Joint Report by Permanent Heads to Prime Ministers

[Wellington, December 1980]1

CONFIDENTIAL

Joint Report of Permanent Heads to Prime Ministers on a Closer Economic Relationship between Australia and New Zealand

Introduction

1. The communique2 issued at the conclusion of your meeting in Wellington on 21 March 1980 declared that it was timely to take the special relationship between Australia and New Zealand a step further. The communique and annex (attached) set out an agreed framework for further detailed exploration and examination of possible arrangements for a closer relationship between Australia and New Zealand. Officials were directed to set appropriate studies in train immediately and to consult closely with interested parties.
2. Australian and New Zealand Permanent Heads met in Wellington on 10 and 11 December to review the outcome of these studies. Permanent Heads have concluded that the studies and consultations have been completed in sufficient detail to enable a draft Heads of Agreement to be drawn up outlining the possible shape of a new Agreement that could govern the closer economic and trading relationship between Australia and New Zealand consistent with the approach set out in the March communique.
3. This report is in tow parts: a covering paper indicating the background to the studies, the objectives, principles and concepts on which the new proposals are based, and some comment on the main features of the new arrangement. The second part is a draft Heads of Agreement which could form the basis of a new Agreement to govern the economic and trading relationship. The Heads of Agreement contains an outline of the procedures and policies that Permanent Heads consider would be required to implement the new relationship.
4. This joint report is a confidential document addressed from Permanent Heads to the Prime Ministers of Australia and New Zealand. Whether or not it should be made public at any time is a matter for joint decision by the two Governments.
5. It should be noted that some issues remain to be resolved. These are covered in the report and are covered in paragraphs [6-8, 10] and relate to3

Part I

DESCRIPTIVE OUTLINE OF THE BACKGROUND TO THE STUDIES

1. The March communique records your agreement that an appropriately structured closer economic relationship would bring economic and social benefits to both countries and improve the living standards of their peoples. Closer economic co-operation conducted in conformity with certain agreed principles would also result in a strengthened ability by Australia and New Zealand, working in partnership, to contribute to the development of the region through an expansion of economic and trading links with other countries, particularly those of the Pacific and South-East Asia.
2. It was also agreed that while the New Zealand and Australia Free Trade Agreement (NAFTA) had provided significant growth in bilateral trade since the mid-1960s in its present form it did not seem to be providing sufficient impetus to the kind of co-operation which would best serve the interests of Australia and New Zealand in the changing international economic environment.
3. The set of studies which you directed officials to undertake last March was aimed at exploring, in consultation with interested parties, the possibility of concluding a closer economic relationship than that which had proved possible under the NAFTA. Officials were directed to seek an economic relationship which would better serve the interests of both countries and the region.

Objectives

1. The central trade objective in a closer economic relationship was defined in the March communique as ‘the gradual and progressive liberalisation of trade across the Tasman on all goods produced in either country on a basis that would bring benefits to both countries’. In respect of import restrictions, the objective was defined as the ‘elimination of import licensing and tariff quotas in reasonable time’.
2. At the direction of Permanent Heads, the Joint Working Parties have concentrated their attention on the attainment of this central trade objective and the issues raised by the various forms of frontier protection each country maintains against the other. The emphasis of this report therefore falls heavily on questions raised by tariffs and quantitative restrictions and the desire to see trade conducted in conformity with certain principles. Other objectives outlined in the March communique, which were related to the strengthening of links in fields such as tourism, energy, marketing, scientific research, technological development, labour, transport, finance and investment, while important to the goal of closer economic co-operation, are seen as coming after the central trade issues. Once the immediate questions raised by frontier protection are resolved it should be possible to tum attention to these remaining matters in the context of the closer trading relationship that will undoubtedly develop if the new arrangement outlined in this report is set in place. Other issues which will require attention at the appropriate time are touched on elsewhere in this report.

