Australia’s Troubled EU Trade Deal Still Second Best – Analysis

By Ken Heydon

After five years of intense negotiation, the proposed preferential trade agreement (PTA) between Australia and the European Union is in trouble. On 29 October 2023, talks were suspended, with little immediate prospect of resumption. This setback, plus other recent developments in EU preferential trade policy, offer some broad lessons — for both Australia and the region.

The failed negotiation is, in part, a victim of current times. With liberal trade policy in retreat, government-fuelled industrial policy is on the rise, and, according to the Eurobarometer Poll of July 2022, the majority of Europeans now view protectionism positively.

The immediate cause of breakdown in the talks was, unsurprisingly, agriculture. This is the sector that, given EU intransigence, was a key factor in the failure of the Doha Development Round of multilateral trade talks. Agriculture is still the beneficiary of massive industry assistance within the European Union.

Though there has been some reform of the Common Agricultural Policy, according to the World Trade Organization (WTO) Common Agricultural Policy outlays remain largely unchanged, at roughly one third of the European Union’s budget. And tariffs on EU farm imports remain three times higher (at some 20 per cent) than those on non-agricultural goods.

Australia’s particular concerns during negotiations with Brussels arose from EU resistance to opening up its market to Australian beef and sheepmeat, and protective geographical indications that would restrict the labelling of Australian feta cheese and prosecco. As highlighted by the WTO Trade Policy Review of the EU, the number of products subject to EU ‘geographical indication protection’ continues to rise.

Looking ahead, there are still some broad strategic factors that might favour a deal. For the European Union, this includes gaining secure access to Australia’s critical minerals, such as lithium and copper. For Australia, there is interest in reducing trade dependence on China while gaining greater participation in EU-centred supply chains. For both parties, there is a shared interest in promoting investment, skilled labour movement and trade in services.

But immediate prospects for the early and fruitful resumption of talks between Australia and the European Union are slim.

This is because of a fundamental asymmetry in respective tariff levels. Australia has an applied tariff of just 2.6 per cent on non-agricultural goods — an EU priority for export gains. In contrast, the European Union value-based duty on beef — a key Australian export priority — is 43 per cent. Tariff ‘concessions’ will have a higher political cost for Brussels than for Canberra. With elections for the European Parliament due in June 2024, that political cost is very unlikely to be incurred soon.

Two clear lessons can be drawn for the Asia-Pacific region from this setback in trade diplomacy. First, gains in agricultural exports through PTAs with the European Union will be elusive. This is particularly so where EU protection is highest — that is, according to the OECD, poultry, rice, beef and veal. Second, where geographical indications are in play, their use must be subject — as in the Regional Comprehensive Economic Partnership (RCEP) trade agreement — to strict transparency and due process obligations.

But there is another, and potentially more worrying, lesson that might be drawn from recent developments in EU PTA policy. The latest EU preferential agreement was concluded with New Zealand in June 2022. It is the first that provides explicitly for trade sanctions for noncompliance with the labour and environment standards as contained in the International Labour Organization’s Fundamental Principles and Rights at Work and the Paris Agreement on climate change, respectively.

However worthy the social and environmental objectives here, it is better that they be pursued directly rather than through the blunt instrument of the trade weapon. This only heightens the ever-present risk of protectionist capture and stunted growth.

With the EU–New Zealand PTA as a potential standard setter, the threat of labour-standard or environmental sanctions is very real — albeit differentiated — for Asia-Pacific nations. This applies for those with existing agreements with Brussels — Japan, South Korea, New Zealand, Singapore, Vietnam, Fiji, Papua New Guinea, Samoa and the Solomon Islands. It also applies for those where PTAs are planned — namely India, Indonesia and Australia.

Against this risk, there are potential gains in economic welfare from entering into preferential deals with the European Union. But PTA gains should not be exaggerated. It is estimated that the EU–Japan trade agreement will increase long-term GDP for the European Union by just 0.76 per cent, and by an even more modest 0.29 per cent for Japan.

Preferential trade agreements are second best to multilateral liberalisation. This is because of the detrimental effect of trade diversion at the expense of non-PTA members. This diversion is compounded by the risk of regulatory proliferation and confusion — exemplified by US agreements focusing on science-based regulation, in contrast with the precautionary approach embodied in EU accords.

Rather than shed tears over the troubled Australia–EU talks, it is better to reinvigorate efforts within the WTO, in the lead up to its 13th Ministerial Conference, to strengthen the trading system on a multilateral, nondiscriminatory basis. It will be better still if such efforts are backed by widespread, unilateral, productivity-enhancing reforms at the domestic level.