British High Commission, Canberra, 7 June 1967
Confidential
Australia: Probable Effects on Anglo-Australian Trade and Economic Relations
of British Entry into the European Economic Community
Summary
Public statements by Australian Ministers and Press reaction to Britain’s application are calmer and quieter than in 1961. Public opinion is comforted by the thought of export diversification. (Paragraphs 1–3.)
2. Informed opinion is less sure of the extent of diversification, especially of primary products. Exports of canned, fresh and dried fruit, butter, sugar and other products are heavily dependent on the British market. (Paragraphs 4–5.)
3. Australians are not so hopeful about essential interests being safeguarded. (Paragraph 6.)
4. Possible Australian steps, domestic and international, to mitigate the effect of the loss of the British market for sensitive products. (Paragraphs 7–8.)
5. Japan as a possible alternative market and effects on Australia’s tariff policy and on British tariff preferences. (Paragraphs 9–10.)
6. Australian fears of the reduction of British investment in Australia. (Paragraphs 11–12.)
In this despatch I have the honour to submit some observations about the probable effect on Anglo/Australian relations in the fields of trade and finance of the announcement of the British Government’s decision to apply for membership of the European Economic Community.
2. By contrast to the vehement outbursts on the part of Australian Ministers with which the British application was greeted in 1961, the reception accorded to the announcement on this occasion was relatively restrained. ‘Keep cool this time’ was the caption which headed an editorial in one of the leading Australian newspapers. This contrasted the ‘air of calm’ of the Australian Prime Minister in making his statement to Parliament on the possible effect on trade and investment in Australia with the ‘xenophobic undertones’ of some Australian Government leaders six years ago. One Minister who once again did not share the general feeling of resignation, indeed almost of relief that the decision had finally been taken, was the Australian Minister for Trade and Industry. But Mr McEwen issued his statement in London and Geneva, 1 where he was attending the closing sessions of the Kennedy Round negotiations, and his stern reminders of the Australian interests which would be at stake if we were to join the EEC—and dire warnings of what might befall British exports to Australia—must be considered against the background of his efforts to persuade us to meet Australian terms for the conclusion of an agreement on wheat. It was in any case unlikely that there would be any repetition of the traumatic shock which Australia experienced in 1961. Whilst both its Government and its people have been well aware that in the intervening years Britain has never abandoned its European ambitions, and whilst they have shown much greater understanding this time of British motives, there is a feeling based on the events of January 1963 that our application may fail once again, and a rather touching faith, principally amongst primary producers, that even if we succeed we shall find some way of safeguarding the interests of everyone. In fact the situation is now being faced by the public with a confidence which would not appear to be entirely warranted by economic realities.
3. Public opinion no doubt takes comfort from the thought that since 1961 Australia has diversified her exports in two ways—by finding new products to export, such as iron-ore, and by finding new markets for traditional exports. It is encouraged by the fact that, whereas in 1961–62 Britain, with more than 19 per cent of Australia’s total exports, was well in the lead as her best customer, in the first eight months of the current financial year it is Japan which is now taking over 19 per cent of her exports, the British share having dropped to little more than 13 per cent. The United States similarly has come up from 10 per cent in 1961–62 to well over 12 per cent in the current year. It must be a source of satisfaction to Australians that China is now Australia’s principal customer for wheat, the United States for beef and Japan for wool and mutton; indeed, in the current year Italy has bought more Australian wool than has Britain. The publicity given to the iron ore developments in the North-West has concentrated attention on new and broader horizons of foreign trade. In 1961–62 iron ore did not figure at all in the trade returns of Australian exports; this year, even though shipments only began within the last year or so, iron ore accounts for more than 1 per cent of total Australian exports, and this percentage will climb steeply as the mining concerns fulfil contracts for the export of some 300 million tons over the next 16 years. Meanwhile, the percentage share of exports held by coal has more than doubled with increased shipments to Japan.
