Prospects for Australian free trade with a post-brexit United Kingdom

Now that the United Kingdom (UK) is once again pursuing an international trade policy independently of its previous membership in the European Union (EU), the UK Government has made clear that it intends to pursue free trade agreements (FTAs) with “Anglosphere” countries (United States, Canada, Australia and New Zealand).

These countries seem to share the UK’s enthusiasm for FTAs and Australia has set out its objectives for a bilateral deal with London. There are some “knowns” and “unknowns” surrounding the negotiations. Among the “knowns” for Australia is that the FTA will not look like a return to the pre-1973 period (the UK joined the EU that year) when Australia was one of the UK’s farm colonies – both countries’ economies and trade have evolved considerably since then.

Among the important “unknowns” is how the UK’s negotiations on a new trade deal with the EU (and to a lesser extent, with the US) will impact on Australia’s effort to get a good deal with the UK. On top of these considerations, we need to bear in mind that the bilateral relationship is generally far less significant for both countries than it was before the UK joined the European Community.

2020 Context: a marginal agreement?

The UK ranks only seventh as a two-way trade partner of Australia (3.4% of imports and exports of goods and services) and is Australia’s ninth most important export market (accounting for just 2.9% of Australian exports). The UK is the sixth most important source of Australian imports (4.0% of the total).  From the UK standpoint, trade with Australia accounts for just 1.3% of UK external trade. The picture is quite different when we look at investment. The UK is the second largest source of investment in Australia (behind the US) and is the second most important destination for Australian investment overseas (again behind the US). 

Regarding negotiating dynamics, much will depend on the extent to which the UK is enamored of EU tariffs in several categories of agricultural goods (especially animal products, dairy, cereals, sugar and fish) and how important access to the UK market for these goods is to Australia. Services negotiations should be easier, and there are good reasons to suspect that Australia will get as good a deal with the UK as Canada and Japan managed to get with the EU when it still included the UK as a member.

Reasons here include common legal and cultural backgrounds, and the fact that Australia already has a well-established service trade relationship with the UK. In 2018 the latter was Australia’s third largest service export market, with Australia being the UK’s tenth largest service export market

What all this means is that the eventual Australia – UK FTA is likely to be a marginally important agreement and far less significant than the FTAs Canberra has negotiated with others (or is negotiating with the EU). That said, a series of well-structured liberalizing FTAs might measurably influence UK growth rates that could help it to achieve economic performance better than its former EU partners, making it a more attractive market for Australian exporters over the longer term.

Australia’s negotiating objectives

Canberra lists its objectives in the negotiations with the UK as: expanding trade in goods; improving access for services providers; increasing two-way investment flows; promoting balanced rules on intellectual property rights; promoting opportunities for small and medium businesses and on government procurement; promoting shared values on trade and sustainable development; and establishing strong legal and institutional frameworks to ensure the effective implementation of the FTA.

Given the UK government’s enthusiasm for negotiating an FTA with Australia, there is no reason to think it would be particularly difficult to eventually realise an agreement that meets Australia’s stated negotiating objectives. Almost certainly, Australia’s negotiations with the UK will be far less complicated than the almost parallel negotiations Canberra is conducting with the EU, where a major problem is presented by the EU’s demands for geographic indication (GI) protections for hundreds of European food products (mainly cheeses and processed meats) that the Australian farm sector will surely resist.

Some complicating issues and non-issues

One important complication for Australia in this FTA negotiation is timing. Washington has indicated it wants an FTA with the UK and there are suggestions in the press that the two sides want to get a deal before the November American presidential election. If one assumes that the Americans are tough in their negotiations with London then it could be a good thing subsequently try to build on what the Americans did.

However, the Trump administration is so unpredictable that waiting for the Americans to go first could delay the Australian negotiating timetable. If Trump is unseated in November, the American-UK negotiations could be in limbo for months for all the usual change of administration reasons. Even so, Australia is likely to see a better overall outcome if it builds on a US-UK result instead of rushing to do a bilateral deal of its own.

If Australia were to conclude a deal with the UK ahead of the Americans, it would be wise to protect its interests through the inclusion of an “MFN clause” in the FTA which would ensure that any benefits of a better American deal would automatically be extended to Australia. Such a clause is normal in most modern FTAs.

Australian access to products that remain under tariff rate quotas in the UK could be problematic due to the UK’s negotiation with the EU over future trade relations. It is easy to imagine that the EU will try in its bilateral with the UK to continue to protect access to the UK market for EU growers of a range of products (citrus, for example) that will then make it hard for Australian exporters to get onto the shelves. There is little doubt that the UK’s priority will be to get as good a deal as possible with the EU post-Brexit, leaving the Anglosphere in a distant second place.

Beef and non-beef meat exports are Australia’s top two agricultural exports accounting for 27.6% (A$ 14.6 billion) of Australian global agricultural exports in 2018-2019.  Australia pre-1973 was a major exporter of these products to the UK and some might be tempted to think that a prospective FTA would open up new opportunities on this front.

That is unlikely. Fifteen years ago, when Australia concluded an FTA with the United States it included a limitation on in-quota TRQ beef exports to the US that many in the agriculture sector decried at the time. Some years after the FTA came into force, an outbreak of “mad cow disease” in the USA brought a temporary end to US beef exports to Korea and Japan and Australian beef producers were quick to take advantage of the opportunities in these high-value markets. Australian beef exporters have ever since not come close to hitting the American beef TRQ quota, instead remaining focused on Asian markets closer to home. This suggests that the UK market for beef and non-beef meat is unlikely, initially at least, to be a major focus for Australian producers.

Final observations

While there may be no initial dramatic economic results from an Australia-UK FTA there are certain to be benefits for both parties over time. The UK, for example, is currently at a disadvantage in the Australian market compared to others benefitting from Australia’s now significant number of preferential deals. Even if Australian beef and non-beef meat exporters are likely in the short-term to pay more attention to high-value Asian markets, a supply response by these producers might be small initially and grow over time if access is secure and remunerative.

Australia will certainly also be interested in using the FTA to attract higher levels of investment from an already very important investment partner. If other Australian FTAs are any guide, Foreign Investment Review Board investment review thresholds should be raised significantly for the UK, encouraging higher levels of British investment. As both parties are predominantly services economies where many services industries share a common legal and cultural background, there are obvious opportunities on both sides.

Overall, rebuilding a preferential trading and investment relationship between the parties should produce a “win-win” outcome.

By Andrew Stoler, former WTO Deputy Director-General; former Office of the United States Trade Representative senior trade negotiator; and former Executive Director of Institute for International Trade. Andrew is currently on the advisory boards for the European Centre for International Political Economy (ECIPE) and the University of Sydney’s United States Studies Centre and consults on international trade issues.

The views expressed here are the authors, and may not necessarily represent the views of the Institute for International Trade.