Free trade agreement between Australia and the European Union back on the table – with some caveats

The free trade agreement between Australia and the European Union (AU-EU FTA) – which aims to drive Australian exports, economic growth and job creation – appears to be back on the table with negotiations restarting later this year, albeit with some hard lines on climate targets set by the European Union (EU).

In 2016, due to the Brexit fallout, the Turnbull Government announced that it had commenced work towards negotiations with the EU for an AU-EU FTA, with the first round of negotiations occurring in early July 2018.

The most recent round of negotiations for the AU-EU FTA took place virtually on 7-18 February 2022, but further negotiations have been on pause since France placed a block on further progress following the Morrison Government's cancellation of the French contract to supply diesel-powered submarines. Australia's relations with France had been on ice until this May, when newly elected Anthony Albanese made efforts to reinvigorate a spirit of co-operation between the nations, with there now being clear signs from the EU about proceeding with the negotiations.

The shape of those negotiations is a bit clearer, with reports that the EU will include sanctions for failure to reach Paris Agreement targets for emissions reductions (Australia has already satisfied a requirement to make a commitment on carbon neutrality). Some members of the EU Parliament have also called for more sustainability commitments in trade agreements as well, which could be a factor as the EU Parliament must approve any FTA.

Apart from climate issues, the EU is also looking for new laws on geographic indicators, which would bring rules already in place for wine to foodstuffs, while pushing back on the size of beef, lamb and dairy quotas.

Why does Australia need a free trade agreement with the EU?

The AU-EU FTA intends to leverage the partnership between Australia and the EU, given that they both share a commitment to the rule of law, global norms and free and open markets. According to Department of Foreign Affairs and Trade (DFAT), Australia exported goods and services to the value of $18.7 billion in 2019-20, and imported $59.9 billion in the same period.

As a bloc, the EU is a high-income market with a population of just under 450 million people and a GDP of around US$15 trillion. In 2020, it was Australia’s second largest trading partner, as well as our seventh largest export destination, fourth largest services export market and second largest source of foreign investment.

>Similar to the Australia-United Kingdom Free Trade Agreement that was signed on 17 December 2021, an agreement with the EU will provide new opportunities for Australian goods and services in a highly significant market, which in turn will assist Australia with its post-pandemic economic recovery. The AU-EU FTA also has the ability to afford Australian exporters with a competitive edge and more choice about where they do business, while granting Australian consumers greater choice in goods and services at lower prices.

Potential benefits of the AU-EU FTA

The AU-EU FTA has, like most FTAs, the potential to create significant benefits to Australia, such as:

• improved market access for Australian exports;
• guaranteed access for Australian services providers;
• expansion of two-way investment flows;
• a more predictable and seamless business environment;
• rules to support the digital economy and innovation;
• reduced costs and red tape, particularly for small- and medium-sized enterprises;
• greater consumer choice;
• high standards, including on sustainable development; and
• more jobs (noting one in five Australian workers are employed in a trade-related activity, of which 1.57 million work in connection with exports and 671,000 with imports).

What could the AU-EU FTA deliver?

Australia has been at the forefront of concluding modern, comprehensive FTAs which aim to maximise tariff reductions for Australian exporters, open up services markets, and set rules to enhance trade and investment, reduce regulatory risk and support further liberalisation.

The AU-EU FTA would cover goods, services and business investment and is considered key if Australia is to reduce its trade dependency on China. According to an impact assessment, trade in goods and services between the two partners could increase by around a third.

For example, the AU-EU FTA has the potential to deliver:

1. Industrial goods: The elimination of all EU tariffs on industrial goods (noting that currently the EU has higher tariffs than Australia on many industrial goods, with exports facing tariffs of up to 12% on minerals and metals, 10% on wood and paper and 7% on chemicals). In exchange for receiving improved market access into the EU, Australia would make equal cuts on tariffs on imports from the EU.
2. Agricultural goods: Tariff liberalisation of Australian agricultural exports, including beef, sheep meat, sugar, cheese and rice which are currently significantly constrained by EU tariff quotas (noting that negotiations on some agricultural products will be particularly difficult given, for example, some EU countries have protectionist farming sectors).
3. Services: Guaranteed access for Australian services exporters, in addition to the creation of new opportunities in sectors of key commercial interest, such as in education, financial and professional services. The AU-EU FTA also provides an opportunity for the partners to establish a framework for the mutual recognition of professional licensing and qualifications, as well as greater certainty for skilled professionals entering the EU labour market.
4. Investment: Greater access for Australian businesses with investment outcomes in the AU-EU FTA building upon both partners' transparent legal systems in order to provide greater predictability for investors. The AU-EU FTA may potentially add to the attractiveness of Australia as an investment destination, which will subsequently provide Australian businesses with access to additional capital, new technologies and global supply chains.