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12 September 2016Michael Gasiorek

Michael Gasiorek is a Senior Lecturer in Economics, in the School of Business, Management and Economics and a member of UKTPO. He is also Managing Director of InterAnalysis, a University spin-out company focusing on trade policy.

There has been talk in the past week about a future free trade agreement (FTA) between the UK and Australia – and indeed Australia expressed interest in such an FTA soon after the Brexit referendum. For the UK government this seems to be an affirmation of the future possibilities for the UK, as and when it assumes full responsibility for trade policy post Brexit. In reality, our trade with Australia is relatively small and so the real value may be in the opportunity for the UK’s fledgling trade negotiators to get round the table with friendly faces and hammer out a low-stakes trade deal.

‘The real value may be in the opportunity for the UK’s fledgling trade negotiators to get round the table.’

It is worth considering what such a trade deal might look like for the respective parties.

Although some of the reporting has alluded to an existing EU-Australia FTA, this is mistaken. There is no existing FTA. There is currently a political framework agreement with some provisions on economic cooperation, and an agreement to launch negotiations for a future FTA. It is also important to remember that Steven Ciobo, Australia’s trade minister, has reportedly stated that Australia wishes to sign an agreement with the EU before any agreement negotiated in parallel with the UK. Given that it took the EU and Canada seven years to reach a free trade agreement, if this remains Australian policy, the UK may have a long wait.

Brisbane

The desire to first negotiate and sign an agreement with the EU may be a reflection of the greater importance of the EU for Australian exports in goods (3%) than the UK (1.4%). Though in contrast the latest UN data suggests that the UK accounts for just over 7.5% of Australia’s services exports (and is Australia’s third largest single export destination), while the key other EU destinations account for slightly less than 6.5%, and where services exports to the UK slightly exceed exports of goods.

The importance of services for both the UK and Australia is likely to mean that both parties will be keen on a more comprehensive services-rich agreement as opposed to focussing primarily on the liberalisation of trade in goods. This is also likely to be an objective of the EU which has been keen on comprehensiveness in its recent agreements.

For the UK, whether a comprehensive agreement is worth waiting for will partly depend on the significance of a UK-Australia FTA. To put this in context: over the period 2013-15 Australia was the 14th largest destination for UK exports of goods, accounting for 1.24% of total exports in 2015. On the import side Australia was the 20th largest supplier of imports of goods to the UK, accounting for just under 0.5% of the UK total. In services Australia accounted for 2.1% of UK exports in 2014, and 1.72% of imports. It could be, of course, that the trade shares are low because of high barriers (which could be tariffs or non-tariff barriers), and that there is much to be gained from the liberalisation of these barriers. But this does not appear to be the case for tariffs. The average tariff applied by Australia on imports from the UK is just over 3%; and the average UK (EU) tariffs, slightly higher at just over 4%. These figures do not suggest that a free trade agreement is going to bring much discernible change in trade in goods.

These are, of course, aggregate figures, and may mask considerable differences across sectors. This is explored in Table 1 below, which looks at the top 10 sectors that the UK exports to Australia over the period 2012-15. The first column of the table gives the level of exports, and the second column gives the share of the sector in the UK’s total exports to Australia. The largest sector was vehicles (HS code 87), with a share of 21.2%. The third column captures how important the Australian market is for the UK in that sector. For example, for Vehicles 2.35% of total UK exports went to Australia. The final column gives the average applied tariff levied by Australia on imports from the UK.

