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Joint Standing Committee on Foreign Affairs, Defence and Trade
07/08/2017
Australia’s trade and investment relationship with the United Kingdom

SWINBANK, Professor Alan, Private capacity

[15:16]

Evidence was taken via tele conference

CHAIR: Welcome. As with our earlier witnesses from overseas, we are on a time limit. We have your submission and want to thank you for participating in our inquiry.

Prof. Swinbank : It's a pleasure.

CHAIR: I inform you that you would be protected by parliamentary privilege if you were sitting here in the room, but if you are beyond Australia's jurisdiction we can't protect you.

Prof. Swinbank : Not until I arrive in Australia!

CHAIR: Would you like to make an opening statement?

Prof. Swinbank : I'm speaking to you in a personal capacity, but I was professor of agricultural economics at the University of Reading, which I joined back in 1977 after a brief spell as a junior administrator with the Commission of the European Communities. I have spent the bulk of my academic career talking about, criticising and analysing the common agricultural policy.

CHAIR: You're our kind of guy!

Prof. Swinbank : The Brexit vote was a bit of a surprise to many people, but not necessarily to everybody. What is difficult is that neither the government nor the leave camp had any real idea about what they would replace the EU membership with. Consequently, we are still scrambling around a year on trying to work out what that might be. I first wrote about Brexit back in February 2013, arguing that the government had to have a plan B, but no-one was particularly interested at the time. This morning I'm very happy to talk to you about agricultural policy and matters of that sort, but I am aware that your inquiry is not restricted to agriculture, touching on investment and trade policy in general. As you say, I—

CHAIR: Just to allay your fears, the three members of the committee you have in front of you are all ardent supporters of the agricultural industry here. We are all regional Australians. So I think just sticking to that with your submission will be fine.

Prof. Swinbank : Fine. Would you like me to give some further background information or would you like to move straight into questions?

CHAIR: Questions.

Mr LITTLEPROUD: Professor, I would like to get your view. Do you believe that there is an advantage for Australia to be an early mover in terms of discussions with the UK around a future FTA or should we be waiting to see where the negotiations fall with other competitors?

Prof. Swinbank : I think discussions are certainly sensible. I think it's very difficult at the moment to enter into any firm commitments because until we know the nature of the UK's departure from the European Union we don't know what we are able to negotiate. In terms of other countries wanting to form free trade areas with the United Kingdom, there is in a sense a copycat effect going on. The first countries negotiating with the UK may find it pretty difficult to get access for sensitive products to the UK's markets because of the fear of the UK farmers that this will set a precedent for future trade agreements with other supplying countries around the world. On the other hand, if you get a generous deal to start off with, that might then make it less likely that other countries can negotiate generous deals in the future. So there's a lot of politics involved in all of this. I really don't know that there is a single answer to your question. I think you need to be vigilant and open up discussion [inaudible].

Mr LITTLEPROUD: So what would you say is our competitive advantage? Whether it be timing or not, what would you say is our competitive advantage in terms of those discussions?

Prof. Swinbank : The competitive advantage is that the British government is rather keen to be seen to be opening up trade negotiations with countries around the world and to have them in place, so if you can deliver an earlier trade agreement that the government can go back to the electorate and say: 'Brexit has been a success. We are able to do this,' then that would be advantageous to you. In that sense you've got a much better chance of forming a free trade agreement with the UK than India or perhaps Brazil, for example.

Mr LITTLEPROUD: Who else would be our major competitor that the UK would want to negotiate with?

Prof. Swinbank : The big one of course is the United States. The advantage is supposedly a new trade agenda with countries like India and China, but in terms of the kith and kin argument with the Brexiteers' view that the Commonwealth is an important element in our future trade negotiations, then Australia is clearly central to that. But I would have thought that the government would be concentrating upon the United States, despite the difficulties of negotiating with the United States.

CHAIR: Yes, and we thought European agricultural policy was bad!

Mr RAMSEY: I notice in your submission you talk about the declining contribution from the EU to farmers' income and yet we've already seen today that British farmers are getting about 50 per cent of their income from those EU policies. That really brings into question as to where you think the current regime will settle on support for British agriculture in the future and what Australia can look forward to to try to angle into that market. I must say, it wasn't any great surprise to me when I found that Europe was supplying the bulk of their dairy imports into Britain and the bulk of that was coming from Ireland, which is obviously going to be a very important point for Europe to stitch up as well.

