EU-Australia FTA: in defence or defiance of a failing system?

The EU finds itself at a critical juncture as the last-man standing defending the globalist post-war liberal economic order, abandoned by US leadership.

While the often-dysfunctional bloc is an unlikely flag-bearer given its adeptness implementing long-term protectionist policies, upheavals in the global trade landscape leave it as the most powerful international force still committed to ‘free trade,’ with potential suitors attracted to its single market, including Australia.

Free trade agreements have historically received bipartisan support in Australia, an expected stance for a resource-rich nation desiring diversification of its economic base and export market dependencies. North Asian deals have brought a significant trade upswing in both goods and services, although some remain concerned that the benefits accrue largely to big business with SME’s missing out. Continuing public support for Australia’s future free trade negotiations will likely rest upon their benefits being more readily accessible to larger parts of the economy.

All the world’s a stage, and all the men and women merely players

A (pre-Brexit) market of 512 million, the EU28 was Australia’s largest source of foreign investment in 2017, second largest trading partner and third largest export destination. With a combined GDP of a whopping US$17.3 trillion and two-way trade of $101 billion with Australia, the prima facie case for a free-trade agreement is self-evident.

The post-Brexit EU of nearly 450 million souls across 27 nations, a single market of consumers 18 times the size of Australia’s population, is still an attractive trading prospect given its enormous scale and complexity, notwithstanding the removal of the UK’s financial sector and the liberalising influence of the City in global financial services.

How would Australia, a geographically massive country dwarfed by Europe’s economic might approach a negotiation with the EU, a bloc which comes to the table slowly and by consensus? It is this bloc-negotiating tactic that presents Australia’s negotiators with both a blessing and a curse, as the simplicity of one negotiating mandate is arguably outweighed by that mandate necessarily consisting of its memberships’ lowest common denominator position.

Large multi-national free trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) and the recently concluded Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) are only a partial guide as to what we can expect from the negotiations, with the EU’s interests diluted by their breadth and magnified by their interconnected complexity.

While Australia’s negotiators are experienced and pragmatic, negotiating increasingly complex free trade agreements, the size of the EU market immediately creates a power disparity with Australia, one that has not necessarily served us well in the past, such as the concessions Australia made to the USA during that FTA negotiation.

What’s past is prologue

Prior to the commencement of talks, the EU revealed its long-held protectionist position on agriculture, Australia’s FTA kryptonite, with French President Emmanuel Macron cautioning fellow EU leaders about negotiating with Australia, fearing a “free-trade stampede” would “wipe out” his country’s “struggling” agricultural sector.

The EU’s hypocritical cry of wolf over agriculture is a signal that member states are jockeying to position their individual interests. The bloc’s pursuit of its shibboleths such as Geographic Indicators (GI’s) has become increasingly puritanical, reinforced through negotiation with each previous agreement entered. The risk is that the EU uses access to its large, complex market as a weapon to force Australia to capitulate on its major interests including agriculture.

Australia’s lack of agricultural subsidisation stands in stark contrast to the EU’s market distorting anti-competitive Common Agricultural Policy (CAP), the removal of which is the only way for Australia’s farmers to compete on a level playing field. The days of the cheese mountains and wine lakes may be over, but cheap, subsidised EU products still represent an unfair threat to producers in partner nations. In 2016, the EU exported €131 billion of agri-food products, importing €112 billion, for a trade surplus of €19 billion. Compare this to Australia’s $44.8 billion in production, with about 77 per cent exported. In terms of direct subsidisation, the EU28’s 22 million farmers secured a staggering €408.31 billion or 38 per cent of the 2014-2020 EU budget, gobbling up an unbelievable €160.113 billion (A$250.871 billion) in subsidies in 2018 alone.

The Australian wine industry thinks that it will benefit from lower or eliminated tariffs, a relatively straightforward objective. However, the proliferation of EU non-tariff barriers such as GI’s which may be extended to non-food products, limits Australia’s ability to trade with the bloc. This sentiment is echoed by the Export Council of Australia, which notes that “any name, symbol or other product which ‘evokes’ the protected [EU] product is not permitted even if the true origin of the product is known,” effectively privileging EU producers over Australian.

Australia’s trade unions are also likely to closely scrutinise the deal, with the Australian Council of Trade Unions warning that there remains a “fundamental obligation on employers to support Australian jobs first”. Labour mobility has proved a vexed issue for the EU, with the UK making its views on the EU’s free-movement principle crystal clear.

The lady doth protest too much, methinks

The reality is that the negotiations are unequal. The EU believes it can extract concessions from Australia, particularly as its negotiations with Canada, Mexico and Japan have concluded, and New Zealand flirts with the prospect of its own EU FTA.

Cecilia Malmstrom, the EU’s Trade Commissioner made no bones about what she expects of Australia, warning that it will need to concede on its farmers’ interests on GI’s to secure a deal, potentially preventing Australian companies from making parmesan, brie and feta cheese for example.

Apparently oblivious to the hypocrisy of simultaneously railing against protectionism while pursuing and defending protectionist practices, the Commissioner observed that an agreement with Australia serves a strategic purpose to remove trade barriers at a time when protectionism, led by US President Trump is on the rise.

To thine own self be true

There is a certain irony in the supranational EU Commission forging ahead with Australian talks against the backdrop of waning globalisation, while national forces reassert their authority. With the EU spending nearly six times as much on subsidising its agriculture sector per year than Australia’s entire annual farm production value, Australia’s negotiators would do well to ask themselves at what cost to our farmers an agreement might be reached.

The US recently accused the EU of being a foe on trade, a view immediately and perhaps not entirely fairly dismissed by the mainstream. Perhaps discretion is indeed the better part of valour and through a methodical consensus approach Australia’s negotiators will insist on an outcome which ensures a level playing field, rather than selling agriculture short. If not, for Australia it may be another case of history repeating itself.

Sam Lawrence, Senior Manager – Global Trade and Customs

[email protected]

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the thought or position of Crowe Horwath (Aust) Pty Ltd.