Australia and Britain are steaming full speed ahead to a Free Trade Agreement, a deal that should provide an economic win for each country and a big side order of political gain for the two prime ministers, Boris Johnson and Scott Morrison.
For Johnson, it’s likely to be taken as evidence that “Global Britain” is more than a slogan, with the Australian FTA as the opening shot in a coming broadside of deals that will deliver on the promise of Brexit.
Morrison has less riding on the deal, but it will provide a useful economic and political counter to the negatives of China’s trade retaliation against Australia and can be shown as positive for local jobs, a focus of his administration.
The duo – BoJo and ScoMo – are expected to sign heads of agreement for the deal on the sidelines of the G7 meeting on 11 June. In April, trade ministers Liz Truss and Dan Tehan were talking up the win-win, pledging to hold follow-on Zoom meetings for the next five Fridays to ensure a signable agreement for June.
They said the vast majority of the deal had been agreed. But that’s a bit like saying the vast majority of a football game is done when it’s nil-nil with 10 minutes to play. In an FTA nothing is agreed until everything is agreed. So once the announcements are over, backs slapped and the headlines read, the hard work of resolving the gritty issues will begin – #negotiationsdraggingon.
Each side has its hot-button issues. Agricultural access is key for the UK farm sector, which has lobbied heavily on non-tariff areas such as hormone and antibiotic use in Australian herds (bad for consumers, threat to UK exports to the EU) in its fight to prevent tariff-free imports (good for consumers, bad for charming but inefficient farmers).
From the Australian end, shielding the popular and politically sensitive Pharmaceutical Benefits Scheme from untrammelled free trade has been a stumbling block in past US trade negotiations and is in the sticky mix here. Australia’s unwillingness to formally commit to carbon neutrality by 2050 is another area with potential for dispute.
Such issues are surmountable. They can be carved out for further consideration, or phased in over extended periods, diminishing value but securing an outcome.
As for value, UK estimates of the potential benefits of the FTA show as little as 0.01 per cent to 0.02 per cent of GDP as a guide (£200m to £500m) – a drop in the Indian Ocean – over 15 years. Australia might hope for a little more in percentage terms given the leverage provided by the greater relative scale of Britain’s US$3.2trn economy versus Australia’s US$1.6trn equivalent.
Australia’s three biggest goods exports by value to the UK are gold, lead and wine. The UK top three to Australia are motor vehicles, pharmaceuticals and alcoholic beverages.
Beyond economic benefits there should be pluses from other sources. An FTA would round out and embrace existing formal agreements covering security, defence, tax, reciprocal health care, criminal investigation and mutual recognition of qualifications, pacts which already tie the UK and Australia in strategic partnership.
For the jobs-focused Morrison government, securing a cosier and more open trade future with Britain would help offset some of the economic and political fall-out from China’s arbitrary imposition of trade bans and tariffs on goods – from coal to barley, wine and lobsters – as punishment for Australia’s failure to toe the Beijing line.
China’s actions have provided an important lesson in portfolio theory to the Australian government, emphasising the benefits of diversification and the risks of concentration. This has seen tight focus on securing proposed FTAs with the EU and India and helps explain the pace at which the UK FTA is proceeding.
From Britain’s viewpoint, cutting a deal with Australia will provide political gloss to Johnson, if only by showing that trade deals can be done relatively quickly and generate a laundry list of benefits, tangible and otherwise. A template of sorts, too, for the other Commonwealth members – Canada, India, South Africa, Nigeria – with whom the UK must seek deals. Did someone say Imperial Preference?
Plainly an FTA with Australia is no substitute in scale for the impacts of Brexit on the previously frictionless free trade Britain had with the EU, but it can be part of the process of repair. Australia is about a €25bn market for the UK at present. The EU is about €700bn, taking more than 40 per cent of UK exports and providing some 50 per cent of imports.
One of the keys to fixing the damage will be to keep knocking over FTAs. New Zealand (with around a fifth the economic importance of Australia to the UK) is next in line and within the Pacific region the UK has applied to accede to the Comprehensive and Progressive Agreement for Trans Pacific Partnership (CPTPP), an 11 country carve-out from the broader TPP. It includes Australia, Japan, Mexico, Canada, NZ and Peru and represents 13 per cent of global GDP, about six times that of Australia. Deals with Australia and NZ could be expected to assist the UK case for accession.
Traditionally the best trading partner is one that is nearby, needs your stuff, can afford to buy it and is easy to deal with (hello EU). But in a world where trade increasingly is in services and commerce is of the “e” kind, proximity takes second place to being easy to deal with. And it is on softer, non-tariff issues where large swathes of any FTA deal will be focused.
Sure, Australia wants open access for its agricultural produce and elimination of tariffs on its metals, ores and manufactured goods – and will drop its tariffs where these apply to UK exports.
But a myriad of process and regulatory improvements, large and small, will be key to driving greater trade integration over time. Making it easy for small businesses to open a bank account and having ready recognition of professional qualifications, “passporting” of financial regulations, mutual acceptance of local standards and ease of travel for professionals are examples of potential beneficial steps.
The ambition is for a seamless and predictable environment for business, one promoting greater trade over time, notably in services – be it education, architecture, design, software, engineering consultancy or financial services, media and entertainment, maybe even medicine.
It is clear that each country can live without an FTA with the other, but a well-crafted deal can bring genuine, if modest, economic benefits, with two identifiable winners inside the deal and the unidentified losers outside. Marginal gain is the name of the game.
