CANBERRA

Trade Negotiations with Japan

1. In May, 1956, Cabinet authorised trade negotiations with Japan
designed to maintain and, if possible, expand our export interests
in the Japanese market. [1] Subject to safeguards for our own
industry and for the exports of third countries to Australia,
Cabinet was prepared to extend most-favoured-nation tariff and
licensing treatment to Japanese goods entering our market. Cabinet
at the same time authorised legislation to enable emergency duties
to be applied to prevent serious damage to Australian industry or
established patterns of trade. The legislation has been enacted.

[2]

2. The negotiations have proved unexpectedly prolonged. This has
been due in part to Japanese difficulties in reconciling their
present bilateral and State trading practices with our requests
for complete m.f.n. treatment. In large part Japanese difficulties
have derived from United States subsidy and special non-commercial
trading policies. Sales at concessional prices and for Japanese
currency, surplus disposals, gifts, tied loans and other variants
of United States commodity arrangements are well established
practices between Japan and the United States and the Japanese
have come to rely upon them to a very large degree.

3. In addition political changes in Japan have made it difficult
for their policy issues to be settled in reasonably short time.

4. The negotiations with Japan have now reached the stage where
important decisions must be taken with a view to finality being
reached. Accordingly, I wish to consult and seek the guidance of
Ministers on the principal issues outstanding. The stage reached
in the negotiations and the principal issues and considerations
are treated under the following subject headings:

1. Proposed Form of Documents.

2. Contents of The Agreement.

3. Agreed Minutes.

4. Exchange of Notes.

5. Prospects of Reaching an Agreement with Japan.

6. Summary of Critical Issues.

Proposed Form of Documents
5. Attached are rough Drafts [3] drawn up by our Delegation in the
light of the original Cabinet decision and discussions with the
Japanese to date. It is proposed to have a formal Agreement
(Attachment 1) plus 'Agreed Minutes' (Attachment 2) spelling out
specific commodity understandings relating to our exports, plus an
'Exchange of Letters' (Attachment 3) drawing attention to our
'Special Duties' legislation and outlining special consultative
measures on a continuing basis to enable the Japanese to avoid the
need of our taking emergency action by themselves supervising
their exports to us of goods which we classify as 'sensitive
items'.

Contents of The Agreement
6. This is drawn up on the basis of reciprocal responsibilities
and seems to cover adequately the kind of points Cabinet had in
mind last May. It incorporates the following provisions:

Article I
Complete and reciprocal m.f.n. but with adequate exceptions for
existing preferences.

Article II
Limits import restrictions to those maintained for balance of
payments reasons and provides for their non-discriminatory
application. Restrictions in connection with State trading are
similarly covered.

Article III
Agreement that State trading agencies in their import policy must
be bound by the m.f.n. principles of the Agreement. (This is
supplemented in the Agreed Minute on commodities.)
Article IV
General acceptance of or lip service to principles of G.A.T.T.-'so
far as practicable and as may be agreed'-but with clear
reservation as to the 'bilateral' nature of the consultations and
substantive commitments.

Article V
Emergency escape from the obligations of the Agreement to permit
the use of quota restrictions, special duties or other devices to
prevent serious injury to domestic producers. It also sets out the
conditions under which the Agreement can be re-negotiated or
terminated.

Article VI
Definition of Australian territories to which Trade Agreement will
apply.

Article VII
Consultation provisions.

Article VIII
Machinery article.

The Agreed Minutes
7. Based on the argument that Japan, because of her present
trading commitments and methods and her trading policies with the
United States, cannot accord us complete m.f.n., the Agreed
Minutes set out minimum treatment which must be accorded certain
important Australian exports. This minimum treatment in respect of
individual commodities is covered under the heading 'Prospect of
Reaching Agreement with Japan'.

Exchange of Notes
8. (a) These cover the following points:

(a) Reference to the Australian emergency duties legislation
providing for the use of special duties to prevent injury to
established trade patterns of Commonwealth countries.

(b) Records the understanding that the Japanese will endeavour to
discipline their own exporters in order to avoid the necessity for
us to use legislation or other measures under 'Emergency Article'
(Article V) of the Agreement.

(c) Provides for consultations to assist the Japanese in
exercising restraint over exports.

(d) Refers to and records the clear understanding that these may
be added to during the process of consultation.

Prospects of Reaching Agreement with Japan
9. In general, there are grounds for believing the approach
contained in the draft Agreement may be acceptable to the
Japanese. Among other considerations it is 'dressed up'-
(a) in similar terms to an earlier suggested Japanese draft;

(b) to give the appearance of reciprocal obligations even although
many of the obligations are rather more onerous on the Japanese
than on ourselves;

(c) to resemble the relevant G.A.T.T. doctrine in the treatment of
such matters as quota restrictions, balance of payments, unfair
trade concept.

