Trade and Prosperity | Policy Briefing | May 2021

May 30, 2021

UK-Australia FTA scare campaign hits fever pitch

No gold rush. There is high expectation that the conclusion of UK-Australia trade negotiations will be announced at the G7 meeting in mid-June. The Johnson Government will hail this as the ‘first of many’ trade deals struck by the UK following Brexit.

Coverage of the agreement in Australia has been relatively muted. Although the UK appears to be a large trading partner, around 80 per cent of Australia’s exports to the UK are in the form of gold and precious metals. The value of exports of other goods (around USD2 billion annually) puts the UK on par with Thailand and the Philippines. The services trade – around US16 billion annually in both directions – is significantly larger. Investment more so – the UK is Australia’s second largest investment partner after the US.

It’s just not (trade) cricket. Despite this, a scare campaign against the agreement is well underway in the United Kingdom. The big concern among the UK agricultural sector is that Australia will gain tariff- and quota-free access in the agreement, likely after a 15-year phase in period.

Some news reports have cited an Australian beef exporter claiming exports to the UK might increase tenfold. Whether this is the case or not, the UK already imports significant quantities of beef, chiefly from Ireland. Better access for Australia would likely result in Australian exporters taking market share for premium cuts from their Irish counterparts rather than squeezing UK domestic producers out of the bulk market.

The scare campaign appears to be about something bigger. The UK opposition’s much larger concern is that the UK will offer similar market access as it goes forward with other deals. Liberalisation in an FTA? Shock no!

It’s not just tariffs either. In our view, the UK’s anti-trade cohort has some homework to do. Tariffs are a blunt instrument for protecting markets, as the last four years of ‘trade wars’ have shown us. Non-tariff measures are now the most effective way for impeding trade – not news to Australian beef (and timber and seafood) exporters. Until Brexit, the UK had ceded much of its ‘red tape’ authority to Brussels, who mastered the art. But, in a new age of social and environmental trade restrictions (see below), anything is possible.

US China trade tensions are not easing

Washington’s new consensus. There was some expectation that a Biden administration might ease trans-Pacific trade tensions. However, trade wonks are well aware that this is simply not the case. Talks between China’s Ministry of Commerce Vice-Premier Liu He and US Trade Representative (USTR) Katherine Tai seemed to yield precisely nothing. Sure, the table-thumping attitude of the Trump area is gone, but in its place is a new set of measures aimed at China.

One key difference is that the White House now has significant congressional support. Senate Finance Committee Chair Ron Wyden and Senate Majority Leader Chuck Schumer have introduced the “Combating Oppressive and Manipulative Policies that Endanger Trade and Economic Security (COMPETES) Act.” According to the two very powerful Democratic senators, the bill “will level the playing field for American workers, farmers, fishers and families by taking aim at China’s worst practices. The proposal is intended to be part of a Senate-wide effort to assure that the United States is positioned to out-compete China in the economy of the future.”

Labour pains for China. What the proposed legislation aims for is fourfold. It puts forced labour accusations around China front and centre, with new Customs and Border Protection (CBP) enforcement and a special emphasis on the fishing sector; it seeks to broaden USTR’s mandate on digital trade; it increases inspections on counterfeit goods; and it also requires USTR to undertake additional reporting on China.

This is broadly in line with overall US policy direction under Trump, but with the added weight of Congress. The move on seafood imports is relatively new; although some lawmakers have been pursuing illegal, unreported and unregulated (IUU) seafood imports since the Obama era, the US ITC moved in February this year to pursue new policies. It looks like China will be in CBP’s sights, as well as Vietnam, India and to a lesser extent Indonesia.

This approach is already yielding action; late last week CBP issued a new withhold release order – effectively a seizing of goods – against Dalian Ocean Fishing, a Chinese fishing company.

No longer just tariffs. The key difference emerging between the Trump and Biden eras is that the former relied primarily on tariffs under a banner of economic nationalism to curb imports, the latter is likely to be dominated by targeted and specific regulation under environmental, human rights or labour banners. Australia take note.

De-risking and on-shoring: Can Australia capitalise?

The supply chain keeps crunching. Supply chain disruptions continue throughout the region in the wake of COVID. A number of companies that pursued a diversification strategy in 2020 have not escaped unharmed; disruptions have continued to emerge in markets outside of China, notably Vietnam and India.

A recent survey by Baker McKenzie points out that diversification will continue; 46 per cent of respondents are onshoring operations, 78 per cent are near-shoring; 67 per cent are insourcing, and 42 per cent are pursuing a ‘Mainland China + 1’ strategy.

However, the survey is notable for its emphasis on Australia. Seventy-six per cent of respondents are looking to Australia as an alternative source of supply, above other sources including the UK (66 per cent), Europe (62 per cent) and North America (62 per cent).

Investment policy settings matter. Australia’s membership of the CPTPP and RCEP, as well as having an FTA with the United States, puts it in a reasonably unique position. The big question is whether Australia’s investment policy settings will be attracive to foreign investors as the global race for capital heats up.

CBAM? No thank you, ma’am?

Does carbon pressure result in diamonds? The EU’s proposal on the carbon border adjustment mechanism (CBAM) is gaining pace in Brussels as well as Washington. The most recent calls for a rapid introduction of a new tax have come from European manufacturers, who are struggling with EUR50/tonne carbon prices. This has prompted some companies – e.g. Tata Steel – to add carbon surcharges to products and argue for a ‘level playing field’. This isn’t quite the spirit of the original carbon price, which was designed to prompt investment in low-carbon energy sources.

The EU’s problem now is that it will face growing international opposition to the CBAM. Japan, among others, has voiced its concern at the WTO. It has stated that “discussions on carbon border adjustment measures need to be stimulated at the WTO to avoid future trade conflicts … carbon border adjustment measures should be formulated based on the GATT principles.” China and Russia also both raised concerns at the Council for Trade in Goods. Similarly, the WTO’s Deputy DG Alan Wolff has stated “Carbon border adjustment measures will likely result in conflicts unless Members engage in joint efforts to find mutually beneficial solutions.”

Club rules. There’s a rising awareness of the possible pitfalls of the CBAM approach. As a response, Germany is pushing Brussels to consider a ‘carbon club’, which would include Japan, China and the US, in order to avoid trade-environment skirmishes. The EU has said countries can bypass the CBAM if their climate ambition “matches” that of the EU. But is this achievable? Does it require new agreements? Will it be based on ambition, or actual reductions? Instead of carbon reductions, the world could end up with a new protectionist cartel and higher-priced goods.

China keeps Australia at arm’s length

Australia-China relationship status remains as “it’s complicated”. China continues to express displeasure at a series of Australian policies. Official and unofficial trade measures affecting billions of dollars’ worth of Australian exports persist. The latest symbolic move from Beijing has been the official suspension of the China Australia Strategic Economic Dialogue – a supposedly annual meeting that has not taken place since 2017.

Beijing: do not walk further on the “wrong path”. There were scant hopes for the Strategic Economic Dialogue even before its official suspension and this move will further complicate efforts for mid-level officials to cooperate. Although Australia’s ministers have been left in the cold for some time now, lower-level embassy staff have been able to keep their working relationships. These relationships may now be increasingly difficult to maintain. Although China is yet to really land a punch with the measures it has taken against Australia’s exports, Beijing has shown that it is willing to incur economic damage – for example paying over the odds for inferior coal – in order to make a political point. This fact will be causing sleepless nights among all major Australian exporters, and among the political leaders who represent their constituencies.

Picture credit Andrew Parsons / 10 Downing Street