Potential Benefits of an Australia-EU Free Trade Agreement: Key Issues and Options Edited by Jane Drake-Brockman and Patrick Messerlin Published in Adelaide by University of Adelaide Press Barr Smith Library The University of Adelaide South Australia 5005 press@adelaide.edu.au www.adelaide.edu.au/press The University of Adelaide Press publishes peer reviewed scholarly books. It aims to maximise access to the best research by publishing works through the internet as free downloads and for sale as high quality printed volumes. © 2018 The Contributors. This work is licenced under the Creative Commons Attribution-NonCommercialNoDerivatives 4.0 International (CC BY-NC-ND 4.0) License. To view a copy of this licence, visit http://creativecommons.org/licenses/by-nc-nd/4.0 or send a letter to Creative Commons, 444 Castro Street, Suite 900, Mountain View, California, 94041, USA. 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For the full Cataloguing-in-Publication data please contact the National Library of Australia: cip@nla.gov.au ISBN (paperback) 978-1-925261-59-2 ISBN (ebook: pdf ) 978-1-925261-60-8 DOI: http://dx.doi.org/10.20851/eu-trade Book and cover design: Zoë Stokes Cover image: Depositphotos Contents Acknowledgements vii List of Contributors ix Abbreviations xv List of Figures and Tables xxiii Preface xxvii Jane Drake-Brockman and Patrick Messerlin Part 1: Australia, Europe, Asia: Evolving Commercial Diplomacy 1 Australia and the European Union: A Brief Commercial History 1 3 Gonzalo Villalta Puig 2 An Australian Perspective on the Australia-EU Free Trade Agreement 9 Jane Drake-Brockman 3 A European Perspective on the Australia-EU Free Trade Agreement 37 Patrick Messerlin and Jimmyn Parc 4 What Difference does Brexit Make? 61 L. Alan Winters 5 How might the Trans-Pacific Partnership Affect the Game? 75 Yose Rizal Damuri 6 Limits to European Union Negotiating Competence Pascal Kerneis 95 Potential Benefits of an Australia-EU Free Trade Agreement Part 2: 21st Century Bilateral Negotiating Challenges 7 103 105 Global Value Chains Richard Pomfret and Patricia Sourdin 8 123 Government Procurement Bernard Hoekman 9 149 Regulatory Cooperation Peter Mumford 10 Agriculture and Food Trade Policy 169 Kym Anderson, AC 11 Foreign Investment and Innovation 189 Shandre Thangavelu and Christopher Findlay Part 3: Services in the Digital Age 12 E-Commerce and Digital Trade 209 211 Hosuk Lee-Makiyama 13 225 Audio-visual Services Jimmyn Parc and Patrick Messerlin 14 245 Professional Services Pascal Kerneis 15 259 Financial Services John Cooke Part 4: Where to on Investor-State Dispute Settlement? 16 Investor-State Dispute Settlement Julien Chaisse and Yves Renouf vi 279 281 3 A European Perspective on The Australia-EU Free Trade Agreement Patrick Messerlin and Jimmyn Parc Abstract Free trade agreements (FTAs) aim to achieve further economic development for the participants. In this respect, the opportunities offered to the European Union (EU) by an Australia-EU FTA are crucial for Europe’s economic future. This is further highlighted by two situations and their consequent effects on the EU economy: (1) the United Kingdom’s exit from the EU (Brexit) and (2) the United States’ hesitations regarding the EU’s global strategy. This chapter argues that the Australia-EU FTA will result in positive effects in the EU for two main reasons. First, Australia is attractive because of its high-quality economic governance—the authors argue that governance is the most important issue in the long run for a mutually beneficial FTA that covers regulation-intensive topics such as technical barriers to trade and services. Second, as Australia has deep political and economic relations with East and South-East Asian countries, the Australia-EU FTA should be used as a key instrument in the EU strategy towards Asian countries with great potential and rapidly growing economies. Introduction In July 2017, Australia and the European Union (EU) signed a new bilateral ‘Framework Agreement’. A framework is a ‘chapeau’ agreement that the EU has imposed on all the trading partners with which it plans to negotiate a free trade agreement (FTA), the only exception being the Transatlantic Trade and Investment Partnership (TTIP) with the United States (US). A typical EU framework agreement deals with a much Potential Benefits of an Australia-EU Free Trade Agreement wider range of issues than trade, from broad societal issues such as common values, democracy, rule of law, social and environmental sustainability, to political issues such as foreign policy, security, emergency management, education and culture (Markovic 2009). The agreement signed with Australia follows this tradition (Framework Agreement between the EU and Australia 2017). Even its ‘Title IV’, which deals with ‘trade and investment dialogue’, covers a wide range of sectors and topics, such as agricultural trade and marketing, two-way investment, public procurement, technical barriers to trade, sanitary and phyto-sanitary issues, animal welfare, customs, intellectual property, competition policy, services, and trade and sustainable development. The wide range of topics within the Framework has generated much unease among most EU partners for several reasons. First, it deals with many different topics in one broad text—most of them unrelated to trade. Australia has been particularly sensitive to this aspect. For example, in 1996 when the EU suggested including a human rights clause in its future trade treaty with Australia, the Australian Government ‘deemed it unnecessary to have such links in a treaty with other developed, democratic states’ (Markovic 2012). Indeed, negotiations on this early trade treaty with Australia were never launched; ten years later, the ‘Global Europe’ White Paper did not even mention Australia as a priority country with which to establish deeper trade relations (European Commission 2006). Second, EU partners often fear that Frameworks will create disagreements over competence between EU Member States and the EU. In EU law, trade (and foreign direct investment (FDI) since the 2009 Lisbon Treaty on the Functioning of the EU)—is one of a handful of ‘exclusive’ competence domains of the