Principles

1. The central trade objectives have been considered in relation to certain principles which were underlined in the March communique: * commitment to an outward looking approach based on the efficient allocation of resources within Australia and New Zealand; * consistency with the economic development policies of both countries; * account to be taken of the wish not to foster inefficient industries in either country as a result of the progressive liberalisation of import restrictions; * industry rationalisation to be encouraged.
2. Implicit in the approach spelt out in this report is a desire to ensure that trade between Australia and New Zealand takes place under conditions of fair competition. This is not an explicit principle laid down by the March communique but, as in Article 2 of the NAFTA agreement, it is a principle which is seen as fundamental to the new trading relationship.
3. The principle of fair competition is one to which both countries are committed. Its application in practice, however, needs to be considered in the light of differing business conditions in both countries arising from divergences in wages, fiscal measures and other factors including different tariff policies towards third countries. At the present stage of the relationship neither government believes it to be practical to harmonise these divergences many of which will in any event tend to cancel each other out when considering the final selling price of goods being traded. Permanent Heads have concluded that impediments to closer economic relations arising from these factors can be best addressed through appropriate safeguard and consultation clauses. This is touched on further in paragraph 3[3] dealing with consultations and safeguards.
4. The sections of this report on intermediate goods, agricultural support and stabilisation measures, export incentives and government purchasing, are all part of this general question. All of these topics can be seen in the context of questions which may arise as a result of the application of the principle of fair competition.
5. A further principle, and one which stems explicitly from the terms of reference set out in the March communique, is that the free trade area which it is envisaged should be established to replace the NAFTA is to be fully comprehensive in tis coverage. All goods produced in either country will eventually be subject to trade liberalisation. Specifically this will include both agricultural and industrial products.
6. Permanent Heads have endorsed the view that, providing adequate time is allowed for industries to adjust to the new trading conditions envisaged in this report, there should be no industries in either country that cannot be included in the Australia and New Zealand free trade area. Deferments for particular goods from the liberalisation measures spelt out elsewhere in this report are seen as being strictly temporary and limited to a predefined period. This period is to be set at the outset of the agreement with the reasonable adjustment needs of industry in mind.
7. In developing the various liberalisation measures to apply to tariffs and quantitative restrictions, considerable stress has been laid on the desire to see these work in a gradual, progressive and predictable way. A balance has been sought between the need to give industries adequate time to adjust to increased flows of goods from the partner country (and the greater competition this will engender) and the desire to eliminate trans-Tasman barriers to trade ‘in reasonable time’.

Underlying Concerns

1. In reviewing the studies conducted by the Australian and New Zealand Joint Working Parties, Permanent Heads have placed considerable emphasis on the desire to create a new trading relationship based on a high degree of automaticity in the tariff reduction and access generating mechanisms and with a minimum of administrative management and review procedures.
2. This is not a requirement imposed by the March communique but stems from experience gained from the administration of NAFTA and a general view expressed during industry consultations that the process of adjustment can be eased if clear marketing and investment signals are provided. Predictability in the operation of the liberalisation measures lying at the heart of the new trading arrangement is sought by the commercial communities in both countries.

Conformity with Terms of Reference laid down in the March Communique

1. In examining the various mechanisms and procedures for trade liberalisation suggested by officials as a result of the intensive programme of studies which have been conducted since your March meeting, Permanent Heads have asked the following questions: 1. Will the procedures recommended result in eventual and complete trade liberalisation including the elimination of tariffs and quantitative restrictions in ‘reasonable time’? 2. Is the pace of liberalisation ‘gradual and progressive’? Will industries be given adequate time to adjust to the new trading environment which is proposed? 3. Are the procedures comprehensive in their scope? Will all agricultural and industrial goods produced in either country be included? 4. Is there a high degree of automaticity in the mechanisms recommended? Is the pace and direction of liberalisation predictable? Will clear marketing and investment signals be provided? 5. Is the outward looking principle on which the new arrangement is to be based effectively preserved? What are the implications for third country trading relationships? 6. Will trade take place under conditions of fair competition? 7. Are the mechanisms designed to provide an acceptable balance of advantage to both countries? 8. Will they lead to more effective use of each country’s resources? Will each country do more of what it can do best? 9. Is the arrangement consistent with the economic development policies of the two countries? 10. What appropriate transitional arrangements will be required to minimise disruption to existing trade and access opportunities set out under the NAFTA as the new agreement takes effect?

Conclusions and main features of the new arrangement

1. On the basis of the studies conducted, Permanent Heads have concluded that the framework for examination of possible arrangements for a closer economic relationship set out in the March communique and annex provides a workable basis for achieving the central trade objective of gradual and progressive liberalisation of trade across the Tasman on all goods produced in either country.
2. The Permanent Heads have concluded that the Heads of Agreement set out in the second part of this paper, if agreed by Governments, would enable the establishment of a fully comprehensive free trade area between Australia and New Zealand.
3. The creation of a full free trade are between Australia and New Zealand in accordance with the plan and schedule set out in the draft Heads of Agreement is seen by Permanent Heads as a further evolutionary step in the development of the special relationship.
4. The mechanisms and procedures set out in the draft Heads of Agreement are designed to accord with the objectives, principles and underlying concerns set out in paragraphs 4-15 above.

