Canberra, 1 July 1961
Secret
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United Kingdom and the European Economic Community
Implications for Australia’s Trade
Australia’s Trade Interests
1. This paper depicts only the trade background against which the impact upon Australian trade interests would have to be considered if the United Kingdom—which is Australia’s most important single market—decides to join with the European Economic Community (EEC or the Common Market). The paper does not therefore include any consideration of political questions or any analysis of policy problems or discussion of possible courses of policy.
2. The United Kingdom takes about 30% of our total exports and about 30% of this is wool. At the same time some Australian export commodities depend almost entirely on the United Kingdom for their export market, e.g., canned fruits, of which 90% of our exports go to the United Kingdom. However, with some industries it is not only a question of the proportion the United Kingdom takes of their total exports, but the proportion of their total production for which they rely on the United Kingdom for disposal. Additionally, some of these industries are heavily concentrated in particular areas and to them the United Kingdom market has great importance. For instance, over 40% of Tasmania’s total apple and pear production goes to the United Kingdom market. More than half of Australia’s canned fruit output is normally exported to the United Kingdom. The extent to which our wheat industry depends on the United Kingdom market is shown by the fact that in 1959/60 11% of our total crop was marketed in the United Kingdom.
3. After the United Kingdom, our largest total markets are Japan (14%), United States (8%), France (6%), and New Zealand (6%). The second largest market for some of our primary export commodities is Canada where we also get a number of preferences.
4. Turning to Australia’s pattern of imports the United Kingdom is our largest supplier, providing more than a third of our imports. Before the war we normally had a substantial surplus in our balance of trade with the United Kingdom but in post-war years there has normally been substantial deficit. In other words our exports to the United Kingdom have fallen away, whilst her exports to Australia have increased.
5. Australia is an important market for the United Kingdom—until recently her largest single market—and now taking over 7% of her exports. Australia, Canada and New Zealand together (16%) take more of the United Kingdom’s exports than the countries of the EEC jointly (14%). The Commonwealth as a whole constitutes a market for the United Kingdom three times as big (42%) as the EEC countries (14%).
Australia’s Trade Relations with the United Kingdom
6. Our trade relations with the United Kingdom are based on the United Kingdom/Australia Trade Agreement 1956 which was adapted from the 1932 Ottawa Agreement. According to the letter of the Agreement as it now stands (it is open to re-negotiation this year) it could, at any time after November, 1961, be terminated at six months’ notice. However, the Ottawa Agreement ran for over twenty years on a similar termination clause.
7. Under the Trade Agreement, Australian exports to the United Kingdom which now enjoy duty-free entry are guaranteed that treatment and duty preferences are also guaranteed on many of our important export commodities such as dairy and fruit products. Quite apart from the guaranteed preferences, it should be noted that many of our primary exports rely heavily on freedom from import restrictions that they enjoy in practice as well as the freedom from duty.
8. The guarantee of duty-free entry under the Trade Agreement gives a benefit to Australian trade in that almost all foreign goods pay duty. Many of the preferences arising in this way are not scheduled in the Trade Agreement and are not guaranteed. Many processed foods and practically all Australian manufactured goods enjoy this kind of duty preference. Our trade in manufactures now amounts to more than £6 million annually and with the growth of our industry substantial growth of exports of our manufactures to the United Kingdom could be relied upon.
9. While Australian exports of wheat do not get a preference under the Trade Agreement (but do get guaranteed free-entry), there is a clause in the Agreement which gives Australia an assurance of minimum sales to the United Kingdom of 750,000 tons per year, worth at present prices about £18 million.
10. The preferences we get in the United Kingdom and the guaranteed free-entry, are one side of the bargain. The other side is represented by preferential treatment for United Kingdom goods in the Australian tariff, and the guarantee that we will not impose or increase duty on British goods until after enquiry and report by the Tariff Board and then not in excess of the Tariff Board’s recommended level of duties. The preferences which are guaranteed to the United Kingdom in the Australian tariff range from 7½% to 10% and in very many cases, the actual preferences at present accorded are much larger than the level guaranteed under the Agreement.
11. Our formalised trade relations however, extend beyond the actual Trade Agreement. Through the Commonwealth Sugar Agreement, the United Kingdom guarantees Australian producers an outlet for 600,000 tons of sugar, of which 315,000 tons are sold at a negotiated price, and the balance at world price plus preference. The termination date of the Agreement has been extended annually 8 years in advance. As it now stands it will terminate in 1968.