EU.1 All the other aspects handled within the Frameworks fall under the ‘shared’ competence of the EU and its Member States. That said, the May 2017 Opinion of the European Court of Justice (ECJ) on the Singapore-EU FTA has clarified the competence issue: in summary, only portfolio investment and investor-state dispute settlement are excluded from EU exclusive competence.2 However, this legal opinion has not eliminated political forces hostile to FTAs. This is illustrated by the post-May 2017 Opinion battles, such as those that occurred in France and Germany in mid-2017, against the ratification process of the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU. Third, there is no clear separation between the topics handled by a Framework and those addressed by its associated FTA. For instance, the 2008 Australia-EU Framework operated as a platform for concluding a comprehensive 1 For further clarification, refer to chapter 6 of this volume. 2 Ibid. 38 Potential Benefits of an Australia-EU Free Trade Agreement air services agreement, which could have been an FTA transport chapter. Conversely, most existing EU FTAs deal with topics already addressed in their respective Frameworks, such as anti-corruption measures, energy, fisheries or climate change. These overlaps risk generating different interpretations and fuelling legal uncertainty. Finally and maybe decisively, the EU’s insistence on negotiating a Framework first was seriously damaged by the US’s blunt refusal to follow this process before opening the now-stalled bilateral US-EU TTIP negotiations. All these factors explain why it took some time for Australia and the EU to finally become ‘engaged in an informal process to review each other’s policies related to FTAs with a view to strengthening our trade and investment relationship’ (DFAT 2015). This move on Australia’s part was echoed shortly afterwards in the ‘Trade for All’ White Paper (European Commission 2015). In this document, the European Commission requests ‘authorisation to negotiate FTAs with Australia and New Zealand (NZ), taking into account EU agricultural sensitivities’ (European Commission 2015). In January 2016, a new step was reached in the EU with publication of the ‘Inception Impact Assessment’ on EU-Australia (and EU-NZ) FTAs (European Commission 2016). This document opened the door to the EU internal decision process, aiming to launch a ‘comprehensive and highquality’ FTA (DFAT 2017). In May 2018, the European Council gave the green light to negotiation of an FTA with Australia (and with NZ). This chapter is organised as follows. The first section shows that the Australia-EU FTA must cope with a crowded EU trade agenda in an increasingly chaotic environment generated by the current US Administration’s trade policy. In other words, the importance of this FTA for the EU must be demonstrated, a point examined in the next section. The chapter then examines the potential consequences of an Australia-EU FTA from the perspective of content and the negotiating process, taking into consideration that Australia-United Kingdom (UK) trade and investment relations have comprised a large share of previous Australia-EU relations. The conclusion explores the role that an Australia-EU FTA might play in developing and strengthening economic relations, in particular between the EU and East Asia. The crowded EU trade agenda Table 3.1 lists the main economies with which the EU has entered into bilateral FTA negotiations, or those with whom it has envisaged doing so during the last decade. It excludes countries covered by three specific EU regional initiatives: the Eastern Neighbourhood (Ukraine, Moldova and Caucasus countries); the South Mediterranean and Middle East regions; the African, Caribbean and Pacific 39 Potential Benefits of an Australia-EU Free Trade Agreement Notes: [a] bilateral investment agreement; [b] negotiations for the ‘modernisation’ of the existing EU-Mexico Global Agreement; [c] EUMS: EU Member States. Table 3.1: An overview of the main EU FTAs (as of July 2018). Source: European Commission (2018). countries. It also omits plurilateral negotiations on the Trade in Services Agreement (TiSA) in Geneva, which has been on hold since December 2016, with the election of US President Trump. The list is long and, as of today, the outcome meagre: only the FTA with the Republic of Korea (Korea) is ratified and fully enforced. The three other deals (Canada, Singapore and Vietnam) are at different stages of ratification, with processes that have been much delayed and full of twists and turns. This situation means that the staff of the European Commission as well as those of the Member States dealing with trade issues, are increasingly stressed. This is not only because they are required to deal with more countries, but also because they have to take care of increasingly numerous, complex and inconsistent demands from the Council and from the EU and Member States’ Parliaments which are themselves under pressure from diverse lobby groups. This brief presentation of the EU FTA agenda deserves two remarks. First, the delays in the ratification process and the incomplete deals have created in some EU quarters a sense of ‘fatigue’ with FTAs, raising the following question: 40 Potential Benefits of an Australia-EU Free Trade Agreement should the EU announce a ‘pause’ and concentrate on the pending ratifications while ceasing negotiations of new FTAs? Official launch of the negotiations with Australia seems to have closed this issue for now but the times are so uncertain that nothing can be taken as granted. It is therefore worth focusing here on a response to this question. At this stage it suffices to stress that the idea of a ‘pause’ raises its own set of problems. For example, would the ‘agreement in principle’ with Japan be considered to be close enough to the ratification stage to be out of reach of any proposed pause? Including this ‘agreement in principle’ in a ‘pause’ would certainly seem somewhat peculiar for the following reason: given that a ‘pause’ in the negotiations with the UK is impossible, a ‘pause’ in other negotiations would mean that only the negotiations deteriorating EU welfare (those with