Submission to Cabinet Economic Committee

Wellington, 16 August 1979

CONFIDENTIAL

Australian - New Zealand Economic Cooperation: Progress Report

Introduction

1. This is to report on progress under the present initiative to investigate options for greater economic cooperation between Australia and New Zealand.
2. The work currently under way has arisen from the recent discussions, statements and speeches by Ministers of both Governments who have expressed dissatisfaction with the present state of the economic relationship between the two countries and called for a full discussion of the alternatives for the future. This has culminated in the meeting of the Prime Ministers of both countries at the Commonwealth Heads of Government meeting in Lusaka. Those discussions set the scope of the present initiative in general terms and the timing for the next stages of discussions between officials and Ministers.
3. These recent activities follow on from the Nareen Declaration1 and the establishment of the Australian- New Zealand Businessmen’s Council and the Australia- New Zealand Foundation. The discussions which the Prime Minister of New Zealand and others had with the Australian Deputy Prime Minister, Mr Anthony, in April underscored the problems with NAFTA trade negotiations. Also, the Australian invitation to New Zealand to make proposals for a fresh approach to developing the relationship2 were made at that time. Mr Anthony’s views were subsequently reinforced in correspondence between the two Prime Ministers.
4. The Prime Ministerial statement from the discussions in Lusaka lays the foundation of future analysis and discussion, and is recorded below:

Following work that has been done in recent months by committees of officials in each country, it was agreed that further investigation would be made into broad areas of economic cooperation as well as specific fields where the two countries could work more closely together. The timetable was set for Australia and New Zealand officials to exchange information about the end of September and meet shortly thereafter. Following consideration of the results of that meeting by the respective Government, it was anticipated that the two Prime Ministers and other appropriate Ministers would meet to discuss the future direction of economic cooperation not later than February of next year.

The Prime Ministers emphasised that any form of structural change in the two economies would be necessarily a long term operation and that neither country would wish to see drastic changes made rapidly to any particular industry or group of industries. Nevertheless they agreed that in a complex world economy which continues to throw up new and almost intractable problems, it is in the best interests of Australia and New Zealand to join forces wherever possible in advancing their own economic development and combating the forces that are arrayed against us.

The two Prime Ministers agreed that their study would consider the full range of options and would be undertaken in a positive spirit.

In addition to the meetings of officials and Ministers set out in this statement the Australian Minister for Special Trade Representations, Mr Garland, has expressed his interest in visiting New Zealand in mid-September.

Work Programme

1. A working party of officials has been established which is presently chaired by the Prime Minister’s Department and includes the Ministry of Foreign Affairs, the Department of Trade and Industry, Customs Department, Treasury, Ministry of Agriculture and Fisheries and the Reserve Bank. The approach being taken to the study is to examine the possibilities for closer economic cooperation and assessing the implications for New Zealand’s economic objectives and policies. This is the first step in defining a path of development in economic cooperation that best suits New Zealand’s interests. The brief provided for the Prime Minister’s meetings with Australian Ministers in Lusaka summarised this approach and parts of this are reproduced as the Appendix to this report.
2. It has been agreed that papers will be prepared by the departments on the following topics: 1. Examine the potential of New Zealand industries by comparison with their Australian counterparts to assess their vulnerability and their likely export performance under various alternatives; (Treasury) 2. Assess the potential for trade creation and trade diversion on the basis of the relative competitiveness of Australian and New Zealand industries in relation to world prices for their products and current levels of protection; (Trade and Industry) 3. Examine the implications of a possible rationalisation of Australian and New Zealand tariffs; (Customs) 4. Examine the implications of a closer economic relationship with Australia on New Zealand’s other economic interests); (Trade and Industry/Foreign Affairs) 5. Consider the implications for our political and other interests with, for example, the Pacific, Europe and South East Asia; (Foreign Affairs) 6. Assess the future prospects for the Australian economy with emphasis upon its likely trade policy and its attitudes towards protection; (Foreign Affairs) 7. Consider possible areas of coordination in major industrial developments; (Trade and Industry) 8. Consider relevant overseas free-trade precedents, including EFTA; (Treasury/Foreign Affairs) 9. Consider the implications for agricultural production and trade of closer economic cooperation; (Agriculture and Fisheriesffrade and Industry)
3. The statement by the Prime Ministers sets a timetable for the end of September for an exchange of information and a meeting of officials in October. By then it can be expected that officials will have completed a preliminary review of the alternatives and have the outline of an approach to developing greater economic cooperation. This will provide the basis for discussion with Australian officials after which the areas requiring deeper analysis and consultation should become clearer.

