CANBERRA

Australian Reply to Japanese Note of 8 February 1957
The Australian delegation has carefully considered the statement
presented by the Japanese Ambassador on 8th February, 1957,
recording the Japanese Government's views on the treatment which
might be accorded to imports of Australian soft wheat within the
framework of a trade agreement between the two countries. [2] We
are impressed by the obvious sincerity of the Japanese Government
in its endeavours to arrive at a mutually satisfactory solution to
the Australian request on wheat and fully appreciate the value of
the Japanese Ambassador's personal discussion of the problem
during his recent visit to Tokyo. We feel certain that his
explanation of Australia's position to Japanese Ministers will
result in a better appreciation of the current situation and that
this in turn will enable the two countries to reach a satisfactory
conclusion to the current trade negotiations.

The Australian delegation reaffirms its desire to arrive at a
basis for a mutually advantageous trade agreement as soon as
possible. To date the major obstacle has been the type of
assurance which can be given in regard to Japanese imports of
Australian soft wheat. In effect the Australian Government is in
the position of being asked to offer important and continuing
tariff concessions-represented by the difference between the G.T.

and M.F.N. rates-and an assurance of complete and continuing non-
discrimination in the licensing treatment accorded to Japanese
goods. Under these circumstances it is essential that Australian
soft wheat and other commodities should receive not only
satisfactory access, but also a continuing assurance of access to
the Japanese market on fair trade terms.

As we understand the position, the Japanese Government is prepared
to give Australia an undertaking that equal treatment will be
accorded to foreign wheat in the Food Agency's purchasing
programme irrespective of the sources of supply. It is our
understanding that this means that the Japanese Food Agency would
call tenders for its wheat requirements on a global basis, and
that purchases would then be governed by commercial
considerations. This would be the situation at least for the
forthcoming Japanese fiscal year commencing on 1st April, 1957,
during which period the Japanese Government would not enter into
any surplus agreement or conditional sales arrangement.

The Australian delegation appreciates that this represents a
definite change in Japan's wheat import policy and that this
development is intended to meet the Australian request for
opportunity to compete in the Japanese market on commercial terms.

We recognise the difficulties confronting Japan in giving
Australia any assured quota or assurances of a minimum level of
imports in view of her trade agreement with Canada and her trade
relations with the United States.

The Japanese Government has indicated that it may be possible to
import at least 200,000 tons of soft wheat each year from
Australia. Moreover the Japanese Government has stated that it
desires to facilitate the import of as much Australian wheat as
possible provided it is supplied on a competitive basis.

Nevertheless, the Australian Government's endeavours to market
soft wheat in Japan and the Japanese Government's intention to
import as much Australian soft wheat as possible on a competitive
basis could be completely frustrated if Australia's soft wheat
competitors resort to heavy subsidies or other unfair trade
practices. In other words, Japan could administer a non-
discriminatory import policy, but as a result of trade practices
by competitors and against which Australia had no protection in
any Trade Agreement with Japan, Australia could find herself in
the position of marketing no soft wheat in Japan, or alternatively
of not obtaining the share of the market which she would expect
under conditions of fair competition.

The Australian Delegation re-affirms that what Australia really
wants is an assurance that her wheat can compete in the Japanese
market on fair trade basis and on the basis of normal commercial
considerations. However, it was largely because of the United
States surplus disposal and subsidy problems and the very real
fear of competition from subsidised or 'special arrangement'
exports that the Australian request on wheat was put in the form
of a specific quota or a percentage share of the market. Given a
satisfactory assurance in regard to reasonable access to the
Japanese market on fair trading conditions, and recognising the
Japanese difficulty with quotas, the Australian Delegation would
be prepared to recommend to its Government a modification of the
request for a quota of soft wheat.

Australia is willing to compete on commercial terms and under
conditions of fair trade in the Japanese market with soft wheat
from any country. In particular, Australia has probably least of
all to fear from soft wheat imported from the U.S.A., if it were
imported into Japan on other than a subsidised or dumped basis or
under some special arrangement not normally regarded as complying
with fair or normal trading conditions. It is quite clear that
Australia could not compete with the U.S. in a battle of
subsidies. It is equally clear that the potential ability of the
U.S., as well as her present practice in regard to subsidies and
dumping, is such that in any global tender basis which the
Japanese proposals envisage, Australia would have every reason to
fear that wheat from the U.S. could always be offered
(irrespective of cost of production) below prices at which
unsubsidised Australian wheat could be offered.

