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130 Submission 174 To Cabinet By Mcewen

16th May, 1956

Trade Negotiations with Japan
1. Following recent exploratory trade talks between Australian and
Japanese officials in Canberra, in accordance with Cabinet's
earlier approval, the way has now been cleared for trade
negotiations with Japan looking toward a trade agreement. Our
objective in such negotiations would be to protect our export
interests by obtaining contractual benefits in Japan. In return,
we would undertake commitments with the practical effect of
reducing the extent to which we discriminate against imports from
Japan.

Australia might seek benefits of the following kinds:

(i) in general, fair opportunity for Australian products to enter
Japan;

(ii) assurances on minimum import quotas or exchange allocations
for major Australian products such as wool, wheat, barley and
sugar;

(iii)appropriate tariff commitments;

(iv) opportunity for prior consultation on proposed receivals by
Japan of surplus primary commodities from the United States (e.g.

grains, dairy products).

Progress since November 1954
2. In November, 1954, Cabinet decided that informal trade talks
would be held between Australian officials and members of the
Japanese Embassy. Shortly afterwards the Japanese became pre-
occupied with the question of their admission into G.A.T.T. and
talks did not begin until late in 1955. They ended in February,
1956.

3. The talks were informal and purely exploratory and related
mainly to the background to trade between Australia and Japan, the
trade and tariff policies and practices of the two countries and
mutual trade problems. The Japanese wished to raise the question
of application of G.A.T.T. between Australia and Japan and also
expressed a desire for a comprehensive treaty of friendship,
commerce and navigation. However, these matters were considered to
be outside the scope of the informal trade talks. The Japanese
have been pressing in recent weeks for the commencement of trade
negotiations.

Importance of the Japanese Market to Australia
4. Japan vies with France as our second most important market, and
takes a greater range of major products than France, which takes
almost solely wool and sheepskins. There is scope for Japan to
expand as a natural market for major Australian products,
particularly for wool and grains. Our exports to Japan are now
running at an annual rate of 80m. compared with imports from
Japan of 25m. In the eight months ended February, 1956, Japan
took 17% of our wool exports, 23% of our wheat, 57% of our barley,
and 12.5% of the sugar exported from Australia. Attachment A shows
Australian exports to Japan in selected years.

5. Wool is licensed for importation into Japan on the basis of the
needs of the woollen mills. Goods essential for Japan's export
trade are subject to open licensing. Wool is not treated in that
way. Japan's woollen textile exports are small, most of the raw
wool imported being for home consumption. Raw wool imports are,
however, one of the big debit items in Japan's trading accounts.

There is some pressure on these grounds for Japan to make herself
less dependent on imports of wool by encouraging the production of
synthetics and to direct her purchases of wool to countries that
are prepared to provide markets for Japanese goods. Discrimination
by Australia against imports from Japan gives Japan further
grounds to cut imports of wool in general and to divert her
purchases away from Australia, or perhaps both.

6. Australian exports of wool to Japan have recently progressed
favourably. The Japanese industry prefers Australian wool and
Japan has had the sterling. The Japanese Government, however, in
making their approaches for a trade agreement, have been concerned
that Australian discrimination against imports from Japan
militates against their earning from exports to Australia, the
finance necessary for their imports. Of course, if Japan limits
her participation in the Australian wool auctions this does not
necessarily mean we export so much less wool, but auction prices
reflect the presence and degree of buying interest of major buying
countries. In the auctions Japan is usually a strong competitor
with Bradford, and this helps our bread and butter lines in the
wool clip. Japanese buying has been a major factor in the
hardening of wool prices in recent months.

