Trans-Tasman Free Trade Area Proposal

Press, Volume C, Issue 29699, 18 December 1961, Page 16

Trans-Tasman Free Trade Area Proposal

A free trade area between Australia and New Zealand should result in benefits for both countries, according to the New’ Zealand Institute of Economic Research. In a paper released for publication today, the institute says there is a prima facie case for the assumption that increased specialisation and exchange between the two countries would improve the efficiency of both economies.

"New Zealand would not enter any free trade arrangement as a relatively poor, underdeveloped rural region." the paper says “It is a country with a high per capita income, g'ing it great capacity for saving and investment; a country with a wide range of growing manufacturing enterprises already in existence, which have scope for considerable improvements in productivity, especially if they have access to a wide market; a country with a skilled labour force, whose skills can be further improved by development of our education and extension services. “Moreover, we would retain our own Government, which could give, and would be induced by the agree nent to give, considerable assistance to industry by methods which would have more positive effects than protection in increasing efficiency. In addition it is to be hoped that provision would be made in any free trade agreement for mutual assistance, where necessary, to maintain full employment and an adequate rate of development in each country and to ensure that each country received adequate benefit from the agreement. Example of Europe “It is probably the case that the political climate in both countries is not at present conducive to rapid progress towards complete free trade. However, if the possibilty is admitted that there might be advantages in complete free trade in the not too distant future, it is likely that we shall take more interest than we have so far in making in the immediate future co-operative arrangements, less far-reaching than a free trade area, which might provide a partial test of the desirability of going further.

“For example, we might ■ give consideration to the pos- , sibility of freeing trade in • one or two selected groups | of products. The six members of E.E.C. began the process of integration by creating a Coal and Steel Community, and this was given the blessing of G.A.T.T. Could Australia and New Zealand do , something similar in the case of pulp and paper or perhaps iron and steel? "Other measures which might be taken both by Governments and by business interests, to create closer ties between the two countries and to help to break down the fears which cloud our vision at present, are more likely to receive positive attention if we see a complete treeing of trade as an ultimate possibility, than if we rule out this possibility entirely. “It has not been the intention here to argue that making arrangements for increased specialisation and exchange between Australia and New Zealand would provide any panacea for the problems with which our countries are confronted. What matters most in reducing our vulnerability and raising our standards of living is that each country should make better use of its available resources. “Other things, such as the level and nature of our capital investment, and our ability to improve the skill and enterprise of our labour force, are more important than our international trading arrangements in achieving this objective. It does appear, however, that there is a prima facie case that increased specialisation and exchange between Australia and New Zealand would make a useful contribution to improving the efficiency of cur economies and that, therefore, our Governments and peoples might look much more seriously than they have in the past at tl.e possibility of achieving a greater measure of integration of our economies." the paper says.

Exports And Imports New Zealand's exports to Australia comprised a narrow range of products—newsprint and woodpulp i worth some £5 million in 19591. timber, wool, seeds, fish, and a variety of manufactured products worth nearly £ll million. In this year Australia took 3.7 per cent, of New Zealand’s total exports. Australia was now New Zealand's second largest source of supply, providing more than 18 per cent, of New Zealand’s imports in 1959 Foodstuffs, metals and metal manufactures, petroleum products, machinery and transport equipment were Australia's main exports to New Zealand The New Zealand deficit with Australia had grown from some £lo_ _ million in 1948 to nearly £32 million in 1959. “The important question when we are considering trade between Australia and New Zealand is not bow we can narrow the trade deficit, but whether we can suggest any changes ... to improve the efficiency of our economies, to speed up our rates of growth, and thereby to accelerate the improvement of the standard of living of a rapidly growing number of Australians and New Zealanders” The extent to which the Governments of the two countries have been prepared to act jointly in economic matters, or to .nake trade

concessions to one another has been “decidedly limited ” the paper says. Recent developments in international trade, and especially tHe movements toward regional

groupings in Europe and elsewhere. appeared to have reawakened a realisation of the similarity of interests of the two countries. An Illusory Freedom Each country retained (and exercised* the right to increase duties on specific commodities imported from the other. “Moreover, the value of any tariff preferences can be. and has been, reduced or nullified by the imposition of quantitative restrictions on imports by both parties. Thus, not only can a high degree of protection against competition from the industry of the other partner be maintained, but there is little safeguard against an increase in the extent of protection at any time." Commenting on the 1960 removal of Australian quantitative restrictions, the paper discusses the position of dairy produce. “It is understood from industry sources that Australia has let it be known in no uncertain terms that restrictions would be rapidly reimposed if New Zealand attempted to take advantage of her apparent freedom to export to Australia’s relatively high-priced markets. “This is, of course, a particularly sensitive area of production and trade for Australia; but even in the case of other less politically sensitive commodities, there is obvious uncertainty in the minds of New Zealand producers as to the security of the market in Australia for imported products. The post-war history of alternative relaxation and intensification of import controls in New Zealand must have erected similar uncertainties in the minds of Australian producers." “No Real Endeavour” Summing up trade arrangements. the paper says there has so far been no real endeavour to work very closely together in matters of economic development and transTasman trade; margins of preference are tending to decline; and trade is hampered both by protective duties and restrictions and the fear that protection might at any time be increased.