12. The Fifteen Year Meat Agreement gives Australia the right of unrestricted entry of all beef, mutton and lamb from 1st July, 1952 to 30th September, 1967, at guaranteed minimum prices, which are mutually agreed. Australia has a corresponding obligation to increase exports to the fullest extent, subject to agreed arrangements for marketing in other countries. Under this Agreement, Australia has received deficiency payments amounting to £9.3 million from the United Kingdom Government. (For canned meats and boneless beef the preference guaranteed in the Trade Agreement is valuable. For beef while the present duty preference is small there are in reserve our rights to the ‘old Ottawa quota preferences’ which have not operated since the war but which could be of value.)
13. Apart from our formalised trade relations in the Trade Agreement and in the Meat and Sugar Agreements, there is a whole web of continuing intimate commercial relations with the United Kingdom based on frank discussions of problems in each other’s market. Mutual efforts are made to find common ground in international trade and commercial discussions and at times to support each other’s objectives in such organisations as the General Agreement on Tariffs and Trade, the International Wheat Agreement and the International Sugar Agreement. In recent discussions between officials in London the United Kingdom officials acknowledged that there will be far-reaching effects of their having to subscribe to the common commercial policy of the United Kingdom/EEC group, which will not only rule out future trade agreements between the United Kingdom and individual Commonwealth countries, but will also require them to adopt a common line in international forums dealing with trade questions.
The Treaty of Rome (effective 1958)
14. The Treaty of Rome, by which the EEC was established, is by no means solely a trade treaty. It includes provisions for harmonisation of social services, mobility of labour and other economic and social matters. A transitional period of from 12 to 15 years is provided for putting these provisions into effect.
15. In the trade field the objective of the EEC is a customs union (i.e., the progressive removal of all trade barriers among the member states and the replacement of the existing national tariffs by a single or common external tariff against the outside world)—cf. the Australian Commonwealth.
16. The levels of duty for the common external tariff have been established and programmes laid down for the necessary modification of the existing national tariffs to put it into effect. So far as concerns Australian exports, the rates of duty are free entry for wool and for ores and concentrates and moderate duties for metals. For agricultural products the rates set are high, but also have to be considered in conjunction with the common agricultural policy described below.
The Common Agricultural Policy
17. The agricultural chapter ofthe Treaty of Rome provides for a common agricultural policy to be established and to be put into effect by stages. The stated objectives of the common agricultural policy are to raise agricultural productivity and the standard of living of those engaged in agriculture, to stabilise markets, to guarantee supplies and to ensure reasonable prices to consumers.
18. The proposals being developed for the common agricultural policy envisage high market prices for the major products (wheat and coarse grains, sugar, meat and dairy products) propped up by high import duties or variable levies (with import restrictions being used as an additional safeguard in ‘emergency’ situations). Marketing authorities to regulate internal trade and markets in agriculture and also the import of the products concerned are also envisaged.
19. The level of the common prices inside the EEC set under the common agricultural policy will influence the level of production within the EEC and will therefore heavily influence the need for imports from outside. Hitherto, the indications have been that these prices will be set at such levels as would restrict still further, or result in the elimination of, the already restricted imports of foodstuffs from outside and could result in significant surpluses for export.
20. There will also be funds for ‘structural’ improvements in agriculture (e.g., amalgamation of small holdings). The possibility of special subsidies for such commodities as fertilizers is not ruled out and it is proposed to establish a fund for export subsidies for dairy products. Direct farm subsidies are not necessarily excluded at least in the transitional period, e.g., to help German agriculture adjust to reduced market price levels.
21. The trade and agricultural provisions of the Treaty of Rome will therefore affect the trade of outside countries like Australia through–
- the creation of the common external tariff;
- the removal of trade barriers within the group; and
- the application of the common agricultural policy.
European Free Trade Association (EFTA)
22. Following the collapse of her efforts at the end of 1958 to negotiate a Western Europe-wide industrial free trade area which would give her an association with the EEC, the United Kingdom in 1959, together with Austria, Denmark, Sweden, Norway, Switzerland and Portugal, set up the ‘European Free Trade Association’ (the ‘Seven’)—an industrial free trade area. Finland has lately associated with this group. The distinguishing features of EFTA are–
- It is confined to industrial products (there are a few, and from Australia’s point of view not major, separate bilateral agreements affecting agricultural trade);
- on industrial products, trade barriers within the group will be eliminated over a period of years;
- each member will retain its national tariff against outside countries (Australian free entry thus remaining unimpaired and for practical purposes her preferences remaining intact).