7. Because her sterling situation has been favourable in recent
months, Japan has been able to purchase grains in Australia. But
we have no monopoly or near-monopoly of grain. U.S. surplus
disposals are a constant threat to our trade and potential trade
with Japan in wheat and barley. Under aid agreements signed with
the U.S.A. in 1955, Japan is to receive some 800,000 tons of wheat
and 170,000 tons of barley from U.S. surplus stocks. Argentina
competes against us in the grain trade with Japan. Our grain
exports to Japan could also be affected if the Japanese Government
were to encourage rice consumption, and engage in trade deals with
Asian rice-producing countries for larger rice imports. As it is,
Australia could have supplied much of the wheat and barley
obtained from U.S.A. and Argentina if commercial considerations
only had been involved.

8. Again, in the management of her foreign exchange, Japan has
bought Cuban sugar for sterling payment. She bought sugar from
Australia for the first time in 1955, but the scope is there for
regular trade if we can compete against Cuba and other suppliers
and have the opportunity of competing against them.

9. In her import licensing or exchange control, Japan has not
taken any action against Australian goods which could be
interpreted as retaliation for our discrimination against imports
from Japan. However, in the case of wheat the purchase policy of
the state trading organisation has not been favourable. To the
extent that Japan favours, say, Argentine grains on currency or
other grounds, there is a measure of discrimination against us,
but on the whole Japanese treatment of Australian exports has been
relatively favourable. This is explainable in terms of Japan's
present high holdings of sterling, but also it seems to have been
influenced in part by the desire of the Japanese to reach an
understanding with us on trade questions. In large measure the
recent exploratory talks have been used to bring home to the
Japanese the degree to which we are concerned at the covert
discrimination that can be practised by state trading
organisations and to influence official Japanese opinion against
such discrimination if they wish to make much progress in trade
discussions.

10. Only by giving Japan assurances that will allow her
opportunities for improving her export trade with Australia, can
we obtain assurances that Japan will treat our wool, grains, sugar
and other products favourably. Japan's system of import controls
and her pattern of imports give considerable scope for
discrimination. Because of this, and because of the particular
products involved, Japan could reduce substantially her purchases
from Australia, if she had to do so or if she chose to do so. It
is important, therefore, that we reach an understanding with Japan
to protect our export interests in the Japanese market whether in
respect of actions by the Japanese Government (tariff, import
controls) or in respect of actions by other Governments (surplus
disposals, etc.)

Concessions we might seek from Japan
11. While there would be mutual recognition that the balance of
payments situation might on occasions make some discrimination in
import controls unavoidable, we would seek commitments by Japan
not to discriminate in exchange allocations or import licensing
against Australian wool, wheat, barley, sugar, hides and skins,
frozen and canned meat and a number of other commodities. We would
also seek assurances as to the quantities of Australian wool,
wheat, barley and sugar to be permitted importation into Japan, or
the conditions on which these products are to be imported. We
could also explore ways of ensuring that Japanese trade or even
general economic policies would not be disadvantageous to our
exports of these commodities, particularly wool. Some opportunity
might also be sought for prior consultation where United States
aid programs or disposal transactions involve commodities supplied
by Australia.

12. Our main exports to Japan are few in number and being
foodstuffs and raw materials for the most part, enter Japan duty
free or at relatively low rates of duty. On the other hand, the
range of Japanese exports to Australia is fairly wide and being
mainly secondary products enter Australia at relatively high
duties under the General Tariff. Our interest in securing a
guarantee of continued most-favoured-nation tariff treatment from
Japan is therefore less than her interest in obtaining most-
favoured-nation treatment from us. It would however, be desirable
to obtain from Japan a guarantee of most-favoured-nation tariff
treatment especially to protect our wool and grain exports from
possible discriminatory duties. The Japanese tariff provides for
duties of 20% on wheat and 10% on barley, but these duties are
usually suspended. The greater benefit to Japan of obtaining most-
favoured-nation tariff treatment from us could be balanced in
negotiations by the benefits to us of undertakings-additional to
most-favoured-nation tariff treatment-of the sort described above.

Commitments we might accept towards Japan
13. The concessions we might seek from Japan cannot be considered
apart from the reciprocal concessions Japan might seek from
Australia. Here two points are relevant.