the UK) would escape the decision to take a ‘pause’. This raises another crucial question: should the EU be prohibited from opening new markets by negotiating FTAs which could compensate the welfare losses resulting from Brexit? A second point related to the UK’s withdrawal from the EU is that it will generate profound changes in the way the Council of the EU27 (EU after Brexit) will work. It will require a ‘shaking up’ of the political ‘narrative’ that has prevailed on trade issues in the Council since the UK’s accession to the EU. The standard narrative has been that the UK led the free-trade camp and France the protectionist one, with Germany positioned at the epicentre. These narratives were convenient for the two ‘opposite twins’. For example, the UK was relieved when France tempered UK free trade rhetoric by stopping or decelerating some freer-trade initiatives, such as reducing EU farm subsidies. France was relieved when the UK tempered French protectionist rhetoric by putting its weight behind initiatives, ultimately providing better market access for French goods or services, such as through the Japan-EU FTA. Brexit signals the end of this well-oiled narrative at the Council. France, Germany and the other EU Member States must thus reinvent their narratives at the Council as well as reinform their publics. The necessity for new ‘narratives’ will occur in a Council subjected to a new balance of voting weights among the Member States. The ‘qualifying majority’ rule for Council decisions requires approval by a minimum of 55 per cent of Member states, which together represent at least 65 per cent of the EU population. It has been calculated that the UK’s withdrawal could increase substantially the relative power of the large Member States (Germany, France, Italy, Spain and Poland, which often have protectionist instincts) and diminish the relative power of other Member States (the Netherlands, Sweden, Denmark, Finland and Estonia, which tend to be strong supporters of freer trade) (Kirsch 2016). If these estimates are correct, pushing through an FTA in the Council may become more difficult than in the past, unless the large Member states recast their trade-related narratives, in 41 Potential Benefits of an Australia-EU Free Trade Agreement realisation of the need to take initiatives to cope with the collapse of traditional US trade policy. The EU FTA with Australia and the EU trade strategy A crowded EU FTA agenda, new dynamics in the Council’s narratives and votes, FTA negotiating ‘fatigue’ in some EU quarters: all these elements make it essential to assess the economic importance to the EU of the FTA with Australia. During recent years, economic motives for negotiating FTAs have become increasingly important in the EU debate. This trend reflects a higher EU demand for FTAs that can boost flagging growth in several Member States. This chapter examines the following two questions (the latter often neglected): 1. Which are the best FTAs from the EU perspective; that is, which FTAs provide the largest economic boost to EU growth? 2. How will the gains expected from an FTA be spread over time? This section relies on the following proposition: if one sets aside the level of trade barriers between negotiating countries—a point examined later in the chapter—the intrinsic capacity of the EU’s trading partners to boost EU growth depends on three main factors: 1. the economic size of the EU27’s FTA partner 2. the ‘regulatory quality’ of the EU27’s FTA trading partner 3. the ‘hub quality’ of the EU27’s FTA partner. First, the economic size of the EU27 partner—a criterion initially stressed by John Stuart Mill—is vital. The smaller the FTA partner, the less likely are wide and large pressures for changes in the relative prices (terms of trade) of the huge EU27 economy; hence, the lower welfare gains for the EU27. The second factor is the ‘regulatory quality’ of the trading partner.3 Modern economies rely heavily on regulations: norms on products and production processes, legal provisions for shaping efficient services markets and regulations related to the sustainable dimension of the various components of the agreement. Signing a trade agreement is of little benefit if the signatory government does not adopt the new regulations which allow domestic markets to respond as efficiently as possible to the changes generated by the FTA in question. In such a context, ‘regulatory quality’ has several dimensions: the intrinsic quality of a regulation; the consistency of the regulation with the country’s other regulations; and last but not least, the quality of the enforcement of the regulation (Australian Government 2007, Jacobzone et al. 2007). Then it can be argued that the higher the regulatory 3 Refer to chapter 9 of this volume. 42 Potential Benefits of an Australia-EU Free Trade Agreement quality of the EU’s FTA partner, the stronger the EU’s motives for improving its own regulations—hence boosting the efficiency of EU economy. As improving regulations is not an easy matter, lively regulatory ‘emulation’ with an FTA partner equipped with good regulations and skilled regulators can be a substantial source of welfare gain. These positive aspects of an FTA are still too often mentioned en passant, whereas they are likely to be the most important welfare-enhancing forces from a dynamic and long-term perspective. This point is well illustrated by the EU itself, as the various EU Member States have differing capacities to benefit from the same Single Market directives and regulations. These dissimilarities are related to variations in regulatory quality, despite decades of ‘economic integration’. The third factor to be considered is the ‘hub quality’ of the EU’s FTA partner. The more the FTAs of an EU partner involve countries with which the EU itself does not have an FTA, the more the EU trading partner indirectly offers new opportunities to EU firms. In particular, EU firms can invest in an EU FTA partner, and from this ‘hub’ they can enjoy better market access to the other countries involved. For example, the FTA between Korea and the People's Republic of China (China) could induce EU firms to invest more in Korea; hence, they can