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]