Prof. Swinbank : Indeed, as you probably know the common agricultural policies provide support in two ways. The first is through direct payments to farmers—taxpayer funded—and that's what you've just been referring to. If you set those figures against UK farm accounts, it's about half of the income. To what extent the British government will be willing to fund something of that sort in the future is one of the debating points at the moment, as is whether it would be more environmentally conditioned than it currently is. The second form of support is very high tariffs on a number of products, including dairy, as you just mentioned, but red meats and sugar as well. These very high tariffs basically mean that getting competitive products—for example, Australian beef or Australian dairy products—into the European market is extremely difficult, if not impossible, unless you have access to tariff-rate quotas. That's why one of the big import sources is Ireland. But you have to remember that Ireland is next to the United Kingdom and always has been a major supplier of dairy and beef, so it's not just the tariffs and the policy; it's also locational advantage.

The trade between Ireland and the United Kingdom is one of the crucial issues, I think, in the Brexit negotiations because there's a very sensitive border there. My real fear in all of this is that we end up with a hard Brexit, trading more with Australia maybe—to the benefit of your farmers—but that border in Ireland becomes a very difficult border to transport goods over and we might return to the troubles of the past. I think this is a sticking point that very few people in the United Kingdom or, for that matter, the rest of Europe have yet appreciated about Brexit. I think that for political reasons we need a soft Brexit. We need the United Kingdom to be bound quite tightly with the European Union restricting your farm exports to the United Kingdom in future.

Mr RAMSEY: A hard Brexit would create real issues between the Northern Ireland province and the Irish Republic, would it not?

Prof. Swinbank : Indeed. If we had a hard Brexit, maybe we could go for unilateral free trade in agricultural products, significantly reducing our tariffs, and then your sugar industry, for example, may have a real opportunity to enter the United Kingdom market. Just take sugar as an example. You've been shut out since we joined the European Economic Community back in 1973. Very high tariffs mean you can't get into the European market unless you go to a tariff-rate quota. You have a very small tariff-rate quota. You have a sugar-refining capacity. We have a raw sugar-refining capacity in Britain. Suppose we moved to free trade and suppose we reduced our tariffs on sugar. Would it be Australian sugar that got access to our market? I think not. I think it would be either Brazilian sugar, because that would be cheaper with the shorter distances, or European manufactured sugar, because if we had zero tariffs on sugar then the European sugar beet producers would be able to export packaged sugar into the UK market. So the form this hard Brexit takes is very, very crucial. There are all sorts of permutations out there and, at the moment, we have very little idea of what our future trade policy is going to be and, under those circumstances, to go back to an earlier question, it's very difficult to know what your negotiating stance can be. Unless you know what you're negotiating, there's not much negotiation you can do.

Mr LITTLEPROUD: How powerful is the UK farming lobby in their influence with respect to any agreements, not only with Australia but with anybody? Politically, where does the landscape in the UK sit?

Prof. Swinbank : You're moving a bit out of my confidence zone, but I would say the British farm sector is really still quite powerful. It recognises that the form of subsidy has to change. It's arguing for more environmentally linked payments to farmers rather than just direct income payments, but it is arguing for the same level of financial support overall. It wants to see British agriculture expanding. It's talking very much about British agriculture supplying the larger proportion of the British market, including sugar, beef and sheepmeat, for example. It would be very reluctant to see sharp reductions in tariff protection. I think it would protest quite vigorously. You have to remember that a lot of conservative members of parliament represent rural areas and are quite reliant upon the rural vote—not necessarily in terms of numbers but in terms of attitude. You also have to remember that there are four parts of the United Kingdom. Support for the agriculture sector is much stronger in Wales, Northern Ireland and Scotland than it is in England, so there is a whole mix of political factors at work. If you want access to the British market—the European market, for that matter—you need to remember that a free trade area is a reciprocal agreement: what can you offer; how can you make a free trade area look attractive to farmers; what is it that people would want access to? British consumers might want access to cheaper beef, but it's very difficult selling them the idea that a free trade area agreement is going to reduce food prices noticeably in their pockets.

Mr LITTLEPROUD: In terms of the negotiations—not so much about tariffs, but also non-tariff barriers, and particularly some of those around EU protocols that are imposed on us here in Australia—would there be scope for us in that agreement? How would the political landscape be with respect to the easing of some of those protocols? Do you think the negotiations would be straight down the line with the protocols that are in place with the EU agreements at the moment and that they would continue under a UK agreement?

Prof. Swinbank : I think you've hit the nail on the head there, because, if there are UK protocols in place and Britain wants to continue exporting to the EU market, then basically we need to remain linked with those protocols—also recognising that there is a very strong consumer lobby saying, 'We don't want to reduce the quality of our foodstuffs.' You might have noticed in the press recently the issue about the treatment of chicken to reduce pathogens—the fact that the Americans allow a chlorine wash and we don't in the European Union and, hence, in the United Kingdom. At the moment, if there were a proposal to rescind that legislation and say, 'Yes, we could have chlorine washing of chicken,' there would be major problems amongst the British public. The British electorate is very divided at the moment and Brexit is a very divisive issue. All sorts of things could change the political climate. You will remember we have a government which has a very small majority. A crisis can arise from day to day and week to week, and any suggestion that food standards were eroded could be problematic. So don't expect a major change in legislation in that area in the immediate future. It's something to be negotiated over a longer time frame.

