Submission from Corner to Talboys

18 January 1980

Australia/New Zealand Relations: Officials Meeting: 12-13 December 1979

Attached for your information is a copy of a report of the interdepartmental working party on Australia/New Zealand Economic Co-operation to be considered by NZ Permanent Heads on 23 January. The report describes the outcome of two meetings held in Canberra on 12 and 13 December of Australian and New Zealand officials, at a working party level, to review the studies being undertaken on both sides of the Tasman in accordance with the terms of reference agreed by Australian and New Zealand Permanent Heads1 in November last year.

A further meeting of Australian and New Zealand officials at a working party level will be held in Wellington from 30 January to 1 February 1980. This will be followed by a second joint meeting of Australian and New Zealand Permanent Heads in Canberra on 25 and 26 February to prepare for the meeting of Prime Ministers in New Zealand in March 1980.
Work so far has focussed on the various ways both countries could eliminate all barriers to trade over a 5-7 year period. Australia’s concern has been to ensure that whatever form of arrangement Governments may wish to adopt it should enhance, as far as possible, general economic conditions within the two countries. They have been less concerned with encouraging the growth of bilateral trade per se. New Zealand officials, while fully recognising the long-term importance of Australia’s main objective, have been more mindful of the difficulties New Zealand industry would face from substantial and rapid economic restructuring.
There is general agreement that the most fruitful option for further study is neither a pure customs union nor a pure free trade area but a mixture of both-a ‘hybrid’. But Australian officials tend to favour a hybrid which veers more towards a customs union; New Zealand officials tend to favour more of a free trade area approach. These differences in perspective basically reflect the greater progress Australian industry has already made in living with lower levels of protection.
There is a good measure of agreement about the effects of the various types of arrangements. A common external regime, on the basis of the lower of the two tariff levels, would have major implications for much of New Zealand manufacturing and agriculture. It would also give rise to additional imports from third countries with balance of payments consequences which would have to be resolved by other means. A full free trade area (or a ‘hybrid’ close to it) would have fewer problems for New Zealand industry but could cause greater problems from an Australian perspective because it would maintain certain advantages New Zealand manufacturers currently enjoy compared with their Australian counterparts. It could also lead to growth in industries which may not be internationally competitive in the long-term.
Again, so far as the effects are concerned, there is agreement that whatever form closer economic integration may take, some industries in both countries would be hurt, others would benefit.
Australia is seeking to put conditions of competition on, as they see it, a more equal footing. While this is a matter for negotiation, there will have to be provision for harmonisation of policies in certain areas–export incentives and developing country preferences for example. In the longer term, New Zealand’s import licensing, at least as it is applied to Australia, would need to be phased out.
The quantitative analyses by Australian officials indicate that either a full free trade area, a customs union, or a hybrid arrangement would have a positive and beneficial impact on both countries. However, the extent and distribution of these benefits is critically dependant on the terms of the agreement. Their studies suggest that the benefits of any of these arrangements would be greater for New Zealand than for Australia because New Zealand’s smaller size and higher levels of protection. New Zealand officials have not carried out comparable studies. To the extent that the Australians’ assessment is correct, it is likely that the adjustment costs necessary to obtain those strict economic benefits would be correspondingly greater for New Zealand.
The Ministry would be happy to arrange a full briefing on this and other aspects of the current exercise should you wish.

Attachment

Report of Australia/New Zealand Working Party

AUSTRALIA/NEW ZEALAND ECONOMIC CO-OPERATION

Introduction

On 12-13 December 1979 Officials from the Departments in Canberra and Wellington respectively, that have been involved in consideration of possible changes to the economic relationship between Australia and New Zealand, met to review the work they have been undertaking. This report reviews the outcome of that meeting and outlines the further programme of work and the schedule of meetings that are being set up preparatory to the meeting of Australian and New Zealand Prime Ministers around 21 March 1980.