Implementation date

1. Permanent Heads consider that on the assumption that the Heads of Agreement are initialled by the two governments in the first half of 1981, it would seem appropriate for the additional access provisions and first reduction in tariffs to take place on 1 July 1982, thus providing a one year grace period on all products. If the Heads of Agreement are initialled at a later date, the implementation of the Agreement on the date envisaged would still be possible, but the formal grace period would need to be reduced.

FORM OF THE NEW AGREEMENT

1. Permanent Heads recommend that the closer economic relationship be formalised in a completely new and comprehensive agreement and the current agreements terminated. This would have the advantage of clearly signalling in Australia and New Zealand a new approach to the bilateral relationship.

Tariffs

1. Permanent Heads recommend a variation to the indicative tariff phasing approach in accordance with the principles of the March communique aimed at more equitable treatment. All tariffs would be reduced and eliminated over a five-year period according to the formula set out in the Heads of Agreement. With the exception of goods initially committed to the deferred category duty free trade would be achieved by 1 July 1987 assuming tariff phasing commences on 1 July 1982.
2. The deferred category is to be a temporary category only. Conditions governing its nature and indicative criteria to be used in considering goods which may initially be given deferred status are contained in the draft Heads of Agreement. In brief, the deferred category is to be kept as small as possible; it will be closed when the new Agreement comes into effect; (it will have a predetermined lifespan set in accordance with the reasonable adjustment needs of industry. At the end of the predetermined period all goods will be removed to the tariff phasing category and the deferred category will be abolished. At that point all goods produced in either county will be subject to the normal tariff liberalisation and access generating formula). The product coverage in the deferred category is still under examination by both countries in accordance with the above principles. A recommended common list of goods to be included in the deferred category will be placed before Ministers as soon as possible. It is recognised that a final decision on the new Agreement will not be possible until Ministers have decided on the content of the common deferred category.
3. Provision will be made for acceleration of the agreed liberalisation measures where this is the wish of industry in both countries and is consistent with the overall objectives and principles of the new relationship. It is recommended that no provision be made for reversal of tariff phasing and that retardation will not be possible, except in exceptional circumstances arising from the operations of agreed safeguard measures.

Import Restrictions

1. Additional access opportunities are to be generated by a combination of formulae as set out in the Heads of Agreement. In general, special access opportunities exclusive to either country will double approximately every seven years. The formulae are predictable, gradual and progressive in their impact and provide for a high degree of automaticity. With one general exception (paragraph 26) all goods subject to quantitative restrictions and not initially in the deferred category will be covered by the additional access opportunity formulae.
2. At the outset of the agreement certain goods may be identified which, although subject to quantitative restrictions, may be considered to be liberally licensed in the sense that available access opportunities are not judged to be an impediment to trade. It is agreed that where these give rise to access problems for specific products, they could be examined within the consultative framework with a view to giving liberal treatment consistent with the principles of the new Agreement.

Intermediate Goods

1. Permanent Heads have affirmed a set of principles covering an approach which should enable intermediate goods problems of significant dimensions to be resolved consistent with the overall objectives of the closer economic relationship. The details are set out in the draft Heads of Agreement.

Agricultural Support/Stabilisation Measures

1. Permanent Heads request Prime Ministers to note that for most agricultural commodities, support/stabilisation measures in either country do no hinder trans-Tasman trade. However, in the cases of wheat, citrus fruits, grapes, bananas, pineapples, peas and beans and dairy products there are a number of issues to be resolved. These will be the subject of separate study and recommendation.

Export Incentives

1. Permanent Heads recommend that there should be a joint review of performance related export incentives applying to trans-Tasman trade. The terms of reference for the review and its specific objectives are still to be resolved and are being reported on separately.

Government Purchasing

1. Permanent Heads are of the view that discrimination in purchasing by national and state governments is not in harmony with the concepts of the closer economic relationship. Australian Permanent Heads would recommend that the subject be discussed with supporting material at the Australian Premier’s conference in June 1981.

Customs Issues

1. Permanent Heads agreed that on the basis of their studies customs issues do not present any substantial impediment to a closer economic relationship along the lines envisaged. Existing rules of origin applied to the NAFTA relationship provide an adequate general basis for continuing and expanding trade between the two countries in terms of the new Agreement.

