4 March 2022

Minako Morita-Jaeger is Policy Research Fellow at the UK Trade Policy Observatory
Senior Research Fellow in International Trade in the Department of Economics, University of Sussex

The UK signed a bilateral FTA with Australia on 17^th December 2021. The Agreement is currently under UK parliamentary scrutiny for a three-month period until the middle of March. This is the first FTA the UK has negotiated with a trade partner ‘from scratch’. The Agreement is potentially an important benchmark for future trade negotiations, notably the ongoing application by the UK for accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

A political achievement towards the Asia-Pacific region with limited overall economic impacts

Overall, the value of the UK-Australia FTAs lies mostly in the geopolitical tilt towards the Asia-Pacific region and the CPTPP rather than in its economic value to the UK economy. The agreement can be seen as a “deep FTA” which, in many areas, appears to have used the CPTPP as a template and has also gone further in terms of its coverage and depth of rules.

The economic impact of the FTA is modest.  While the agreement did achieve comprehensive tariff elimination covering almost all products the economic effects of this increased market access will be small – simply because Australia is not one of the UK’s major trade partners. The share of Australia in the UK’s total goods exports in 2020 accounted was only 1.4% (in contrast the share of the EU was 47.5%) and imports accounted for 0.7% (EU share: 53.2%). As for services trade, Australia’s share in UK’s total services exports accounted for 1.7% (EU’s share 35.8%) and that of imports accounted for 1.2% (EU’s share 42.7%).[1] UKTPO simulations suggest that the FTA may lead to an increase in GDP for the UK of between 0.05% to 0.07%.[2] This is more or less similar to the UK Government’s assessment of 0.02% to 0.08%.[3]

Very limited gains from liberalisation by industry and sector

The economic impacts at the industry/sector level arising from the market liberalisation commitments are thus also modest. Our simulations suggest that iron and steel (0.85% output change) and other electronic goods (0.75% output changes) are the top two sectors that will gain from tariff eliminations whereas Wine (-0.66% output changes) and processing of meat (-0.45% output changes) are the two sectors most likely to have negative impacts.

There has been some attention regarding the potential negative impact on beef and sheep meat producers in the UK. It is important to note that historically over 90% of UK beef imports come from the EU, with only 1% being supplied by Australia. Also, this does not take into account that around 80% of domestic final consumption of beef is from domestic production. Finally, historically Australia has rarely filled its existing beef and sheep quotas. On balance, therefore, and given the long phase-in period, it would seem that these concerns are overstated.

What about services?

While Australia’s commitments are higher than its GATS commitments, and in certain areas higher than in other FTAs (temporary entry of business persons, the inclusion of federal level measures), the gains from the services liberalisation commitments are also limited. This is because Australia is already a fairly liberal services market, and because of the small share of UK services trade with Australia. According to the OECD Services Trade Restrictiveness Index (STRI), Australia’s regulatory restrictiveness in services is lower than the OECD average. A key benefit from the FTA is the increased legal certainty regarding those commitments, which lock-in the current autonomous liberalisation in services trade in terms of major disciplines (e.g. market access and national treatment obligations),  except for measures listed as reservations. With regard to investment, the number of reservations indicate that the agreement retains Australia’s more restrictive approach.

Ambiguity and lack of ambition in regulatory cooperation

The UK-Australia FTA reflects the UK move towards an Asia-Pacific style market-driven and innovation-oriented regulatory approach which in turn reveals some tension with maintaining the UK’s high regulatory standards.

For example, there is a comprehensive digital trade chapter modelled on the Australia-Singapore Digital Economy Agreement (DEA) that prioritises free cross-border data flows and a market-led digital economy to promote innovation and technology. The provisions relating to cross-border data transfer, such as digital identities, cross-border transfer of information by electronic means, and a ban on data localisation, are expected to facilitate business. On the other hand, the provisions of personal information protection do not provide clear safeguard solutions to ensure the protection of UK citizens’ data.

The areas of Sanitary and Phyto-Sanitary Standards (SPS), environment and animal welfare provide more examples. The UK has established high regulatory standards in these areas based on EU law. In the Trade Act 2021, the UK has committed to maintaining statutory levels of protection in the areas of the protection of human, animal or plant life or health, animal welfare and environmental protection. On SPS related measures, the UK takes a more cautious ‘precautionary approach’ rather than the WTO’s SPS approach based on ‘scientific principles’ and ‘risk assessment’. However, the UK-Australia FTA is based more on the WTO approach. Interestingly, the SPS chapter in the Agreement is not subject to dispute settlement, whereas, in contrast, this is not the case for the environment chapter.

On environmental protection, the chapter is wide-ranging and couched in terms of ‘best endeavour clause’ as opposed to specifying obligations or commitments. In contrast, the UK-New Zealand FTA announced on Monday goes further, for example, on fossil fuel subsidies, or in having an agreed list of environmental products.

On animal welfare, concerns have also been raised about the Australian use of certain practices (hot branding, mulesing, and longer allowable transportation times) which are banned in the UK. We note that there was no conditionality imposed by the UK banning such practices in return for access to the UK market.

Overall, our preliminary analysis finds that the UK-Australia’s value lies mostly in its policy development tilting towards the Asia-Pacific region rather than economic value. At the same time, the rules in some areas reveal difficulties in promoting regulatory cooperation with Asian-Pacific countries.

Footnotes

[1] ONS Pink Book 2021

[2] The UKTPO’s model is slightly different from the UK government’s modes as it does not include general equilibrium effects while it used more detailed/disaggregated sectoral data.

[3] 0.02% is the figure of Scoping Assessment and 0.08% is the figure of Impact Assessment. It should be noted that the difference in numbers is driven by underlying data, by the modelling assumptions and by the degree of market access liberalisation being modelled.

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