export their ‘made in Korea’ goods to China, while the negotiations for a direct China-EU FTA are still in their infancy. The various combinations of these three factors have very different results depending on the time dimension. The size criterion is likely to have a quick impact if the cuts in tariffs and non-tariff barriers happen very quickly—almost an immediate once-for-all economic shock. By contrast, the regulatory quality impact is likely to consist of a succession of regulatory improvements spread over many years: the years necessary to realise the better quality of the partner’s regulations; those needed to redesign one’s own better regulations; and last but not least, those needed to enforce these regulations adequately and efficiently.4 Finally, the ‘hub quality’ has an impact in the short and long run, depending on the country involved, its relative size, the efficiency of its regulatory environment, and whether these features are present in its FTA partners. In summary, an FTA with a large country that possesses poor regulatory quality is likely to have a strong impact on the EU economy in the short run, followed by no notable long-term positive effects associated with regulatory quality—a risky combination from a political perspective. By contrast, an FTA with a smaller country benefiting from high regulatory quality is likely to have a more limited impact on the EU economy 4 Refer to chapter 9 of this volume. 43 Potential Benefits of an Australia-EU Free Trade Agreement in the short run, but an increasingly strong impact in the long run, which may be easier to sell politically because of its progressivity over time. Table 3.2 provides some information on these three criteria. Columns 1 to 3 show the size of the partner country’s gross domestic product (GDP) as a percentage of the size of the EU28 and EU27 (EU minus the UK) for 2015 (columns 1 and 3) and for 2030 (column 2) based on the forecast GDP of the main global economies in 2030 (Buiter & Rahbari 2011). As it is very difficult to obtain a good sense of ‘regulatory quality’, Table 3.2 uses two indicators: the World Bank’s Ease of Doing Business Index (column 4) and the World Economic Forum’s Global Competitiveness Index (column 5). That these regulatory quality indicators are based on very different methodologies and information delivers a more nuanced sense of the situation. Column 6 presents the hub quality simply by listing the other main FTAs of the EU’s partners. Table 3.2 includes the UK. However, it is clear that the UK-EU trade deal is likely to be radically different from the other FTAs mentioned in the table; it will not be an exercise in liberalisation, but, at best, an effort to limit the increase in trade barriers between the UK and the EU, hence to minimise the losses of consumer welfare in both partners. In other words, the prospective UK-EU trade deal provides an incentive to negotiate other FTAs which can ‘compensate’ these losses. Table 3.2 provides a clear direction for prioritisation, and hence a rational answer to the emerging FTA ‘fatigue’ based on two main lessons. First, Block C1 lists the countries which are the most attractive when the three criteria are combined. In the current context of high volatility in US trade policy (following the meeting between Presidents Trump and Juncker in July 2018), the US has been kept in this Block, despite the fact that negotiations were ‘stopped’ at the end of 2016 (European Commission 2018). The FTA with the US looks the most attractive—large relative size, good regulatory quality and strong hub quality if the US joins the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). However, it is an option which seems out of question for at least the next four years. Then come the trio of Australia, NZ and Chinese Taipei.5 This trio has the capacity to compensate to some extent Brexit’s negative consequences. Together, these countries have a global size almost equivalent to the UK, very similar ‘regulatory quality’ and a much better ‘hub quality’. Interestingly, regarding the regulatory aspect, Australia has a rare and often untold connection with the EU principles: the efforts to improve Australian 5 The size effect is even stronger if activities of firms from Chinese Taipei in China are taken into account. 44 Potential Benefits of an Australia-EU Free Trade Agreement Table 3.2: Prioritising FTA negotiations: the EU27 choices. Sources: [a] World Bank nominal GDP in 2015 with EU28=100; [b] estimates of GDP in 2030 (Buiter & Rahbari, 2011); [c] World Bank nominal GDP in 2015 with EU27=100; [d] Ease of Doing Business Index (World Bank, 2016 [2012 in parenthesis]). The higher the country’s rank, the poorer its regulatory performance; For the EU, only the ranks for the lowest (best regulated) and highest (worst regulated) Member States are reported (no information on Malta); [e] overall index, Global Competitiveness Index (World Economic Forum, 2015 [2012n parenthesis]). The higher the country’s rank, the poorer its regulatory performance. For the EU, only the ranks for the lowest (best regulated) and highest (worst regulated) Member States are reported (no information on Malta); [f] only the major FTA partners are mentioned; [g] estimates of GDP generated by firms from Chinese Taipei in China and Chinese Taipei. Authors’ calculations. 