The EU is launching bilateral trade agreement negotiations with Australia. In an interview with Borderlex’s Iana Dreyer, Australian Ambassador to the EU Justin Brown shares his views on the crisis of the multilateral system, the solutions Australia and the EU could offer, and the tough nuts that need cracking to conclude their pact.
“We use every asset we can,” he said, smiling. Australia is the only country that was exempted from US tariffs on steel and aluminium this month. The White House’s move, made on national security grounds, was the first shot in what may be mutating into an international trade war.
How did the faraway continent with a mere 24 million inhabitants and yet a competitive steel exporter pull this off? “We’ve got a trade deficit with the US. We pointed that out to the US administration. We basically lobbied very aggressively.” The ‘lobbying’ also involved relying on Greg Norman, a former golf champion, to put in a good word with his friend Donald Trump on the golf course.
Suddenly Brown’s tone turns sombre. “We don’t expect this to be the end of the story. We are pleased to have got the exemption. But our concern is this national security rationale. Where it might lead. We could see it being abused.”
The launch of a bilateral European Union agreement with Australia – and its neighbour New Zealand – couldn’t have come at a better time. This week, EU trade commissioner Cecilia Malmström is Down Under to kick start the negotiation process with two countries that have long awaited this moment.
As the United States retreats from the World Trade Organization-centred multilateral trading system, “the list of countries standing up for fair, open and rules-based global trade is growing, we form an even bigger circle of friends”, Malmström said at the Australian National University.
Brown recently took over the role of Australia’s envoy to the EU after having negotiated the Comprehensive and Progressive Agreement for Transpacific Partnership. The deal is the successor to the Trans-Pacific Partnership, the plurilateral trade deal from which the US withdrew in early 2017. The 11 remaining countries – which include Japan, Canada, Mexico, Peru and Vietnam – then moved on to clinch an accord among themselves, with the hope of seeing the US rejoin one day.
To Brown, CPTPP is one of the solutions to the multilateral trading system’s inability to deliver significant new trade liberalisation or to update the rules of trade to the digital and services era. Brown is in Brussels to propose CPTPP-inspired solutions.
“It really is important at the moment that countries that believe in the rules first of all demonstrate that they believe in the rules, secondly that they start developing rules where there aren’t any,” he explains. “For example digital, e-commerce [are areas] where we want to use our FTAs as a kind of a testing lab.”
Such FTAs “can help to create new models. If Australia and the EU can live with such a model and think it works, then other countries would say, OK, we’ll have a look at it as well”, reckons Brown. CPTPP-inspired rules disciplining the behaviour of state-owned enterprises could go a long way in resolving the many frictions between China and other WTO members, argues Brown. “We want the WTO to succeed and to come back to life. And we’ll keep at it in Geneva,” he said.
But the real game in town these days is bilateral or region-wide trade agreements. “Australia was a latecomer to FTAs. Historically we were always very committed to Article I of the GATS – the so-called MFN provision.”
Australia just added the CPTPP to the list of trade agreements it has signed with Japan, Korea, China, the US and the South East Asian bloc ASEAN as well as individual members of this grouping.
“The EU is frankly a hugely important trade negotiating partner for us,” said Brown. “We think an FTA would give our corporate entities on both sides greater legal certainty around the business environment and help to reduce some of the transaction costs.”
Overcoming the tyranny of distance
Australia comes to the EU as a country that believes in services and the data-driven economy. It has a thriving financial services and tech sector and is an important player in the fintech and blockchain areas. With Brexit, diversifying its exposure to the European market will become a priority.
In 2016, Australia exported US $3.5 billion (€3 billion) of services to the United Kingdom and only US $1 billion to Germany. Between 2013 and 2016, Australian services exports to the EU increased 1.6% a year, whereas EU services exports declined by 1.5% annually, although overall the bloc boasts a sizeable services export surplus with Australia.
“For a country like ours that is geographically so remote, the so-called tyranny of distance is a huge driver for our trade,” explains Brown. “Can we find technological solutions which will allow us to penetrate markets which for real goods are difficult for us? That’s where services, tech are really interesting for us. We think this is where future growth is going to come from.”
The immense continent is no longer the bulk exporter of cheap agricultural commodities it used to be. “Some see it like Brazilian-like scale, much of it directed at pushing out low-value, high-volume commodities in bulk. That perception is quite dated,” says Brown. Most agriculture exports go to North and East Asia, and Brown expects this to remain the case.
“Climate change and other factors mean that there are real limits to our ability to scale up production in agriculture. Australia is one of the driest continents on earth, subject to frequent droughts. Water shortages are common,” explains Brown. “We couldn’t swamp the EU market even if we wanted to.”
Distance and population size mean Australia is not a major industrial production centre. But it occupies niches in the global auto and aerospace value chain: a lot of high value-added Australian components are already integrated with German, French and British industries. There’s a buzzing trade going on there. An FTA could help remove some of the frictional trade barriers – tariffs and standard related duplications – prevailing in that trade.
A tough nut to crack
Both the Australian and European economies are relatively open, but have opposing interests in areas that are politically highly sensitive back home. Australia is one of the world’s top cane sugar exporters. It enjoys a very small quota of 9,925 tonnes at €98 a tonne with the EU, and Canberra wants that increased.
With Brexit and the likely splitting of this quota with the United Kingdom, Australia risks being left with almost nothing. “Splitting means we wouldn’t fill a ship,” complains Brown. Since Australia’s EU quota was negotiated in the WTO in 1990s, the bloc slightly opened up to competitors in Latin America, Africa and the Caribbean. “For us it’s a matter of equity,” said Brown.
Australia will see the CPTPP’s chapter on e-commerce and data flows as a benchmark for future trade in the digital sector. The EU for its part is still fumbling with its own position on this matter for its FTAs and has been reluctant to enshrine a straight free data-flow principle in its text – contrary to TPP.
For Australia, some EU asks will be difficult to navigate politically back home, too.
Australia applies high duties on some dairy products – dairy being a key export interest of the EU. Its stringent sanitary and phytosanitary rules mean exporting pork, meat, poultry and fruit – also key EU asks – is very challenging. Australia is gradually opening up its public procurement market. It is about to join the WTO’s Government Procurement Agreement – as a latecomer to that club for a rich country. Canberra’s offer has been generally well received by the GPA members. Australia also opened up procurement markets in CPTPP. Yet the EU is likely to want more: namely, access to municipal markets.
Australia isn’t at all comfortable with the idea of protecting food names as the EU does with its Geographical Indications regime. Yet it is ready to play along. “We agreed to start negotiations after being told there will be no FTA with no substantial outcome on GIs. We will see where this gets us.”
Australia and New Zealand will negotiate their separate deals with the EU in parallel. The bloc itself launched the two processes jointly, and the negotiating mandates that member states gave the European Commission are very similar. Both countries share many broad interests, and behind the scenes, they work together a lot to handle the FTA process. “We’re friendly rivals,” says Brown.
Let’s see if the EU can resist the temptation to play the two out against each other.