August 31, 2021

Abbott in Delhi: On an FTA ‘fast track’?

FTA announcements abound. Two weeks ago there was some buzz around an announcement that India would ‘fast track’ trade agreements with the UAE, UK, Australia, EU and Canada. The Secretary to India’s Minister of Trade stated that the UAE would likely be the first completed. Then a week later Indian Trade Minister Goyal stated that “Australia is first on the list, UK, then the UAE, and if the UAE happens, the pact with GCC [Gulf Cooperation Council] will also be expedited. We have already started the dialogue with the UAE and one more country from the Middle East.”

This statement was made following another announcement that a deal with the US – first floated several years ago – was off the table for now. 

Both of these announcements have come off the back of a visit to India by former Prime Minister Tony Abbott, and the declaration that an ‘early harvest’ agreement is being pursued.

Is Australia on the ‘fast track’ to an FTA with India? Less than two years ago India walked away from the RCEP negotiations at the last minute after eight years of negotiations. The review of the regional agreement between India and ASEAN has hit serious stumbling blocks. Even when agreements are in force, India’s customs authorities don’t always make it easy for exporters to utilise trade agreements.

A lot has changed in the last two years. Australia and India have cemented a Strategic Economic Partnership, and there appears be new impetus from India to reengage in the region. But an FTA is likely still some way off. India is yet to demonstrate it can commit to market opening beyond that set out in its current agreements- what was struck in RCEP before talks fell away would be a start.

Realistic expectations. In our view, setting expectations for Australian constituents and a dose of realism will be key to a path forward. For example, India is relatively open on log exports, but less so on sawn timber and other timber products. This is not because its log supply is poor, but because its timber processors and manufacturers seek protection.

There may be greater gains in pursuing technical market access and reducing non-tariff barriers than in seeking tariff reductions. Partial and targeted outcomes may be more prospective. As we’ve pointed out previously, tariff reductions always look great on paper, but whether they actually promote trade is another matter.

Will EU environmental measures boost trade?

Significant trade impacts. The European Commission has undertaken modelling on two of its proposed ‘Green Deal’ environmental regulations and their impact on trade, specifically the ‘Farm to Fork’ strategy and its biodiversity policies.

The modelling reveals that the trade impacts are reasonably significant. They note that the measures – through reducing domestic supply – will result in greater net imports of cereals, oilseeds, meat and poultry. The only positive trade change for the EU is an increase in net dairy products, primarily whey.

The report predicts that sheep meat quotas into Europe will largely become overfilled with exports from Australia, New Zealand and to a lesser extent Mercosur countries. There is a similar pattern predicted in beef trade. More broadly the report projects that EU producers’ competitiveness will be eroded further.

No going back? This is significant because the EU is highly unlikely to unwind any of these measures. They are generally politically popular. EU farm lobbies have already put forward arguments against introducing the measures. The response from Brussels is more likely to be either a different form of financial support, or an attempt to level the playing field by indirectly applying these regulations to imports in some way.

This is precisely what has taken place with the EU Emissions Trading System, which has reduced competitiveness for a number of European sectors, and the subsequent introduction of the Carbon Border Adjustment Mechanism to remedy this loss of competitiveness.

Australian and global exporters to the EU – particularly those involved in trade negotiations – should be well aware of these ongoing risks.

Mixed Signals: the US, Asia and APEC

Less trade, more geopolitics. US Vice President Kamala Harris’ Asia sojourn has been less than the triumphant visit that many had hoped for. The visit has taken place on the back of the final withdrawal of the US from Afghanistan, which has given many economies second thoughts on US commitment beyond its own borders.

Harris’ choice of destinations – Vietnam and Singapore – has also been viewed by some commentators as a clear snub to the region’s relative powerhouses, Indonesia and Thailand. Some have even gone so far as to argue that this may actually undermine ASEAN more broadly – resulting in an own goal for the US.

The choices by the administration are militarily strategic; they have much less to do with economics and trade. The administration has made clear that trade is not a high priority.

US indifference? Does this mean there is US indifference to trade and investment in the region? Or is it a small stepping stone? The announcement by Harris that the US is offering to host APEC in 2023 is welcomed in this regard. While the US has no clear ambition to open trade negotiations with any Asian economies, or join the CPTPP any time soon, it is at least a step toward engagement.
But a US APEC year would be two years away. And as we have seen, a lot can happen in a short time. 

Australia’s bind on trade, diversification and travel

Going nowhere. Australia businesses are acutely aware of curbs on both departures from Australia as well as arrivals within the region. The tighter caps on arrivals that are in place for several more weeks were exacerbated by Singapore’s border closure, which meant that most routes into Southeast Asia were closed.

However, this has been followed by an announcement by Germany and Singapore that the two countries will host a vaccination corridor – well ahead of planned a travel bubble between Australia and Singapore.

Trade diversification needs mobility. The correlations between trade and travel – for both business and leisure – have been well studied.
Like every other part of the world, Australia’s arrivals and departures have been greatly impacted by pandemic-related travel restrictions.

In addition to attempting to re-start exports, Australia is under economic pressure to diversify its export markets. This is difficult under the best of circumstances, but even tougher under current conditions.

Although bulk commodities can generally be sold on price and a very limited set of variables, selling more elaborate services and goods gets tougher without meeting face to face, or maintaining relationships with suppliers and customers – and it’s currently impossible to have those meetings.

