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Explainer: why an Australian trade deal with the UK could take a decade

Australia’s trade relationship with the UK is about to get very complex. Image sourced from Shutterstock.com

Explainer: why an Australian trade deal with the UK could take a decade

Australia’s trade relationship with the UK is about to get very complex. Image sourced from Shutterstock.com

Australian Trade Minister Steven Ciobo has ruled out negotiating free-trade deals with the UK until Britain has formally completed its departure from the European Union. In fact, it may be many years before Australia can seriously contemplate negotiating a Free Trade Agreement (FTA) with the UK.

Why?

“Formally completing its departure from the EU” is just one of the hurdles to be overcome and perhaps not the greatest. The UK needs to become an independent World Trade Organization (WTO) member as a precondition for serious trade negotiations.

To be a credible negotiator, the UK requires national “schedules” that legally “bind” the degree of market openness for its imports of goods and services. If additional restrictive measures are applied over and above what is in the schedules, these can be challenged in the WTO and result in heavy fines or compensation payments.

Without national schedules, the UK has nothing to negotiate with. And it doesn’t have them.

The catch is that even though the UK is a founding member of the WTO (via its membership of the EU) it does not have national WTO schedules it can use as a basis for negotiation with Australia. As a member of a customs union, the UK shares common schedules with 27 other EU member countries, which it currently applies to imports.

Is this just an administrative nuisance or a matter of real substance? Wouldn’t it make sense for the UK to just “cut and paste” the EU schedules that it now applies and rename them UK schedules?

Not necessarily.

First, past practice in the WTO dictates that no country can unilaterally decide what its rights and obligations are (including schedules). These are to be negotiated with other members to ensure a fair balance of commitments. Therefore, when the UK creates its national schedule, all countries have the opportunity to negotiate its content before it is accepted on the basis of consensus.

Back to the negotiating table

The EU goods schedule contains tariffs and other measures relating to 9,379 individual product lines. There is no guarantee that the content of the EU schedule is appropriate for the UK and modifications may well be sought. Countries exporting to the UK will certainly use the opportunity to negotiate improved access to the UK, particularly as the structure of UK trade will not be the same as for the EU.

This has led the WTO director general to remark that:

Pretty much all of the UK’s trade [with the world] would somehow have to be negotiated … These negotiations will be “torturous” and “akin” to WTO accession negotiations.

Nothing is given away free in the WTO. Based on past experience, WTO negotiators will be looking for “concessions” from the UK before approving its schedule. If this process is “akin” to accession negotiations, it’s worth noting that the five most recent accessions took 15 years on average to complete; to adjust schedules has taken more than 10 years.

There many additional areas of negotiations required to “formally complete the UK departure”. These are inextricably linked to the market access negotiations.

For example, there are around 500 products imported into the EU that are subject to “tariff quotas” i.e. duty free access to the EU market up to a cut-off point after which prohibitive tariffs may be applied. These are administered by the European Commission on a “first-come, first-served” basis for the 28 EU countries. The future allocation of these quantitative limits between the EU and UK will determine which (primarily agricultural) imports receive duty free access and the origin of those imports. This will require serious negotiation.

So too for agricultural support in EU countries. The WTO has authorised EU support of €72,378 million per annum for all EU countries. How this “right to subsidise” will be allocated between the remaining EU countries and the UK will be intensively negotiated.

There is no precedent for Brexit. The transition of the UK to an independent WTO member is much more about negotiations than international law. While these negotiations will be complex and interrelated, there is no WTO framework within which they can take place.

What is needed is a structured process tailored to “Brexit” requirements that will rationalise and shorten the negotiating period. In its absence, a UK/Australia FTA will be a very long time in coming.