The Brexit vote and the effect on the Australian trade agenda

Originally published by Lloyds List - July 1, 2016

So - the referendum vote is in and seemingly to the surprise of many commentators the result is that the UK will be leaving the EU (not the UN as suggested by a number of US TV networks). The media response has been massive and ranged from polite support for the democratic process and the right of the UK to determine its own future to suggestions that the split in the EU is the harbinger of doom, not just for the EU but for Western democracy altogether.

There have been some immediate consequences. The British PM has announced his intention to resign in October 2016 as he was a big supporter of the EU. There are stories of a second referendum on the EU. The Scottish leaders have raised the prospect of a further referendum on leaving the UK as Scotland voted strongly in support of the EU. The value of the pound dropped immediately to 1985 levels, causing some Australian Banks to put a stop on customers buying pounds or transacting in pounds which was bad news for those trying to pay for goods and services in the UK. There were significant falls in global stock exchanges and stories have appeared that large financial institutions have already put into place plans to move staff and operations to the EU.

I could go on for some time on the psychology and politics behind the decision but this is not the time and place to do so although I would be available to discuss the issues for the usual rates. We don't even know the basis on which the EU and the UK will part ways. That said, the decision has significant potential consequences for Australia as our relationship with the EU is largely founded in the relationship of the UK with the EU and in any break - up, our natural and traditional instincts may be to support the UK over the EU. So, to try and put things in perspective it is probably worth considering the raw figures and our trade with the EU - and how it looks when we adjust for the trade figures with the UK.

Thanks to ABC online, quoting Austrade figures, the EU consistently is shown as one of our main trading partners.

• In 2014, the EU was Australia’s largest source of foreign investment and second largest trading partner, although the records of the European Commission placed it third after China and Japan in 2015.
• In 2014, the EU’s foreign direct investment in Australia was valued at $169.6B and Australian foreign direct investment in the EU was valued at $83.5B. Total two - way trade in goods and services between Australia and the EU was worth $83.9B.
• The EU is Australia’s largest services export market, valued at nearly $10B in 2014. Given that services account for nearly 20% of the total trade in goods and services this will be important in the future of trade negotiations.

However, when the UK is considered separately to the EU, 48% of Australia’s export in services to the EU were via the UK. Of the $169B in EU direct foreign investment, 51% was from the UK and 66% of the Australian direct foreign investment in the EU went to the UK. The UK was Australia’s eighth largest export market for 2014 and 37.4% of total Australian exports to the EU. In the end? Our trade with the UK is more significant than with the rest of the EU. Add that to the significant historical, legal, linguistic, political, social, cultural and defence linkages between Australia and the UK that creates an interesting twist to our current trade agenda.

As readers may be aware in 2015, Australia announced that it had agreed with the EU to start negotiations on an FTA in 2017 and preliminary discussions have already started on that front. The Brexit outcome creates a quandary - how to persist with the EU (likely) yet then find a way to push for a separate FTA with the UK. This won’t be an issue alone for Australia but also for NZ which is in a similar position with the EU and the UK (maybe an Australian/NZ FTA with the UK anyone?) and it also creates all manner of issues for the US which is negotiating a Trade and Investment Treaty with the EU. Indeed, the potential demise of the EU and US deal and a fear of regional Asian deals (not involving the US) may make the US more keen than previously to support the TPP.

Whatever happens, I have a real hope that this Euro - schism does not descend into even further isolationist or protectionist movement. A recent WTO report identified that trade restrictive measures in the G - 20 countries have hit their highest monthly average since the WTO started tracking them seven years ago. This has arisen at the time of weak trade growth. Additional restrictions which could be imposed on trade arising from the UK departure from the EU including additional tariffs between the EU countries and the UK and additional permit requirements - which would have an adverse impact on those in Australia trading with the EU and the UK.

At this stage it is difficult to get any clear views on the likely effect of the departure of the UK from the EU. It does seem reasonable to assume that the focus of the UK and the EU may now be on their own issues rather than wider trade deals and that, as a result, our focus and resources may more naturally be turn to our other trade deals in the Asian region.