Trade and Prosperity | Briefing | August 2021

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.