4. Informed opinion is well aware however that such over-simplifications could give rise to a dangerous complacency. For this reason no doubt the Australian Prime Minister, in his statement to Parliament following the announcement of our decision, warned specifically against drawing erroneous conclusions from the diversification of Australia’s foreign trade which had taken place in recent years. He pointed out that even though Britain’s share of Australia’s total exports had declined, the total value over the past five years had increased slightly to £190 million. Of this, products to the value of approximately £160 million were sold ‘under preferential conditions’. He drew attention to the heavy dependence of a number of Australian export industries on the British market and the concentration of exports to Britain in relatively few products, referring particularly to beef, butter, fresh fruit, canned fruit and sugar (where Australian dependence on the British market had in fact increased) as well as wheat, flour, dried fruit and canned meat. Mr McEwen amplified this by saying that more than 65 per cent of Australia’s exports were receiving preferences (in Mr Holt’s statement the figure was 85 per cent, but presumably he was referring also to imports enjoying guaranteed free entry into Britain), and that these exports had been growing. According to Mr McEwen, last year some 80 per cent of Australia’s export income from butter, 65 per cent of income from canned fruit and 50 per cent from sugar was earned from sales to Britain. Of Australia’s total earnings from exports of apples and pears and dried vine fruit, 50 per cent came from sales to Britain as did 30 per cent of Australia’s exports of beef and veal. He might have added that 30 per cent of Australia’s exports of mutton and lamb go to Britain, 30 per cent of her exports of zinc and 57 per cent of her exports of lead. He might have added further that Australia’s exports of manufactured goods to Britain had trebled in the last ten years to reach a current total of some £10 million. Exports of all these products from Australia would be affected by Britain’s entry into the EEC. They would be subject either to levies imposed under the common agricultural policy or to duties under the common external tariff on the Community which would establish reverse preferences except in those cases where the CET duty is zero. The most important item in this latter category is wool, of which we take between 10 per cent and 15 per cent of total Australian exports.
5. Those commodities of which we are the principal purchaser and which would be affected by our entry into the Community—butter, sugar and fruit, fresh, dried or canned—account for between 8 per cent and 9 per cent of Australian exports overall. This represents a sizeable slice of Australia’s foreign exchange earnings from exports. Moreover, the Australian problem does not end here. Mr Holt in his statement mentioned that there were whole communities whose basic industries had geared themselves to the British market. Quite apart from the probable loss in foreign exchange from export earnings, the fact that the effects of British entry would be heavily concentrated in relatively few areas could create serious internal economic and political problems for the Australian Government. The economy of the irrigation areas in the Murray Valley, particularly around Renmark in South Australia and Mildura in Victoria, are dependent almost entirely on the production of dried vine fruits and canned fruit, although some citrus is produced for the local market. The economy of Southern Tasmania hinges on apple and pear exports, of which more than half goes to Britain. The dairy industries of Victoria, around Mount Gambier in South Australia, Northern New South Wales and Southern Queensland, except for those farms providing liquid milk for the home market, are all to a great extent dependent on exports to Britain for their livelihood. There is a structural problem in the dairy industry, particularly in Northern New South Wales and South Queensland, as a result of which satisfactory incomes cannot be obtained by the farmers there even at the present time. A number of prosperous towns in Central Victoria, including Shepparton and Rochester, are dependent on a mixture of dairying and canned fruit production for export. Several towns on the Queensland coast, particularly Bundaberg, Mackay, Ingham and Cairns, are almost entirely dependent on sugar production. Indeed, the entire economy of the tropical coast of Queensland is dependent to a very great extent on sugar and no suitable alternative crop exists for which market outlets could be found on an appreciable scale. To compound the Australian Government’s difficulties, much of the dairy and fruit-farming is in the hands of small producers, many of them ex-soldier settlers. Any reduction in their income would leave the Government with a prickly political problem on its hands.
6. Australian Ministers and officials are aware that before the terms of Britain’s entry into the Community have been finalised, there will be consultations with us on Australia’s ‘essential interests’. They are, however, under no illusions that they can stretch the definition of these essential interests as widely as they tried to stretch it five or six years ago. They have deduced from the information which was passed on to them about the probes undertaken by the Prime Minister and the Foreign Secretary in the various capitals of the Six, that the most they can hope for is a fairly lengthy transitional period to enable them to adjust the pattern of their exports. Even in the case of sugar, of which special mention was made during the course of the probes and by Mr Wilson in the House of Commons, officials almost certainly suspect that our concern is mainly, if not exclusively, for producers in the developing countries and that Australia may not benefit to the same extent, if at all, from any special concessions which we may be able to negotiate. (This suspicion, however, has not yet percolated down to the Australian sugar producers.) In these circumstances, it is unlikely that the Australian Government will pin its hopes this time on our ability to safeguard what they consider to be their essential interests in our negotiations with the Community. Indeed, in his Geneva statement referred to above, Mr McEwen remarked rather ironically that it had not been indicated just how essential Commonwealth interests would be safeguarded. If the Australian Government’s assessment of the position is correct, they must realise that it would be political suicide for them to remain inactive during the period preceding Britain’s possible entry into the Community. It may be appropriate here, therefore, to consider the courses open to them.
