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New Zealand recoils at proposal that it become a mere state of Australia

To Australians it is a minor issue. But to New Zealanders the question is highly important. The issue: Should Australia and New Zealand form a political union? Put another way: Should smaller New Zealand become part of larger Australia?

Australians, by and large, don't care much. Certainly, they are affectionate toward New Zealand. New Zealanders live and work without restriction in Australia. A common sentiment is that New Zealanders would benefit from becoming part of Australia and, if they wanted it, they'd be welcomed. But no one's pushing it.

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Across the Tasman Sea, in New Zealand, it is a much less mundane matter. Judge Michael Kirby, chairman of Australia's Law Reform Commission, suggested in a speech in Auckland that a union of the two nations would make economic and political sense. New Zealand's north and south islands could, he suggested, each become states within Australia's federal system.

The two nations this year adopted a Closer Economic Relations Agreement (CER). But, already an important difference of opinion has surfaced on an aspect of economic policy. New Zealand wants greater freedom for its corporations to operate in Australia.

Australia retorts that CER makes no specific concession on this issue and that New Zealand companies must qualify for the same Foreign Investment Review Board approval as must companies from other countries. (Approval is based on the board's evaluation of the benefits Australia and its citizens would derive from the investment.)

Angered by the Australian stance, New Zealand's pugnacious prime minister, Robert Muldoon, acted swiftly in June. He placed a temporary ban on all new investment from Australia - a decision that still stands - and mused aloud about the inconvenience Australian companies might suffer if they faced hurdles similar to those faced by New Zealand corporations that seek to expand in Australia.

A shiver went through the ranks of Australian companies, particularly those involved in banking, which enjoy unfettered access to the New Zealand marketplace.

Few analysts expect New Zealand to make any Australian companies pack their bags.

Some political commentators suggest Mr. Muldoon's feisty attitude toward Canberra is designed primarily for domestic consumption. ''Standing up to the Aussies'' appeals to New Zealanders' nationalistic streak.

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And New Zealanders have had their share of Australian irritants. They now need passports to enter Australia, a step ostensibly taken to limit narcotics traffic.

Some Australian labor unionists are asking for restrictions on New Zealanders' rights to live in Australia, which is weathering a recession and high unemployment (about 10 percent). New Zealand's economy is weaker than Australia's, and young New Zealanders commonly head for the bright lights of Australian cities.

New Zealanders are criticized, too, for an allegedly disproportionate involvement in crime in Australian cities and for swelling the numbers of people on the welfare rolls.

Despite their differences, people on both sides of the Tasman are careful to say their disputes amount to little more than a family squabble. The bonds between Australia and New Zealand, they say, remain strong.

But that does not mean political union is likely.

New Zealanders are concerned that any political union would chisel away at their cultural identity.

As Prime Minister Muldoon sees it, ''Anybody who thinks Australia and New Zealand can become one nation is out of their mind. . . . I treat the whole business as a bad joke.''

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