Firstly, Japan is the only significant trading country to which
Australia applies the General Tariff (the highest column of duties
in the Tariff), and Japan is the only country against which
Australia discriminates in import licensing for other than balance
of payments reasons.

Secondly, because of the importance of textiles in Japanese export
trade, any agreement which did not accord at least qualified most-
favoured-nation tariff treatment to Japanese cotton and rayon
piecegoods and reasonable import licensing treatment for those
goods would have little appeal to the Japanese.

14. In effect, the Japanese will seek the same treatment for their
exports to Australia as we extend to almost all countries-in the
tariff, most-favoured-nation treatment; and in import licensing,
non-discriminatory treatment unless on balance of payments
grounds.

15. It has been noted that textiles are the main item involved in
any trade negotiations with Japan, but various other consumer
goods such as crockery and toys would also be likely to raise
problems of protection for Australian industries and perhaps for
export industries in the United Kingdom or other major supplying
countries, unless there are effective safeguards against a
disruptive volume of imports from Japan. (Attachment B shows the
main imports from Japan). Japan, of course, is not the only
supplier of low-cost goods. Indian cotton piecegoods are in
general cheaper than Japanese, and it may before long be necessary
to develop safeguards against competition from low cost countries
in any case, even if Japan is not now to be accorded m.f.n.

treatment.

16. The Japanese Government undoubtedly attaches weight to Japan's
international trade standing, and a successful agreement with
Australia would facilitate their rehabilitation as a trading
nation. For these reasons, as well as because of the trade with
Australia that would be at stake, the Japanese may be prepared
eventually to accept an agreement which, while according them
m.f.n. tariff treatment and nondiscrimination in import licensing,
retains to Australia full freedom to control imports from Japan by
either tariff or import licensing action if an undue volume of
imports from Japan threatens serious damage to Australian industry
or to the trade with Australia of established suppliers such as
U.K.

17. It is not impossible that the Japanese authorities would co-
operate in supervising the price or volume of Japanese exports to
Australia. Their supervision would put a brake upon any tendency
to flood the Australian market. We would nevertheless need to
retain freedom to keep imports within reasonable bounds in the
interests of our own producers or, in special cases, in the
interests of the United Kingdom, or other established suppliers to
Australia. This would require an escape clause in the trade
agreement enabling Australia to impose additional or special
customs duties or to apply special import quotas in certain
specified circumstances.

18. There would have to be some understanding worked out with the
Japanese regarding the circumstances in which Australia would
apply these safeguards and one basis of the arrangement might be
that the Japanese exporters themselves, under supervision of their
Government, would control either the price or the volume of their
exports to Australia so as to make special action by Australia
unnecessary. The important thing, however, would be that Australia
retained freedom to impose special duties or quotas to prevent
serious damage to Australian industries or to the trade of
established suppliers to the Australian market like the United
Kingdom.

19. The proposed special duties safeguard would provide a
selective method of dealing with low-cost consignments by one or
two exporters. In this connection, however, legislative action
would be necessary, e.g. by amendment of the Customs Tariff
(Industries Preservation) Act, to enable these special duties to
be applied speedily and effectively.

20. The basis of the special or emergency duty would be that
whenever imports threaten or cause serious damage to Australian
industry or disruption of the trade of established suppliers like
the U.K., special duty should be payable which would bring the
cost up to the cost of the comparable product imported from other
countries. An essential feature would be to ensure that such
duties could be applied swiftly and certainly. The details would
need to be worked out by the departments concerned. They would
include such matters as the criteria to be employed in the
assessment of the duty, the role of the Tariff Board, the period
for which the emergency duty could apply, and procedural aspects.

21. The power to impose special duties could be very valuable in
our dealings with the U.K. or for that matter with other important
supplying countries. It would be a policy issue whether we
resorted to it to protect the interests of U.K. or other countries
in particular cases in return for an adequate quid pro quo.

