Submission to Cabinet Economic Committee

Wellington, 28 August 1980

Australia- New Zealand Economic Relations

Introduction

1. This report discusses the position that has been reached in relation to the work programme agreed to at the March meeting of the Australian and New Zealand Prime Ministers in the light of the Ministerial and official level discussions which took place in Canberra in August.

Progress on Studies

1. At the August meeting, officials exchanged papers on the following subjects: * Basic data relating to goods with duty rates of 10% or less, or equivalent. This was the first step towards compiling Category 1 comprising goods which might immediately move to duty free treatment. * Factual information on New Zealand’s import licensing system and Australia’s tariff quota system. * General principles which might be applied to a relaxation of import licensing in Australia’s favour consequential to any new relationship, on the basis approved by the Committee on 5 August 1980 (E (80) M27 Part II refers1). * An industry description paper on agricultural products other than dairy products. * Position papers on the intermediate goods question. * Comparative studies of Customs issues (rules of origin and tariff concessions/by-laws).
2. Much of the information was of a factual nature. In the case of Customs issues, the analyses are now complete to the stage that the conclusions need to be related only to the latter stages of the negotiations. On other topics, the principal focus of attention was directed at the work necessary to complete the categorisation of tariff items, to secure broad agreement on a basis for considering import licensing/access questions and to advance the formulation of conclusions on the intermediate goods problem.

Import Licensing/Access Issues

1. Following consultation with the New Zealand Manufacturers’ Federation and the Federation of Labour, a paper (annexed) setting out possible principles that might be applied in accommodating New Zealand’s import licensing system to any new relationship was given to the Australian officials. Although the paper requires further detailed evaluation by Australian officials, their initial reaction was that it was helpful in advancing the exercise. None of the principles was challenged at the meeting. It was acknowledged, however, that there was latitude for interpretation on such critical issues as the level at which New Zealand judges that existing import licensing arrangements present no substantive hindrance to Australian imports (thus necessitating no extra provision) and what might constitute a commercially viable allocation in those cases where there are no or few Australia sales at present.
2. Australia is expected to react more specifically to the access question (including accommodation for New Zealand exports within their own tariff quotas) at the next working party meeting. A final package involving defined specific levels of access for Australia (and vice versa) will not emerge before consultations with manufacturers and producers have been completed and until the later stages of negotiation are reached.

Categorisation of Tariff Items

1. It was agreed that the approach used in drawing up Category 1 (for immediate duty free treatment) and Category 2 (planned phase down of tariffs) should be on the exceptions principle-that is, goods should only be singled out for special treatment (Category 3 which comprises goods which would be temporarily deferred from Categories 1 and 2) where there were clearly identifiable reasons for doing so.
2. Officials conclude that they are now in a position to advance the preparation of Category 1 on an ad referendum basis to the extent that it should be possible to exchange initial lists of goods that might be considered for this category at the next working level meeting. This was on the basis that goods attracting a tariff of 10% or less would not in general justify the phasing in treatment envisaged for Category 2. (The New Zealand Manufacturers’ Federation has indicated a relaxed attitude on this question, subject to accommodation being reached on other aspects of greater concern such as import licensing treatment.) It is considered, however, that the final identification of goods for the sensitive Category 3 list must follow industry consultation. The initial Category 1 list will be submitted to the Committee once it has been prepared.

Agricultural Products Other Than Dairy Products

1. An industry description paper was handed to the Australian officials. The Ministry of Agriculture and Fisheries is commenting on factual points which have been raised. It is expected that Australia will respond to the paper at the next meeting.

Dairy Products

1. The Bureau of Agricultural Economics has prepared a first draft of its paper on the dairy industries in both countries. A copy of the paper has been passed to the Ministry of Agriculture and Fisheries and to the New Zealand Dairy Board for comment on the factual content. Comments have been supplied. Further dialogue on dairy products is expected to take place following completion of the report in November.

Intermediate Goods

1. The New Zealand delegation expressed disappointment at the limited progress reported in the Australian studies. This issue had originally been presented by the Australian Prime Minister as an Australian concern. However, it would seem that some of this concern has dissipated and Australian analyses are now more related to quantifying the impact of differing policies on intermediate goods and on the possible shape of the relationship, recognising that these differences are not substantial in a large number of cases.
2. On the basis of the work that had been done so far, New Zealand officials attempted to draw out a reaction from Australian officials which might assist in providing a basis on which discussion might take place with industry and a narrowing of the studies towards a basis for possible solution. A paper (annexed) was presented for their consideration. Pressure is now on Australian officials to bring their exercise to a conclusion and to react to the work already done in New Zealand.

Timetable

1. Officials envisage a timetable in which the next step will be a meeting of the joint working party to be held in early October in Wellington. The principal objective of the meeting will be the identification of Category 1 goods ad referendum; reaching an understanding on import licensing/access principles (which, however would not go so far as to include offers relating to specific goods); major progress in resolving the intermediate goods issue; progress towards resolution of institutional differences in agriculture; and exchanges of study papers on export incentives and Government purchasing as far as this is practicable.
2. Hopefully, a sufficient basis will then exist on which to work towards a second meeting in November. The objectives of the second meeting would be to complete the balance of the item categorisation; to reach positions on all outstanding issues; and to draft a joint report for Permanent Heads to discuss prior to Ministerial discussions in early 1981 directed at establishing a Heads of Agreement with a view to the eventual completion of negotiations.