Rationalisation

1. Permanent Heads agreed that procedures to assist rationalisation of industry are an important element of the new Agreement. Measures to facilitate rationalisation require further consideration in the context of drafting the Agreement.

Consultation and Safeguards

1. Permanent Heads are agreed that there is a need for appropriate consultation and working safeguard provisions in the new Agreement. Working safeguard instruments would offset cases of unfair advantage that may arise for example from dumping, subsidisation or significant trade deflection. In addition, during a transitional period the need was seen for general safeguards to be extended to cover cases of severe material injury arising from the trade liberalisation process. In the longer term, it is considered that even limited recourse to general safeguard provisions could seriously undermine the objectives of a closer economic relationship. The consultative provisions of the agreement are seen as providing sufficient opportunity for serious problems, for example, relation to industrial development, to be addressed and solutions found.

Duration of Agreement and Review Provisions

1. Permanent Heads recommend that the duration of the new Agreement should be open-ended.
2. Permanent Heads also recommend that there should be provision for a broad-based general review by a Council of Ministers of the working of the new Agreement five years after it comes into effect. The purpose of the review would be to consider whether the Agreement is providing a satisfactory balance of advantage to both countries and whether its full potential is being realised. The review would also consider other issues that might arise once frontier protection has declined, for example industrial standards, economic policies and practices, industry co-operation with a view to assessing whether these were frustrating the objectives of the new Agreement. Progress in other areas set out in the March communique as being important to the overall economic relationship would also be examined.

Transitional Arrangements

1. Although a completely new Agreement to supersede the NAFTA and its associated instruments is recommended, Permanent Heads emphasise that there would be considerable elements of continuity between the NAFTA and its successor. Transitional arrangements will need to be developed to ensure that existing trading arrangements are maintained until they are overtaken by the trade liberalisation procedures of the new arrangement.

Existing Agreement on Tariffs and Tariff Preferences

1. The New Zealand delegation believed that a continuation of tariff preferences provided in the 1977 Agreement on Tariffs and Tariff Preferences, would be warranted. The Australian delegation agreed to undertake an urgent examination of the issue with a view to reaching a joint position in January 1981.

Conclusion

1. Permanent Heads believe that the mechanisms and procedures outlined in this paper and the accompanying draft Heads of Agreement will result in the attainment of the agreed central trade objective of the gradual and progressive liberalisation of trade across the Tasman on all goods produced in either country on a basis that will bring benefits to both.
2. The process of liberalisation will result in significant new trading opportunities, enhance economies of scale, assist in a move towards the more efficient use of the resources of both countries and contribute to the improvement of long term growth prospects and hence employment opportunities in New Zealand and Australia.
3. Permanent Heads believe that the approach outlined is in general conformity with the principles contained in the March communique and the underlying concepts spelt out elsewhere in this report.
4. Moreover, since the agreed procedures are based on an outward looking approach to trade, they will assist both countries to expand their economic and trading links with other countries, particularly those of the Pacific and South-East Asia.

PART II

DRAFT HEADS OF AGREEMENT

Objectives

1. To bring economic and social benefits to Australia and New Zealand and improve the living standards of their peoples through the conclusion of an appropriately structured closer economic relationship.
2. The closer economic relationship will be based, in the first instance, on the development of the partial free trade area at present operating under NAFTA into a fully comprehensive free trade area according to an agreed timetable.
3. All goods produced in either Australia or New Zealand will eventually be traded between the two countries free of duties and import restrictions.
4. It is expected that the sustained and mutually beneficial expansion of trade that will result from liberalisation will lead to the more effective use of each country’s resources. Increasingly, each will do more of what it can do best.
5. Trade expansion will also lead to a strengthened Australia and New Zealand partnership with an increased capacity to contribute to the development of the region through closer economic and trading links with other countries, particularly those of the Pacific and South-East Asia.

Principles

1. The new Agreement will be comprehensive in coverage, evolutionary in nature and based on the free movement of goods.
2. Trade is to take place under conditions of fair competition. The Agreement is to be consistent with the overall economic development policies of both countries.
3. It will be based on an outward looking approach to trade and should not foster the expansion of inefficient industries.
4. Automatic procedures are to be preferred to those relying on administrative discretion so as to minimise the extent of Government involvement in the day to day trading relationship.
5. The procedures are to be designed to achieve the maximum degree of certainty so as to facilitate investment decisions, planning for change and industry rationalisation.
6. The transition to free trade conditions is to be achieved in such a way as to minimise unnecessary disruption.
7. Trade liberalisation will take place in a gradual and progressive way and in accordance with an agreed timetable. Import restrictions are to be eliminated in reasonable time.
8. The CER tariff reduction formula and access generating mechanisms will apply from the outset to all goods produced in either country, industrial and agricultural, except for those placed in the agreed temporary deferment category.