Requests from the other country for action along these lines would
be handled in a similar manner to requests for special duties to
safeguard domestic industry and the amended legislation would be
framed to provide for this.

22. These new provisions would need to be of general application-
i.e. they would not appear to relate to Japan alone-and they would
be permissive, not mandatory. On that basis, the adoption of the
legislation would not itself bring any conflict with G.A.T.T. nor
would application of the special duty to a non-G.A.T.T. country
raise any questions in G.A.T.T. Application of the special duty to
a G.A.T.T. country would be quite compatible with G.A.T.T. if on
the grounds of protecting the Australian industry, and fairly well

defensible, though not conclusively so, if on the grounds of
protecting the established pattern of trade.

23. It should be noted that the proposed negotiations with Japan
have no immediate connection from Australia's point of view with
the question of the application of G.A.T.T. to trade relations
between Australia and Japan.

24. For presentational purposes any escape provision in the trade
agreement would probably need to confer equal rights on Japan and
Australia, but this would have no real effect for Australian
exports which, because of their character as primary products, do
not raise this kind of problem for Japan. However, Japan may seek
her own kind of escape clause to balance the one sought by
Australia.

25. Other possible bases for trade negotiations with Japan have
been examined. Of these the main one has been that we should give
Japan most-favoured-nation tariff treatment, but should have a
list of exceptions, i.e., goods to which that most-favoured-nation
commitment would not apply.

The main reasons for rejecting this approach have been:-

(a) It would be difficult to justify to Australian manufacturers
leaving some items off the list of exceptions when other items
were in the list.

(b) Such a 'partial m.f.n.' commitment would be bound to be much
reduced in value to the Japanese, as a trade agreement benefit,
because we would almost certainly exclude some of her key items of
trade. Also it would have very much less value to Japan from a
trading prestige point of view.

(c) It would invite the Japanese to make similar exceptions on
their side in their treatment of Australian goods. Making
treatment of this kind reciprocal would be much more to our
disadvantage than having the escape clause now proposed apply
reciprocally (see para 24).

26. Japan's principal exports are 'B' category goods for purposes
of import licensing. As 'B' category goods from all sources are
now restricted to 30% of 1950/51 imports, the impact of Japanese
competition on local industries generally would be cushioned. The
present time is therefore as favourable as any for according most-
favoured-nation treatment to Japan.

United Kingdom Interests
27. Japan might be brought to agree to special provision for the
protection of the interests of third countries in the Australian
market against low cost commercial competition (as distinct from
dumping) which would violently disrupt production in these
countries. They said as much in Geneva in 1953 in connection with
the report of the G.A.T.T. Intersessional Committee on the
question of adequate safeguards against Japanese competition,
although their statement then was connected with their admission
to G.A.T.T. and not with any bilateral agreement. At all events,
something on these lines could be pressed for in the negotiations.

28. U.K. has expressed the hope that if Commonwealth countries
make bilateral agreements with Japan they will provide safeguards
for the interests of other Commonwealth countries. If Australia
were free under a trade agreement with Japan under certain
conditions to regulate imports from Japan in the interests of the
U.K., this could be a very valuable consideration in our dealings
with the U.K. and could be explored with the U.K. concurrently
with any trade negotiations with Japan. It could have value in our
dealings with other countries also (e.g. Italy, Germany).

Foreign Policy Considerations
29. Cabinet has already decided that, in handling issues involving
our relations with Japan, we should be guided by the principle of
allowing Japan, through co-operation with non-communist nations,
to have reasonable facilities 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 her association with the West. A satisfactory solution
to our present trade problems with Japan would be in conformity
with that policy decision.