Background

At their meeting in Wellington on 2 November 1979 to discuss Australia/New Zealand economic co-operation, Permanent Heads recognised that there is scope for new economic arrangements between Australia and New Zealand which could provide economic benefits for both countries, strengthen relationships between both countries, and allow each to cope with greater confidence with the difficult economic and trading environments. In a statement of understanding2 agreed to at that meeting, Permanent Heads noted that while it would be inaccurate to see current discussions as the last possible opportunity that Australia and New Zealand might have to discuss the prospects of closer economic co-operation, it could well be more difficult to attempt the same exercise in 10 or 20 years time when the economies and trading interests of both countries have diverged further from their present roughly similar paths. It was understood that any new arrangements between the two countries should reflect an outward looking approach based on an efficient allocation of resources and an efficient structure of industry. Such an approach would be in conformity with the economic policy objectives of both countries.

Studies in Progress

The statement of understanding endorsed by Permanent Heads contained terms of reference for study groups to report early in 1980 on a number of issues that were identified as being central to any consideration of the merits of closer economic ties between the two countries. Four working groups have been established in Canberra to prepare material in conformity with the terms of reference, and in New Zealand officials have been undertaking work on the same programme through the inter-departmental committee that was set up earlier in the year.
The terms of reference require study of the implications of the elimination over a period of around 5-7 years of all tariff and non-tariff barriers, and other protective devices between the two countries, on all agricultural and industrial products, on the basis of: 1. a full free trade area; 2. a full customs union; based on the lower of the two tariff regimes; (3) a combination of these.

On the New Zealand side, a survey of manufacturers and studies of agricultural products most likely to be affected, are being conducted to assess the possible effects on trans-Tasman trade of a full free trade area or customs union approach to the phased elimination of tariff and non-tariff barriers. A report on this work is now being prepared. For their part the Australians are not undertaking a survey of this kind, but a considerable amount of quantitative work on the possible impact on the two economies of alternative approaches to free trans-Tasman trade, is being undertaken in Canberra.

Also under the terms of reference, the customs administrations on both sides of the Tasman have been involved in discussions on adjustments that would be required to tariff related policies if either a free trade area or customs union approach were to be put into effect. In addition, Officials on both sides of the Tasman have investigated the forms of assistance currently provided to industries in each country with a view to assessing the likely effects in these two policy areas of a move to closer economic relations. Officials have identified policies, such as export incentives, development grants, bounties, special sectoral policies, and Government purchasing policies, that are judged to be relevant in this context, with a view to establishing the prospects for harmonising these. Studies are also under way on the longer term dynamic effects of closer economic co-operation on economic growth, industrial structure, etc. These questions are difficult to assess in a precise factual manner. An attempt is being made to identify broad trends and dynamic effects on particular sectors, including an analysis of the experience of other countries in this area. These issues, together with the short-run static effects emerging from other studies, will be brought together to form a report on general conclusions.
In addition to the work just outlined, both sides are investigating a number of subjects including third country marketing, co-operation in international fora, transport, Government purchasing, energy, telecommunications and cultural co-operation (Annex 1). Also being considered are the merits of establishing a formal framework agreement between the two Governments to update the 1944 Canberra Pact. These are all possible issues for review by the Prime Ministers when they meet in March.

Officials Meeting Canberra 12-13 December 1979

At their meeting in Canberra on 12-13 December 1979 Australian and New Zealand Officials reviewed the work being undertaken on the basis of the programme outlined above.

