By: Richard Pomfret, CASE Fellow, Professor of Economics at the University of Adelaide
The European parliament has recently given a green light to the proposed European Union (EU) – Australia trade agreement, setting guidelines for trade talks. In his State of the Union Address on 13 September 2017, the European Commission President, Jean-Claude Juncker began by reaffirming the EU’s openness to business and then stated “Today, we are proposing to open trade negotiations with Australia and New Zealand.” This proposal has been previously embraced by Australia, and a framework agreement was signed in August.
Past EU-Australia relations have been cordial but not warm. Australia lost its major agricultural market when the UK joined the EU. Agriculture continues to be a source of discord even though farm products now account for a small part of each partner’s trade. One of the few EU-Australia agreements concerns wine, but suspicion remains, e.g. over EU efforts to include “prosecco” as a geographic indicator in an EU-China accord.
Agricultural details may dominate FTA negotiations, but agriculture is not the major driver, and should be manageable. The recently concluded and implemented Canada-EU Trade Agreement provides a blueprint to facilitate negotiations. With few non-agricultural goods facing serious tariff barriers in either Australia or the EU, the major goal will be to negotiate WTO+ measures in areas such as trade facilitation, services, investment, and intellectual property rights.
For many Australian firms, trade with Europe has been discouraged by high trade costs. However, the obstacles of distance are falling. Information and communications technology advances continuously improve the quality and reduce the cost of real-time communication. In 2018, non-stop Australia-EU air service will begin between Perth and London. Already, large Australian firms such as News Corp in the media, Westfield in shopping malls and Macquarie in infrastructure, as well as niche producers of consumer goods such as Aesop, Rip Curl or Billabong have a European presence.
A particular concern for Australia is the low level of participation in global value chains (GVCs), which so far have centred on the EU or on East Asia. This development was highlighted by the disappearance in 2017 of Australia’s integrated car manufacturing which cannot compete with cars produced in GVCs. Since 2015 the iconic GM brand Holden has been assembled at the Opel plant in Gliwice (Poland) from components sourced from across Europe before being shipped to Australia.
The WTO+ elements of a EU-Australia trade agreement could help Australian producers to participate in EU-based GVCs. More imaginative commentators see Australia as a link between EU and East Asian GVCs, or as a base for European firms’ operations in Asia (a suggestion made in passing in the EU’s 2015 Trade for All White Paper). With a business culture and lifestyle familiar to most Europeans and on convenient time zones to the main Asian centres, Australia can offer a good intermediate solution.
The extent to which these hopes will be fulfilled is, of course, uncertain, but the EU-Australia trade agreement will be another step towards global economic integration. Already since 2004 trade between eastern Europe and Australia has boomed, albeit from a low base, as Australia’s imports of cars assembled in Poland, Slovakia, and the Czech Republic are accompanied by commodity exports to those countries. The outcomes are as unpredictable as Holden cars coming from Gliwice, but there will be specialization in an increasing number of niches as global production networks become the norm.