Minute from Lang to Kingsmill

Canberra, 23 July 1980

CONFIDENTIAL

New Zealand: ‘Closer Economic Co-operation’

The following is a progress report on the studies and discussions by officials that have taken place in the name of closer economic co-operation with New Zealand since the Prime Minister visited New Zealand at the end of March.

1. Meetings have been neither frequent nor regular. The most recent was held on 3 July 1980, and chaired by Frank Anderson of STR. The meeting reviewed progress on the special studies for which a need was identified in the March communique.(1) Initial drafts of some of these papers have been circulated. Others are not yet available. The Department of Primary Industry has probably been more dilatory than any of the other departments with a major involvement, although it is not clear whether from design, or an inability to understand and come to grips with the last task that it has been set.
2. Comments on the papers prepared on particular issues follow. The complete list of special studies is in Attachment A. The papers themselves are not attached because of their considerable bulk.

(A) LIBERALISATION OF TRADE

(i) Tariff Reductions

The preparation of lists of products for immediate or progressive tariff reductions has been undertaken by the Department oflndustry and Commerce (DIC) and the Department of Primary Industry (PI). It will be recalled that the objective of this study was to locate as many as possible of those products not already duty free, in the duty free or phase-to-duty-free-over-five-years categories, and to locate as few products as possible in the ‘decision deferred for special reasons’ category. The initial DIC paper on this subject listed 133 items which could immediately be made duty free, 45 items which could be phased to duty free over five years, and 1083 items on which special considerations required that decision be deferred. The paper was distinguished by its failure to include product descriptions along with the tariff code numbers, so that without a copy of the tariff code alongside, it is impossible to make sense of it.

PI’s paper on this subject was better in that it included product descriptions as well as the tariff code. PI’s paper listed 140 items in Category 1 (duty free) and rather fewer in Category 3 (decision deferred). There was some overlap between the two Departments’ lists, and a consolidated version will now need to be prepared. The Department of Business and Consumer Affairs, which is also meant to be covering this subject, has not yet come forward with a paper.

Neither the PI or DIC papers put forward the logic of their classification, so that their reasons for including items in Categories 2 and 3 are not known to most of the Departments taking part in the IDC, with the probable exception of Trade and Resources. (T&R is represented by Newton Lind, who probably knows more about NAFTA and the history of innumerable NAFTA wrangles over tariffs than anyone else in the Public Service.) At some stage, the rationale of the classification will have to be exposed for discussion and evaluation, but that stage seems not yet to have been reached. The Treasury spokesman has been critical of the extent of the Category 3 list included in the DIC paper, although the criticism was mainly ‘ideological’, reflecting the standard Treasury line on tariff reductions, and seemed to have little or no regard to what particular goods were involved, or why.

Another problem is that it is not yet known how significant most of these tariff items are for Australia- New Zealand trade. It would be my guess, for example, that the move to duty free status of most of the 140 items listed in PI’s paper will be of little consequence, either because no trade occurs, or because tariffs are not a significant influence over such trade as does occur.

Another problem is that it is not yet known how significant most of these tariff items are for Australia- New Zealand trade. It would be my guess, for example, that the move to duty free status of most of the 140 items listed in PI’s paper will be of little consequence, either because no trade occurs, or because tariffs are not a significant influence over such trade as does occur.

In short, it is not clear what conclusions the papers prepared so far actually permit. In particular, it does not seem possible yet to say whether further changes in trading arrangements will have significant consequences for actual trade.

(ii) Possiblity of Liberalising Import Licensing and Tariff Quotas

T&R, DIC and PI have all prepared papers on this subject. The DIC paper points out that on the Australian side, ‘apart from textiles, clothing and footwear and assembled motor vehicles, which are subject to separate sectoral policies, the range of imports from New Zealand subject to tariff quotas or import licensing is very small’. For this small range the paper concludes that a ten per cent increase in access in real terms is unlikely to result in any significant problems for Australian industry.

