations with Japan should be placed on a more satisfactory basis. Ministers agreed to defer the announcement of an intention to open negotiations until after the Commonwealth talks on the General Agreement on Tariffs and Trade (GATT) now taking place in London. 
3. The question of Japan's admission to the GATT will be discussed at the Ninth Session of the contracting parties which opens on October 28th. Background notes to the proposal for a bilateral treaty with Japan including the GATT aspects are given in Attachment 'B'. 
4. The suggestion made by Mr McEwen and Senator O'Sullivan was put forward on the basis that there are good tactical reasons for taking the initial step of announcing our willingness to talk with Japan before the opening of the GATT Session at the end of the month. Before this step is actually taken however, Ministers should have in mind fairly clearly what would be the form and scope of an agreement and what would be the implications in such an agreement for Australian industry and the pattern of imports including imports from the United Kingdom.
5. If the suggestion of Mr McEwen and Senator O'Sullivan is accepted the Committee envisages that the opening of trade talks with Japan could take place in three steps.
Step 1. Japan could be told immediately that Australia is prepared to open talks with them with a view to negotiating a bilateral trade treaty. As soon as this step has been taken a short public statement could be issued.
Step 2. The time and place for the opening of the talks could be suggested to the Japanese. If convenient the Japanese could be given at the same time a broad outline of Australia's ideas on the possible basis of an agreement and the Japanese could be invited to give us their ideas. This step would be taken in 4-5 weeks' time when Ministers would have had an opportunity for a more detailed examination of the issues.
Step 3. The detailed negotiation of the agreement. It was contemplated in the previous Ministerial discussions that Mr McEwen and Senator O'Sullivan would be available before the detailed negotiations were taken too far.
6. Concessions we might seek from Japan Most-favoured-nation treatment in tariff and related matters.
7. While there would be mutual recognition that the balance of payments situation could preclude unconditional non-discriminatory treatment, Japan should apply that treatment, subject to exceptions agreed upon between the two Governments, to Australian wool, wheat, barley, hides and skins and processed milk. This commitment would not preclude the imposition of discriminatory restrictions to protect Japan's balance of payments position; but it would afford Australia the right to consult on the imposition of such restrictions against the Australian products mentioned.
8. In seeking a commitment on m.f.n. we are asking Japan to maintain and continue the treatment currently accorded to imports from Australia. Ministers may wish to consider at a later stage whether tariff concessions should be sought from Japan. The goods from which items might be selected are:
Wool Wheat Barley Hides and skins Processed milk Tallow Casein Butter and Cheese Meat Canned and dried fruits, fruit juices, cordials, jams and jellies Shoe polishes Attachment 'C'  indicates the tariff treatment on the item suggested.
Commitments we could accept 9. The concession sought in paragraph 7 immediately raises the question of reciprocal action by Australia. Australia is at present using quantitative restrictions which discriminate against Japanese goods. It is not at the present time possible to justify this discrimination on balance of payments grounds. The Cabinet decision on Submission No. 135  indicates that Cabinet favours this policy of using quantitative restrictions for protective purposes against Japan for the time being.
9A. Under the import controls at present applicable to Japanese goods, 50 per cent of our imports from Japan consist of textiles.
The bulk of these imports are of goods for further processing by Australian manufacturers. Imports of textiles would probably account for two-thirds of our imports from Japan in the absence of the present discriminatory controls on Japanese goods and the proportion of finished textiles would be likely to increase. It follows that an agreement which did not accord m.f.n. to all or most imports of Japanese cotton and rayon piecegoods would have little appeal to the Japanese.
9B. It appears therefore that the Government should consider how far it is prepared to go in according m.f.n. tariff treatment to Japanese cotton and rayon piecegoods to establish a basis for negotiation. This raises the question not only of Australian manufacturing interests but also those of U.K. textile manufacturers.
9C. Although textiles are the main item involved in any negotiations with Japan, various other items, mainly consumer goods (such as toys, artificial flowers, pencils, etc.) also raise problems of protection.
