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Tuesday, 27 April 1965

Senator McKENNA (Tasmania) (Leader of the Opposition) . - The matter now before the chamber raises questions of vital importance to Australia. It relates, primarily, to our balance of payments and the preservation of that balance at a steady and even level. Upon the achievement of that objective, of course, depend the employment position in this country, our standard of living and the rate and direction of progress in the scheme of national development. Accordingly one faces the issue with a sense of very great responsibility. As the letters exchanged between the Prime Minister (Sir Robert Menzies), and the President of the United States of America, which form the subject of this debate, have not yet been included in the records of the Senate, with the concurrence of honorable senators I now incorporate them in " Hansard ". 12th March, 1965.

Mr. President.

This note is designed to be direct and clear, as it should be in a communication to one whose friendship I value, and whose sympathetic understanding of Australia and her problems we have great reason to appreciate.

Since you informed Congress on 11th February, 1965, of the measures you proposed to take to improve the external payments position of the United States I have been studying, with my colleagues in the Australian Government, the likely effects of those measures upon our situation, abroad and at home.

So far as we can see, Australia does not come within the several reservations stated by you and designed to lessen the impact of your measures upon various countries such as Canada, Japan, the United Kingdom and others more generally described as developing countries. 1 feel I should say to you that while we fully and warmly understand the reasons for the action your Administration is taking to deal with its balance of payments problem, we fear that this action as it now stands could have adverse effects on Australia which we imagine it would be no part of the United States intention to inflict.

When the Interest Equalisation Tax was first announced, we pointed out to the United States Administration our interests in the matter but did not seek exemption from it. Amongst other reasons, we wanted to avoid the embarrassment this might have caused your Administration in its negotiations with certain other countries on this matter. We do not seek exemption from the Tax now, but we do wish to bring to your notice the facts of our economic situation which will be relevant to the administration of the system of voluntary restraint to which United States investors are being asked to conform in making decisions about investments abroad.

Australia is not a " developed " country in the sense that the mature, capital-exporting and highly industrialised countries of Europe are developed. On the contrary, we have an immense task of developing a relatively under-populated continent which, while rich in some resources, presents in other respects most formidable difficulties of climate, terrain and distance. As yet we have a population of little more than eleven million people. Like the United States in earlier years, we are endeavouring to build our numbers up by largescale immigration. But this effort necessarily adds to our capital needs. Although by now we have achieved a large and varied production of goods, and in fact generate from our own savings more than four-fifths of the capital we require, we must perforce rely heavily on export earnings and on capital inflow to obtain abroad additional resources for growth.

Australia is a free enterprise economy that has welcomed private oversea investment and treated it with exactly the same consideration that it gives to private investment of Australian origin. Moreover, Australia has joined with other Free World countries in measures to promote freer international trade and payments and, to this end, maintains an " open " economy with practically no quantitative restrictions on imports and no restrictions on current payments. Although subject to formal control, repatriation of capital invested in Australia is not, in practice, refused.

Being predominantly an exporter of primary products, Australia experiences large fluctuations in the amount of her export receipts and, being in a phase or rapid development, normally has a deficit in her current balance of payments. Though this varies from one year to another, it has to be covered by net capital inflow. By far the greater part of this has comprised private oversea investment in Australia. In the eight years from 1956-57 to 1963-64 the accumulated deficit on current account amounted to $2,417 million. During that period the annual inflow of private oversea investment (including undistributed income) in companies in Australia totalled $3,022 million, of which $1,147 million came from the United States and Canada - most of it from the United States.

Ordinarily Australia has a large current account deficit with the United States. In 1962-63 Australia's exports to the United States totalled $297 million while her imports from the United States amounted to $478 million. Her net invisible payments to the United States in that year were $181.2 million giving a deficit on current account of $362.2 million. In 1963-64, with exports of $312.9 million, imports of $559.9 million and net invisible payments of $194.7 million, her current account deficit with the United States rose to $441.7 million. In the half year to December, 1964 Australia's recorded exports to- the United States were $153.2 million compared with $180.3 million for the same period of 1963, a decline of 15 per cent, whereas Australia's recorded imports from the United States increased as between these two periods from $273.7 million to $392 million, a rise of 43 per cent.

In this connection, we feel constrained to point to the contrast between the rapid expansion of United States exports to Australia - Australia now being the fastest-growing of the United States' major commercial markets - and the manner in which United States policies impede Australian efforts to expand exports to the United States of some major Australia export commodities.