The Primary Industry paper, which is very brief, deals only with cheddar cheese and pigmeat. The latter, except in canned form, is subject to quarantine restrictions, whilst the former is the subject of continuing discussions between the Government, the dairy industry and the New Zealand Government.

The paper prepared by T&R sets out to assess the importance to New Zealand of its own licensing and quota arrangements. The likely problems in bringing about substantial changes in this aspect of the trading relationship are clearly highlighted in this paper. T&R is obligated to admit that there are serious gaps in its knowledge of how New Zealand’s licensing system actually works. This ignorance is not due to a lack of diligence on T&R’s part; New Zealand has consistently refused to provide certain information about its licensing system, such as who actually holds licenses, and the total quantity or value of particular goods for which licenses have been allocated. Trade’s paper invites the suspicion that, although the total of imports entering New Zealand under licensing arrangements is a declining percentage of total imports, the licensing arrangements amount to a fairly flexible weapon which the Government has used in conjunction with New Zealand producers to ensure effective protection for them. As much as the export incentive scheme (see below), import licensing appears to be a central feature of industrial development policy in New Zealand. It is to be doubted whether the New Zealand Government would readily agree to negotiate changes that significantly disadvantaged New Zealand producers, whatever New Zealand Ministers might say publicly about their recognition of the need for economic rationalisation.

(B) OTHER TRADE RELATED ISSUES

(i) Agricultural Support/Stabilisation Measures (including special study on dairy industry)

These papers, three in all, are obviously the domain of PI. They were to have been ready by the end of May, but are not yet available.

(ii) Assessment of the Intermediate Goods Problem

Both DIC and BACA have prepared papers on the subject. Both underline the complexity of the subject. Having produced them, neither Department feels itself in a position to say whether there is an intermediate goods problem and if there is, how significant it is and what the solution might be. Mr Muldoon challenged the Australian side in March to say what the problem was with intermediate goods. We still do not appear to have worked out the answer. The discussion at the 3 July meeting did not leave the impression that DIC, BACA or STR have any clear idea about what to do next on this item.

(iii) Export Incentives

T&R (Lind) has produced a useful but somewhat general paper on this subject. The paper is not such as would permit any negotiation between the two sides of changes in the level of such incentives, because it does not assess in sufficient detail the importance of the incentives to particular items in the trans-Tasman trade. T&R has proposed the collection of survey data from Australian firms exporting to New Zealand, to make his assessment. Such a survey would take several months to complete. The paper points out the strong attachment of private business on both sides of the Tasman to existing incentive schemes, and notes that the Australian and New Zealand Governments have given commitments to maintain them until 1983 and 1985 respectively.

Of rather more interest than the T&R paper is a study which has been sent to economic departments by Simpson Pope Ltd., Adelaide. We hold a copy of Simpson Pope’s covering letter, which summarises the findings of the study. Simpson Pope commissioned a New Zealand firm of chartered Accountants, Clarke Menzies & Co., to prepare a report on ‘New Zealand Taxation Export Incentives Available to Industry’. Clarke Menzies and Co. examined the balance sheets and annual reports of five major New Zealand companies. They conclude that New Zealand manufacturing companies operate under radically different fiscal policies than Australian manufacturing companies. Simpson Pope express their concern in this way:

‘Although we would be more than pleased to see a completely unrestricted and unassisted flow of trade between Australia and New Zealand under consistent and compatible policies, we are apprehensive because of the radically different fiscal, trade and regional policies of Australia and New Zealand.’

The Clarke Menzies study in fact shows that as a result of export incentives in the form of cash rebates on taxation, one firm converted an operating loss to an operating profit, and another firm had an after-tax profit that was greater than pre-tax profit.

From the discussion that took place at the meeting on 3 July, it would appear that Australian departments were not aware of the actual impact on New Zealand firms of the complex system of export incentives in operation in New Zealand. Their understanding had been limited to the provisions of the system itself. The system appears to amount to a purposeful and important tool of industrial development, the use of which the New Zealand Government would not lightly forgo.