Consultation with the Private Sector

1. It will be important to keep the private sector well informed of progress in the coming months to allay any fears of undue official secrecy. Also because of the intensive publicity the subject is receiving there is some risk of public attitudes towards various proposals being influenced prematurely before thorough consideration has been made by the Government. In the light of this there is a need to consider carefully and to coordinate the publicity given to various announcements and formal consultations as they arise.
2. The Australian-New Zealand Businessmen’s Council and the Manufacturers Federation are seeking a close involvement with the Government in these developments and other groups will no doubt wish to be involved in the near future. These two organisations have close links with their counterparts in Australia and can provide valuable information to Government. The Businessmen’s Council has met with Mr Talboys, Mr Adams-Schneider, Mr Templeton and with officials. It was agreed that the Council will be kept abreast of the on-going work and consulted for views on specific proposals at the appropriate time. For its own part the Council, together with the Foundation have supported a study by the New Zealand Institute of Economic Research on the subject which has just been made available to Government.
3. The Manufacturers Federation have raised with Ministers and officials its strong wish to be involved and it points to the consultations that took place over the new export incentive scheme as an example it would like to be followed on this subject. Part of the work being undertaken by the Department of Trade and Industry will require discussions with manufacturers on the likely effects of various proposals for their operations. This is the first stage of consultation with manufacturers and the approval of the Cabinet Economic Committee is sought for officials to enter into these discussions.

Recommendations

1. It is recommended that the Cabinet Economic Committee: 1. note this report; 2. authorise officials to enter into consultations with manufacturers and other relevant bodies on the implications of alternative developments in economic cooperation between Australia and New Zealand; 3. note the need for coordination of the publicity given to proposals and consultations as they arise; 4. request officials to report further on the question of future meetings of officials with their Australian counterparts.
2. The departments of Foreign Affairs, Trade and Industry, Customs, Agriculture and Fisheries and the Treasury have been involved in the preparation of this report and concur with its recommendations.

Appendix

CONFIDENTIAL

Australian Attitudes

It is difficult to assess Australian views on how they wish the relationship to develop. They are plainly frustrated with NAFTA negotiations and they do not see the relationship as equitable in its present form. New Zealand’s continuing maintenance of import controls is perhaps the most fundamental objection. They have also in recent years complained about other imbalances built into the trading relationship through the inter-company agreements in Article 3:7 arrangements, for example, and at New Zealand’s export incentives. It seems unlikely that these objections could be resolved by New Zealand offers to put more items on Schedule A and minor concessions on import controls. A more fundamental response from New Zealand may be required to offset this hardening of the Australian position and it is possible that Mr Anthony’s initiative3 was, in part, intended to point this out. It may be that the supporters of a general lowering of Australian protection and an effort to boost its trade see the present relationship with New Zealand as inconsistent with this, particularly as Australian exports to New Zealand have been static. They may see Australia and New Zealand jointly adopting an outward looking trading strategy and improving the prospects for this by a closer internal relationship.

New Zealand’s Objectives

New Zealand’s general economic objectives provide the basis for defining and evaluating proposals to expand its relationship with Australia, although factors including other trading relationships must also be taken into account. It is assumed that our economic objectives over the longer tern are to raise living standards by the most efficient use of our resources. Among other things this requires that we expand exports of goods and services which we can produce efficiently in comparison with the major trading nations and for which markets are available. The cost of inputs into export production and hence the general level of costs in the New Zealand economy must be competitive with our trading partners. This means we must increase the efficiency of resources used domestically in part by lowering the costs in firms producing tradeable commodities at prices that are excessive by world standards (or by moving resources out of those firms). Producers must also have access to imported inputs at prices that are reasonable in relation to what is generally available in world trade. The restructuring policies the Government has initiated are directed towards those goals. The recent Budget announcements on exchange rates, import licensing, export incentives and other measures provide the means for further progress.

Options

This general objective and these policies have profound implications for our economic relationship with Australia as it provides the largest market for our manufactured exports and is the source of many of our imports. There are potential gains from the greater efficiency an integrated market would permit. There are many options open for developing our economic relationship with Australia and each should be evaluated according to how far it goes towards satisfying the requirements above. While there are endless variations available on any theme the main ones are:

• Extension to the present limited free trade
• Area; Full free trade area
• Customs union;
• Economic community;
• Monetary union.

In this order, and with some over-simplification, they extend along the spectrum from the lowest to the highest degree of economic cooperation and integration. There is substantial evidence that Australia under the present NAFTA regime is unwilling to make progress and that there are difficulties in preserving our present trading advantages. Australia is in effect inviting New Zealand to propose a greater degree of cooperation and implying that otherwise we will slip backwards. Each of these broad alternatives is described briefly in the following paragraphs.