10. On the other hand, they may have great difficulty in accepting
one or two points or in meeting requests which are important to
us. Accordingly, I have summarised the present position the
Delegation has taken (contained in the draft Agreed Minutes
referred to in para. 7 so far as the commodities are concerned)
and have indicated where appropriate the reactions of the
Japanese.

(a) Wool
11. In the Agreed Minutes we have suggested the following
undertakings:

(i) Provision that no more than ten per cent (existing level) of
Japanese imports can be other than under a 'global-quota'.

(ii) Foreign exchange allocations to be determined solely by total
balance of payments situation.

(iii)Binding of free entry for period of Agreement.

12. The Japanese are still resisting our request to obtain a
binding of duty free entry on wool on the grounds that this is not
a tariff negotiation. Our delegation is pressing the following
points:-

(i) In obtaining m.f.n. on the Australian market, Japan is in fact
immediately obtaining tariff concessions represented by the
difference between the general tariff rate and the m.f.n. rate.

This concession covers 80% of Japan's trade with Australia in
1955-56.

(ii) Japan is obtaining the benefit of bindings which we have
already made of our duties to other m.f.n. countries and relating
to goods which comprise 50% of those which Japan would expect to
be selling to this market.

(iii)In addition, we have publicly stated and intend to press on
with a further reduction of the m.f.n. duties to whatever extent
the Australian Government considers it can take advantage of its
recently negotiated right to reduce preferences. [4]

(iv) Australia receives no such direct or indirect tariff benefits
from the Agreement proposed with Japan and for this reason and
also because Japan is really only according 90% m.f.n. treatment
in regard to wool, a binding of the present duty free entry would
be no more than equitable and would be essential presentationally
in Australia and yet capable of reasonable explanation
presentationally in Japan.

13. Without being too sanguine that Japan will accept a free entry
binding on wool, I would nevertheless propose to hold out for this
concession for some considerable period. In the final analysis, if
this is unobtainable, I would feel that in respect of wool we
would gain quite a bit from an Agreement which went as far as
possible to ensure that wool allocations were not guided by
motives or considerations other than the balance of payments
position of Japan and that at least 90% of wool was purchased on a
non-discriminatory and commercial basis giving the Japanese
importer the right to buy where he wants to.

14. Nevertheless on the wool duty issue there are alternative
approaches to the bold request for a binding of duty free entry
which we should consider:

(i) a declaration by Australia that, if the duty on wool was
increased during the operation of the Agreement, Australia would
reserve the right to re-negotiate all provisions of the Agreement;

(ii) as the Japanese claim that tariff concessions are excluded
from the present negotiations, Australia confine its offers to
non-tariff concessions (this would exclude m.f.n. tariff treatment
for imports from Japan);

(iii) giving them m.f.n. at present m.f.n. tariff rates, but
withholding from Japan any further reductions in the m.f.n. rates;

(iv) an undertaking not to raise the duty on wool above a
percentage to be determined.

15. Desirable as a binding of duty free entry would be
presentationally, failure to achieve such an undertaking should
not swing the balance against any agreement at all, if
satisfactory progress is made on other items.

(b) Wheat
16. In the Agreed Minutes we have suggested that wheat should be
admitted on a competitive and non-discriminatory basis subject to
the following provisos:

(i) So far as Australian soft wheat is concerned Japan should be
prepared to buy an amount equal to at least 12 1/2% of total
imported millable wheat in the first year of the Agreement and at
least 16 2/3% in the second year;

(ii) thereafter, should Japan enter into a special non-commercial
wheat import arrangement or take subsidised, dumped, gift or
'special arrangement' wheat, she must buy Australian soft wheat to
the amount of not less than 16 2/3% of total millable wheat
imports by volume;

(iii) hard and semi-hard wheats to be purchased in accordance with
normal commercial considerations over and above the minimum soft
wheat figures given above.

17. An undertaking along the above lines should provide an
adequate entry to the Japanese market for Australian wheat whilst
Japan continues to admit wheat under U.S. concessional
arrangements or unfair trade practices. In the event of no dumped
or special arrangement soft wheat being imported from the U.S. or
elsewhere the market should be open to the Argentine and Australia
who would presumably share it on the basis of their supply and
competitive position.

18. When it is realised that in the post-war period Australia has
sold virtually no soft wheat to Japan, an achievement of anything
like the percentages we are currently asking and the conditions
that should apply thereafter would be a tremendous improvement in
respect of the export prospects for this commodity.