ACTING CHAIR: What about quota setting? We note that the New Zealanders have an incredibly generous and often unfulfilled sheepmeat quota that was set up in the 70s, when everyone was probably feeling very sorry for them, way before their dairy industry took off. Do you see an opportunity for Australia to have an EU-plus quota arrangement in any future UK agreement?

Prof. Swinbank : The New Zealanders, of course, also have a dairy-butter quota, which they don't use, basically, these days. The history of that is long and complex and would take us a long time to discuss. How those EU quotas are going to be allocated between the United Kingdom and the EU after Brexit is one of the things which is still to be decided, and no doubt that will preoccupy the World Trade Organisation and your discussions for some time into the future. In terms of whether there's going to be a bigger quota to allocate, that largely depends upon UK trade policy after Brexit. If, in the context of a hard Brexit, we decide we want to import cheaper lamb, for example, then we could unilaterally introduce a MFN tariff rate for lamb, which Australia could access. We couldn't, except within the framework of a free trade area agreement, give Australia a tariff-rate quota for lamb. That would be contrary to WTO rules. The fact there are country-specific quotas at the moment is a historic fact. But you can't set about creating new tariff-rate quotas except in the context of a free trade area agreement. So what you'd be looking for is either a unilateral quota open to all WTO members, or a quota within the context of a free trade area agreement you negotiate with the UK, or the UK simply deciding it will not impose any tariffs on lamb in the future.

CHAIR: And then it's a free for all.

Prof. Swinbank : Which of those outcomes is likely? I don't know.

CHAIR: It's all a bit of crystal-ball gazing at the moment, isn't it?

Prof. Swinbank : Yes, it is, I'm afraid.

CHAIR: Going to Mr Littleproud's question around the political armour of the local British farmers federation, as opposed to, for instance, the French or the Irish: do you get a sense of who will win that? In terms of Brexit, whose tractors will drive to which parliament first? Will it be the French farmers and the Irish farmers, or will the British farmers say, 'This is an opportunity for us. We need to get out'?

Prof. Swinbank : The French and the Irish farmers of course won't have any real influence over the British government—

CHAIR: But they'll have influence, I imagine, over the EU.

Prof. Swinbank : To a certain extent, yes. But I think the overall framework of an agreement between the EU and the United Kingdom is not going to hinge on agriculture. Much as I emphasise the importance of the Northern Irish border and trade in agricultural products over it, there are lots of other issues at stake. One of the dangers at the moment is the negotiations are heading towards a brick wall because of rather strong positions on either side of the negotiations, and trade, although important, is not going to be the dominant force.

Irish farmers clearly have quite a big influence in Ireland, because Ireland is such an agriculturally dependent economy, and, in that sense, Irish farmers are more politically important than our British farmers. I don't think French farmers are really engaged in the Brexit debate as yet. I may be wrong, but I don't think they see it as an issue yet. Their real issue in the future would be access for specialty cheeses to the UK market and the United Kingdom's access for lamb to their market.

CHAIR: Do you have any views around geographic naming and recognition of certain products from certain regions and where that should stand in any future UK-Australia agreement?

Prof. Swinbank : I've always been somewhat sceptical about geographical indications. Trademarks seem to me to be perfectly acceptable. When I have been in Australia, however, I've been somewhat surprised at some of the denominations of products, but that's beside the point. If the United Kingdom is a totally independent entity after Brexit then I don't think there'll be much appetite in the UK for geographical indicators of origin. We have very few to defend. If, however, the UK is tightly tied in with the European Union after Brexit then I think one of the conditions would be to apply geographical indication legislation in the UK. So, if you think you can start relabelling your sparkling wine as champagne and selling it to the British market, I think that's some way into the future.

CHAIR: We're just happy for our prosecco to stay as prosecco!

Prof. Swinbank : I'm not sufficiently into the intricacies of the trade rules there to work out—

CHAIR: You should have a look at that particular variety when you're in your next bottle shop.

Mr LITTLEPROUD: We did hear evidence a month or so ago about whether we would be better off entering into non-binding agreements with not only the UK but other like-minded countries, and whether that could be a precursor to basically opening up trade not only between Australia and the UK but also with a third or fourth party as an opportunity to get some momentum and like-minded goals. Do you have any thoughts on that?

Prof. Swinbank : Not really. All I could comment is that, if they are non-binding, of course, then you have no arbitration mechanism in place. Private individuals and private enterprises on both sides of the trade could engage in those activities now without waiting for Brexit. That's not necessarily dependent upon Brexit.