Tariffs

1. Items already traded free of duty will remain free. This applies to items free of duty under either the preferential or the general tariff.
2. All goods produced in either country will be placed in categories for tariff phasing purposes. There will be no exclusions either at the outset or subsequently from the scope of the Agreement. A common tariff phasing formula (as set out below will be applied at the outset of the Agreement to all goods placed in Categories A/B.4 The objective for these goods is full duty free trade within a clearly defined and predictable timetable set out before the commencement of the agreement.
3. Goods for which the application of the common tariff phasing formula will be temporarily deferred will be placed in Category C. During the period of inclusion in Category C, on their removal, these goods may be subject to the common phasing formula or some suitably adjusted formula compatible with the general objectives of the Agreement, under terms and conditions agreed between the two Governments.
4. A one year grace period mentioned in the Prime Ministers Communique will be provided before tariff phasing commences. The grace period will begin on 1 July 1981.
5. All goods in Categories AlB will have all tariffs applying to them reduced to zero and bound to duty free no later than five years after the date of commencement of the tariff phaising.
6. The following tariff phasing formula will apply to all goods in Categories A/B: 1. The first reduction in tariffs will take place on 1 July 1982 2. On this date all goods with a tariff level of 5 percentage points (or equivalent) or less will move to duty free 3. Ad valorem tariffs of greater than 5 percent but not more than 30 per cent will be reduced initially by 5 percentage points and rounded down to the nearest whole number where fractional rates are involved. Thereafter tariff rates will be reduced by 5 percentage points per annum 4. Specific rates of duty equivalent to more than 5 percent but not more than 30 percent ad valorem will be reduced each year by the equivalent of 5 percentage points based on 1979-80 assessed unit values 5. Tariffs greater than 30 percent or equivalent will be phased out over 5 years. This will be achieved by applying a duty cut in each year at a level calculated by dividing the duty by 6 and rounding to the nearest whole number with an additional adjustment being made in the first step so that duties are eliminated within the agreed five year period 6. Procedures will be agreed for removing or phasing out other than ad valorem and specific rates of duty consistent with the approach and timetable set out above.
7. Where tariff quotes apply, the tariff rate on imports within the quota will be subject to the Categories A/B phasing formula.
8. Duties imposed for revenue purposes at rates equivalent to those imposed on like goods of domestic production will not be subject to the phasing formula. Revenue duties or taxes may be imposed on goods, or on ingredients or components contained in those goods, at rates equivalent to those imposed on like goods, ingredients or components when of domestic production or manufacture. (Subject to agreement, duties may be imposed for revenue purposes, in cases where there may be no like goods of domestic production or manufacture and such duties have therefore no protective effect.)
9. Where goods already on Schedule A are in the process of phasing to free, phasing arrangements established under the NAFTA will continue, except where the application of the new formula to the tariff level existing immediately prior to the commencement of phasing would result in a more rapid achievement of duty free status. In such case the formula will be applied.
10. In certain circumstances, including at the request of the industries concerned, it may be practicable to accelerate the tariff phasing process. To be agreed by both Governments, such acceleration must be in accordance with the underlying principles and objectives of the Agreement.
11. Consistent with the 1977 Agreement on Tariffs and Tariff Preferences, it is agreed that in any consideration of assistance and protection for industry, the lowest rates of import duties will be accorded the products of the other country consistent with the need to protect producers of like or directly competitive goods. It is agreed also that tariff advisory bodies will be requested to base their recommendations on this principle, particularly where decreases in the rates of duty for third countries might be contemplated.
12. Except as a result of carefully limited and temporary action arising from the safeguard provisions of this agreement, there will be no reversal or retardation of the CER tariff phasing formula.
13. The following provisions shall apply to Category C: 1. Category C is a temporary deferred category with an overall predetermined maximum lifespan set in accordance with the reasonable adjustment needs of each industry concerned. 2. Category C will comprise a list of goods common to both countries which governments consider should not be immediately subject to the tariff phasing and access provisions of categories A/B. 3. Bearing in mind the overall objectives of the new Agreement the number of goods placed in Category C shall be kept as small as possible. 4. The individual periods of deferment for goods in Category C will get set for as short a time as possible taking account of the adjustment problems faced by individual industries. To this end, the reasons for goods being included on the list will be clearly specified and a programme of measures tailored to each good developed to enable their early removal. This may involve an early reference to an appropriate industry advisory body which could be asked to recommend on the terms and timing of individual removals from Category C. 5. Implementation of the programme of measures to enable the early removal of each good from Category C will commence as soon as possible after the implementation of the new Agreement. There will be an individual timetable developed for each good in Category C. The overall lifespan of the Category will be set after the reasonable adjustment needs of each industry with goods in the Category have been considered. 6. It is recognised that in certain cases variations to the phasing formula may facilitate early removal from Category C. 7. It is agreed that in order to maximise continued opportunities for trade during the period in which Category C goods are deferred from the tariff phasing process, the tariff levels applied to such goods should be set at the lowest level consistent with protective needs. 8. The list will be finalised before the new Agreement comes into effect and shall not be added to thereafter. 9. When all goods have been removed from Category C the Category will be abolished.
14. It is noted that a need exists to define what customs charges will constitute a tariff for the purposes of this agreement.
15. The Agreement on Tariffs and Tariff Preferences (This section will be drafted to record the outcome of the examination to be carried out in terms of paragraph 2.385.)