(iv) Customs By-laws and Rules of Origin

BACA’s paper on this subject is comprehensive, partly reflecting the fact that the issues it covers have all been well aired in discussions with New Zealand over the last decade. The descriptive parts of the paper have been passed to the New Zealanders for comment. This is a desirable part of the process, but may not yield much, since the area is not specially contentious. A concluding section of the paper discusses the scope for achieving compatibility in the administration of rules of origin. There appears to be such scope, but once again, the area is not specially contentious, so it is possible that the consequences would not be specially significant.

(v) Extension of Agreement on Tariffs and Tariff Preferences

Formal Cabinet approval has now been obtained for a 12 month extension of NAFTA. It is expected to announce the extension during the NAFTA Ministerial talks on 12, 13 August.

(vi) Other Studies

The ‘Outline of Arrangements for Further Studies (Attachment A) lists a number of other papers which are to be prepared. They cover government purchasing, joint marketing, transport, energy, finance, tourism, industry rationalisation and one or two other minor studies, including one that Foreign Affairs is to be involved in, on relations with third countries. These other studies constitute a substantial agenda. It is my impression that little or nothing has been done in these areas although it ought to be stressed that the deadline in each case was generous, and none have expired.

1. In February this year a meeting of Australian and New Zealand Permanent Heads was able to conclude that: ‘on the basis of its discussions and the report of the Joint Working Parties it should be recommended to Ministers that an appropriately structured closer economic relationship would provide economic benefits for both countries’.(2)
2. I must admit to some difficulty in understanding how this judgement was arrived at, and even in deciding whether it should be taken as a judgement, or as a [pious](3) hope. The special studies now being carried out do not remove that difficulty. If anything, they add to it. Nothing that has so far been discovered or proposed in these papers promises any economic benefit to Australia. Whether benefit to us occurs will depend on the outcome of negotiations with New Zealanders, and the papers tend to highlight the extent to which economic management in New Zealand depends [heavily] upon procedures which we would like to see abandoned.
3. If we consider change, as distinct from benefit, then the papers produced so far do contain a few kernels of change which, if political exigencies required it, could be tarted up in the manner that is depressingly familiar, and publicly unveiled as a ‘significant breakthrough’ or as ‘changes expected to bring fresh impetus …’ or some such. Several participants in the IDC have already begun to speak of the new arrangements as being ‘NAFTA by another name’ and there is a tendency on the part of some, particularly T&R and DIC, to regret what I think they regard as the euphoria that characterised earlier studies and statements.
4. The indications are that the New Zealanders are beginning to realise how little they have to offer in return for what they hope to get. We almost certainly will see more of last week’s attempts to force our hand by public statements suggesting that we have not honoured our commitments,4 and the motive for them will undoubtedly be that the New Zealand Government wants to avoid for as long as possible (or perhaps to avoid altogether) negotiations that involve concessions on points of substance. A tendency towards this has been in evidence from the outset.
5. Whether by accident or with forethought, the New Zealanders seem to have developed the habit, in their dealings with us, of giving us every opportunity and encouragement to ‘talk big’. Then they wait a while, and challenge us publicly to deliver the goods or accuse us of failing to deliver the goods. We could make that accusation with somewhat greater cause, but the tactic would not work for Australia because it would look like unpardonable bullying.
6. In the early days of the ‘closer economic co-operation’ saga, our files reveal, Mr Dalrymple repeatedly sounded the cautionary note that the initiative must come, and be seen to come, from New Zealand. This suggestion regrettably did not attract much attention or support. If it had, I believe we would have been much less likely to be now in a position where the New Zealanders can (as they are) put pressure on us to deliver the goods they say we promised.

[NAA: A1838, 370/1/19/18, xviii]

• 1 Document 93.
• 2 Document 66.
• 3 Material in square brackets was corrected by Lang in handwriting.