CANBERRA

Australia's Trade Relations with Japan
It is understood that the problem of making some adjustment
towards correcting Japan's present heavily adverse balance of
trade with Australia will come before Ministers very shortly in
two ways, namely:

(i) through a Cabinet agendum proposed by the Minister for Trade
and Customs based on a report of an Expert Committee, composed of
the Departments of Trade and Customs, Commerce and Agriculture,
Treasury and National Development. [1]

This report surveys the economic problems associated with trade
with Japan but makes only one recommendation designed to afford
Japanese imports into Australia some short-term alleviation under
the import licensing controls. It explicitly avoids such longer
term issues as the extension of most-favoured-nation tariff
treatment to Japanese goods, and the accession of Japan to the
GATT.

Similarly, the report does not deal with approaches made to us by
Japan to hold trade discussions.

(ii) through informal discussions with interested Ministers,
proposed by the Minister for Commerce and Agriculture.

It is understood that these discussions will embrace the projected
review of the GATT, as well as the problem of Australia's trade
relations with Japan. (A separate note is attached on GATT
questions apart from that of the accession of Japan. [2])

2. The case for giving Japan increased opportunities of trade is
covered in some detail in the comprehensive paper being submitted
to you for the information of Cabinet, on outstanding questions in
regard to Japan. [3]

3. The interests of the Department of External Affairs run
parallel to those of Commerce and Agriculture, which is
apprehensive of a severe reduction by Japan of imports of wool and
foodstuffs from Australia, unless Australian imports from Japan
are facilitated through relaxation of the import licensing
controls and tariff concessions. Our objectives to some extent
conflict with the concern of Trade and Customs to protect
Australian industry. Treasury appears to be in rather a dilemma at
the moment, since admittedly there is no ground for maintaining
the present discrimination against Japan, in exchange control
policy, on balance of payments grounds. National Development's
interest presumably runs parallel to Trade and Customs.

4. There is, moreover, a certain degree of pressure-not exerted
directly as yet-from the United Kingdom for Australia to refrain
from granting most-favoured-nation tariff treatment to Japanese
goods such as textiles which might thus compete more effectively
in the Australian market with British products. The UK, however,
herself accords m.f.n. tariff treatment to Japanese goods.

Although the UK avoided undertaking any obligation to continue
this treatment, on the other hand Japan is obliged to reciprocate
under the terms of the Peace Treaty. The UK also has negotiated a
Payments Arrangement with Japan, under which agreement was reached
on levels of trade.

5. France and Australia are the only major trading countries which
do not extend m.f.n. tariff treatment to Japan. France's attitude
is doubtless dictated by her own difficult economic position and
high-cost production. Australia applies the General Tariff (the
highest rate) to Japanese goods. Under the import licensing system
we accord her less favourable treatment than that given all other
countries outside the dollar area. In 1952/53 our imports from
Japan amounted to only 4.7 million against exports of 84 million.

Relaxations have brought the permissable level of licensing to
21million, but it is doubtful whether firm orders actually reach
this level. Moreover, under the 'administration' control system
import quotas for particular goods are not publicised or made
known in any way, and the Japanese complain with some justice,
that this uncertainty is a deterrent to traders.

6. There is no easy solution of the problems, on the one hand, of
affording Japan access to the Australian market on equitable terms
and, on the other, of providing assurances to the Australian
manufacturing interests against their fear of severe competition
from cheap Japanese goods and a recurrence of the harmful trade
practices associated with prewar Japanese trade (although it is
understood that as far as Australia is concerned, there has been
no evidence of either).

7. The following proposals have been discussed to some extent with
the interested Departments and it is felt that they represent
limits, within which Cabinet might agree to authorise trade
discussions with Japan.

Import Licensing
8. The objective should be the elimination of the existing
discriminatory element and the placing of Japanese goods on a par
with imports from other countries outside the dollar area. The
original basis of discrimination, which lay in the possibility of
an adverse balance of trade resulting in a dollar liability to
Australia, has disappeared. Although the Government has not
committed itself specifically in relation to Japanese goods, it
has reiterated many times that import restrictions are not
intended to be used for purposes of protection of local
industries.