SUMMARY
30. Under post-war conditions, Japan is in fact one of our most
important markets, and is of growing importance-especially for our
two major exports, wool and wheat. We apply our highest tariff
rates to Japanese goods (almost only to Japanese goods) and in
import licensing we discriminate on non-currency grounds against
Japanese goods alone. Our exports to Japan are by no means
invulnerable. We cannot assume that if the present opening of a
trade agreement misfires, Japan will continue even her present
treatment of Australian goods. It is important, therefore, that we
reach an understanding with Japan for the protection of our trade
interests now and the future improvement of our export
opportunities.

31. Owing to the nature of the respective export trades most-
favoured-nation tariff treatment is perhaps more important to
Japan than to Australia. This disparity of benefit may be balanced
by the wider assurances we seek in non-tariff matters.

32. To reach agreement with Japan it will be necessary to give the
Japanese as near to normal treatment as practicable, i.e. m.f.n.

tariff treatment and non-discriminatory import licensing
treatment. The essential point is that adequate safeguards be
retained in order to protect Australian manufacturing interests
where necessary and to protect UK interests as required. Adequate
safeguards could be provided by the inclusion of appropriate
escape provisions in any trade agreement with Japan and by
amendment of the Customs Tariff (Industries Preservation) Act.

Recommendation
(a) That trade negotiations be entered into with Japan on the
basis that:-

(i) We seek commitments by Japan to safeguard our export interests
in her market, e.g. in tariff treatment, import licensing
treatment, her internal economic policies on major Australian
commodities (wool, wheat and barley), and opportunity of prior
consultation in respect of proposed receivals of aid or surplus
primary commodities from U.S.A. which might prejudice Australian
trade interests.

(ii) Subject to Australia's retaining full freedom to safeguard
Australian industry or established trade of the U.K. or other
suppliers to Australia from a disruptive volume of imports from
Japan, we be prepared to consider accepting commitments to extend
most-favoured-nation treatment to Japan in tariff matters, and
(subject to currency considerations) the same import licensing
treatment as is extended to non-dollar countries generally.

(iii)That the Customs Tariff (Industries Preservation) Act be
amended to enable emergency duties to be applied to the extent
necessary to control low-cost imports from Japan so as to avoid
serious damage to Australian industry or established patterns of
trade.

(b) That other Commonwealth countries be informed of the
Government's intention to enter into negotiations with Japan and a
public announcement be made at an appropriate time.

Attachment A
Exports to Japan from Australia
'000

Year Butter Meat Barley Wheat & Wool Other
Total
Flour
1950/51 55 15 3,290 2,720 51,500 3,950 61,600
1951/52 65 135 2,800 Nil 40,600 4,890 48,500
1952/53 801 39 8,730 2,140 66,700 5,570 84,000
1953/54 358 275 6,260 275 43,700 4,840 55,700
1954/55 108 307 3,420 1,460 46,100 7,200 58,600
Nine months
1955/56 49 107 3,140 6,530 42,700 6,660 59,200

Attachment B
Imports from Japan into Australia
'000

Commodity 1950/51 1951/52 1952/53 1953/54
1954/55 1955/56
9 months
Piecegoods (mainly 3,120 8,730 752 4,410 7,050 6,230
cotton and rayon)
Iron and Steel (sheet, 8,900 23,800 1,840 70 3,032 5,900
plate, rod, wire, etc.)
Non-Ferrous Metals 2,220 2,400 120 121 1,008 320
and Manufactures
(mainly copper and
aluminium)
Plywood 181 1,810 2 18 95 50
Portland Cement 161 1,410 310 130 120 -
Porcelain and Earthen- 155 363 88 94 549 781
ware (mainly high
tension insulators and
household crockery)
Raw Silk 288 129 29 73 57 5
Sodium Salts (mainly 11 75 36 119 88 5
Mono Sodium
Glutamate)
Toys - 7 - 62 258 211
Sulphur - - 1,200 328 109 14

Other 564 4,855 319 1,121 782 4,400
Total 15,600 43,600 4,700 6,540 18,400 17,900


[AA : A4926, VOLUME 8]
Last Updated: 11 September 2013
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