Quantitative import restrictions

1. The measures which are to be adopted and which are designed to lead to the progressive elimination within reasonable time of all import licensing and tariff quotas in trans-Tasman trade will be equitable both as between the two countries and between different industries in each country. Unless otherwise agreed in exceptional circumstances the same rules will be applied to both countries and to all products subject to licensing or quota.
2. Administrative discretion in the operation of liberalisation measures will be kept to a minimum. The techniques adopted for liberalisation will be administratively simple and designed to achieve maximum automaticity.
3. The liberalisation will be effected in such a way as to generate additional opportunity to sell to each other’s market. It is not intended to guarantee sales or market shares.
4. Where the agreed liberalisation measures provide for action at the discretion of either government, each government will bear in mind the need to minimise the effects which such action may have in fostering the expansion of inefficient industries in either country.
5. The liberalisation measures will apply to all goods committed to duty free treatment under Categories A/B which are presently subject to import licensing tariff quotas, or any other form of quantitative import restriction. In certain circumstances it may be possible to apply partially the mechanisms in the agreement to liberalise access opportunities in respect of goods deferred from the tariff phasing process. Such action would need to be examined on a case by case basis.
6. Goods from the other country which are exempt from import licensing, tariff quota measures or quantitative import restriction of any kind at the commencement of the new Agreement will remain exempt.
7. Goods from the other country which are accorded licence on demand or replacement licensing treatment will continue to receive at least such treatment.
8. Having regard to the overall objective of achieving the gradual and progressive elimination of import licensing and tariff quotas, either country should at any time during the period when the access formula is being applied, remove or liberalise restrictive measures on particular products at the point when the country applying these measures judges that they are no longer necessary and/or effective.
9. In cases where retention of controls on particular products is considered desirable for general monitoring purposes only, then licensing may be continued provided that this does not result in constraints on imports from the other country.
10. Global allocations will continue to be available for imports from the other country.
11. As far as possible access levels will relate to global item codes in New Zealand and quota categories in Australia and be measured in quantity or value to correspond to global licensing/quota practice.
12. Progressive liberalisation of import restrictions will be achieved by increasing access opportunities by 10 percent per annum in real terms. This will result in a doubling of access opportunities about every seven years.
13. In order to establish the annual increase in access a base access level will be calculated for each product grouping by taking an average of imports from the other country over the 3 year period 1978/79-1980/81.
14. The exclusive licenses under this Agreement to be made available in the first year of the arrangement shall represent 10 percent of the base access level defined in 13 as adjusted by a deflator (defined in 19) (covering the 1980/81 trade year).
15. A minimum base level of NZ$200,000 cif (or the equivalent in Australian currency at the date of signature) or 5 percent of the domestic market, whichever is the lower, in respect of item codes, quota categories or other agreed quota groupings, will apply to all products, irrespective of current trade.6
16. Exclusive licences will be made available at the beginning of the first year of the Agreement to the extent that the calculated base access derived under 13 and 14 is less than the minimum base level.
17. It is agreed that where significant anomalies are created by the access provisions set out above the two Governments will seek to resolve these within the consultative framework of the Agreement.
18. Where licence or quota allocations are expressed in value, an increase in ‘real terms’ will require adjustment to be made for inflation in the importing country. An appropriate deflator will be agreed for each direction of trade.
19. Any increase or decrease in global license or quotas will be taken into account in calculating the increase in exclusive licenses or quotas necessary to achieve a 10 percent annual increase in real terms. A formula suggested by Australia was accepted in principle by New Zealand subject to further clarification.
20. The liberalisation of individual exclusive licence categories to a global basis was also accepted subject to such decisions being made within general parameters which ensured that, to the maximum extent possible, any such conversions were predictable, were not too abrupt in their impact and maintained the objective of progressive liberalisation of quotas between the two countries.
21. The allocation of special access will be left to the importing country having regard to the following objectives: 1. the need to provide genuine access opportunity; 2. allocations will take account as far as possible of import performance; 3. the publication of names of licence holders; 4. rights of consultation.
22. In respect of tariff quotas, base access figures, minimum base levels and a 10 percent annual increment will apply to the quota element as for import licensing. Tariff rates applying to imports within the tariff quotas will be treated as for tariffs generally under the Agreement.
23. In respect of special Schedule A access the objective will be for allocations to be determined eventually by the importing country rather than the exporting country as is the current general practice. Products where special Schedule A access is not presently fully utilised or where only one exporter is interested in the market will be handled in this manner immediately. Where exporters have competing claims for the available access these exporters will retain the right to nominate the importers for their present value of allocation for a period of 2 years.
24. The value of Schedule A licences will not be increased above present values. All increases will be within the new liberalisation arrangements.
25. It is envisaged that the level of trade under existing inter-firm Article 3:7 arrangements7 would not normally be increased above present levels. However, there may be some situations where because of rationalisation proposals and/or a significant move towards accelerating the liberalisation process, increases could warrant consideration.
26. No new Schedule B, or other Article 3:7 arrangements will be entered into. However, existing Article 3:7 arrangements should be allowed to continue subject to meeting normal criteria until such time as duties are eliminated on the goods concerned in the Australian Tariff or duties and effective licence barriers are eliminated on the goods concerned in New Zealand. Any arrangement currently in existence with ‘promise to source’ provisions where the goods are already duty free should lapse at the end of its current term.
27. Special provisions in respect of NAFTA footwear and textiles arrangements and the Schedule B furniture arrangement will be agreed before the agreement enters into force where these are necessary on an interim basis to avoid the transitional introduction of more restrictive conditions.
28. Where appropriate, the process of liberalisation set out above may in some circumstances be accelerated in a manner designed to further the objectives of the new Agreement.
29. Without limiting the form which any such arrangements may take and notwithstanding the provisions of paragraph 26 it is agreed that these may include agreements reached on an industry basis.
30. Liberalisation measures in respect of all quantitative import restrictions will come into operation from 1 July 1982, as soon as practicable after the date at which the new Agreement comes into force taking into account normal administrative arrangements.