The corridor narrows for Australia. The opening up of international movement is generally taking place between the US, Mexico and other Central American countries, some of which are operating above 2019 capacity. Travel between the UAE and India, as well as Spain and other European economies has rebounded from recent falls. Although much of this is regional, travel between Australia and its biggest travel pairings – New Zealand and Southeast Asia – are still heavily impacted.

None of this bodes well for an export strategy, diversified or otherwise. It’s worth noting that despite some rosy headlines around Australian exports, many have fallen to multi-year lows. All eastern seaboard states have had falls in total exports. Western Australia’s exports – and Australia’s more broadly – are being propped up by resources.

All economies are acutely aware of this, and many are feeling the pressure to diversify away from China. The risk for Australia is that other businesses and economies will beat Australia to it.

August 20, 2020

Article Three Director Kristen Bondietti has been featured in ANZ’s Bluenotes, looking at the potential of Australia’s financial services exports.

Australia’s exports of cross border financial services are small as a proportion of services exports – accounting for just 5.7 per cent in 2018-19 – and also compared with other leading financial centres.

In Singapore, financial services account for over 17 per cent of services exports, more than 22 per cent in Hong Kong and almost 25 per cent in the UK.

“Australia can leverage the post-COVID environment to expand its financial services exports to the region.”

Australia’s exports of wealth management services are also low, particularly given the size of the Australian funds management industry. Funds managed by Australian investment managers on behalf of overseas investors account for just 3.6 per cent of the total $A3.7 trillion funds under management in Australia.

Why is this so?

Australia’s exports of services (on a cross border basis) are dominated by travel and transport (accounting for over 72 per cent in 2018-19, with almost 39 per cent education-related). The impact of the superannuation guarantee creates a large pool of domestic assets for Australian fund managers to invest. However, this alone does not explain Australia’s relatively low level of exports given the deep expertise of the domestic industry and the large volume of funds under management.

Australia’s domestic policy settings are not as competitive as other economies in the region, for example Singapore. Taxes are higher and arrangements more complex, deterring both foreign productive investment that improves the competitiveness of the domestic sector and foreign capital that can be managed by Australian financial services firms. The recommendations of the 2009 Johnson Review to address these issues are yet to be fully implemented.

Regulatory barriers to trade in North and South-East Asia still persist. While Australia’s Free Trade Agreements (FTAs) have helped create some opportunities to improve access, not all of the potential trade across Asian markets is accessible to Australian businesses.

New opportunities

Australia can leverage the post-COVID environment to expand its financial services exports to the region.

As pointed out by financial services leaders and politicians alike, there is scope to capitalise on the recent political upheaval in Hong Kong to attract greater financial talent, technology and investment to Australia and strengthen its position as a regional finance centre.

With borders indefinitely closed due to COVID-19, education and tourism exports will continue to be severely impacted. Increasing reliance on digital forms of cross border exchange, intensified by the pandemic, creates opportunities for financial services trade to grow, thus further diversifying Australia’s export base.

Continued economic growth in the region is expected in the longer term. PWC forecasts assets under management in the Asia Pacific region to almost double from $US15.1 trillion in 2017 to $US29.6 trillion in 2025.

Australia’s financial services sector can expand by accessing potentially large pools of capital in key Asian markets and increasing cross border offerings. With the exception of China, Australia’s exports of financial services to Asia are tiny –  less than 1 per cent are to Japan and to Korea and less than 6 per cent to ASEAN.

The current policy environment is also more conducive to reform than in previous years. Open and competitive policy settings will be important for economic recovery. The benefit of a strong financial services sector has become apparent to policy makers amid the pandemic.

Open and competitive markets

So how can Australia act to realise export opportunities? A targeted agenda is needed to support more open and competitive policy settings for financial services at home and abroad. This should be done now to capitalise on opportunities such as the uncertain future of Hong Kong as a regional financial centre.

The agenda can build on the government’s 2018 Services Export Action Plan. It should:

1.       Better assess the benefits. The benefits of expanded trade are broad – more exports help to grow the Australian financial services industry, generate jobs and support the economy. Financial services also support trade in other goods and services as ‘embodied’ inputs (for example, banking, insurance, accountancy and advice are essential for the creation and trade of mining, agricultural and manufacturing goods and other professional services). However, the magnitude of these benefits is still not yet fully appreciated. The value of exports, both in dollar terms and to the broader economy, is generally understated. Greater clarity of the potential opportunities is needed.

2.       Reduce domestic regulatory and tax complexity. As recommended by industry in the2018 Services Export Action Plan, reforms to institute more open and competitive domestic policy settings need to continue. This includes addressing taxation policy, licensing requirements for exporters and rules on collective investment vehicles to enable Australia to better compete with Singapore as a regional finance centre and allow fund managers to better attract offshore investors. Finance industry leaders have recently affirmed the need for Australia to implement the recommendations of the 2009 Johnson Review to make our market more attractive to overseas investors and improve our global standing.

3.       Address regulatory barriers in key Asian markets. Australia can continue to reduce barriers to trade by building on existing Free Trade Agreements, pursuing bilateral and regional regulatory cooperation arrangements and advancing tax treaties. Efforts should be focused on advancing greater regulatory alignment of financial services, recognition of licencing requirements and improved cross-border data mobility and security. Regional initiatives like the APEC Asia Region Funds Passport should be expanded to more markets and its potential interoperability with EU and ASEAN schemes further explored.

Public perceptions of exports to Asia are still often wedded to the idea of Australia’s primary sectors exporting commodities or niche high-value manufacturing. Australia’s services exports – when they are thought of at all – are generally considered to be tourism and education.

This needs to change if Australia is to take full advantage of the opportunities on its doorstep.

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