Is Australia’s troubled EU trade deal salvageable?

Australia-European Union (EU)

The proposed preferential trade agreement between Australia and the European Union (EU) has been suspended after five years of negotiations. The failure is partly due to the current times, with liberal trade policy retreating and government-fueled industrial policy on the rise.

Agriculture was a key factor in the failure of the Doha Development Round of multilateral trade talks. The EU’s Common Agricultural Policy outlays remain largely unchanged, with tariffs on EU farm imports being three times higher than those on non-agricultural goods. Australia’s concerns during negotiations with Brussels arose from EU resistance to opening its market to Australian beef and sheepmeat, and protective geographical indications that would restrict the labelling of Australian feta cheese and prosecco.

Looking ahead, there are still strategic factors that might favor a deal, such as gaining secure access to Australia’s critical minerals, reducing trade dependence on China, and promoting investment, skilled labor movement, and trade in services. However, immediate prospects for the early and fruitful resumption of talks are slim due to a fundamental asymmetry in respective tariff levels. Australia has an applied tariff of just 2.6% on non-agricultural goods, an EU priority for export gains, while the European Union value-based duty on beef is 43%. Tariff concessions will have a higher political cost for Brussels than for Canberra, and with elections for the European Parliament due in June 2024, that political cost is unlikely to be incurred soon.

The Asia-Pacific region faces challenges in trade diplomacy due to a setback in trade agreements with the European Union. Gains in agricultural exports through preferential trade agreements with the EU will be elusive, especially in areas where EU protection is highest. Additionally, the use of geographical indications must be subject to strict transparency and due process obligations. The latest EU preferential agreement with New Zealand in June 2022 provides explicit trade sanctions for noncompliance with labor and environmental standards.

The threat of labor-standard or environmental sanctions is very real for Asia-Pacific nations with existing agreements with Brussels, as well as those where PTAs are planned. Despite this risk, there are potential gains in economic welfare from entering into preferential deals with the European Union. However, PTA gains should not be exaggerated, as the EU-Japan trade agreement is estimated to increase long-term GDP for the European Union by just 0.76% and for Japan by an even more modest 0.29%.

Preferential trade agreements are second best to multilateral liberalization due to the detrimental effect of trade diversion at the expense of non-PTA members. The US’s science-based regulation approach contrasts with EU’s precautionary approach, causing confusion and regulatory proliferation. To strengthen the multilateral trading system, reinvigorate WTO efforts and support widespread, unilateral, productivity-enhancing domestic reforms, promoting a nondiscriminatory, multilateral approach.

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