Report by Department of Foreign Affairs on Interdepartmental Meeting

[Canberra], 22 August 1979

CONFIDENTIAL

Meeting to Discuss STR Study on Closer Economic Association with New Zealand, 22 August, 1979

Mr Flood said that the purpose of the meeting was to receive reactions to the STR task force’s preliminary study; to define areas for further work and to discuss procedural arrangements.

1. He advised that discussions with Australian businessmen had revealed: * a positive inclination to the idea of closer association * a preference for the initiative to remain with the Government for the time being * caution against expecting any quick results * mixed views on the merits of a customs union as opposed to other forms of co-operation * mixed views on the competitiveness of New Zealand industry under freer trade arrangements * caution about distracting Australian exporters from the larger Asian market * a view that non-economic factors would complicate any technical economic assessment of the results of freer trade * some were convinced that there was little in it economically for Australia and it was really a political exercise to help New Zealand.
2. There was no substantive discussion of the task force report, although several Departments indicated they would be submitting comments in writing. Flood said the report would be issued in a revised form in about two weeks but emphasised that it was only a first attempt which would lead on to further reports.
3. Treasury, DFA, PM&C and DIC felt that more attention needed to be given to developing the options other than that of a customs union. It was agreed that political union was ruled out. DFA said that all the possibilities discussed in Lusaka should be included in any report to Ministers.
4. Industry and Commerce took the view that we needed a clearer statement of our national interests in pursuing closer integration in order to define the degree of co-operation which is relevant to the totality of the relationship. Industry and Commerce said in their view strategic/foreign policy/defence considerations may have the crucial weighting in the Government’s decision on this issue.
5. Treasury did not disagree with the analysis in the preliminary STR report but suggested that a wider range of options should be explored. The Treasury view is that we should concentrate on the forms of co-operation that are less ambitious than a customs union.
6. PM&C also adopted a cautious attitude and suggested that the preparatory work should cover the possibility that Ministers may not be prepared to accept a free trade area or customs union by pursuing areas of subsidiary co-operation such as energy, shipping and banking.
7. Flood agreed with the need to develop other options and said that the objective should be to ascertain whether there is any option for closer economic co-operation which provides benefits to both New Zealand and Australia. He did not rule out the possibility, however, that we may be involved in a ‘zero sum game’ with benefits to one side being at cost to the other.
8. It was agreed that there was a need for more quantitative analysis of the options. DTR had already done some preliminary work with the (informal) co-operation of the IAC to apply the IAC ‘Impact’ model. There are, however, substantial problems involved in a quantitative approach relating to data deficiencies (particularly in regard to the New Zealand licensing regime) and conceptual difficulties with the model itself. PM&C mentioned the possibility of engaging academic specialists for a short period as consultants. Drysdale1 and Lloyd2 were mentioned.
9. There was no substantive discussion of the possible effects of closer integration. Industry and Commerce commented (without elaboration) that a full free trade area would probably not be in Australia’s interests but a customs union might bring benefits to us. DTR said that the initial quantitative studies indicated that a customs union would result in trade diversion of very large proportions in favour of Australia. The preliminary analysis also indicated that the amount of trade creation would not be large. DTR emphasised, however, that these were very tentative results.
10. In regard to future work, Departments endorsed the attached list of additional reports to supplement the STR study. In response to a [D]FA query Flood gave an assurance that all Departments would have the opportunity to see and comment on all papers. DFA registered its interest in three particular papers A(a), A(d) and B(d).
11. Arising out of the question of whether there should be some joint exchange of papers between the two sides, there was discussion of whether any ANZ report would be put to the two Prime Ministers in February. STR reported that Mr Garland had said that the Lusaka meeting had fudged this question, although it was possible that New Zealand might ask for such an approach. STR did not favour the idea of an agreed joint report as it could only lead to a lowest common denominator document similar to the Trans-Tasman Market Integration Study. STR did not object however to the idea of a document containing the independent views of each side going to the Prime Ministers or perhaps a joint agreed technical study by the two industry assistance authorities.
12. There was inconclusive discussion on when we should put something to Cabinet. [D]PI, DIC and DFA favoured an early paper not making firm recommendations but alerting Ministers to the issues and to possible advantages and disadvantages of various options. [D]PI was concerned about the publicity that was being generated. The reaction of the dairy lobby was mentioned and the sensitivity of the exercise underlined. STR and Treasury saw advantage in not going to Cabinet until after officials’ discussions. It was recognised that New Zealand officials would probably have been to Cabinet before the discussions.
13. Foreign Affairs expressed some doubt about the need to maintain any longer that the initiative had to come from New Zealand. The situation had now changed somewhat. In Mr Muldoon’s letter to Mr Fraser of [16] August about the public line to be taken he said that he would continue to follow the line that the idea emerged naturally from discussions following a NAFTA meeting. It was felt it was now more accepted by both sides that there could be movement in parallel and that it was not necessary to wait for the New Zealanders to make each move. Flood said that personally he saw advantage in the initiative still being seen to come from New Zealand. He thought that there should be no exchange of papers in the foreseeable future but we should wait until the New Zealanders to make each move. Flood said that personally he saw advantage in the initiative still being seen to come from New Zealand. He thought that there should be no exchange of papers in the foreseeable future but we should wait until the New Zealand side presented us with a paper or proposals to which we could react. Flood said that, based on a list that he had received of papers commissioned by Dr Scott, he believed that New Zealand may be more advanced than we are in their preparatory work.
14. The meeting did not specifically address the question of inter-Department responsibilities for the future work. STR will finalise the task force report and co-ordinate the preparation of the further papers. Flood indicated that this work would be done by individual departments but he did not rule out the possibility of a task force being convened at some later stage. In concluding the meeting, Flood said that it would be up to PM&C to give a lead to other Departments in regard to the next stages.
15. Flood proposed the following course of action: 1. distributing an amended version of the initial study in two weeks 2. preparation of a number of additional papers (see list attached) on topics requiring more detailed attention. To be cleared and finalised by 21 September 3. discussions with New Zealand officials at the end of September (Flood was thinking of 2-3 on each side) 4. meeting of ANZ Permanent heads in mid-October (Henderson, Scully, Currie mentioned as possibilities) 5. possibly a Cabinet Submission at the end of October.

Attachment

DRAFT-22 August 1979 Australia - New Zealand Economic Co-operation Subject of Report to be completed by 30 September| Responsible Departments| Departments to be consulted in addition to STR
—|—|—
Group A Implications of (1) a free trade area and (2) a customs union for:| |
(a) Manufacturing-trade in manufactures, the local industry, and Australian industry policies (protection policy, export incentives, etc)| DIC/T&R | BACA
(b) Rural products-trade, local production and rural policies| PI/T&R |
(c) Overall economic effects, e.g. effects on resource allocation and national income, balance of payments Treasury| Treasury|
(d) Trade policy

• implications for all existing Resources trade arrangements
• possible future expansion of trading block to include other countries

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

• 1 Not identified.
• 2 Not identified.