19. I have little doubt that we could get a commitment for the
lower percentage (12 1/2% of total wheat imports or 250,000 tons-
6,500,000 on the basis of last year's imports) but would press
for the higher figure of 16 2/3% (350,000 tons-9,000,000) and
would willingly recommend acceptance of the lower figure or any
figure in between.

(c) Barley
20. We have suggested in the Agreed Minutes that barley should be
admitted on a competitive and non-discriminatory basis, except
that if Japan should enter into a special quota arrangement with
another country or should receive subsidised, gift or special
arrangement barley, she should buy from Australia not less than
30% of total imports.

21. Japanese imports of Australian barley (varying from 25% to 30%
of total imports in the last three years) have been very
satisfactory in the post-war period. Japan has, in fact,
constituted our major market. I would like to see us get the
assurance of 30% of her total imports in the eventuality of unfair
trade practices or special U.S. disposal arrangement, but do not
regard such an assurance as having anything like the same
importance as it would have for wheat. 22. Should the Japanese
object to 30% and be willing to settle for 25%, I would think this
would be quite satisfactory.

(d) Sugar
23. In the Agreed Minutes we have requested the following
undertakings on sugar:

(i) To be accorded opportunity to compete on a normal commercial
basis for not less than 40% of total exchange allocations for
sugar.

(ii) In the event of unfair trade practices by competitors Japan
should be prepared to import 100,000 tons from Australia.

(iii)To admit Australian raw sugar at the lower rate of duty
applying to raw sugar from other sources when it is purchased by
Japanese refiners.

24. The Japanese have indicated that it would be economically and
politically difficult for them to consider any adjustment to the
rate of duty applicable to Australian sugar. At present Australian
sugar qualifies for a higher rate of duty than most other sugar
imported because it is a higher polarisation raw sugar.

(e) Other Commodities
25. In respect of other commodities where we do not receive m.f.n.

treatment the draft Agreed Minutes provide:

(i) Beef Tallow and Cattle Hides
To be put on open-general licence qualifying for automatic
exchange approval.

(ii) Dried Skim Milk
Opportunity to compete on a competitive and non-discriminatory
basis within a global foreign exchange allocation except for
imports from the United States for welfare programmes.

(iii)Dried Fruits
Guarantee of not less than 100,000 per annum.

(f) Elimination of Discrimination in Import Restrictions
26. The draft Agreement itself provides for the accord of most-
favoured-nation treatment in respect of quantitative restrictions
(as well as on the tariff), which are only to be applied on
balance of payment grounds. This means that we shall no longer
discriminate against Japan in our import licensing and Japan would
be required to accord similar treatment to Australia.

27. I think the Japanese should be expected to accede to our
suggestions in this regard. We are under pretty strict obligation
in G.A.T.T. to be able to defend our import restrictions in terms
of our balance of payments position. In the proposed Agreement
with Japan we undertake no greater responsibility than this and at
the same time seek to get a similar undertaking from her. This is
particularly important in the case of Japan, where a great deal of
her arrangements for exchange allocation and commodity imports is
drawn up in terms of country quotas or country allocations and

where her State trading activities make it so easy for her import
policies to be dictated by other than commercial considerations.

(g) Protection of Australian industry
28. A major provision in Cabinet's Decision of last May,
authorising trade negotiations with Japan, was that Australia
should retain full freedom to safeguard Australian industry or the
established trade of the U.K. or other suppliers to Australia from
a disruptive volume of imports from Japan.

29. So far as the Agreement with Japan is concerned, the attached
Drafts provide quite clearly that Australia, in the event of her
industry being threatened, can, to the extent necessary, be
relieved of all obligations in the trade agreement to accord
m.f.n. and non-discriminatory treatment to Japanese goods. In
practice, this would mean that Australia could impose import
restrictions specifically against Japan and, if necessary, to a
greater extent than restrictions currently being imposed against
imports generally.

30. Additionally, Australia could impose special emergency duties
which, in the opinion of the Government, would be sufficient to
restrict imports of Japanese goods to the point where they would
not represent a threat to Australian industry or would cease to
cause Australian industry serious damage.

31. I am quite certain that at least the textile industry in
Australia would regard any attempt whatsoever to normalise our
trade relations with Japan as something which represented a
serious challenge to this industry. I am also certain that even
although we are armed with the ability to use special duties and
special quota restrictions in the case of imports from Japan, some
sections of Australian industry will be very vocal in their
opposition to any trade agreement and will proclaim loudly they
are hurt even before they are hurt.