In fact, U.S. wheat carrying subsidies of as much as 50% of the
Australian cost of production has already been offered in many
markets in competition with Australian wheat. Quite clearly, the
U.S. possesses the capacity to make its subsidy 60% or whatever
percentage is necessary to compete with Australian wheat on the
Japanese market.

With no subsidised or dumped wheat in the Japanese market, the
Australian view is that her wheat would probably take a very large
share of the Japanese soft wheat market.

However, we admit quite frankly that in the absence of any recent
history of Australian soft wheat exports to Japan, the
determination of what constitutes a fair share of the market is
open to debate. Pre-war, Australia supplied 63% of Japan's total
wheat imports. However, these were small and the market has since
changed substantially in size and character. Under current
circumstances Australia would not claim that 60% of total imports
is a 'fair share' for Australian soft wheat.

Only since 1952-53 have world wheat supplies been adequate to meet
world demand and have exporting countries been in a position to
compete for shares of the world market on commercial terms. But
the emergence of adequate supplies coincided with U.S. surplus
disposal activities which have over-ridden commercial
considerations. Hence there is no normal historical pattern of
Japanese imports to give a real indication of the share of the
market which Australia properly could expect to gain under
commercial trading conditions. The Australian request for a quota
of 400,000 tons of soft wheat or one-sixth of Japan's total wheat
[im]ports, was therefore based on our experience of competition in
other markets and our geographic position in relation to the
Japanese market in comparison with our competitors. This was a
figure, in fact, which we considered to be a reasonable share and
yet a Much smaller share than we would get of the soft wheat
market if conditions of fair trade and normal commercial practices
and considerations were to apply.

Australian soft wheat sold in other markets has been competitive
with United States and other soft wheat on a quality basis, and to
the best of our knowledge there is no technological reason why
Australian soft wheat should not be completely interchangeable
with U.S. and other soft wheats. It is in Australia's interest to
demonstrate this conclusively to the Japanese Food Agency, to
Japanese millers and to the general public. The arrangements which
the Japanese Food Agency has already made to import commercial
samples from each of the main producing States should remove any
doubts on this score.

However, it will be some time before this wheat is shipped and
before the results of the commercial costs will be available. In
the meantime, the Australian Delegation would be pleased to
arrange for smaller samples to be air-freighted to Japan, if this
would assist the Japanese Government to reach a conclusion on the
acceptability of Australian soft wheat. In this regard the
Australian Delegation notes with considerable interest that a
technical expert of the Japanese Food Agency is to make an early
investigation on the spot. If it would assist the Japanese
Government to have wheat samples flown to Tokyo, it is suggested
that the technical expert should select the samples while he is in
Australia.

Once the Food Agency has investigated the quality of Australian
soft wheat, the Australian Delegation has no doubt that Australia
would obtain a substantial share of the Japanese market if
competitors did not resort to unfair trade practices. However,
Australia recognises the difficulties that Japan would face
economically and politically is she refused all gift, subsidised
or dumped wheat. The Australian Delegation does not wish to press
Japan both to protect Australia from unfair competition in the
Japanese market to the extent necessary to enable her to obtain
reasonable access, and at the same time to specify a quota which
would assure her of a major share of the market.

Under all the circumstances, the Australian Delegation is anxious
to find an alternative solution to the problem of providing
reasonable access to the Japanese market which would not be so
embarrassing to Japan in her international relations as would a
quota provision.

The problem, from the Australian point of view, revolves around
several major issues:-

(1) If our soft wheat were given complete protection from unfair
trade practices of our competitors and if all imports were made on
commercial terms, it is our view that Australia would probably get
the bulk of the soft wheat business in Japan.

(2) If Australian soft wheat were assured, on a continuing basis,
only of entry on commercial considerations of price and quality
and with no regard to unfair trade practices of competitors, it is
quite possible that the subsidies, dumping and other non-
commercial policies of our major competitors for soft wheat sales
would leave Australia with little or no share of the market-
certainly no share of the Japanese market in any way corresponding
to what we would expect to obtain on the basis of fair
competition.

(3) Our dilemma is that we do not wish to press for (1) above to
the extreme position where our competitors have little or no place
in the Japanese market, and, on the other hand, an agreement on
the basis of (2) would be impossible for the Australian Government
to sustain.

(4) Moreover, the Japanese compromise proposals, helpful as they
are in some respects, lack the requisite degree of assurance and
have little or no degree of continuity about them to match the
kind of commitment Australia is asked to enter into.

To seek another way around this dilemma, apart from the original
proposals of a firm quota undertaking on soft wheat amounting to
either 400,000 tons or one-sixth of total wheat imports, the
Australian Delegation puts forward for consideration a compromise
alternative.