The present arrangement under NAFTA requires consideration to be given to free-trade product coverage on a case-by-case basis. It is increasingly difficult to add items to Schedule A for a number of reasons including reluctance on the part of manufacturers on both sides of the Tasman to accept competition and Australian concern on the effects of New Zealand’s import licensing policy. Some useful trade also takes place, however, under special arrangements (Schedule B,4 Article 3:75). A necessary administrative detail is an area-content rule (currently 50 per cent) designed to ensure that the benefits of the NAFTA devolve on the participants and industry is not subjected to competition from goods which to a large extent are sourced elsewhere.

Under a full free-trade approach all goods would be traded freely between the countries with zero tariffs but with no requirement to harmonise the tariffs applied against third countries. A complete free trade area would create pressure to rationalise or eliminate those industries which are more heavily protected in one country than in the other. Area-content rules could be maintained and in practice pressure could be expected from Australia to make these more restrictive and other non-tariff restrictions could receive even more attention than at present. Area-content rules in a free trade area have a crudely similar effect to harmonised external tariffs as an exporter is restricted in his freedom to purchase raw materials from countries outside the free trade area.

Under a customs union both countries would agree to harmonise their external tariffs against third countries. Whether this raises or lowers the level of protection in general or for particular products against third countries depends on how the process is negotiated. While the customs union approach has many merits it would be inconsistent with New Zealand’s restructuring policies to enter a union which raises protection or commits us to a high long term level of protection. On the other hand a customs union that is directed towards a general lowering of New Zealand’s level of protection is desirable and this should be our objective in any discussions of this concept. As New Zealand’s level of protection is higher than Australia’s except in certain areas, there should be scope to develop such discussions.

Both the free trade area and customs union options emphasise trade flows as the focus of cooperation. Economic cooperation may also encompass many other matters some of which are listed below:

1. Free flow of people;
2. Free flow of capital;
3. Consultation on industrial development strategies;
4. Cooperation in marketing of major products in the rest of the world;
5. Cooperation on energy development;
6. Coordination of economic relationships with other countries and trading regions;
7. Coordination of monetary, fiscal and exchange rate policies between both countries;
8. Coordination of employment and incomes policies;
9. Establishment of a monetary union.

Rather than choose, at this stage, a particular ideal form for a future economic relationship made up of some particular trading arrangements and some of these other elements it is essential instead to keep in motion the machinery of analysis, consultation and negotiations. However, some preliminary studies of these latter elements is justified.

The terms ‘Economic Community’ and ‘Economic Union’ can encompass various of these elements and can bring to mind misleading parallels from other areas of the world. There is already a free flow of people (although threatened by difficulties in tracing criminals and unemployment problems) and a significant flow of capital between Australia and New Zealand which indicates a closer relationship than might be inferred from our trade agreements. There is already a degree of consultation, if not coordination, in some areas of economic policy. The problem in coordination of monetary, fiscal and exchange rate policy is that it arouses suspicions that one country may export more of its inflation or unemployment than it might do otherwise. The last step in economic union is the establishment of a common currency which cannot succeed unless there is already an intimate coordination of these policies and completely unrestricted trade. A step towards cooperation in these areas could be taken through greater consultation between Ministers and officials and the integration of more non-government organisations across the Tasman. New institutions could be established for formal consultations between Governments on these questions. In the immediate future the most fruitful steps might be to explore possibilities for cooperation in industrial development strategy and to review New Zealand’s foreign investment policy in relation to our relationship with Australia. The complications arising from Australia’s federal structure of government must be accounted for.

The Basis for Possible Proposals

Until we have a clearer understanding of the Australian scene and have completed our consideration of the options it is premature to raise specific proposals. Whatever recommendations eventually emerge from our studies it is apparent that if any proposal is to succeed it will have to be expressed in more comprehensive terms than those which are presently occurring under NAFTA. The Government’s restructuring policies including those in the recent Budget form the basis of a new approach to our relationship with Australia. In this connection we will have to recognise Australian concerns over New Zealand import licensing if we wish to bring about significant change. The possibilities for cooperation in the development of energy and other resources and for coordinated marketing of major export products may also have some promise.

[ABHS 950/Boxes1221-1226, 40/4/1 Part 19A Archives New Zealand/Te Whare Tohu Tuhituhinga 0 Aotearoa, Head Office, Wellington]

• 1 Document 1.
• 2 See Document 15.
• 3 See Document 15.
• 4 Schedule B of the NAFTA was an intermediate arrangement to provide for partial participation in free trade provisions ‘by way of quotes or duty free schedules on the basis of partial reciprocity’.
• 5 Article 3:7 allowed for the remission or reduction of duties on goods that were not duty free.