32. I don't think any device or safeguard can be contrived which
removes either the possibility of hurt or, in practice, the
probability of some pinches to Australian industry. Politically,
this is something that this Government will have to stand up to
and it will not necessarily be easy.

33. On the other hand, it is quite clear that there can be no
treaty with Japan unless we are prepared to ensure full m.f.n.

treatment, subject only to the maximum safeguards which I have
referred to above and which I believe exist in the present draft
of the Agreement.

(h) Protection of the established trade of the U.K.

34. The special mention in the Exchange of Notes of the amendment
to the Australian Industries Preservation Act clearly brings to
the attention of the Japanese the fact that we will use the
special duties measure to protect the established pattern of trade
of Commonwealth countries. No such safeguards exist, however, in
respect of the established trade of other countries. This latter
is a departure from one of the provisions which Cabinet agreed to
in May last year, but I believe any attempt to secure the
agreement of the Japanese to protect on our market the exports of
Third Countries other than Commonwealth countries would, in fact,
make the conclusion of an Agreement impossible.

35. The ability to protect Australian industry and Commonwealth
suppliers of goods from serious damage by imports from Japan is
dependent in this approach upon the provisions of Article V and
the relative exchange of notes. The Japanese have not shown any
objection to the use of emergency duties to this end but the
delegation has not as yet sounded them out on the proposals for
the application of discriminating quantitative restrictions. The
draft of Article V does not specifically refer to the use of
quantitative restrictions but nevertheless the power is there. We
are hopeful that the Japanese would find it easier to accept a
provision in these terms rather than an open reference. However it
may well be that any provision which allows the use of
discriminatory quantitative restrictions, no matter how oblique,
will be unacceptable to them. In this event Ministers must decide
whether they consider that emergency duty powers would be
sufficient, both presentationally and in practice, to give the
necessary protection.

(i) General advantages of concluding an Agreement
36. On the export side, the Japanese trading system presents very
many opportunities for denying a country m.f.n. in the true sense
while nominally extending such treatment. Therefore, their
exchange allocation system, their bilateral trading arrangements
and their State trading agencies can be at the mercy of Japanese
policies unless these are reasonably governed by an overall
Agreement of the type contemplated.

[37.] In actual fact we are seeking more from Japan than we
receive from some other countries to whom we accord most-favoured-
nation treatment. Moreover if we can obtain reasonable assurances
about the treatment of our exports, and the Agreement is designed
to provide these assurances, there are important additional
opportunities for the development of Australia's export trade.

38. Japan is now our second largest market and still a growing
market for our goods. Curiously enough, the Japanese delegation
already appears to accept the fact that although the original
incentive for the negotiations arose from the imbalance in our
favour of present trading levels, the net result of the trade
arrangement-largely because of the possible increase of exports of
soft wheat which would flow from it-is likely, certainly in the
short term, to give a still greater imbalance to Japanese trade.

39. I don't think we can afford to give Japan grounds for
irritation at the imbalance in trade by not extending m.f.n.

tariff and licensing to her. If we remove the grounds for
irritation and succeed in getting an Agreement along the lines we
are currently following, not only will our trading position be
improved so far as Japan is concerned but the indirect benefits of
this will be felt by good customer countries from whom we purchase
our requirements.

40. From the point of view of the Australian economy, it is
essential that we reach agreement. Politically, I think that if
the terms of the agreement are anything like as favourable as I
have outlined to you, the conclusion of the Agreement would be
manageable.

41. So far as individual Australian industries are concerned, I
believe the terms of the Agreement and our powers in respect of
quota restrictions and special duties are adequate to prevent
major damage but are not likely to avoid some damage to our
industries at the margin.

SUMMARY OF CRITICAL ISSUES
42. At this stage the following appear to be the major issues on
which we must determine our position if, in the course of
subsequent negotiations, the Japanese are not prepared to meet our
current requests. In other words we must indicate the extent to
which we are prepared to deviate from the following approach in
order to obtain an Agreement with Japan.

(i) Wool: the request for duty free entry;

(ii) Wheat: the request for firm quotas in the event of U.S.

surplus arrangements or unfair trade practices by competitors;

(iii)Other Commodities: the request for an assurance against
unfair trade practices on barley and for an amendment of the
tariff treatment for sugar;

(iv) Provision for Emergency Action: the right to use emergency
duties and discriminatory quantitative restrictions in order to
protect Australian industry and the trade of Commonwealth
countries; especially the application of discriminatory
quantitative restrictions.

43. Submitted for the information of Ministers in accordance with
Cabinet Decision 203 of 21st May, 1956.