Intermediate goods

1. Intermediate goods problems (or trade deflection) can arise: 1. where governments in one country have policies which enable producers to source intermediate goods (inputs) from third countries, at better prices than their competitors in the other country; 2. where other forms of government assistance-e.g. a subsidy or other form of direct assistance; the existence of a monopoly supplier of intermediate goods; including in New Zealand’s case the existence of import licensing enables the purchase of intermediate goods to be made on terms and conditions more favourable than are available to users in the other country.
2. Where the extent of the advantage (i.e. in relation to the total cost for the manufacture and sale of the relevant final goods) in substantial enough to give rise to a trend in trade which may frustrate the achievement of equal market opportunities being available to producers in both countries, then there will be a provision for consultations aimed at finding a satisfactory solution to the problem.
3. Currently known intermediate goods problems of a significant nature will, if possible, be solved in advance of the Agreement coming into operation so that they can then be placed in Category A/B from its beginning.
4. The first step with both currently known and future problems of this nature will be the conducting of a joint examination of the intermediate goods industry concerned in an attempt to find a solution which, as far as practicable, is consistent with the objectives of the Agreement.
5. Should no solution be found at the source of the problem, an examination will be made of a range of options designed to offset the advantage enjoyed by the industry in the exporting country. Measures which may be considered, either individually or in combination, could include: 1. the possibility of adopting a common external tariff or narrowing the tariff differential (with associated joint policies relating to concessions/by-laws and drawbacks); 2. variation of area content requirement on the particular finished goods incorporating intermediate products; 3. cancellation of drawback provisions and/or concessions/by-laws granted for export purposes as these relate to trans-Tasman trade; 4. a preparedness, consistent with national legislation and the provisions of GATT, to initiate anti-dumping or countervailing action on the request of the other country to offset any cost advantages achieved by this practice. This is on the understanding that similar action would have already been initiated in the country with an intermediate goods industry to protect, if dumping of these products were already taking place in that country; 5. compensation production/export subsides for the disadvantaged industry; 6. adjustment of phasing arrangements on finished goods; 7. compensating tariffs; 8. tariffs to offset the quantum of advantage.