In the trade sense the United Kingdom dominates this group.
The United Kingdom and the EEC
23. If the United Kingdom joined the EEC on the basis of accepting the Treaty of Rome without qualification (this they have said they will not do), they would, in due course, have to adopt a common external tariff with the EEC. They would thus no longer be able to give us duty-free entry to their market for either primary products or manufactured goods.
24. Since we would be paying the same rates of duty as all outside countries and since imports from other countries inside the new group would enter duty-free, we would–
–first, lose our preferences against outside countries like the United States of America;
–second, not only lose our present preferences against the members of the group like France, but find our present preferential position reversed—we would be paying duties whilst they would be enjoying duty-free entry.
25. As already noted, we have traditionally (except in war conditions) enjoyed freedom from import restrictions into the United Kingdom market. As a member of the EEC the United Kingdom would have to follow common commercial and probably international economic policies. In the event that the United Kingdom, either because of her own balance of payments position, or as a result of the balance of payments position of other members of the group, or for other reasons came to apply import restrictions our freedom from import restrictions would be lost.
26. Moreover, the United Kingdom would be obliged to adopt the common agricultural policy when this is worked out.
27. If the United Kingdom joined the EEC without qualifications, the following would be the consequences
–high rates of duty in the common external tariff, or
–variable levies equating import prices with the common internal prices
–import restrictions on agricultural products at least in ‘emergency’ situations;
–reduced import demand arising from increased production in the United Kingdom (resulting from new common market prices giving higher returns to producers than obtained under the present United Kingdom deficiency payments system).
–More importantly in contrast to our long established preferred position, the continental members of the new group would obtain a preferred position in the United Kingdom market. Not only would this enable them to sell in greater volume but their producers would be receiving higher returns than Australian producers.
28. From another point of view, the United Kingdom is the only great world market for many agricultural products and her association with the EEC would produce an entirely new and adverse situation for our trade in these products.
29. There would be plenty of scope for increased production in the new group, and because of their new assured market in the United Kingdom, the EEC countries would be disposed to increase production still more to supply this new market. Thus, existing problems of competition in third markets arising from the present EEC would by no means be removed. In addition, outside countries now shipping to the United Kingdom would find this market restricted or closed to them. The pressure of the diverted supplies upon whatever third markets might be available would aggravate the grave marketing problems and the serious effects on ‘world’ prices. None of these effects would arise suddenly but would be felt over a period of years.
30. The situation just outlined is based on the assumption that the United Kingdom joins the EEC without qualification. However, the effects of the common agricultural policy on production would, among other things, depend heavily on the level of common market prices applied in the new group. In this respect it has apparently so far been contemplated with regard to the present matters of the EEC that prices would be set at something like the average level between those of the lower cost producers (the Netherlands and France) and those of the higher cost producers (Italy and Germany). Since the United Kingdom level of returns to farmers are lower in some important products than the French (though higher for one or two) the averaging principle would result in a generally lower level of common prices for the new group than the present EEC; but this, of course, would have to be acceptable to the present members. In any case higher returns to the United Kingdom farmers would be almost certain for grains and dairy products if not for beef.
31. In a few cases, notably butter, the adoption of higher prices would substantially reduce import demand because of the restriction on consumption that would follow.
32. On the assumption that the United Kingdom accepted the Treaty of Rome without qualification—the worst situation for Australia—it is estimated that about 60% of Australia’s present export trade with the United Kingdom (about £A 170 million) would be at risk. This represents nearly 20% of Australia’s total export trade.
33. The attachments set out the possible situation in respect of several of Australia’s important products.
Offsetting Considerations
34. There are some offsetting considerations, but these vary from product to product. For products where there would be common prices under the common agricultural policy price competition would largely be ruled out. To the extent that imports are required and allowed trade may persist by virtue of long established trade connections and the reputation of the product. Where trade inside the group is free but production is protected by a high duty (e.g. canned fruit) the market reputation of the product may enable sales to continue at the cost of substantially lower returns.