9. It is considered that the non-protection principle is the best
answer to opponents of the admission of Japanese goods, together
with the ancillary argument that they should look for protection
to the Tariff Board.

10. It may have to be conceded that equality of treatment to Japan
under the import licensing system can only be reached by
progressive steps, to avoid abrupt dislocation of Australian
industries but a definition of this as the ultimate policy
objective would prepare Australian manufacturers and should
satisfy the Japanese.

11. In the meantime, it is thought that a part relaxation of the
Australian import restrictions, on a unilateral basis, as proposed
by the Expert Report referred to in para. 1 (i) above, would be
bad tactics. The Report recommends relaxation on items which offer
no detriment to Australian industry. It would be better to agree
to such a relaxation (naming specific goods), as a first step, in
trade discussions with Japan.

Tariff Treatment
12. Anything short of accord of m.f.n. tariff treatment would
present problems as difficult as the extension of complete m.f.n.

treatment. New Zealand has reached an agreement with Japan under
which each party will accord m.f.n. treatment to a range of
imports from the other (i.e. New Zealand has virtually excluded
from this agreement goods manufactured in that country). However
the question is entirely different for New Zealand, which does not
manufacture the range of goods produced in Australia. For
Australia, the task of sorting out items for different tariff
treatment would be very difficult, politically, in the face of
pressures from business interests, and, in the outcome, little
increased trade for Japan would be likely.

13. The major question is whether extension of general m.f.n.

tariff treatment is possible with sufficient safeguards to satisfy
Australian industries that their interests can be protected
against a flood of Japanese goods.

14. In the first place there is, of course, the machinery of the
Tariff Board, but, while this is very important, the procedures
are time-consuming and the Board's powers are probably
insufficient to cope with the kind of problems which may arise. A
higher tariff recommended by the Board normally has general
application, whereas action might only be indicated against
imports from Japan.

15. The best example of the type of safeguards needed seems to be
the Trade Agreement recently negotiated by Canada with Japan.

Under that Agreement, Canada, while according m.f.n. treatment to
Japanese goods reserved the right to establish values for duty
purposes, on which duties would be assessed in respect of any
Japanese goods entering Canada in such increased quantities as to
cause or threat[en] serious injury to Canadian producers of like
or competitive products.

16. One difficulty is that the Australian Tariff Act does not
permit of the establishment of special values for duty, but this
could be met by amendment of the Act.

17. If such an Agreement were achieved with Japan (and there is
ground to believe Japan would be quite willing to accept limiting
conditions, provided there is a prospect of increased trade), it
should solve the problems connected with Japanese accession to the
GATT. We should be able, as Canada has done, to stipulate that our
bilateral agreement with Japan would continue in operation even if
we applied the GATT to Japan, i.e. make the GATT, in respect of
Japan, subordinate to the bilateral agreement. While the USA which
is very anxious to ensure trade concessions for Japan, which would
assist the latter's international position, would doubtless reckon
any inconsistency with GATT as one of the costs necessarily
incurred.

Summary
18. It is recommended that you should propose-
(i) trade discussions be undertaken with Japan. These should be
held in Australia to obviate criticism of undue pressures and to
permit of ready access to Ministers for direction.

(ii) that authority be given to the Australian negotiators to
endeavour to secure agreement within the following limits-
(a) extension of m.f.n. tariff treatment to Japanese goods, with
adequate safeguards on the lines of the Canadian/Japanese
Agreement.

(b) equality in import licensing treatment with goods from other
countries outside the dollar area. (But see possible practical
limits in para 10 above).

(c) inclusion in any bilateral agreement reached with Japan that
the agreement will continue even if Japan accedes to the GATT and
Australia applies the GATT to Japan.

(d) on the Japanese side, Australia should secure the continuance
of m.f.n. tariff treatment of Australian goods, and the best
treatment obtainable under Japan's import licensing controls in
respect of the entry of Australian goods. (Commerce and
Agriculture would be responsible for the details of this.)