Australia must not be hurried into a free trade deal with Britain

21 July 2017

Australia has little to gain by rushing a free trade deal during Brexit angst, writes Associate Professor Mark Melatos for the Australian Financial Review.

British Prime Minister Theresa May

British Prime Minister Theresa May. Image: WikiMedia Commons.

Nothing makes people lose their heads quite like a divorce. And the possibility of Brexit – the UK's divorce from the EU – is no exception.

The UK government's response – from arguing that the UK can "have its cake and eat it", to peddling the fantastical "no deal option" and calling an election to change the imbalance of power in Brexit negotiations – has become increasingly bizarre.

But if anyone has been acting even more strangely than the UK government, it is the Australian government who appear to be chasing a free trade agreement (FTA) with the UK with the eagerness of an over-anxious single at a desperate-and-dateless ball. Post-Brexit, it is the UK, not Australia, who will be searching for new trade and investment partners.

Australia should bide its time and not rush into any deal with the UK unless and until it can be concluded comprehensively on our own terms.

Brexit will introduce new uncertainties that will complicate future trade agreement negotiations. In particular, it will create a precedent for an advanced economy exiting a trade agreement. In response, future agreements will have to incorporate exit clauses explicitly.

Small traders, like Australia, will need to be cautious committing to new FTAs until the post-Brexit architecture of such deals has been clarified. An agreement, once signed, cannot be easily renegotiated. The largest traders are best resourced to resolve these new uncertainties and, in any case, will set the new agreement design standards post-Brexit.

Brexit is also likely to significantly weaken the UK's post-Brexit bargaining position on trade and investment; it will be a distressed negotiator. However, the extent and nature of this weakness will only be revealed once the UK starts negotiating with its largest trade partners who are best-placed to test its post-Brexit negotiating positions across the broadest range of products and services.

Australia, a small trader with a narrow bilateral trading profile with the UK, should observe these negotiations before making any commitments of its own.

At present, the value of the UK to Australia as a trade partner is mostly as a gateway to accessing the EU common market. Post-Brexit, the UK's value as a trade and FTA partner is likely to be greatly diminished.

The greatest economic risk for Australia post-Brexit is not in failing to conclude a FTA with the UK soon enough – or not at all. Rather, a bigger risk is that Australia does not extract the maximum possible trade and investment concessions from the UK following this once-only event. There is a close relationship between our two countries, but the UK is unlikely to make significant trade and investment concessions to Australia if they have to be extended to much larger trade partners.

Australia should not commit to any deal until post-Brexit uncertainties in global trade architecture and the UK's own trade and investment position have been at least partly clarified. Most crucially on the UK's trading relationship with the EU.

The fundamental rule of international relations: there are no friends, only interests.

Australia should then demand the deepest and most flexible trade and investment agreement consistent with this new reality, piggy-backing off UK trade negotiations with larger economies and the EU in order to secure a more advantageous negotiating baseline.

Australia should prioritise negotiating an FTA with the EU over scoping an FTA with the UK, which cannot be implemented until Brexit is concluded.

Visiting London last week, the Prime Minister emphasised the close cultural and historical ties between Australia and the UK. The Prime Minister said: "There are no two nations in the world that trust each other more than the UK and Australia."

He added Australians "don't muck around, we are very simple" and, therefore, will happily conclude an FTA with the UK as soon as possible.

Simple we might be, but hopefully not so simple that we forget the fundamental – if unwritten – rule of international relations: "there are no friends, only interests."

This article was written by Associate Professor Mark Melatos from the University's School of Economics. It was originally published by the Australian Financial Review

Luke O'Neill

Media and Public Relations Adviser (Humanities and Social Sciences)

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