Telegram from Ministry of Foreign Affairs to New Zealand High Commission in Canberra

Wellington, 2 September 1977

No 2169. CONFIDENTIAL (NZEO) PRIORITY

Economic Relations with Australia

Herewith first draft of a CEC paper for your information and reaction. We would appreciate your comments by 6 September in order that final draft can be cleared for consideration by Committee on 13 September.

1. This paper discusses in general terms the position reached in our economic relations with Australia and suggests that a work programme be adopted to identify the scope for furthering these relations in the longer term.

Australian Economic Developments

1. The pressing need for detailed consideration to be given to the direction of trans-Tasman relations is the critical position that has been reached in the formulation of Australian economic policies and the real danger that without a considerable effort on our part these policies could develop further against our interests.
2. In recent years there has been a structural shift in the Australian economy contributed to by the increasing importance of rapidly growing mineral exports. A high inflation rate and forces which have brought about a fluctuating but generally strong exchange rate. The consequence has been a loss of competitiveness by Australian industry leading to high unemployment (about 6 per cent but up to 14 per cent in some areas).
3. A White Paper on manufacturing industry presented in May of this year in the face of these difficulties has identified a need to restructure industrial development, has affirmed that it is not the intention to provide blanket protection for Australian industry but has acknowledged that emphasis will be required on short-term policies which will enable employment opportunities to be maintained until more sustainable growth can be restored. In brief, the White Paper envisages pragmatic use of temporary assistance for immediate problems during which policies are implemented to effect a movement into manufacturing developments which make best use of Australia’s natural advantages and consequently have a high degree of natural protection.
4. At the same time, Australia is [in] the process of re-defining its trading relations internationally. In particular, it is adjusting to the ASEAN relationship which it conceives as of importance both in a political and economic sense. In doing so it has been asked to respond to ASEAN pressures for the removal of existing trade restrictions and a preferred position on the Australian market. The further development of ASEAN/Australian relations will undoubtedly receive even more attention in the years ahead.
5. The influences affecting the Australian economic environment have already been felt in our trading relations with Australia. In part this has been occasioned also by a new found realisation by Australia that New Zealand industry has acquired a strength sufficient to create competitive problems in a growing number of areas and has to be treated as an equal, rather than a junior partner as formerly.
6. This harder Australian attitude has found expression in * the Australian Cabinet direction to include New Zealand goods within global quota restriction in the absence of any special NAFTA arrangement being negotiated * a tendency to look for a 1:1 basis in any such arrangements rather than the 1:4 basis (broadly reflecting market sizes) which were traditional previously * criticism of the effects of New Zealand’s import licensing system on Australian trade and an insistence on special licensing provision for Australian goods as a prerequisite to the maintenance of any preferred provision on the Australian market * an apparent reluctance to progress the NAFTA by the addition of further goods of export interest to New Zealand to Schedule A 1 * a harder line attitude on the balance of advantage in Article 3:7 and Schedule B arrangements * a hard negotiation on a more enduring preference agreement and insistence that the present imbalance in the interim arrangement (whereby Australia gave New Zealand a margin of 15 per cent in the protected sector in exchange for a reciprocal 10 per cent) be abandoned.
7. This policy derives from the immediate sectoral difficulties with which Australia is faced. However in the light of the general movement in Australian policies reluctance to find special accommodation for New Zealand could have longer term implications which are more important and which underscore the need for a fundamental reappraisal of the direction of the trans-Tasman relationship.
8. Indeed, the overall pattern of trade with Australia at present gives some cause for satisfaction. Provisional statistics indicate that exports to that country grew by 35 per cent during the past year, from $264 million to $355 million. The trade imbalance in Australia’s favour has declined to below 2:1 the difference being reflected in raw materials and semi-finished products. Trade is virtually balanced in the area of sophisticated manufactures and it is in this area that New Zealand has made its greatest gains in recent years.