The paper rejects any possible review of the 1933 agreement between Australia and New Zealand on the ground that it would be a breach of the General Agreement on Tariffs and Trade to extend to one country alone the benefits of new tariff preferences. Australia and New Zealand could, however, form a customs union or free trade area, without prejudice to their G.A.T.T. commitments. New Zealand's rate of growth of productivity has been one of the slowest in the world in the last decade. The economy remains extremely dependent on a narrow range of export products subject to wide fluctuations of price. “Industrialisation” has in no way reduced this dependence. “New Zealand’s dilemma is that the further the process of import substitution is pushed—behind a wall of protection and within the confines of a relatively small market—the greater are the attendant difficulties likely to be and the more likely we are to prejudice the development of our existing export industries and of our industries and services generally, by raising their costs of production.” Australia's difficulties are not dissimilar, though her recent rate of growth is a good deal higher than New Zealand's. Promoting Efficiency An agreement to abolish gradually trade barriers between the two countries would stimulate efficiency in three main ways:— 1. Through increased specialisation by both countries in the types of farming and industry for which they were best fitted. 2. Through economies of scale. 3. Extra competition among producers. “A free trade arrangement would assist greatly in creating a better climate for growth, both in this way and by making Governments more immediately aware of the disadvantages of permitting inflationary conditions to develop which would weaken the competitive position of their own producers. “The reduction of costs ■ whic*- should be achieved as a result of specialisation. ' larger scale, and increased competition, should improve ' the capacity of both coun--1 tries to export, and to produce ' goods able to compete suc--1 cessfully with imports. This would be a positive contribu- : tion towards reducing their i present vulnerability to exi ternal fluctuations.” Costs of Integration These advantages would not be achieved . without some 1 cost. The major questions to be considered were:— , 1. Would such an arrangement lead to uneconomic trade diversion? From New Zealand's point of view would it lead us to buy too many imports from Australian sources which could be purchased ■with less expenditure of overseas exchange from other countries? , 2. What would be the re- [ action of the United Kingdom. in particular, and of , other countries with which we trade, to the increased ■ discrimination against their exports to Australia and i New Zealand? ■ 3. Would the gradual aboliI tion of trade barriers seri-

ously disrupt industry or farming in either country and prejudice its ability to maintain full employment and an adequate rate of growth, especially in the case of the smaller partner? Discussing tfae first question the paper says that commodities m which trade between the two countries would be most likely to expand are those in which domestic industries are already accorded a high (and growing) level of protection against imports from all sources. “Exports from the partner country are therefore more likely to replace domestically-produced asticles than to replace articles which are now imported from overseas or which would be so imported if the countries formed no free trade area and maintained their separate systems of protection in the future.”

(The paper mentions that some economists might not accept this view.) The regional freeing of trade should eventually improve the capacity of the partners to export to and import from the rest of the world. To the extent that this was achieved, there would be less chance of opposition to the arrangement from the United Kingdom or other countries.

“It is highly unlikely that any industry would be completely exterminated,” the paper says. Sections of some industries in both countries which had received substantial protection would find it difficult to survive, or to make the profits to which they had become accustomed. “Those likely to be adversely affected would put up considerable political resistance to any proposal for integration. and in some cases —for example, the Australian dairy industry—those protesting x-ould carry considerable political weight.” Limited Area Dismissed

The paper dismisses the suggestion for a partial free trade area, which would exclude industries particularly sensitive to the reduction of barriers to trade. “If, for example, Australia insisted on the exclusion of dairy products from the arrangements, they would look considerably less attractive from New Zealand’s point of view.” Provided reasonable reciprocity were achieved. New Zealand industry stood to gain more than Australian from the stimulus to efficiency which a free trade arrangement would provide. “Protection and our propensity to inflate are two of the major factors responsible for the relatively slow rate of growth in New Zealand in recent years, because they have raised our capital requirements per worker and led to inefficient use of cap'r tai through labour shortages, insufficient specialisation, and the survival of too many relatively inefficient smallscale enterprises. . . . We should not be pessimistic about the ability of New Zealand manufacturers generally to compete on level terms with their Australian competitors.

“In this connexion, an important factor to be considered. if a regional free trade area were contemplated, would be whether the existing exchange rate was appropriate. . . . The existing rate cannot be regarded as sacrosanct. and it would be important before a free trade area was established to determine whether any change was justified.”