45 Potential Benefits of an Australia-EU Free Trade Agreement regulatory quality have been based on the famous case law of the ECJ—the Cassis de Dijon ruling (Messerlin 2011)—which has been particularly instrumental in creating the Australian ‘single market’ and then the Australia-NZ Closer Economic Relations Trade Agreement (Scollay et al. 2010). Finally, Australia exhibits an attractive ‘hub quality’ since it has FTAs with many countries in the Asia Pacific region, countries with which the EU has not yet achieved agreements. This point is examined in more detail in the next section. In summary, all these features suggest that the EU should ‘prioritise’ its negotiations with Australia, the largest and least problematic (from a political point of view) of this trio. The second lesson from Table 3.2 is that if there is a need to take a ‘pause’, it should involve FTAs with the countries of Block D. All of these ‘D’ countries are characterised by limited regulatory quality. This implies that negotiating today with these countries will not deliver the long-term benefits generated by enhanced regulatory cooperation—except if these countries improve their regulations quickly—an unlikely proposition. Moreover, the size impact is limited for all these countries, except for China (and for Brazil and India if these last two countries adopt a clear stance on trade). Table 3.2 also shows the interesting case of China. On the one hand, China’s huge relative size enables an expectation of a strong impact on the EU27 economies in the short run, a benefit that is likely to raise political problems which could be solved by appropriate adjustment policies—though these policies are difficult to design and even harder to ‘sell’ to public opinion. On the other hand, China’s regulatory quality is low, but improving significantly. These two features suggest that any adoption by the EU of a strict ‘pause’ option with China would be a mistake. Rather, the EU should adopt a trade policy of improving its trade relations with China by ‘petits pas’ (small steps), that is a sequence of trade deals, each of them giving birth to a series of iterative FTA texts based on a realistic assessment of the possible changes in China’s ‘regulatory quality’, while also allowing the necessary progressivity for coping with the Chinese economy’s rapid growth. The Australia-EU FTA: how challenging are the bilateral negotiations? This section focuses on the Australia-EU FTA bilateral negotiations. The interactions between these bilateral negotiations and the negotiations the EU has, or may be having with other countries in the Asia Pacific region, are addressed in the concluding section.6 As other chapters of this volume examine specific aspects covering the bilateral Australia-EU negotiations, this section focuses mainly on an 6 Also see chapter 4, which focuses on Australia-UK bilateral negotiations. 46 Potential Benefits of an Australia-EU Free Trade Agreement important horizontal feature that may influence them: the UK is by far Australia’s most important EU28 trading partner. This point raises first a question of substance and second a question about the negotiating process: 1. Is the Australia-EU FTA less attractive for the EU27 than it was for the EU28? 2. How can Australia, the EU and the UK interact during the negotiations, now that the EU and the UK will negotiate separately? Is the Australia-EU FTA of more commercial interest for the EU27 than for the EU28? Yes What follows gives a sense of how importantly the UK figures in EU trade with Australia by identifying the three main types of international transactions: trade in goods, trade in services and investment. Table 3.3 shows that, in the case of trade in goods, the UK’s share of exports to Australia is closely in line with its weight in total EU28 GDP, and that indeed Germany may have larger offensive interests in Australia than does the UK. The fact that the UK’s share of Australian imports is much higher than its share in EU28 GDP is unlikely to change the EU interest in the Australia-EU FTA, whereas it should boost Australia’s interest in gaining better market access to the EU. However, the situation is very different in relation to services and investment. In services, the UK represents more than a third of EU28 exports of services to Australia and almost half of EU28 imports of services from Australia. This is respectively twice and four times more than Germany, the second largest services trading partner for Australia among the EU28. The differences in regard to investment are even larger: the UK represents more than half of EU28 investments in Australia and two-thirds of Australia’s investment in the EU28. It is beyond the scope of this chapter to examine the causes of such differences. They probably have very little to do with geographical distance—the ‘tyranny of geography’ faced by Australia is roughly the same for the UK or any other EU Member State—and a lot to do with the ‘tyranny of history’, which includes cultural as well as political factors. Australia’s closer modern commercial relations with the UK date at least from the 1931 ‘Imperial preference trading system’.7 Moreover, both services and investment flows are much more sensitive to regulations than goods flows, and their regulations are evolving more slowly and incrementally. All these are factors contributing to maintaining a higher share for the UK compared to other EU Member States. These differences, as well as cultural factors, including language, are likely to explain the larger Australia-UK trade in 7 For further information on the Imperial preference trading system refer to chapter 1. 47 Potential Benefits of an Australia-EU Free Trade Agreement Table 3.3: The UK and EU28/27 economic relations with Australia. Sources: DFAT (2017b), authors’ calculations. services compared to the EU27, and the even larger Australia—UK situation in the decades-long accumulation of capital flows over decades. This situation does not mean, however, that the Australia-EU FTA is less important for the EU27 than it was for the EU28. As argued above, the value of a trade deal depends on two key factors: the level of protection afforded to each party with respect to the other party’s exports, and the intrinsic capacity of each to boost the other’s growth. Focusing first on the Australian protection imposed on EU exports, this does not change according to whether it relates to EU27 or EU28. The only difference is that the structural composition of the EU27 basket of goods and services facing Australian barriers is not the same as the structural composition of the EU28 goods and services. This implies that the structure of market access requests and offers, in terms of goods and services, is likely to differ between EU27 and EU28. Turning to EU protection against Australian exports, the same conclusion prevails for goods. The UK and EU27 have the same tariff schedule and regulatory framework as the EU single market in goods with which negotiators will deal. The EU regulatory ‘red tape’ in industrial goods, which was much criticised during the referendum campaign for Brexit in the UK, is likely to remain in place in the UK because most of the norms on products and production processes have been decided by larger bodies than the EU, for instance by the United Nations Economic Commission for Europe (UNECE). In fact, the similarity in norms has been reinforced by the Japan-EU FTA deal in some sectors (such as cars) with a convergence of the UNECE and Japanese norms. 