The United States, alone among major trading countries, maintains a very high tariff on raw wool, despite many representations and negotiations aimed at reduction or elimination of duty; quotas imposed on lead and zinc in 1958 remain unchanged despite a greatly improved world market situation; United States domestic legislation imposes limitations on. and creates uncertainties for, the Australian export trade in meat; the continuance of access for Australian sugar is uncertain and the size of the present Australian quota is not commensurate with Australia's position as the world's second-largest sugar exporter.

In 1963-64, these commodities accounted for 81 per cent, of total Australian exports to the United States. They are the products on which Australia must chiefly depend if a significant expansion of exports to the United States is to be achieved and if the progressive deterioration in our trade and payments balances with the United States is to be arrested and re-dressed. Yet, with respect to each of them, United States restrictions of one kind or another prevent or impede expansion.

This current account deficit with the United States has been offset in part by capital inflow from the United Stales, most of it on private account. In 1962-63, the annual inflow from the United States and Canada (by far the greater part being from the United States) of private oversea investment (including undistributed income) in companies in Australia was $201.6 million, and this increased to $220.2 million in 1963-64. In the latter year, the inflow from the United States and Canada was not far short of half of the total of $481.6 million of private oversea investment in companies in Australia.

To turn now to our immediate situation, it is a fact that in 1963-64 Australia's export pro auction was high and for most exports reasonably good prices were received. Capital inflow was strong and our external reserves were strengthened. For the present financial year, however, the prospects are much less favourable. Export prices have fallen, local demand for imports has been strong and, although capital inflow has been fairly well sustained, it is certain that substantial drawings will be made on our' external reserves.

These seem certain to decline over the year as a whole by appreciably more than £100 million ($224 million).

For the financial year ahead, the signs point to a continued drain on our external reserves. We have greatly enlarged our defence programmes and this will entail substantial additions to oversea payments for defence equipment and supplies. Oversea expenditure in 1965-66 and later years arising from existing defence commitments and the new three-year defence programme is estimated at about £400 million or the equivalent of about $880 million, of which about £250 million or some $550 million will relate to procurement in the United States. Although recent arrangements reached with you to phase payments of some major items over a longer period will ease the burden to some extent, it will still be considerable. At the time we undertook these commitments we had no reason to anticipate that our payments position vis-a-vis the United States would be altered for the worse by action of the kind you have since announced.

An additional consideration is that the Australian Government has commitments of nearly $200 million in the United States over the next five years in respect of debt maturities and sinking fund commitments. This figure is exclusive of instalment repayments of approximately $130 million due to the International Bank over that period.

Although a relatively large scale importer of capital, Australia is nevertheless a donor and not a recipient of international aid. Australia has, in fact, played her full part in various international aid arrangements and also provides a considerable amount of aid, both civil and military, on a bilateral basis to less-developed countries. The development of Papua and New Guinea is a prime Australian responsibility and one that is making large and increasing calls on Australia's resources. Requests for additional aid are being received from other developing countries as well and in most cases are met to the best of our ability. Our recent gift of wheat to India worth nearly $9 million is a case in point. These all add to the pressures on our external resources.

In what at present appears to be a deteriorating balance of payments situation, any substantial falling off in capital inflow would be a matter of serious concern to the Australian Government. Furthermore, since we hold the bulk of our external reserves in sterling, any drawings we have to make on our reserves will tend to increase Britain's balance of payments difficulties which are, of course, a matter of international concern.

In drawing attention to these facts, the Australian Government hopes that, in setting oversea investment targets for United States banks and other businesses, the Administration will take full account of the Australian situation and will not take action likely to result in any substantial reduction in the flow of private American capital to this country.

This is not to say that we would oppose the issue by United States investors of some equity capital in their subsidiaries here to finance new investment in this country; indeed it would accord with an attitude we have frequently expressed. We have made it clear on many occasions in the past that we think it desirable for oversea investors to take in Australian investors as partners in businesses established in Australia.

On the other hand, however, we would be troubled and embarrassed if United Slates investors were to begin repatriating capital, substantially increasing the proportion of profits remitted or adding largely to their fixed-interest borrowings or other forms of capital-raising in Australia which gave Australian investors no equity share in the businesses in question. Developments such as these could very well force upon us the need to reconsider the policies we have hitherto followed in these areas. This we should regard as regrettable in the extreme, especially if it resulted in conflict of policies, with subsequent confusion in, and disruption of, established and greatly valued financial and commercial relationships between our two countries.

Our own policies in these important fields have, we believe, had the encouragement and approval of successive United States' Administrations. We should like to think that it will be possible to continue them without detriment to ourselves and without impairing the effect of the policies you find necessary to strengthen your own balance of payments and uphold the world standing of the dollar.

I am, Mr. President, and with warm personal regards,

Yours sincerely, (Sgd.) R. G. MENZIES

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