35. It has been argued that if the United Kingdom joins the EEC she would be stronger economically and therefore would present in total a better market for Australian products. The effects on the United Kingdom economy of joining the EEC are not capable of precise assessment and the assessment is primarily for the United Kingdom itself to make. It may be noted, however, that our officials in talks in London over the past week or so were left unconvinced by the trade and economic arguments advanced by United Kingdom officials for joining the EEC. Indeed, they concluded that in the short–term a move into the EEC would seem likely to have adverse effects on the United Kingdom trade balance. The United Kingdom in any case has recently been resting her case for joining the EEC much more upon political grounds than upon economic grounds.
36. The United Kingdom has spoken of the liberal influence which she would seek to exercise on the level of agricultural protection in the new group. However, there is no present indication of the extent to which she would be able to achieve this if she joined, and at present it would be impossible to assess the likely outcome or the possibility of an improvement in Australia’s trade position as a result.
37. Any offsetting advantages in relation to wool and metals would turn on whether the United Kingdom’s economic strength would be enhanced and also on whether any such increase in economic strength would significantly increase consumption of wool or metals compared with the position if the United Kingdom stayed out of the EEC. Apart from doubts about the economic effects already mentioned, on the United Kingdom joining the EEC, such evidence as we have does not point to any consistent pattern of growth in wool consumption as national income grows.
Alternative Markets
38. For some of the products likely to be affected, e.g., canned fruits and butter, there are few discernible alternative markets of any significance. In a number of markets we are already vigorously seeking to expand our exports. In others great and expensive efforts on our part would be needed to develop trade in particular products and substantial changes in the existing market conditions and consumer tastes would be necessary before we could hope to ship goods in any quantity.
39. For staple primary products like wheat, sugar and butter the problem would be aggravated by the fact that other exporters of similar products who are outside the new group would also be similarly placed.
40. We would have to look to the Americas, Asia or Africa for alternative markets. The North American countries are in general also exporters and the prospects there are not encouraging. The African countries in the main have either not much taste for our products or lack the foreign exchange to pay for them. Many Asian countries are similarly placed. Mainland China has, of course, made substantial purchases of our grains this year. However, leaving political considerations aside, her future potential as a permanent market for Australian products is an unknown quantity.
41. Even where we have expanding markets today, such as in Japan or New Zealand, it is improbable that we could secure additional outlets, to compensate for our inability to sustain our exports to Western Europe.
42. All in all, though under stress we would presumably be able to market some of the displaced products in other markets, perhaps with lower prices, there are certainly no easy or assured alternate outlets to be seen which would compensate for trade losses in Western Europe.
Safeguards for Australian Trade
43. The preceding analysis of effects of the United Kingdom joining with the EEC has been made on the assumption of her joining without qualification. Any safeguards for Australian trade would, it appears have to take the form of special arrangements negotiated with the EEC or ‘derogations’ from the present provisions of the Rome Treaty, acceptable to the present EEC members.
44. The United Kingdom have stated that they could not sign the Rome Treaty as it stands. In the House of Commons on 9th May, 1961, Mr Macmillan said it had been made quite clear that satisfactory arrangements in respect of the interests of British agriculture and fellow members of the Commonwealth were a pre-condition of any close association with the EEC. United Kingdom officials have told us that they could not expect to protect more than our ‘essential interests’ and have indicated that whatever safeguards or derogations might be negotiated could be expected to apply only to a limited number of products.
45. The United Kingdom officials have said that they will only learn in negotiations with the EEC what special arrangements could be secured on account of the Commonwealth.
46. On the other hand, French officials have told our people in Paris that they could only agree to the United Kingdom joining the EEC if the United Kingdom accepted all the obligations of the Treaty of Rome including the common external tariff and the common agricultural policy.1
47. Since any safeguards for Australian trade would have to be secured by negotiation it is relevant to note that the United Kingdom has indicated to the EEC that, in the event of her joining, she would have no objection to her tariff preferences in the Commonwealth being negotiated between the EEC and the Commonwealth countries concerned.
Conclusion
48. In the light of such advices as we have about the United Kingdom’s intentions in respect of safeguards for Australian trade and the discussions between the United Kingdom and Australian officials in London in the past ten days, the departmental assessment is that the United Kingdom’s entry into the EEC would have widespread adverse effects on our trade and quite significant adverse effects on the trade and economic side of Commonwealth relations.
1 See Document 142.
[NAA: A3917 VOLUME 9]