It is suggested that the Trade Agreement itself, in respect of
wheat and perhaps other commodities, should record clearly and
fully the agreed intentions of both Governments but that, where
desirable, the method of implementation of these intentions be
left to an 'Exchange of Notes'. For example, in the case of wheat,
the following illustration will indicate what the Australian
Delegation has in mind:-

(a) The Trade Agreement itself would contain inter alia:

(i) The agreed intention of the Japanese Government to admit
Australian soft wheat to Japan under conditions of non-
discrimination and on the basis of commercial considerations
safeguarded against unfair trade practices of third parties.

(ii) An agreed statement by both Governments that, in the light of
Australia's competitive position and the present and prospective
requirements of soft wheat on the Japanese market, it is unlikely
that under conditions of fair trade and on commercial
considerations Japanese imports of Australian soft wheat would
fall below . . .*tons if Australia offers this amount and the
Japanese Government would use its best endeavours to assure the
import of at least this quantity.

(iii)The Exchange of Notes.

It is our understanding that an Exchange of Letters implementing
any Trade Agreement expressing the intentions of both Governments
need not be registered nor made public.

The Exchange of Letters would contain the following:-

(1) Recognition that the post-war circumstances of Japanese
imports, initially due to overall world wheat shortage and
subsequently due to special U.S.A. non-commercial arrangements, do
not permit a clear definition of what would constitute for
Australian soft wheat a fair share of Japanese wheat imports.

(2) Recognition of the Australian view that on fair trade
practices and commercial considerations a fair share for
Australian soft wheat in the Japanese market would amount to not
less than one-sixth of total wheat imports, i.e. on the basis of
1956 imports this would be approximately 400,000 tons.

(3) Expression by the Japanese Government that in the absence of a
reasonably long period of normal competition under conditions of
fair trade, it cannot agree specifically on what might be a fair
share of the Japanese market for Australian soft wheat.

(4) An undertaking by the Japanese Government that if in any six
months period when Australian wheat was freely offered for export
to Japan, Australian exports of soft wheat should fall below one-
sixth of total Japanese wheat imports under conditions where
commercial considerations and fair trade practices do not apply in
respect of Japanese imports of wheat from a major supplier, the
Japanese Government will take such steps during the ensuing six
months to enable Australian soft wheat to reach a level over the
current twelve months period of not less than one-sixth of Japan's
total wheat imports or, alternatively, to take measures to ensure
for the succeeding twelve months that Australian soft wheat did
not have to meet the competition on the Japanese market from
subsidised or dumped wheat or wheat sold under special non-
commercial arrangements.

This kind of an arrangement would appear to be completely
compatible with Japan's international obligations on the
protection of third parties against unfair trade practices. It
would not appear to involve Japan in her present difficulty,
particularly in regard to P.L.480, of not being able to give
Australia an assurance over a continuing and long-term period,
matching the kind of period for which the Australian concessions
would be given. It would be a method which could operate whether
or not the Japanese Government continued its present form of wheat
importation.

There may well be other ways of achieving the same objective-that
of finding a compromise solution to the wheat problem. As we have
explained previously the problem is a serious one for Australia
both practically and presentationally. If Australia is to agree to
permanent and clearly demonstrable changes in her tariff and
import licensing treatment of Japanese goods, she must be
convinced and be able to demonstrate just as clearly that she has
negotiated comparable advantages for her goods in the Japanese
market. In this regard the publicity which has been given in Tokyo
to the Australian request for a quota of 400,000 tons of soft
wheat annually has had an important impact on the Australian
public. This public knowledge of Australia's request highlights
the importance which Australia must now attach to the
presentational aspects of the Japanese Government's undertaking on
wheat, or alternatively on the Australian requests as a whole.

Obviously the alternative suggested by the Australian Delegation
represents a significant departure from the original request and
from the Australian Delegation's original instructions.

Presentationally it does not offer the advantages of a quota or of
an assurance as to a minimum level of purchases. In these
circumstances, the Australian Delegation would need to pay
particular attention to the presentational value of Japan's
undertakings on other items. We are nevertheless prepared to
submit such an alternative wheat arrangement to the Australian
Government, but would need to be in the position to advise the
Government at the same time of Japan's formal response on the
other items. We would look forward to receiving this at the same
time as we receive the Japanese reaction to an alternative wheat
undertaking.

The Australian Delegation would hope that in reporting this formal
response to the Government the basis for a formal trade
arrangement conferring substantial mutual advantages would emerge.