Comment

1. The August Ministerial meeting and the associated discussion at officials level in reviewing the work so far undertaken did not bring to light any new factors which adversely affect the progress of the studies. There was a general agreement on the importance of consultations with industry and other interested parties (including the States in Australia’s case). It was understood that the timing of the later stages of negotiation would have to take into account the timing of general elections in both Australia and New Zealand.
2. Mr Anthony at the Ministerial meeting indicated that he was, in general, pleasantly surprised at how the closer economic relations concept was being received in Australia. This was against his judgement that, although Australia stood to gain some benefit in political and security terms, in terms of economic advantage any such arrangement would be in New Zealand’s favour. He made a special plea for the Category 3 (special case) listing to be as small as possible and expressed the hope that neither country would allow a small number of vested interests to terminate the exercise.
3. Mr Anthony drew a significant distinction between the specific concessions arising from negotiations under NAFTA which are essentially on a ‘knock for knock’ basis, and the broader framework of agreement which is being sought in the closer economic relations exercise. In the latter case the question of balanced trading opportunities is set in a wider context. There will be a plan and an agreed schedule of movement to freer trade across the board. Australia would not expect dollar for dollar arrangements as a general principle in a freer trading arrangement. As Mr Anthony would see it, given an equal trading opportunity the market will decide what trade will flow.
4. Ultimately, Mr Anthony acknowledged that when any negotiated arrangement was agreed there would have to be a comprehensive presentational exercise. The implementation of the arrangement itself he saw as being gradual, so as to reduce adverse impacts. However, he stressed that once a plan was in place it was highly important that neither country deviate from it, if the concept was to succeed.
5. With the reservation that the balance of advantage in any new relationship has still to be determined in later negotiation, officials concur with Mr Anthony’s broad perception as indicated above. In particular, in discussion with manufacturers it will be necessary to isolate issues of real and major concern before any decision is taken to include goods in Category 3. It is also appreciated that the treatment to be accorded on import licensing access will be crucial to the attitude of manufacturers and later negotiations.

Consultations

1. The Prime Ministers’ Communique2 recognised that consultations with interested parties would be necessary before either country could take decisions on the ultimate direction of the closer economic relations exercise.
2. If timing options are to be kept open it is necessary to have the manufacturing and business communities focus on the exercise, on the importance of these consultations and on the need for involvement in them. This might best be achieved by a Ministerial press release by 4 September. A draft statement is being prepared and will be submitted shortly.
3. Recent experience with consultations involving documentation shows that working papers tend to get in the hands of the press in a way that causes many problems. A suitably worded press statement would let all concerned know what was going on and the reasons for it. The methodology spelt out would draw on the Prime Ministerial Communique and would cover all problems, such as intermediate goods, in a way that would not publicly disclose any Australian position. There is perhaps not too much to worry about on this score because there is as yet no finite Australian position and the consultations on such points will need to be held in a way that leaves options open.
4. It is intended to give Australia advance notice of the press release and to inform Australia that New Zealand intends to carry out such consultations.

Reccomendation

1. It is recommended that the Committee: 1. note the progress that has been achieved in advancing the studies associated with determining a basis for possible closer economic relations with Australia; 2. agree that these studies should be further progressed by a meeting of the joint working party to be held in Wellington in October; 3. agree that a timetable be followed with the objective of providing Ministers with the material needed to reach Heads of Agreement stage by early 1981; 4. direct officials to report back to the Committee on the initial Category 1 list and on any specific proposals to include goods in Category 3 and on the implications of taking this action; 5. direct officials to report back to the Committee on the initial Category 1 list and on any specific proposals to include goods in Category 3 and on the implications of taking this action; 6. agree that advance notice of the contents of the proposed press statement be given to Australia.

Annex [1]

Australia - New Zealand: Closer Economic Relations Exercise

General Principles that may apply in the consideration of possible Import Licensing Allocations

• All additional licences arranged as a result of any agreement reached with Australia, would be designated being for goods of that country only (NAFTA rules of origin would apply).
• It would be assumed that Australia would be moving towards unrestricted access for equivalent New Zealand goods where this did not already apply.
• The basis for study specified that where additional Australia licences are to be instituted they would also provide for 10 percent access growth per annum in real terms. There is therefore a need to establish a basis on which ‘real terms’ would be assessed.
• There should be no general intention to use the licensing system to guarantee shares of the New Zealand market to Australia. Rather the intention is to generate additional access opportunities in each other’s markets.
• Administratively simple solutions are to be preferred, keeping in mind the balance of other requirements. Wherever practicable whole item codes rather than individual tariff items which make up each item code should be dealt with.