Mr LITTLEPROUD: The evidence suggested that it could be done between three or four countries and it would be a sign of goodwill.

Prof. Swinbank : No problem, I wouldn't have thought.

Mr RAMSEY: This committee has heard from a number of academics. When asked about Britain's prospects after Brexit, they saw them as pretty gloomy, I would have to say. Yet, when we talk to business and people associated with chambers of commerce, they are much more optimistic than the academics. What do you think the prospects for Britain are under Brexit and consequently the spin-offs for Australia?

Prof. Swinbank : I'm not a macro economist or a trade modeller and so I have no insight. My general belief is the United Kingdom is likely to be poorer with Brexit but, of course, we'll never know in the future because we'll never know the counterfactuals. Whatever the outcome is, measuring it against an alternative is difficult. Unless we do manage to generate major new trade deals—not with countries like Australia, which frankly is small beer, but with countries like China, India and the United States—then we end up as a poor economy, and that would be a disaster from an economic perspective.

CHAIR: I would like to get a sense of the capacity of the UK to negotiate anything, given that they've handed that over to the EU for so long.

Prof. Swinbank : I have no inside knowledge on this. All I know is what I read in the newspapers, as you do, and the evidence suggests that the civil service are really quite competent but struggling a bit at the moment. They really need critical direction to know exactly where they're going and what they're going to negotiate.

CHAIR: I understand you're heading over here to ANU on a fellowship in a couple of months.

Prof. Swinbank : I am. In just over a month, yes.

CHAIR: If we have any further questions, we might catch up with you then.

Prof. Swinbank : That would be great.

CHAIR: We really appreciate your time. Is there anything else you would like to add? Do you have any oversight on the Scottish perspective?

Prof. Swinbank : As I said earlier, the devolved nations—Scotland, Northern Ireland and Wales—tend to have a more pro-agricultural outlook than Whitehall does, but, of course, it would be Whitehall which would be handling the subsidies to the farm sector and environmental protection and it is Whitehall that will be representing the United Kingdom in any trade negotiations. The scope they have for freedom of movement is limited by the constraints the UK government imposes upon them.

CHAIR: Can I get some understanding of these payments, which are incredible from our perspective? What's the WTO's view of these payments?

Prof. Swinbank : There is a long history there, and you don't want to spend half an hour discussing it, but basically—

CHAIR: No, but I do have 10 minutes.

Prof. Swinbank : They are declared as so-called green box payments and so they are supposedly decoupled from production. They have no significant impact upon the overall level of production and hence upon trade. Whether or not they are strictly green box payments is debatable.

CHAIR: Has anyone tested that, Professor?

Prof. Swinbank : Well, there is no need to, because the European Union at the moment is well below its permitted level of support under the so-called amber box. Even if you were to say all of these green box payments were not green box payments but were amber box payments, it would still be within its limits. There is no reason for Australia or Brazil to challenge them, because it would be a long, time-consuming process and the outcome would be the same as where we are at the moment. The real issue is: whether there is a conclusion of the Doha Round. You must be pressing very strongly for a conclusion to the Doha Round, because, if and when there is a conclusion to the Doha Round, then the constraints would become much more binding. Whether or not these really are green box payments would become much more important. In the context of Brexit, there is the issue about how the EU's overall amber box allowance is split, if it is split at all, between the European Union and the United Kingdom. If the United Kingdom ends up with a zero allowance and it is simply restricted to the minimalist provisions in the WTO, then there will be tighter constraints on the design of future British agricultural policy.

CHAIR: I would like to clarify that. Whether we have green box or amber box payments is not something we talk about here. You seem to be saying that in the process of negotiating Brexit the EU says, 'We are keeping all of our WTO amber payment allotment.' Does that mean that the UK government can't give the farming lobby the 50 per cent of their income payments?

Prof. Swinbank : Well, it's not just a debate between the EU and the United Kingdom. How that allowance was distributed would need to be ratified by the WTO. If and when the United Kingdom ends up with a zero allowance, a minimalist allowance, if it can design proper green box payments—and I'm sure it can—then it would still be allowed its green box balance. However, I fear that, if it simply continues with its current system of direct payments, then that might be challengeable. This is time into the future—2019—when you lodge your case and then it takes some time, and so there is plenty of time for the UK government to change its policy. We'd be talking about a ruling in 2025 or some such date. Yes, it is an issue that the United Kingdom government and, more particularly, the devolved administrations—which have different ideas about how to pay support to the environment and farmers—need to be bearing in mind, as they design their new policies.

CHAIR: Thank you. Are there any further questions? I will think of a question on notice and visit you when you're here and have a chat.

Prof. Swinbank : Okay. I look forward to that.

CHAIR: Thank you very much for your evidence today.

Prof. Swinbank : Thank you. Goodbye.

Proceedings suspended from 15:48 to 16:02