Brexit: deal or no deal for Australia?

As long as a political standoff persists, an Australia-UK FTA remains on ice. Preliminary work may have begun but for all practical purposes little substantial progress is possible until Britain’s trade status is clarified.

"From Australia’s perspective, all this uncertainty has had the beneficial effect of energising European efforts to establish free trade agreements with its major trading partners.”

A second Brexit referendum to resolve a UK political impasse cannot be excluded. It might result in Britain remaining in the EU - in which case a separate free trade agreement would be redundant.

In the lead-up to Johnson’s ouster of Theresa May, who was regarded by hardline Brexiteers as a weak negotiator with Brussels, there was a lot of loose commentary in Australian media about the imminence of an Australia-UK FTA.

That persisted at the recent G7 summit in Biarritz where Prime Minister Scott Morrison was intent on pushing Australia to the front of the queue in any post-Brexit negotiation with the UK.

Warp speed

The Australian newspaper reported Morrison, in his first “face-to-face meeting" with Johnson as respective prime ministers, would “push to lock in’’ a free-trade agreement post-Brexit with Britain.

That possibility of re-establishing a stand-alone Australia-UK trading partnership was reflected in excitable - and as it has turned out, premature - reporting of prospects for such a relationship.

The Sydney Morning Herald headlined one of its stories post the Johnson takeover: “Australia-UK trade deal could happen within weeks of Brexit."

This would’ve involved moving, improbably, at warp speed given the complexities of any FTA with its multiple chapters covering everything from tariffs, to intellectual property rights to procurement issues to complex dispute resolution mechanisms.

That misplaced optimism has been dampened for the time being and, possibly, permanently if Britain ends up remaining in the EU.

From Australia’s perspective, all this uncertainty has had the beneficial effect of energising European efforts to establish free trade agreements with its major trading partners.

Adding impetus to an EU deal are concerns about a disrupted international trading environment due to the ongoing US-China trade war.

Australia is a beneficiary, therefore, of the EU’s push to strengthen trading partnerships with important economies whose trade and investment relationships with Europe provide a foundation for expanded economic ties.

Possible model

Among models for an Australian-EU trade agreement is an agreement signed in 2016 by the EU and Canada called the Comprehensive Economic and Trade Agreement (CETA).

Under CETA, 98 per cent of tariffs on goods traded between Canada and EU have become duty free. All tariffs will be removed within seven years.

This is, by any standards, a comprehensive free trade agreement. It is World Trade Organisation compatible. It has been spoken of as a possible model for a UK-EU free trade agreement if Brexit were to take place.

In the meantime, Australian and EU negotiators have had a first round of meetings to scope out details of an FTA. The second round will take place in Canberra in November.

These negotiations began in June, 2018 as the UK wrestled with challenges involved in resolving deep political differences over detaching itself from the EU following its 2016 referendum. The referendum resulted in a 52-48 percent vote to leave the EU.

As a trading bloc, the 28-member EU (including the UK) is critical for Australia economically. It is Australia’s second largest trading partner, third largest export destination and second largest services export market. In 2018, EU countries were Australia’s largest source of foreign investment.

The EU is, by any standards, an economic behemoth. It is by far the world’s largest trading bloc with a population of half a billion people and GDP of $US18.7 trillion.

A long way from the 70s

Australian business has much scope to take advantage of benefits that would flow from improved access. Australia ranks 31 as a source of EU imports, just 0.6 percent of the total.

On two-way trade of $A109 billion, Australia’s share is about one-third. Clearly, there is much room for improvement. The UK accounts for about one-quarter of two-way trade.

EU countries have investments in Australia valued at $A1.2 trillion dollars. Australia investments in the EU are worth $A713 billion, of which just less than a half is invested in the UK. These are big numbers and provide a foundation for a much more extensive trading and investment relationship.

This is how the Department of Foreign Affairs and Trade (DFAT) describes the importance of the Australia-EU relationship:

"Australia and the EU are natural partners with a shared commitment to the rule of law, global norms and free and open markets. A strong EU is vital to Australian interests in protecting and promoting a rules-based international order. We want an FTA with the EU to set the benchmark for what can be achieved between like-minded partners.

An FTA with the EU has the potential to open up a market for Australian goods and services of half a billion people and a GDP of US18.7 trillion. It would provide Australian exporters with a competitive edge and would give Australian business access to a larger export market in the EU. Australian consumers and companies stand to benefit from a free trade deal with the EU, through greater access to goods and services at lower prices."

Historically, this is all a very long way from 1973 when the UK joined the European common market to Australia’s dismay thus putting aside a preferential trading relationship that dated back to Imperial Preferences for products from Commonwealth countries.

Appealing prospect

A tense relationship between Australia and the EU persisted for several decades into the 1990s. This reflected Canberra’s irritation over the Common Agricultural Policy.

Australia chafed at the virtual exclusion of Australian primary agricultural goods from Europe and the distorting effect on world markets of the CAP.

In this latter period discriminatory policies to shore up European agricultural producers remain in place but given the development of alternative markets for Australian goods and services these impediments are much less of an irritation now.

In 1973, China’s rise was not a blip on anyone’s radar screen as an economic force. Or, more to the point, from Australia’s perspective, a potential boom market for Australian goods and services.

Viewed from Canberra, an FTA with the EU, with, or without, the UK is an appealing prospect given progress made in recent years towards strengthening ties between Australia and Europe.

In 2017, Canberra and Brussels signed the Australia-EU framework agreement to provide a platform for closer cooperation across a range of issues from counter terrorism to regional security to dealing collaboratively with climate change.

The 2017 agreement builds on an earlier Australia-EU Partnership Framework initialled in 2008 during Australia-EU ministerial consultations in Paris.

People-to-people

Trade and investment might be significant but so too are people-to-people links. In the year ending March 2019, more than 1.6 million Europeans visited Australia. Some 44,000 students from the EU studied in Australia in that period.

In the final wash-up of negotiations, assuming the Canadian model will be followed, Australian business can expect significant advantages to flow from a EU-Australia FTA.

Removal of most tariffs will benefit industrial and agricultural goods exporters. Australia’s exports of minerals and metals to the EU attract tariffs of 12 per cent, for example. Agricultural products, including beef, sheep meat, sugar, cheese and rice are significantly constrained by EU tariff quotas.

High and seasonal tariffs impede trade in other agricultural commodities such as horticulture. None of these tariff and market access issues will be easy to resolve but the fact Australian and EU negotiators now have a real incentive to get an agreement concluded relatively quickly cannot be anything but good news for Australian business.

Tony Walker is a bluenotes contributor, former Financial Times correspondent in China and former Australian Financial Review political editor.