48 Potential Benefits of an Australia-EU Free Trade Agreement The same broad observation is true for agriculture. UK farmers enjoy the same subsidy-based protection as continental farmers. However, and somewhat ironically, UK agricultural protection is among the highest in the EU because UK farm production is more concentrated in EU-subsidised products than the farm production of most other Member States. By contrast, since the Single Market in services is highly incomplete (Messerlin 2015), one cannot exclude the likelihood that services and investment barriers imposed by the UK and the EU27 against Australian exports may differ notably. In such cases, these barriers are likely to be lower in the UK than in the EU27, if only because of the above-mentioned ‘tyranny of history’. If this is the case, these differences will boost Australia’s interests in an Australia-EU27 FTA, again without changing the EU27’s interest (compared to the EU28’s). This is because the EU27 is facing the same Australian barriers as the EU28, meaning that the level of interest for an Australia-EU FTA remains the same for the EU27 and the EU28. Again, what could change—and probably will—is the structural nature of offers and requests, and hence final concessions, on goods and on services. In addition to the existing level of protection, the other key factor determining the value of a trade deal is the capacity of Australia to boost the EU’s growth. As argued above, this capacity does not depend on the level of current Australia-EU trade, but on Australia’s economic size and on Australian ‘regulatory and hub qualities’ for the EU27, variables which are largely exogenous to bilateral trade flows. The ‘shrinking’ of the EU28 to EU27 should increase the EU27 interest in an FTA with Australia, as it mechanically amplifies Australia’s relative size compared to the EU, and its potential impact on EU27 growth. In addition, Australia’s ‘regulatory quality’ is becoming more attractive for the EU27. This is because, as the UK was one of the best EU28 regulated countries, the ‘regulatory quality’ in the EU27 overall is lower than its equivalent for the EU28. The focus of the Australia-EU FTA: services and investment Table 3.3 deserves a further remark. The data here could be interpreted as meaning that the EU27 trade negotiators should focus on trade in goods, since goods constitute the bulk of today’s Australia-EU27 trade relations. Such a narrow focus would be a major mistake. From an economic perspective, such an approach would ignore increasing evidence of the ‘servicification’ of world trade: services are an essential ingredient for more efficient trade in both goods and services (Kommerskollegium 2016). 49 Potential Benefits of an Australia-EU Free Trade Agreement From a purely negotiating perspective, focusing on trade in goods is a sure recipe for difficult negotiations in the Australia-EU FTA for the same reason as for any FTA discussions on goods among two relatively open OECD countries. This is because the talks will inevitably be dominated by the limited list of goods that have remained highly protected by tariffs and non-tariff barriers even after 50 years of trade liberalisation—and have hence built huge capacities for lobbying against market opening throughout all this time. Trade negotiators tend to address the case of goods which remain highly protected after decades by finessing inappropriate instruments for opening markets, for instance substituting tariffs with tariff-rate quotas. Such decisions often lead to outcomes worse than the situation prevailing before the negotiations, especially if the quotas adopted are small and if the non-quota tariffs remain high, as is generally the case.8 The additional trade generated by such decisions is then minimal, hence insufficient to impact on domestic prices in the importing partner or to generate welfare gains. On the contrary, such outcomes can generate large rents which ensure resources to those opposed to the future opening up of markets. It is thus critically important to avoid the trap of ‘goods only’ negotiations and to have a wider negotiating agenda covering services and investment. The UK and the EU 27’s offensive interests: overlapping or not? Since April 2017, the press reported statements from European Commission officials that the EU27 would like to exclude the UK from EU internal discussions of ‘sensitive information’ on proposed EU27 trade negotiations (Boffey 2017; Motta 2017). Some of these statements were made with specific reference to the Australia-EU27 negotiations. To be interpreted correctly, such concerns need to be understood in the legal context of the Brexit negotiating procedures. As long as the UK remains a full EU member—that is until (in principle) the first quarter of 2019—it has access to all EU documents. At the same time, the UK could undertake ‘preparatory work’ with third countries, although it has no right to conclude its own FTAs until it has officially left the EU. These byzantine procedures have fuelled the fear of ‘rivalry’ in negotiating strategies and tactics between the UK and the EU27 block. It first needs to be stressed that trade negotiation rivalries are common among EU Member States. Simply, they are subjected to well-oiled EU mechanisms. Potential rivalry between the interests of one EU Member State and those of other EU Member States in an FTA negotiation is generally resolved by intra-EU negotiations that deliver a compromise on the competing trade-related 8 For further information on tariffs and tariff quotas, refer to chapter 10 of this volume. 