TABLE 1: TOP UK EXPORTS TO AUSTRALIA (2012-15)

HSCODE PRODUCT NAME EXPORTS (MILLION $) EXPORTS SHARE SHARE GOING TO AUSTRALIA AUS. TARIFFS
87 Vehicles other than railway or tramway rolling stock 1,207.4 21.2 % 2.4 % 3.2 %
84 Machinery and mechanical appliances 852.2 15.0 % 1.3 % 3.1 %
30 Pharmaceutical products 510.0 9.0 % 1.4 % 1.3 %
85 Electrical machinery, equipment and parts thereof 392.2 6.9 % 1.4 % 2.8 %
90 Optical, photographic, cinematographic… 303.2 5.3 % 1.6 % 0.7 %
49 Printed books, newspapers, pictures … 267.8 4.7 % 6.1 % 1.1 %
22 Beverages, spirits and vinegar 215.0 3.8 % 2.1 % 3.6 %
62 Articles of apparel and clothing accessories 167.2 2.9 % 3.4 % 4.5 %
39 Plastics and articles thereof 144.8 2.5 % 1.2 % 4.7 %
29 Organic chemicals 139.3 2.4 % 1.1 % 0.6 %
Total 4,199.0 73.7 %

Source: UN Comtrade. Calculations undertaken using the TradeSift software (www.tradesift.com).
Note: The 2-digit level of the HS trade in goods classification has 99 chapters (sectors). The table gives the 10 biggest UK export sectors.

The table shows that three sectors (vehicles, machinery and pharmaceuticals) account for nearly 50% of UK exports to Australia. However, what is also clear is that for these sectors Australia is not a significant destination as it comprises a small proportion of total sectoral exports and faces relatively low existing tariffs. The sector for which Australia is the most important relative destination is HS 49 Printed Book etc., but even here the Australian market only accounts for 6.12% of UK sales.

Table 2 gives the same information now for Australia’s exports to the UK. Here we see that four sectors account for over 50% of Australia’s exports, and once again we see that the currently applied EU tariffs are typically very low. The relative importance of the UK is, however, more important for three Australian sectors – Lead, Beverages, and Optical, Photographic, Cinematographic equipment.

TABLE 2: TOP AUSTRALIAN EXPORTS TO THE UK (2012-15)

HSCODE PRODUCT NAME EXPORTS (MILLION $) EXPORTS SHARE SHARE GOING TO UK UK (EU) TARIFFS
71 Natural or cultured pearls… 650.5 24.14 % 5.12% 0.78 %
22 Beverages, spirits and vinegar 291.7 10.82 % 13.51% 3.94 %
90 Optical, photographic, cinematographic…. 272.2 10.10 % 9.01% 2.00 %
78 Lead and articles thereof 354.5 13.16 % 30.46% 2.75 %
27 Mineral fuels, mineral oils … 184.2 6.84 % 0.39% 0.85 %
02 Meat and edible meat offal 170.7 6.33 % 1.71% 1.98 %
84 Machinery and mechanical appliances 128.5 4.77 % 2.41% 1.65 %
85 Electrical machinery and equipment… 119.1 4.42 % 4.44% 2.50 %
30 Pharmaceutical products 96.1 3.56 % 5.23% 0.00 %
87 Vehicles other than railway or tramway rolling stock 62.2 1.91 % 2.02% 5.84 %
Total 2,329.3 86.05 %

There are two key messages which emerge from this. First, for neither the UK nor Australia does it seem likely that a free trade agreement focussed primarily on goods would have a significant impact on trade and thence economic activity. It is possible that there exist significant non-tariff, regulatory barriers to trade and that considerably more benefits could derive to either or both parties from reductions in these. However, negotiating and signing such an agreement is likely to be considerably more complex and time consuming than a simple tariffs-on-goods agreement. Second, the key export sectors that matter most for each of the countries are somewhat different. This applies both to goods and may well apply to services. This may make negotiations more difficult depending on each countries defensive interests.

This therefore raises the question of how much effort the UK should invest in such an agreement. One reason to invest may be not because of the anticipated economic benefits, but because the practice and experience of undertaking a trade negotiation would be useful. Indeed arguably the UK’s new cohort of trade analysts and negotiators should cut their teeth on an agreement with a closely allied country with which the economic stakes are not too great.

Disclaimer:

The opinions expressed in this blog are those of the author alone and do not necessarily represent the opinions of the University of Sussex or UK Trade Policy Observatory.

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