Friction in Australian-US relations in the 1930s: Australia's Trade Diversion Policy of 1936

In: http://hdl.handle.net/1885/14602

Open Access

Abstract

At first glance, the introduction, on 22 May 1936, of the Trade Diversion Policy appears to be an Australian example of the protectionist policies being instituted globally in the 1930s, as states sought to isolate their national economies as far as possible from the vagaries of the international market in the wake of the Great Depression. However, while the policy was a result of the transitional nature of international affairs in the 1930s, an in-depth analysis of trade diversion reveals a myriad of factors that impelled the Australian Government to pursue what was a controversial course of action, in the face of unanimous condemnation of Australian economists, and which would have a significant impact on Australian-United States relations. The imposition of a new tariff schedule that placed higher duties on specified commodities imported from countries outside the British Empire, and the implementation of an import licensing scheme of quantitative restrictions was publicised as an initiative designed to help the Australian Government avert a impending crisis in their balance of payments with Great Britain, and the threat of default which loomed in 1936. The government's aim of diverting its import trade from 'bad customer' countries to 'good customer' countries, was intended to encourage larger purchases of Australian exports by 'good customers', whilst also providing a practical means of addressing the long standing adverse balance of trade with the United States free of any punitive spirit. Neither the threat of default or the authenticity of the 'good customer' 'bad customer' tenet, stand up under critical reassessment. The impending balance in payments crisis was a fallacy designed to veil the introduction of drastic measures to ensure greater long-term economic stability and the expansion of Australia's secondary industry. The political motivations driving trade diversion begin to come to light with consideration of the application of the policy to Japanese imports. The policy's in-applicability in the case of Japanese imports, reveals the level of discrimination that underpinned trade diversion, for in 1936 not only was Japan an important market for Australian produce but Australia ran a large surplus on its balance of trade with Japan, and there was thus no economic rationale in diverting Japanese trade. The early 1930s saw the Australian government becoming increasingly unsatisfied with the trading position it occupied in relation to the United States, and in 1934 prime Minister Lyon's presented a letter to the US Consul-General in Sydney outlining Australian trade requests which were to provide the foundation for the opening of negotiations for a bilateral trade treaty between the two nations. Unfortunately the Australian proposals clashed directly with the liberalizing trade policies being introduced by the American Government, and plans for domestic development which also determined the outlook of the United States government at the time. In the face of the persistent negative American attitude, Arbitrary action was sanctioned by the Australian Parliament in May 1936, and the Trade Diversion policy was introduced, creating a protracted trade conflict that was to have significant consequences for Australian-United States relations.