UK-Australia Free Trade Agreement – the first from scratch

On 16 December the UK and Australia signed a free trade agreement (FTA), the first FTA to have been negotiated by the UK with another country from scratch. Another with New Zealand is projected to follow suit. 

Our conclusions on the agreement as signed?

• the tariff agreement with zero tariffs on most products is most welcome;
• the extensive concessions to Australia on agriculture are giving rise to some controversy;
• the provisions on services and visitors are quite extensive, and have already been cited by India in advance of UK-India FTA negotiations soon to be launched; and
• the provisions on labour and on environmental standards contain important safeguards and commitments.

The UK’s Department for International Trade highlights what it says are ten key benefits of the UK –Australia Free Trade Agreement:

1. Tariff free trade for all British goods
2. Easier for Brits to travel and work in Australia
3. Lower prices and more choice for British shoppers
4. Enhanced access for British tech companies
5. Greater opportunities for UK professionals in Australia
6. Boost for UK services industries
7. Slashing red tape for entrepreneurs and small business
8. Access to billions of pounds worth of procurement contracts
9. Stronger cooperation on shared challenges
10. Paves the way to CPTPP

What will the FTA achieve?

It is probably no surprise that the FTA will not add much to the UK’s economy as a whole. By the government’s own initial admission, the agreement will add to the size of the UK economy over 15 years by 0.01 or 0.02 per cent. The Impact Assessment published on 16 December now says this could be up to 0.1 per cent. On any calculation, trade with Australia remains small, compared to trade with the EU27.

In addition, there are concerns that increased import competition will make life difficult for UK farmers. That said, the successful conclusion of the FTA is a first demonstration of the UK’s independent trade policy, and shows the way for agreements with other partners, such as the United States.

The agreement itself is essentially a fairly standard form free trade agreement, although it contains some advances in the areas of digital trade and animal welfare in particular, and also in some respects in services. It affirms adherence to applicable WTO rules and contains provisions on trade in goods, customs, trade facilitation, rules of origin, SPS, non-tariff barriers and trade remedies. Provisions on these matters commonly appear in all FTAs, but this agreement represents an advance on previous models and specifically aims at simplifying and speeding up customs processes. Whether this will be effective remains to be seen.

What does the FTA cover?

On services, if the agreement goes somewhat further than UK-Japan CEPA (see our previous note on this agreement) in the area of cross-border trade in services, financial services and professional services as well as temporary stay, these are essentially incremental steps; they do not sweep away all national restrictions or introduce EU-style mutual recognition.

FTA provisions on labour and environmental standards are, at least in part, designed to prevent the parties from lowering their standards to gain a competitive edge, and prior to the conclusion of the new set of UK FTAs, there were concerns in some quarters that the UK would lower some of its domestic standards as part of the give and take of negotiations. These concerns led the government to establish a Trade and Agriculture Commission with a mandate to provide a written advice on whether, in respect of environmental, animal welfare and animal and plant safety standards, that would be the case. The TAC has until 31 March 2022 to provide this advice, but it can already be noted that this agreement contains important clauses on not reducing or avoiding existing protections (non-regression clauses) and commitments to giving effect to international obligations in the environmental field and ground-breaking commitments to animal welfare.

There is no provision for investor-State dispute settlement, but the agreement does provide for State-State Dispute Settlement (SSDS), to be settled by binding arbitration.

What are the key impacts of the FTA?

CPTPP: The agreement certainly forms part of the UK Government’s “pivot to Asia” strategy and agreement on these terms will no doubt facilitate UK accession to CPTPP since any potential Australian objections now fall away. With the addition of the UK and other accessions, the CPTPP bloc could represent some 18% of global GDP by 2025. With the Australian agreement and the New Zealand agreement in principle of last autumn, the UK already has agreements with all current CPTPP members except Malaysia and Brunei. But there are still advantages to be gained from membership of a regional bloc, including via more expansive rules of origin.

Manufactured goods: For UK industry the big win is zero-tariff, zero-quota access on the vast majority of UK exports to Australia. However, tariffs were already low and even here the agreement has received a qualified welcome. The UK SMMT automotive sector group for instance points out that Australian tax policies remain a significant barrier to UK exports. The UK Scotch Whisky Association greets the abolition of the 5% tariff on whisky with a similar qualification, pointing to the need to address other regulatory barriers. So abolition of tariffs is not the same as having access to an internal market like the EU.

Agriculture: There will be protection for UK agriculture over a 15-year transition period in the form of tariff quotas over 10 years for beef and sheep meat and safeguards for the remaining 5 years, with shorter tariff quota periods for sugar and for dairy (8 years and 6 years respectively). Pork and chicken are not liberalised. However, the initial tariff quotas will start at much higher levels than they are now and will increase automatically over the transition period. The UK National Farmers’ Union (NFU) has been quite critical, raising concerns that there appears to be very little in the deal to benefit British farmers, and no safeguards at all after the 15-year transition period. There has also been criticism that the agreement fails to adequately address food standards for food exported to the UK. The UK Government has, however, countered that the deal “does not create any new permissions for imports from Australia – hormone treated beef will continue to be banned”. Non-regression and non-derogation clauses should also prevent lowering of existing standards in animal welfare.