50 Potential Benefits of an Australia-EU Free Trade Agreement offers and requests. When rivalry cannot be resolved by an intra-EU trade-based compromise, it can be solved by taking into account issues unrelated to the trade negotiations at stake. This could involve, for instance, a change in the drafting of a Directive in a non-trade domain or financial compensations for the affected EU Member State. This is best illustrated by the additional farm subsidies that the EU gave to France as an ‘incentive’ for that country’s agreement on the 1995 WTO Uruguay Round outcome, only a few days before its conclusion. As a result, the only new aspect of the rivalry between the UK and other Member States is that it will not in future be solved by such intra-EU procedures. Compromises between the UK and the EU27 or between the UK and an individual EU27 Member State could therefore be more difficult to reach. The possibilities of unresolved rivalry may become more common because the UK and the EU27 have to re-examine their detailed lists of requests and offers to be tabled with Australia, compared to the unique list prepared under the EU28 aegis. And, in the case of the EU27, this re-examination implies new compromises among the EU27 Member States, with possible spillover to future Australia-UK FTA negotiations. This context makes it interesting to have a sense of the extent to which the EU27 and the UK’s offensive interests might overlap and whether these two entities export the same goods or services. It would seem a reasonable proposition to assume that the more overlapping (similar) the offensive interests of the UK and the EU27 (and the higher the likelihood of Australian discriminatory treatment of the UK and the EU), the greater the risk of rivalry between UK and EU27 negotiators. In relation to goods, Table 3.4 lists the four major exports to Australia from the UK and from each of Australia’s main EU27 partners. The data here suggest possible overlapping offensive interests in three major industries: cars, medicaments and pharmaceutical products. The European Commission Inception Impact Assessment (European Commission 2016) mentions tariffs on cars explicitly as an offensive interest of the EU28. That said, tariff-based discriminatory treatment between the UK and EU27 is unlikely, and Australia has recently eliminated its regulations on car assembly in Australia. By contrast, the fact that protection in the three other sectors often relies on complex regulations creates easy opportunities for de jure or de facto discriminatory treatment, hence for rivalry. However, this risk deserves a caveat. All these sectors involve the same large multinationals operating in the UK and in the EU27, opening the possibility for the firms in question to reshuffle their activities between their UK and continental subsidiaries in order to eliminate the negative consequences of discrimination. 51 Potential Benefits of an Australia-EU Free Trade Agreement Table 3.4: Overlapping offensive interests: the case of goods. Sources: DFAT (2017b), authors’ calculations. Table 3.5: Overlapping offensive interests: the case of services. Sources: DFAT (2017b), authors’ calculations. Table 3.5 provides the same information for services as Table 3.4 for goods. Overlapping potential interests seem fewer and they occur in sub-sectors where the size of the domestic market is usually much larger than the related trade flows. Competing offensive interests may occur in professional services and in business-related travel services, both services where discriminatory measures for opening markets could be taken; for instance, imposing different quotas on the movement of people from the UK or EU27 citizens, or exploiting existing 52 Potential Benefits of an Australia-EU Free Trade Agreement ‘similarities’ between Australian and UK regulations. By contrast, overlapping offensive interests in personal travel do not seem prone to such discriminatory measures for opening domestic markets. The Inception Impact Assessment suggests other key offensive interests for the EU28: cheese, wine and spirits, geographical indications (GIs), investment and public procurement. The sectors where risks of rivalry are most likely to occur are spirits, GIs and public procurement. For all of these, the risk originates in the liberalisation of these domains being based on technical definitions (spirits) or lists (of products for GIs; of entities for government procurement)—all instruments that can easily lead to discriminatory treatment and hence fuel rivalry. However, there is an internal reason for Australia not to move too far in this direction. Australia has a strong interest in using its negotiations with the UK and the EU27 as a way to simplify and to improve the complex existing set of FTAs (Armstrong et al. 2015; Productivity Commission 2010). Concluding remarks: The Australia-EU FTA’s contribution to the EU27 trade strategy in the Asia Pacific region The European Commission’s ‘Trade for All’ White Paper made a clear reference to Australia’s role in the EU trade strategy with respect to the Asia Pacific region when it states that ‘stronger economic ties with these countries [Australia and NZ] will also provide a solid platform for deeper integration with wider Asia Pacific value chains. Strengthening these relationships should be a priority’ (European Commission 2015 p. 31). The White Paper also mentioned the necessity to ‘work towards restarting negotiations for an ambitious region-to-region FTA with ASEAN building on bilateral agreements between the EU and ASEAN members (European Commission 2015 p. 32). Currently, the EU has only one regional forum with Asian countries. The Asia-Europe Meeting (ASEM) was established in 1996, responding to the then six-year old and very successful APEC. After overcoming Malaysia’s opposition, Australia also became an ASEM member in 2010. It is important to recognise that ASEM did not attract much attention in Europe, to the great bewilderment and frustration of its Asian members. It has mostly been seen by the EU as a forum for discussions, covering the same wide range of topics as the EU bilateral partnership frameworks; namely, the environment, arts and culture, human rights, governance, public health and education. It has not focused on trade and economic issues, which were the preferred topics for most Asian members. ASEM’s role in trade is also fundamentally hindered by a membership that is too wide, as it includes Russia, India, Pakistan and Bangladesh—all countries with little inclination, if any, for deep trade integration. 