7. In theory, if the offtake of the British market is to be seriously impaired, it would be possible to mitigate the effect on primary producers by increasing the domestic price for certain products. Indeed the sugar industry is even now pressing for such an increase, though this move was made before our intentions were known. But if applied to dairy farming, such a step would still leave the Government with the problem of disposing of the enormous surpluses arising from the fall in exports and even though Australia succeeded in selling all its sugar abroad at a reduced price (partly offset by an increase in the domestic price) in neither case could any rise in the domestic price be high enough to compensate the producer in a measure which would bear any comparison with the drop in income from lost exports. The Australian Government could, in theory, rationalise the production of sensitive commodities by assisting the small uneconomic producers to find alternative means of livelihood and by encouraging the efficient producers to adopt methods which would further reduce their costs. This could be achieved by attaching conditions to the very substantial financial assistance, in the form of subsidies, loans or rigged home market prices which is given to the dairying, sugar and dried fruit industries. One step in this direction has already been taken, in that the Government has already announced its intention to provide financial assistance to enable marginal dairy farmers to improve their holdings, or in some cases to leave the industry. But any radical intervention on these lines might expose the Government to the charge of evicting from their holdings men who had risked their lives for their country and this is a risk which no Government would be willing to take, particularly in view of the strength of returned soldier associations here. A third solution would be to seek alternative markets overseas for those primary products which had hitherto been sold mainly to Britain. The probability is that the Australian Government will take some rather cautious and tentative steps towards rationalising primary industries in response to the public appeals which are already being made in Parliament and the Press, with particular reference to dairy farming, whilst at the same time concentrating its main efforts on the search for alternative markets overseas.
8. Australia began this search five years ago but intensified it in the Kennedy Round. She set out, but without any great hope of success, to negotiate international commodity agreements which would secure access for her at prices higher than those presently obtaining, to the major importing countries. In this she was disappointed, except for the conclusion of an international agreement on wheat in which Australia obtained some improvement in international price levels. Simultaneously Australia entered into bilateral negotiations with those countries, or groups of countries, which seemed to offer the best market prospects for her primary products—the United States, the European Economic Community and Japan. Of these, the first two are themselves large producers and exporters, and all have highly protected agricultural systems. Japan—‘the Britain of the Far East’ as she has become known in Australia—is already a substantial buyer of Australian meat, sugar and dairy products; her purchases of Australian cheese for instance rose from 700 tons in 1961–62 to 8,000 tons this year and are expected to reach 11,000 tons next year. Japan was therefore selected as the main target for Australian efforts.
9. At the time of writing, the results of Australia’s bilateral negotiations are not yet known, and indeed so far as Japan is concerned they may not be concluded for some considerable time, according to local Japanese sources, they do not regard them as falling strictly within the scope of the Kennedy Round. The Australians may however well attempt to widen their scope, now that our decision to apply for membership of the EEC has been announced. Australia is asking for improved access to the Japanese market for her meat and dairy products and a higher price for the Australian sugar producer selling to Japan. In return, she is offering to eliminate or reduce preferences on a wide range of British exports to Australia. It is, however, doubtful whether the Japanese will be prepared to pay a very high price for the Australian sugar producer selling to Japan. In return, she is offering to eliminate or reduce preferences on a wide range of British exports to Australia. It is, however, doubtful whether the Japanese will be prepared to pay a very high price for the elimination of British preferences alone. The value of these preferences has been progressively eroded as the average level of the Australian tariff moved upwards in response to appeals for protection from secondary industry. Moreover, now that Britain has taken the decision, the Japanese may feel that if they bide their time they will be able to buy British preferences very cheaply indeed. They are, of course, interested in improving the terms on which they compete with British exporters. They are equally, if not more, interested in competing with Australian industry itself, and for this reason they will almost certainly press for reductions in Australian m.f.n. rates of duty. This may face the Australian Minister for Trade and Industry with an ‘agonising reappraisal’ of his policies. Mr McEwen, who as Leader of the Country Party is the official defender of rural interests, has so far managed to establish himself at the same time as the acknowledged champion of secondary industry by pursuing a highly protectionist tariff policy. He may now find that he can only succeed in fulfilling his obligations towards his own Party by dismantling at least some part of the tariff wall he has built round Australian manufacturing industry. His tariff policies have already attracted serious criticism from rural interests.