Procurement: The UK already has access to the Australian public procurement market under the plurilateral Government Procurement Agreement (GPA) of which both the UK and Australia are members. However, the FTA’s commitments go significantly beyond those baselines. Indeed, according to the UK Government impact assessment, Australia has offered the UK more than it has offered in any other FTA, amounting to approximately £10 billion of new legally guaranteed market access for UK businesses per year.

Financial Services: The financial services chapter takes the standard approach – that is to say it is relatively modest as regards creating new protections or market access rights. Rather, for the most part, existing WTO commitments are reiterated and existing protections locked in. Where commitments are made, these are subject to the usual “prudential carve-out”, which allows the parties to adopt or maintain measures for prudential reasons notwithstanding any other provision of the agreement.

Perhaps more significant in practice are the “softer” provisions, particularly the establishment of a framework for ongoing regulatory dialogue and cooperation, building on the UK Australia Fintech Bridge established in 2017. Other aspects of the deal, not specific to financial services, will also be beneficial to the sector. Good examples here are the provisions dealing with data flows and movement of personnel, whether under temporary business visas or longer-term (see below).

Professional Services: For professional services the agreement provides improved market access, and provisions on mutual recognition of professional qualifications and temporary entry without an economic needs test.

The agreement has been generally welcomed by the Law Society of England and Wales confirming existing practising rights as well as providing greater recognition of qualifications, availability of a larger range of business structures – namely the UK LLP – and eased mobility options, particularly for young lawyers under 35, who will not have to undertake specified regional work in Australia. UK law firms will also have access to Australian government contracts for legal services.

Architects have given a more cautious welcome to the agreement. ICAEW’s CEO Michael Izza commented that plans to give UK accountants guaranteed access to work visas and to mutually recognise professional qualifications are “a good start”.

Data Flows: The sector here is refreshingly enthusiastic about the agreement’s provisions on data flows, pointing out that it goes much further than UK-Japan CEPA, and in line with CPTPP ensuring the free flow of trusted data and standards for personal data protection, with a ban, subject to exceptions of “necessary” measures, on data localisation requirements or requirements to transfer source code, and legal recognition of electronic contracts, signatures and various electronic trust services.

Effect on Northern Ireland and Scotland and Wales

In accordance with the terms of the EU Withdrawal Agreement and the Northern Ireland Protocol (Article 4), the UK is free to include Northern Ireland in the scope of trade agreements which it includes with third countries. So goods produced in Northern Ireland can enjoy preferential access to a trading partner’s market on the same terms as goods produced in other parts of the United Kingdom. In theory goods coming from the trading partner can also access the Northern Ireland market on the agreed preferential terms. However, goods “at risk” of subsequently being moved into the EU (risk of diversion) may not benefit from tariff-free access to Northern Ireland (Article 5 of the Protocol).

Under the devolution settlements for Scotland and Wales, international relations including the regulation of international trade is a reserved matter and the government in Westminster speaks for both Scotland and for Wales. The governments in both devolved nations are consulted but have no veto over what is agreed. The Welsh Government statement, made by Vaughan Gething MS, Minister for Economy, to coincide with the signature of the agreement says “we continue to have significant concerns around the increased market access included in this agreement, the impact this may have on our producers and the precedent it may set for future deals.  I am disappointed that my views on this element of the deal appear to have not been taken on board. My officials and I made this point very clear to UK Government during negotiations.”

What are the requirements for UK ratification?

In the case of the UK, the conclusion and ratification of treaties is still a matter of the Royal Prerogative, i.e. it is for the government to conclude and ratify treaties. Parliament has no powers to amend a signed treaty. A previous parliamentary convention, under which treaties were “laid” before the UK Parliament for 21 sitting days in order to provide an opportunity for debate, was given statutory form in the Constitutional Reform and Governance Act 2010 (CRAG). Under CRAG Section 20 either House of Parliament can resolve that a treaty should not be ratified, provided it acts within the 21 day period. However, if the government lays before Parliament a statement indicating that the Minister is of the opinion that the treaty should nevertheless be ratified and explaining why, the 21-day cycle begins again and this process can continue indefinitely. However, even this limited veto applies only if the House of Commons objects; if the House of Lords alone objects, the Minister can override the objection just with the explanatory statement. The Government has said that it expects there to be a period of at least three months between publication of the treaty text and laying the treaty before Parliament under CRAG, to give the parliamentary committees time to publish reports. The Trade and Agriculture Commission (TAC) also has three months in which to issue its aforementioned advice.