53 Potential Benefits of an Australia-EU Free Trade Agreement Table 3.6. Plurilateral trade agreements including Asia Pacific economies. Source: World Bank data. Table 3.6 presents a brief overview of the membership of the main plurilateral agreements existing or under discussion in the Asia Pacific region. On the one hand these include APEC and the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), both initially strongly backed by the US; on the other hand, In contrast, ASEAN, ASEAN+3 (China, Japan, and Korea) and the Regional Comprehensive Economic Partnership (RCEP) which exclude the US. Currently, only APEC and ASEAN have delivered tangible results. However, APEC has progressively lost its pre-eminence since 2008, when the US decided to embark on 54 Potential Benefits of an Australia-EU Free Trade Agreement deeper trade liberalisation and stricter trade disciplines by taking lead of the original TPP negotiations. Indeed, until January 2017, the TPP was widely perceived as a potential natural heir of APEC in economic terms—though radically different from it in geopolitical terms, given its exclusion of China. The executive order, signed by President Trump in late January 2017, to withdraw the US from the original TPP has changed the situation drastically. After considering the various options available to implement the agreement without US participation (Elms 2017), the remaining eleven TPP members have since concluded the CPTPP. Meanwhile, this change of course has generated a renewed interest in ASEAN and in its two extensions—ASEAN+3 and RCEP—as potential anchors of further Asia Pacific economic integration. Such a complicated and unstable context requires initiatives for re-establishing direction in trade matters. The EU regional approach to East Asia could rely on two main options that are not mutually exclusive. A first option would be to develop ASEM’s capacity to deal with trade issues. The 6th ASEM Economic Ministers Meeting, held under Korean chairmanship in Seoul in September 2017, made some progress towards a more assertive support for the WTO multilateral trading system, and delivered the Seoul Initiative on the 4th Industrial Revolution, which calls for greater regulatory regulation. Although the loose structure of ASEM may prevent more decisive actions, one idea is to create a working group for an ‘EU-East Asia Partnership’, limited to the EU, Australia, NZ and ASEAN+3 members. Its role would be to define a substantial trade and investment agenda, leading to well-defined and measurable actions. The second option would be for the EU to ‘join’ RCEP. Of course, ‘joining’ RCEP need not mean that the EU would become a member of RCEP. Rather, the idea would be for the EU to focus on key RCEP provisions (existing or under negotiation) and to work on their ‘compatibility’ with the corresponding provisions of the EU FTAs in the region. This would make the EU a powerful echo chamber for RCEP’s progress in trade liberalisation and discipline setting. One condition for the success of such an initiative would be that the EU make clear that ‘compatibility’ does not mean harmonisation with EU FTA provisions, but rather an exercise in ‘mutual equivalence’.9 This would require a screening of the RCEP and EU provisions to choose those of genuine common interest for the EU and the Asia Pacific economies, and an assessment as to whether these provisions could be considered as ‘different but equivalent.’ Candidate topics for such an exercise are numerous: the many facets of the ‘digital agenda’, trade facilitation, rules of origin, FDI, logistics and the huge 9 For further information on mutual equivalence, refer to chapter 9 of this volume. 55 Potential Benefits of an Australia-EU Free Trade Agreement domain of services (Findlay 2015). Of course, the EU could envisage a similar approach with the CPTPP countries, especially if the UK seeks to join. However, this move may be more difficult than in the RCEP case because CPTPP countries may fear that accepting such an EU initiative might make future relations with the US more difficult. These options deserve two final remarks. First, the negotiations for an Australia-EU FTA offer an excellent opportunity for the EU to benefit from the experience that Australia has accumulated when negotiating and implementing the ASEAN-Australia-NZ FTA (AANZFTA). Australia and the EU might envisage the possibility of ‘importing’ some provisions of the AANZFTA, such as the capacity building clause, into their prospective FTAs with ASEAN Members and into a possible future ASEAN-EU FTA. Second, and probably even more importantly, Australia and the EU should make their utmost efforts to design the Australia-EU FTA while taking into account the existing and successful provisions of the Korea-EU FTA (KOREU) and of the Korea-Australia FTA (KAFTA). These efforts could range from ‘standardising’ KOREU, KAFTA and Australia-EU texts (when they are sufficiently close to examining the existing texts) with trilateral scrutiny based on a mutual equivalence approach. References Armstrong, S., Reinhardt, S. & Westland, T. (2015). Are FTAs making Swiss cheese of Australia’s foreign investment regime? International Journal of Public Policy, 13(3/4/5), 290-303. Australian Government. (2007). Best practice regulation handbook. Canberra: Australian Government. Boffey, D. (2017, 29 March). First EU response to Article 50 takes a tough line on Article 50. Guardian. 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Retrieved from http://widgets.weforum.org/global-competitiveness-report-2015/ 59 Share this book **** *� *,..._* ** .. * ** The high-quality paperback edition of this book is available for purchase from www.adelaide.edu. au/press Suggested citation: Drake-Brockman, J and Messerlin, P (eds) (2018). Potential Benefits ofan Australia-EU Free Trade Agreement: Key Issues and Options. Adelaide: University of Adelaide Press. DOI: http://dx.doi.org/10.20851/eu-trade License: CC-BY-NC-ND 4.0