Import Licensing Allocations-Possible Lines of Approach

• Items already exempt licensing-these would remain exempt.
• Licence on Demand (LOD)-as there has been little chance for importing patterns to become clear it is considered that licence on demand status should be maintained for these items.
• Special NAFTA Access items-specific licensing access levels have been negotiated under NAFTA for about 110 items, through Schedules A and B. These levels could be taken as the base starting point, and the 10 percent increase formula applied (Article 3:7 arrangements, which are inter­ company, would be dealt with in terms of the 3:7 formula, although regard would have to be had, over time, to the relationship between them and any general increase in access levels for the items concerned that might flow from the rest of the package. Where there are existing special arrangements on non-Schedule A goods (eg apparel and footwear) an access base would be the subject of separate negotiation.
• General licensed products area-these could be split into three broad groups:
  1. for items where New Zealand’s import licensing arrangements are already liberal and offer no substantive hindrance to imports, no special provision would need to be made.
  2. for items where import controls are more tightly administered, but where Australia already enjoys significant trade, a three year average of imports from Australia would be established as the base, on to which the 10 percent progression would be applied.
  3. for items where Australia, for one reason or another-has no or few sales in this country, the initial access level would be based on an estimate of commercial viability which takes account of the nature of the goods, the amount of import provision already available generally and the extent to which the particular industry might be sensitive to Australian competition.

Annex[2]

Intermediate Goods

Objective

1. To establish some preliminary agreed observations about the nature of the intermediate goods problem and thus narrow the field for further study both of the issues and the range of possible solutions. This would help to provide the basis for industry and Government in each country to assess the access and tariff proposals in particular.

The Nature of the Problem

1. On the basis of work already undertaken it could be accepted that: 1. The tremendous diversity of industrial inputs and the considerable differences that exist in the protective structures of each country relating to intermediate goods make the issue a highly complex one. 2. Because of the impossibility of obtaining and aggregating the necessary data, it is unlikely that any further attempt to quantify, with any degree of precision, the overall extent to which either country might be advantaged or disadvantaged would be warranted. 3. Australia has, however, the broader industrial base and where New Zealand does not share the same intermediate goods industry, New Zealand has the ability to source on the most efficient world producers (consistent with the 5% margin provided for in the arrangement on Tariffs and Tariff Preferences). 4. In cases where both countries protect like intermediate goods industries, New Zealand’s tariff levels applicable to such industries are in general higher than Australia’s, but the position varies considerably from product to product. 5. Further, where both countries protect like intermediate goods industries, New Zealand’s import-licensing applicable to such industries results in additional costs borne by the associated New Zealand final-goods industries. 6. The significance of the intermediate goods issue needs to be considered in relation to the total costs of producing the goods in question (namely, labour, overheads etc). In most cases, any advantage/disadvantage arising from differences in treatment of input industries represents a relatively small proportion of factory and cif prices. 7. Rules of origin act as an important constraint against the possibility of any substantial inequity arising.
2. Having regard to these considerations, a possible basis on which the issue might be progressed could be: 1. Acceptance that an across-the-board formula directed at offsetting any possible overall advantage/disadvantage is not required or, indeed, capable of being calculated with any degree of precision. 2. Concentration in the next study phase (and in consultation with industry) on identifying only those individual goods which stand out as a possible significant problem area.

Possible Solutions: Some Relevant Considerations

1. Subject to whatever results might be obtained from this further study, it may be useful to consider ways to concentrate attention on how significant problem areas might be resolved. Intermediate goods problems could arise in two general cases: first, where certain intermediate goods have a fairly general role to play in the industrial structures of both countries and/or are also important inputs to a range of products traded between the two countries. Second, cases where intermediate goods industries are significant to a particular industry of some importance within the trading relationship.
2. In the former case, a solution might be sought on a general basis tailored to the situation. Amongst the options which have been discussed at an earlier stage are special content rules, production subsidies, tariff adjustments, and adjustments to referential margins.
3. In the latter case-where an individual final-goods industry appeared to have a ‘stand-out’ problem-it might be possible to seek an offsetting factor in relation to the trade in the finished goods in question.
4. To establish some bounds to what might be considered a problem of ‘stand­out’ dimensions, it may be necessary to agree on certain criteria. For example: 1. Cases where the cost disabilities (arising from the associated intermediate goods industry) encountered by the final goods industry concerned represented only an insubstantial proportion of the industry’s overall costs could be disregarded. It might be possible to establish a benchmark level. 2. Where there are only relatively modest differences in tariff levels, it might also be possible to disregard such cases. 3. In the case of a particular industry which appeared to have a stand-out problem in the intermediate goods area (para 5 above), it would be necessary to take account of the cumulative effect of other advantages and disadvantages it may incur in its input costs compared with its trans-Tasman counterpart. That is, it is likely that over the range of input costs particular to that industry, there will be pluses and minuses.
5. In making an overall assessment as to whether some specific action was warranted to take account of a stand-out problem, regard would also be had to the possibilities afforded by whatever phasing provisions and safeguard provisions might be agreed upon.
6. All cases would be subject to consultation.

[ABHS 950/Boxes1221-1226, 40/4/1 Part 29 Archives New Zealand/Te Whare Tohu Tuhituhinga 0 Aotearoa, Head Office, Wellington]

• 1 See Document 127.
• 2 Document 93.