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
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ISBN (paperback) 978-1-925261-59-2
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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.
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59
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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