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Is an Australia-UK trade agreement more cultural cringe than commercial reality?

- Monday, September 19, 2016

In the wake of the decision by the United Kingdom to leave the European Union, there has been some speculation that the move will create opportunities for Australia, and that serious efforts should be made to negotiate a free trade deal between the UK and Australia. From the perspective of Australian agriculture, the proposal makes little sense and there appears to be much bigger trade opportunities much closer to home that need pursuing.

Australia certainly has long-term cultural ties with the UK, and the two nations even share a head of state (much to the amazement and confusion of the citizens of Australia's near neighbours in Asia). Therefore it was probably not surprising that, in the wake of the UK decision to leave the European Union, there has been some speculation that Australia should negotiate a free-trade deal with its former colonial masters. Prime Minister Malcolm Turnbull and UK Prime Minister Theresa May reportedly talked enthusiastically about the opportunity at the recent G20 summit in China. 

Leaving aside the fact that negotiations for the British exit from the EU have not even started yet, and entail a minimum of two years notice before taking effect, it is useful to consider what opportunities an Australia-UK trade deal might provide, and in particular whether there would be any improved opportunities for Australian agriculture.

According to the Department of Foreign Affairs and Trade, Australian merchandise exports to the UK were worth $3.8 billion in 2015, and Australian merchandise imports from the UK were valued at $7.1 billion, meaning Australia had a merchandise trade deficit of $3.3 billion. Services trade between the two nations was more closely balances, although still favoured the UK by around $2.2 billion. To put the trade relationship in perspective, Australia ranked twentieth in importance as an export destination for the UK, and ranked thirty sixth in importance as a source of UK imports.

For Australian agriculture, the UK has been and remains an important market for wine exports - although these have declined considerably over the past decade. Beef and sheepmeat exports to the UK have also been growing over recent years - albeit off a very small base. These have faced quota and other restrictions that have limited Australian exports to the UK and to Europe in general, and there is no doubt that a reduction in these trade barriers would create extra opportunities for Australian exports.

However, there is a major impediment to the UK reducing its agricultural trade barriers and allowing increased imports from nations such as Australia, and that is UK farmers. 

Under current arrangements, UK farmers receive up to half their annual income in the form of agricultural subsidies that are paid under the EU's Common Agricultural Policy (CAP). Once the UK leaves the EU, if these subsidies are to continue they will have to be paid by UK taxpayers, and it is likely there will be taxpayer resistance to continuing the heavily subsidised agricultural policy model operated by the EU. 

Faced with a possible loss of at least some of their current subsidies, UK farmers are likely to fiercely resist any reduction in agricultural trade barriers. The UK Government will also be acutely aware that a reduction in agricultural trade barriers by the UK will invariably result in a flood of agricultural imports that will substantially reduce the prices UK farmers receive for their produce, sparking calls for even more subsidies for UK farmers. This is a particular issue for UK livestock farmers, who would not be able to be price competitive with beef and sheepmeat imports from Australia.

Pragmatically, a preferred option for the UK Government post-Brexit is likely to be one which involves a gradual reduction in UK agricultural subsidies, but a maintenance of current agricultural trade restrictions to continue to protect the incomes of UK farmers as the subsidies are gradually reduced. This means there are likely to be few if any new opportunities for Australian agriculture as a consequence of Brexit.

Given this reality, and the fact that Australian agriculture is regularly told that the Australian Government has limited resources that it can dedicate to negotiating trade deals, it is a bit hard to understand exactly why Australian politicians would be talking up the prospects of additional trade with a small and relatively insignificant group of islands located off the west coast of mainland Europe. 

Perhaps its the lure of the common language (no need for translators) and a shared interest in cricket, that makes a UK-Australian free trade deal so attractive - especially if the required ministerial meetings could be scheduled in the UK to coincide with a major cricket test!  If this is the attraction, then perhaps Australian politicians need to be made aware there is a nation with an equally strong interest in cricket, and with a population more than forty times bigger than the UK that is much closer to Australia and that offers much more significant opportunities if a free trade deal could be negotiated.

Tony Wilkin commented on 13-Feb-2017 11:24 AM
If the UK were to surrender her farm subsidies and other European protection tricks. Than a free trade arrangement would make a lot of sense.

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