The Australian Position

1. The Australians indicated that their studies will assess the effect of any arrangement on general economic conditions within the two countries, rather than just on bilateral trade relations.
  1. They claim that their analysis demonstrates that because of New Zealand’s smaller size, the impact of any new relationship would be greater on this country than Australia.
  2. Their theoretically based analysis also indicated that the pure form of either cooperative arrangement, that is either a full free trade area or a customs union, can have a favourable impact on the two economies. Equally, a hybrid arrangement based on a combination of elements of each of these, could have a favourable impact. The terms of agreement establishing any such arrangement would, however, be critical in determining where the final balance of advantage lay between the two economies.
  3. The Australians have also concluded that some approaches to freeing bilateral trade could lead to a form of industrial rationalisation. Whether or not this would be in the interests of the two countries would depend on whether any such rationalisation produced internationally efficient or inefficient industries.
  4. The Australians seemed to favour a customs union based approach. While this did not remove the possibility of inefficient industrial development, such a problem could be controlled by altering tariff rates to third countries. They also stated that distortions created through disadvantages originating from tariff differentials could be avoided.
  5. The Australians stated that the exchange rate is an important factor to be considered in the economic relationship. It is acknowledged as having major importance in complementing assistance and protection policies, but it is not seen as constituting in itself a subject for negotiation between the two governments.
Australian officials asserted that over the years, Australia has developed a broad and reasonably consistent industry development plan and that although New Zealand has not reached this same point, nevertheless there are common areas between the development policies of the two countries. Australian studies so far indicate that issues including import licensing, international sourcing and export incentives would cause problems in any new trading relationship unless some degree of harmonisation of structures was achieved. The officials also affirmed that the future of New Zealand’s import licensing system would be a critical factor in the future of the relationship as far as Australia is concerned. On the question of international sourcing, it was stated that high area content rules could be contrary to some of the policies that Australia is pursuing on the industrial development front but this remains a question for further study. Australian Officials also indicated that their interpretation of the terms of reference of the study groups allowed, in the case of the customs union study, for the tariff level to be set at the higher of the rates prevailing in the two countries, rather than the lower rate, in cases where one country did not have an industry to protect.
On agricultural questions, the subject of the dairy industry was raised. Presently, with the exception of cheddar cheese, free trade exists between the two countries in dairy products. However, the Australian dairy industry is politically sensitive as a result of its home market pricing policies vis-a-vis export markets. The Australians have indicated that they would expect to review support measures for both countries’ industries as part of any negotiations towards a closer economic relationship.

New Zealand’s Position

New Zealand officials informed their Australian counterparts that, on the basis of the work already undertaken, it was clear that New Zealand’s industrial development programme had not reached the same point as its Australian equivalent and that the effects on New Zealand of large scale industrial rationalisation resulting from a substantial or rapid movement towards a closer economic relationship could be severe. It is particularly important that any industrial restructuring as a result of change in the trans-Tasman relationship should be balanced within the context of trade growth opportunities opening up as a result of the changed relationship. In particular, the oft-enunciated Australian concept of an ‘equal go’ relationship could have difficult consequences for New Zealand. New Zealand must be convinced that opportunities for growth would exist in any new relationship, before decisions could be taken that would result in protective barriers being significantly lowered. In particular, the Australian analysis of a customs union approach based on the maintenance of high tariff levels in cases where New Zealand did not have an industry to protect, but sourced internationally, was unacceptable. Indeed, officials were sceptical of a classic customs union approach as a realistic option for developing closer economic ties between the two countries.

Personal Impression of Leader of the Australian Delegation

At the conclusion of the meeting the leader of the Australian delegation gave his personal impressions of the meeting on the basis of the following points that he said had emerged from the two days of discussions. 1. Any new arrangement between Australia and New Zealand should be based on an outward looking approach in which there would be an efficient allocation of resources and an efficient structure of industry and should be designed to enhance relationships with third countries. 2. In any further study of possible liberalisation of trade between Australia and New Zealand attention should be devoted to the development of some kind of hybrid customs union-free trade arrangement tied to a package covering the phased elimination of tariff and non-tariff barriers on the basis that:
1. where both countries employed protective rates harmonisation could proceed by moving towards the lower prevailing rate in either country;
2. where both countries had non-protective rates, harmonisation could likewise proceed by way of the lower prevailing rate; and
3. in the difficult areas where protective rates were employed in one country only, there would be a need for further exploration of the approach to be taken.
  1. Both countries will have to face up to the reality that in any changed relationship some industries would be hurt, but there would also be advantages for each side. An overall balance of advantage for both countries would be necessary.
  2. Any arrangement should not lead to the encouragement of internationally uncompetitive industry.
  3. Automatic adjustments of tariff, and where appropriate, non-tariff barriers would form an essential component of any arrangement.
  4. Any safeguards arrangements should be limited in effect and be of limited duration.
  5. The two Governments would have to agree on principles and arrangements to apply in the area of industry assistance in both countries, especially where existing tariffs were set at levels which might result in harm to one partner.
  6. Normal trade growth opportunities for regional partners should not be impaired.