10. Australian industries manufacturing the following goods would appear to be vulnerable if similar Japanese goods were admitted at m.f.n. rate of duty without some limitation on importation:-
Earthenware products other than crockery Elastics Glassware Fancy Goods Bags, baskets and other similar goods Pencils Porcelain insulators Plastics Snap fasteners Electrical goods (various) Drills, denims Cotton sheeting Artificial silk piecegoods Trimmings, ribbons Buttons Ribbons Canvas and duck, cotton Copper shapes Tiles Articles for games Toys Imitation Jewellery Spectacles, sunglasses Smokers' requisites Cotton piecegoods printed, dyed or coloured Cotton piecegoods, bleached Cotton tickings Artificial silk furnishing fabrics Australian industries manufacturing the following goods (the duties on which are the same under the G.T.  as under the m.f.n. tariff) would be vulnerable if similar Japanese goods were admitted without limitation:-
Plywood Dental chairs and units Pencil cases (of wood or base metal) Cinema projectors (smaller types) Toilet combs Soda ash Snap fasteners (for apparel) Sulphur 11. A schedule of the more important goods of which Japan is a significant or potentially significant supplier to Australia and which are subject to lower duties under the m.f.n. tariff than under the general tariff is attached.  The schedule is in two parts:
1. Items raising questions of protection for domestic industries.
2. Items raising questions concerning the interest of third countries in the Australia market.
The schedule is not exhaustive but is merely to bring to the notice of Ministers certain important products which could be affected.
12. If most-favoured-nation treatment is to be accorded to Japan the agreement must contain safeguards to protect Australian industries as necessary. There are two possible types of agreements.
A-THE QUOTA PRINCIPLE M.F.N. over whole tariff. Import items deemed to be vulnerable restricted by quotas. Imports above quota subject to G.T. duties or subject to outright prohibition.
We would probably require freedom to transfer items to quota list from time to time. The more difficult issues to be decided would be the selection of the goods to be subject to quota control, the fixing of the actual quotas and the fact that it would invite the Japanese to apply similar treatment to Australian exports.
B-THE CANADIAN EXAMPLE General m.f.n. treatment with appropriate escape provisions (wider than anti-dumping) to permit the imposition of special discriminatory duties on damaging low-cost imports from Japan.
The recent agreement between Canada and Japan requires the mutual accord of m.f.n. tariff treatment between the two countries but reserves to Canada the right to establish special values as the basis for levying additional duties on imports entering Canada in threatening volume. An agreement between Australia and Japan with similar provisions for the levying of special duties on low cost imports would entail amendment to existing legislation which would not apply to imports from other sources. it would also raise administrative problems.
13. The Canadian type of agreement has been accepted by Japan and there is therefore the presumption that they would be able to accept such an arrangement with us. This type of agreement has the advantage that its escape clause can be invoked immediately when needed and in principle it could give all the protection required.
This means that we do not have to worry in advance about the list of industries we want to protect. In addition it goes as far as possible to complete most-favoured-nation treatment and would give us a greater chance of getting the concessions we wish to seek from Japan.
14. For the reasons stated in paragraph 13 an approach based on the Canadian agreement appears attractive to some members of the interdepartmental committee. On the other hand the Department of Trade and Customs who will have the responsibility for administering the import aspect of the agreement see major difficulties of administration. These difficulties are listed in attachment 'D'. 
15. The Canadian type of agreement meets the policy requirements but serious administrative difficulties arise with it. The quota approach is administratively feasible but serious doubts arise whether it would result in any useful agreement with the Japanese.
United Kingdom Interests 16. At the Commonwealth talks the United Kingdom expressed the hope that if Commonwealth countries made bilateral agreements with Japan they would provide safeguards for the interests of other Commonwealth countries. This will have to be explored with the United Kingdom during the further preparations for negotiating the treaty.
Conclusions 17. If it is considered in the light of the above that an immediate announcement on trade negotiations with Japan should be made as suggested by Mr McEwen and Senator O'Sullivan it is suggested that the following action might be taken:-
(1) Japan be informed immediately that Australia is prepared to commence talks with a view to negotiating a bilateral trade agreement and that a time and place for the opening of the talks will be suggested as soon as possible.
(2) An announcement be made of the Government's intention.
(3) The other Commonwealth countries be informed of Australia's intention and be invited to consult on the terms of the proposed agreement.
(4) Ministers give further consideration to the merits of the two possible types of agreement.