10. Whatever the final outcome of the hard bargaining currently in progress between Australia and Japan, the Australians will endeavour, initially at any rate, to open up the Japanese market for their primary products by offers which will go no further than the sacrifice of British preferences and possibly an improvement in the procedures for duty-free entry under by-law for Japanese goods. In Geneva Mr McEwen issued a rather ominous reminder of Britain’s ‘big stake’ in the Australian market in the shape of preferences accorded to 90 per cent of total British exports of £300 million. It is being taken for granted by economic commentators that these preferences will be used as ‘bargaining counters’ in order to obtain satisfactory terms from Japan. Some have even gone so far as to speculate on the effect of the loss of preferences on specific British exports such as chemicals, transport equipment, non-electrical machinery and textiles. In the talks which are to take place between Britain and Australia during the next few months on the latter’s ‘essential interest’ and on the modifications which will have to be made to the Trade Agreement as a result of the inroads on preferences which may already have been made by both sides during the course of the Kennedy Round, it may well be difficult to devise a formula which will prevent Australia from sacrificing British preferences in the interest of her trade with third countries. The fact is that Australia has long since discounted Britain’s entry into Europe, and her negotiators will be anxious to have their hands free in their search for alternative outlets for their primary products to compensate for the loss of the British Market. Whether or not we succeed in our Common Market bid, therefore, it is highly unlikely that we shall be able this time to fall back, as we did in 1963, on an Australian market for our exports where the status quo had been preserved.
11. What can Britain do to maintain, at least in some measure, the position which she has built up and maintained so long in Australian industry, trade and finance, and which is now at risk? Australian fears are not limited to trade. The questions which were raised during the probes in the capitals of the Six on the role of sterling have raised doubts in Australian minds as to the future of their relations with Britain in the field of finance as well as trade. Mr Holt, in his statement to Parliament, referred specifically to ‘an issue which will be of considerable interest to us—namely the future level of capitals flows from Britain to Australia’. He emphasised the benefits which the Australian economy derived from the flow of private capital from Britain and from free access to the London capital market, even though these benefits had recently been attenuated by the voluntary restraints. He added that if Britain were to join the EEC ‘it seemed likely’ that she would have to alter her current policies on control of outward private capital outflows, in which case Australian preferences in respect of British investments abroad could be quickly abridged. Here the underlying Australian fear is, I think, that, to ease the anticipated initial shock of entry into the EEC on the British balance of payments, we may be tempted to continue the programme of voluntary restraints on investments in countries such as Australia, notwithstanding the hope expressed by the Chancellor that the programme would not remain in force for more than two years after its inception2—a statement which has been duly noted by Australia. If it were to be continued indefinitely, the gradual reduction in that proportion of her overseas reserves which Australia holds in sterling could well be accelerated.
12. I trust that in this sector we shall have some room to manoeuvre in order to influence the future course of events. Although of every £10 invested in Australia £9 are raised on the Australian capital market, the remaining £1 is crucial in that it presents long-term risk capital with an initial low dividend yield which could hitherto only be raised overseas. Our own voluntary programme, coupled with restraints on the outflow of United States capital, is therefore regarded by Australians as an obstacle in the way of the development of their mineral resources from which they hope to derive a substantial part of their export income in future. Their future, as they see it, turns equally on their ability to maintain a substantial and steady stream of immigrants from Europe for whom, given the relatively limited opportunities in agriculture, jobs must be found in secondary industry. British restraints on direct investment, if prolonged indefinitely, would bear heavily on Australia’s capacity to expand existing industries and establish new ones. Any move which we might be able to make towards the resumption of the inflow of British capital into Australia would compensate in some measure for the damage which British entry into the EEC is bound to inflict on Australian overseas trade. […]
1 Document 229.
2 See note to Document 230.
[UKNA: FCO 20/54]