[6] Agricultural support/Stabilisation measures8

[7] Export incentives

Rationalisation

Custom issues

1. The rules of origin applied to trade which takes place under the existing NAFTA arrangement will continue. These rules will be varied in individual cases only for special reasons consistent with the other provisions of the new relationship.
2. Recognising that there are no significant problems which arise in the area of Customs related issues, there will be provision for harmonisation or adjustment of Customs policies and procedures in particular cases where this is warranted. There could also be circumstances where it might be appropriate for third country dumping or countervailing action to be taken jointly by both countries and/or to protect the interests of one country. It is noted that both countries intend to adopt, on an FOB basis, the Customs Valuation Agreement which emerged from the GATT Multilateral Trade Negotiations.

Consultation, Review, and safeguard provisions

1. The new Agreement will contain a general review and consultative clause. The clause will meet specific needs for consultation arising as a result of the operation of individual areas of the Agreement, as well as the more general case where either government believes that the objectives of the Agreement are being frustrated.
2. Ministers will meet annually, or otherwise as appropriate, to review the operation of the new Agreement.
3. Provision will also be made for a general review of the operation of the new Agreement. This review will be commenced by 1 July 1987. Its terms of reference will include: 1. General consideration of whether the Agreement is bringing benefits to both countries on a reasonably equitable basis. 2. Consideration of additional measures that may be warranted to facilitate adjustment to the new relationship. 3. Consideration of other economic policies and practices in, for example, the fields of taxation, company law, and standards; and to the trans-Tasman elements of such factors as foreign investment, transport, tourism, and the movement of people, to see whether changes in such policies and practices might be required to reflect the stage reached in the closer economic relationship between the two economies.
4. To correct unfair advantage, safeguard clauses will be included in the new Agreement to cover, for example, instances of dumping, subsidisation, or significant trade deflection that may arise. The latter will be drafted to take account of the approach on intermediate goods set out elsewhere in the Heads of Agreement.
5. Beyond the above, general safeguard provisions will be available to meet circumstances where the rate of industry adjustment flowing from further trade liberalisation results in severed material injury and is in need of moderation. Such provisions will only be available in the transitional period.
6. In the longer term, it is considered that even limited recourse to general safeguard provisions could seriously undermine the objectives of a closer economic relationship. The consultative provisions of the Agreement are seen as providing sufficient opportunity for serious problems for example, relating to industrial development, to be addressed and solutions found.
7. 07 Any safeguard clauses considered necessary will be drafted to ensure they are consistent with the objectives and underlying philosophy of the new Agreement. Any suspension of obligations will be temporary in nature. During their operation the greatest possible opportunity will be provided for trade to continue to flow consistent with amelioration of the problem.9

[NAA: A1838, 37011/19/18, xx]

• 1 As explained by Bentley in Document 114, the document is ‘as it stood by the end of 12 December’.
• 2 Document 93.
• 3 As indicated by Bentley in Document 114, the issues related to agricultural support/stabilisation measures, export incentives and rationalisation.
• 4 A footnote here reads: ‘The specific nomenclature dealing with this category will be decided in due course.’
• 5 Presumably paragraph 2.23 was meant.
• 6 A footnote here reads: ‘It is envisaged that a detailed schedule would eventually be annexed to the Heads of Agreement which would cover these details’.

• 7 Article 3:7 of the NAFTA allowed for the remission or reduction of duties on goods that were not duty free.

• 8 For drafts of sections [6] and [7] see Attachments A and B to Document 114.
• 9 In the following months, as participants resolved some of the issues left undecided in the report, it was amended as necessary. It was submitted to Cabinet in February 1981 with slight variations to the version published here. On 23 April 1982 Australian Permanent Heads, meeting in Canberra, agreed to cease work on part I of the report and to continue work on the Heads of Agreement. The final version of part I of the report appears to be that dated 15 April 1982 (on file NAA: Al313/111, 81/1223).