Assessment of Meeting

On the basis of the discussions between Australia and New Zealand officials in Canberra, the New Zealand working party considers that some tentative conclusions can now be drawn on the basis of the terms of reference, about the focus required for further work. These conclusions are- 1. A common external regime based on the lower of the two levels of protection would imply withdrawal of protection in any case where one country has an industry and the other does not. This would affect Australian industry more than New Zealand because it has more intermediate goods industries. 2. In a relatively large number of other cases a common external regime would imply a general lowering of rates of protection. 3. Such changes could be expected to be inconsistent with judgements based on existing policy as expressed in detailed reports from the Australian Industries Assistance Commission and the New Zealand Industrial Development Commission. Movement to a common external regime would give rise to additional imports from third countries with balance of payments consequences which would have to be resolved by other means. 4. There would also have to be readiness to accept similar trade policies in such matters as preferences to third countries including developing countries. Movement to a Common External Tariff would also mean the gradual phasing out of New Zealand’s import licensing system as it applies to Australia. 5. A common external regime, on the basis of the lower tariff level, would have major implications for a relatively wide area of New Zealand manufacturing and agriculture. It would lead to difficulties for a considerable number of industries if introduced abruptly and would have far greater effects than a free trade area. 6. On the other hand a complete free trade area has problems from an Australian perspective because it does not necessarily discourage the expansion of inefficient industries. The use of high area content rules as part of the free trade approach creates administrative difficulty and can also promote the development of industries which are not internationally competitive.
The points above suggest that the full customs union approach is not at this stage fruitful for further detailed analysis from a New Zealand point of view. Emphasis should therefore be given to the free trade approach or a hybrid approach which takes account of Australian concerns and New Zealand aspirations. There will be difficulties in accommodating Australian concerns if such an approach is adopted. From a New Zealand view point, however, further discussions could most usefully focus on the following: 1. How to permit the sourcing of industrial imports at world prices; 2. How to minimise disruptive changes through various safe guards and techniques for predicting and managing change; 3. How to accommodate Australian concerns over what they see to be an unfair advantage for New Zealand exporters through export incentives and so forth.
By directing work along these lines it would be possible to study the framework and institution of possible new trading arrangements in a way that is more meaningful than has been possible to date. The wide and rather abstract range of possibilities under study has meant that an almost limitless variety of institutional arrangements has had to be open for discussion. On the basis of discussions between Australian and New Zealand officials so far, it is accepted that further work on the free trade customs union hybrid concepts should take account of such matters as: 1. Area content rules; 2. Import licensing; 3. Balance of Payments effects; 4. Implications for existing policies; 5. Third countries preferences; 6. Export incentives and other assistance measures;

For further study of these issues to be productive, the focus of attention should be narrowed down as far as practicable from the comprehensive range of possibilities that have been under study up till now.

The work outlined above fits comfortably within the existing terms of reference and it is proposed that it should form the basis for New Zealand participation in further discussions with the Australians on the work programme.

Timetable for Further Meetings

Australian officials will hand over to New Zealand by 15 January 1980, copies of papers that have been prepared in conformity with the terms of reference of the Permanent Heads’ Statement of Understanding. A small delegation of Australian officials will come to Wellington on 30-31 January and 1 February to complete joint consideration of the studies that have been undertaken on both sides of the Tasman and prepare a report for the Permanent Heads of both countries. Papers on the New Zealand studies outline in paragraphs 4-6 above are to be tabled at that meeting.
Tentative agreement has been reached with the Australians that Permanent Heads should meet again in Canberra on 25-26 February to consider the report prepared by Working Party level officials and to consider the subjects that could be discussed by Prime Ministers when they meet on 21-22 March 19[80].

CHAIRMAN

Inter-departmental Working Party on

Australia/New Zealand Economic Co-operation

[ABHS 950/Boxes1221-1226, 40/4/1 Part 23 Archives New Zealand/Te Whare Tohu Tuhituhinga 0 Aotearoa, Head Office, Wellington]

1 See Document 52.
2 See Document 52.