Comment

1. In 1975 a comprehensive review was made of the NAFTA which culminated in the decision to extend the agreement for a further ten years. Although the NAFTA had since 1966 provided an umbrella for the development of trade, the review highlighted a number of deficiencies. These included the very little progress that had been achieved since 1966 in adding additional goods to Schedule A and the inconsiderable impact which the NAFTA has had on the structure of industry in the member states. Officials concluded that a positive effort would be required by Government if the NAFTA was to optimise its benefits and this led in early 1976 to the New Zealand offer to place all goods on Schedule A except for a limited number of particularly sensitive items. Unfortunately, this offer was untimely relative to Australia’s position.
2. New Zealand’s trade objectives are to maintain, and if possible extend, our preferential position in the Australian market which for the foreseeable future will remain critical to expansion in forest products and manufactured exports. It now seems, however, that realisation of this objective will require focus on wider economic issues.
3. Much is already known of Australian concerns relating to present New Zealand policies. The major stumbling block to liberalisation in Australian eyes is New Zealand’s import licensing system. Others include concern at the position of advantage enjoyed by New Zealand exports through export tax incentives and our ability to acquire some raw materials and other industrial inputs from third countries at more advantageous terms than Australian counterparts. This is because of protection accorded to Australian producers of such inputs.
4. Interestingly, it is in this latter context that some thoughts have been voiced informally as to the long term possibility of a customs union. Such a union would envisage not only a free trade area between the two countries but common protective policies against third country imports. Conceivably, a form of customs union could be achieved by adjusting differences in tariff structures thus placing industry on an equal basis as regards imported costs. However, a full customs union having the widest economic consequence would also envisage similar policies of quantitative restrictions. Both these adjustments could cause New Zealand difficulties.
5. The wider economic advantages that might be gained by a customs union or some other form of relationship are less clear than in respect of trade. At best, closer economic integration might assist with the process of restructuring the economy and enable New Zealand to draw on Australia’s balance of payment strength. At worst, it would mean a closer link with a country which is not internationally competitive in a number of important sectors and the prospect of being affected by a spill over of Australia’s unemployment difficulties. However, it is important to point out that in the long term both countries are looking to develop efficient manufacturing sectors and points to scope for closer cooperation.

Work Programme

1. Any substantial adjustment to our economic links with Australia will be at some consequence and subject to a degree of uncertainty. The reason why the NAFTA has not fulfilled all of its expectations is because it has operated on a micro rather than a macro basis. Officials consider that any work programme on the shape of the long term trans-Tasman relationship should be relatively broad brush, looking for a balance of advantage within the widest possible framework.
2. It is considered that present policies being developed to cope with immediate trade concerns are adequate. In cooperation with industry, arrangements are being negotiated on an individual basis but officials are looking to devising principles that can be discussed with Australia which might hopefully minimise the need for protracted consultation in each case. One of these principles is a readiness on New Zealand’s part to make meaningful reciprocal access available to Australian exporters.
3. Looking to the longer term, a work programme on the following basis is suggested: 1. An assessment of the present and likely future competitive position of New Zealand and Australian industry. This will be assisted in part by the results obtained from the deliberations of the Tariff Review Committee and recent experience in the NAFTA context eg on apparel. It will, however, also require an analysis of the cost structures of a representative range of products of trade interests. 2. A closer identification of Australian concerns relating to New Zealand policies to meet Australian concerns in the context of a wider relationship might also be evaluated. 3. A more comprehensive study of elements in our economic relationship which fall outside the trade area. This would include, for example, investment, joint ventures, Defence spending, Tourism, Defence expenditure, exchange rate adjustments, shipping, travel and migration etc. Assistance will be sought from the departments involved in these questions. The intention will, however, be to see whether there is scope for policies in these areas to be developed within a wider economic relationship. 4. Complementary to the above exercises, an analysis could be undertaken as to which option (eg customs union, further development of the free trade area etc) best meets our objectives and what modifications might be necessary to any such option to secure optimum benefits.
4. Since this work programme necessarily requires some assistance from Australian officials and since its success depends upon a willingness by Australia to conceive some possibility of a wider relationship an opportunity should be taken to acquaint the Australian government with our intentions and, if possible, to secure a commitment to their participation on a similar basis. It is preferable, however, that at this stage any publicity be on a low key basis.

Recommendation

1. It is recommended that the Committee: 1. Agree that the question of developing a wider economic relationship with Australia be explored. 2. Concur with the outline of a work programme in this respect set out in paragraph 17. 3. Note that this will involve a number of departments with functions touching on elements that might be influenced by such a relationship and direct that such departments participate in the study. 4. Approve that the Minister of Overseas Trade send a suitable low keyed letter to (Senator Cotton/Mr Anthony) expressing New Zealand’s concern to optimise possible scope for development of the area market. And suggesting that officials cooperate where desirable.’2

[ABHS 950/Boxes1221-1226, 40/4/1 Part 12 Archives New Zealand/Te Whare Tohu Tuhituhinga 0 Aotearoa, Head Office, Wellington]

• 1 Schedule A listed items to be traded duty free between the two countries.
• 2 Francis’s reply indicated strong support for studies along the lines indicated, but expressed some reservations about the likelihood that Australian officials would be willing to focus on such an exercise at that particular economic juncture.