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Brexit: Back to the future for Australian trade relations?

Will the British exit from the European Union – Brexit – see a resurgence in the importance of the British market for Australian exporters and if so, for what types of exports?

Australian trade relations over the last 50 years have pivoted strongly towards Asian markets as the post-WWII era saw our largest traditional trading partner – the UK – tilt towards their neighbours on the European continent and the emergence of an Asian middle class presented greater opportunities closer to home.

Up until 1973, Australia was a beneficiary of the UK-Australia Trade Agreement (UKATA) which was part of the 1932 Ottawa Agreement which gave Commonwealth countries preference.  Once Britain acceded to the European Union in January 1973, however, the UKATA was suspended.  This forced the Australian government and exporters to look for opportunities elsewhere.

A short history of Australian exports

Australia’s trade up to the 1970s was heavily dominated by agricultural commodities. Wool was our biggest export up until the 1960s, and then wheat dominated for a decade or so.  Ever since the 1970s, bulk commodities – coal, and later on iron ore – overtook agricultural commodities as Australia’s top export.

This shift was underpinned by a shift in the relative importance of trading partners.  In a nutshell, we changed from being ‘Britain’s farm’ into ‘Japan’s quarry’. In the first half of the 20th our export base was much narrower and far more vulnerable to the vagaries of international markets.   The world wars, the intervening ‘great depression’ and the Korean War all had a significant effect on Australian export values.  Wartime proved to be quite beneficial for Australian producers as the British war machine voraciously consumed our wool, wheat and dairy products, in particular.

The second half of the century was defined by the rise of Asia and a diversification of Australia’s economy.  The United States played a pivotal role in the reconstruction of Japan through the Marshall Plan and this led to rapid industrialisation.  Australia had plenty of high quality coal and iron ore to feed that industrialisation.  Then as other Asian countries – the so-called tiger economies, and later China – joined the party, demand for bulk commodities surged.  As Asian incomes rose, demand for Australian services exports also grew.  These shifts were driven by necessity as Britain shifted away from its imperial past and towards a European future.

Recent trends and outlook for Australia’s exports

In short, Australia’s export future is all about three letters: LNG. Queensland, Western Australia and the Northern Territory have seen a massive ramp-up in investment in LNG capacity - more than $200 billion in the past decade – as oil prices (and therefore gas prices) surged.  The construction of LNG plants in the northern parts of Australia are some of the largest construction projects ever undertaken in Australian history.

The spike in foreign investment led to a spike in the $A which detrimentally impacted other tradable sectors in the economy, including agriculture.  The $A has since fallen back closer to ‘fair value’ as the investment surge approaches its terminal phase.  As construction on those LNG ‘megaprojects’ winds up, we are already starting to see a surge in LNG exports that will continue as the emerging economies in Asia demand ever greater quantities of energy.

It is clear now that non-rural commodity prices, particularly prices for oil (and therefore gas), coal and iron ore will play a much greater role in longer-term exchange rate movements going forward.   

Possible impacts of Brexit on Australia

The fallout from Brexit will likely manifest itself in a number of ways over different timeframes.  The most immediate impact is through short-term financial volatility, and this has been the focus of a great deal of commentary in the early days since the vote.  The $A fell significantly following the vote but has since rebounded.  There were some fears that Brexit may trigger another financial crisis although these fears appear to have been overblown at this stage.

Therefore, attention has now shifted to the longer-term impacts of Brexit, that is, how it will work in practice. There is a substantial amount of conjecture around the effects on trade.

There are a number of possible effects on trade.  The first is that Britain has indicated a desire to reinvigorate Commonwealth trading links, which could provide opportunities for Australian agribusinesses. Certainly, notable figures from the ‘leave’ campaign have gone on the record saying that there should be an increased focus on Commonwealth ties. UK Business Secretary the Rt. Hon. Sajid Javid MP has opened talks with India and looks set to do the same with other non-EU countries, including Australia, New Zealand, Korea, the US, China and Japan.

One key concern is that the UK has effectively outsourced its trade negotiations to the EU over the last 40 years and this has seen the number of trade negotiators within the UK fall as the number within Brussels has grown.  The UK will need to ramp up its capacity in this area if they are to negotiate bilateral deals with 50-odd trade agreements in force with the EU.

Brexit is likely to have an effect on UK household incomes and therefore their demand for Australian agricultural products. Also, a sustained fall in the British pound will likely reduce demand for imported food in the UK.  All else being equal, this will affect producers with significant exposures to the UK market, such as in the wine and sheep meat sectors.

There are mixed views on whether the UK’s pull out from the EU will hinder the prospects for Australia’s negotiation of a trade deal in Europe. One view is that the UK provides a conduit into the EU and that the UK might have been an advocate ‘in the tent’ for Australia.  However, the other side would contend that the UK has their own priorities and interests and would not necessarily have argued Australia’s case with any degree of vigour except where British and Australian interests aligned.  Of greater concern to Australia is the possibility that Europe might put any Australia-EU trade agreement on the backburner as Europe turns inwards to focus on their own internal politics.

New agreement – new opportunities

A return to the pre-1973 UKATA era is not on the cards.  As Dr Annmarie Elijah of the ANU Centre for European Studies notes that while the suspension in 1973 created some angst, it was already well known within official circles that UKATA had passed its use by date.  So any new agreement between the UK and Australia will have to start from scratch and the opportunities.  And the industrial structure of both economies has changed markedly, as have the tastes of consumers.

Wine, sheep meat, wool and canola are the products or commodities that have the greatest exposure to the UK, making up a significant portion of EU imports from Australia.  The priority here for Australian trade negotiators needs to be obtaining more favourable terms from the UK than would have been achievable with the EU.  Australia’s current access to Europe is restricted by low volume import quotas and high above quota tariffs and so the prospects for growth are good.  With the UK importing 45% of its meat products each year, the UK is a market with good prospects for growth.

Add to that the more favourable treatment that NZ producers currently enjoy and it becomes clear that Brexit could be a boon for Australian red meat producers.  Farmers across the Tasman are already worried, and that could explain the offers from NZ of a symbolic first agreement with the UK and trade negotiators to beef up the UK’s capacity to negotiate agreements.

It remains to be seen how the exit agreement plays out and what domestic assistance measures are put in place in the UK, however, the elimination of subsidies to UK producers and the imposition of tariffs and quotas on UK exports to the EU will make their producers less competitive.  This will provide opportunities for other nations like Australia.  Much also hinges on what happens to the both the Euro and the UK pound.

This article was authored by Scott Kompo-Harms. Scott is the General Manager of Trade and Economics at the National Farmers' Federation.

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