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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

WINTERS, Professor L Alan, Director, UK Trade Policy Observatory, University of Sussex

[16:40]

CHAIR: Welcome, Professor Winters from the UK Trade Policy Observatory at the University of Sussex. We have your submission. I would like to advise you that parliamentary privilege doesn't extend beyond the Australian jurisdiction, but it is something I will be raising at the next committee meeting. We've received your submission; thanks again for that, and thanks for taking time to speak with us. I invite you to make an opening statement and then we will proceed to questions.

Prof. Winters : It's a great pleasure to be here. I wish I was with you rather than here in dowdy England. Since I wrote the submission there has really been quite a lot of change here in Britain insofar as Brexit is concerned—a lot of change that has not yet clarified what's going to happen. As you are of course aware, we had an election. Before the election there was a slightly inchoate view that we were going to head for a hard Brexit with some WTO rules plus free trade agreements sorted out. Since the election that's still on the table—possibly even the most likely outcome—but suddenly all sorts of other opportunities are being talked about in ways that weren't before. So there is a possibility of and people are talking optimistically about a much softer Brexit—a longer transition period. On the other hand, the fact that we've got a government without a majority means that it could all collapse in a heap. So the truth of the matter is that, if you were hoping I was going to tell you what is going to happen, I'm not.

To go back to the submission, I really tried to make two points. One was that an important part of the relationship between the UK and Australia is through the World Trade Organization, and there is technical stuff to be done there. Our recommendation, and UK government policy now, is to make this as simple a process as possible—a simple technical adjustment from which Britain can then go on, once that's stable, to negotiate a more complete trade policy that suits it. We are suggesting that this should be pursued as a so-called rectification in the WTO, recognising that for everybody else in the world there is no interest in having a disrupted arrangement and that therefore we should just carry on, essentially, with the old agreements that we've had in the Uruguay Round and since then.

There are technical difficulties about agricultural subsidies, but that shouldn't be a problem. There are technical difficulties about tariff rate quotas, which are a bit more of a problem, and in my evidence I talked about the sheepmeat quota, which is clearly of interest to Australia—a binding quota of exports to the European Union as a whole. My view is that this is a sufficiently small issue that it can be solved reasonably easily. I know it's big to the actual people who are doing the trade, but their trade is going to continue. The amount of inconvenience they suffer will be relatively small. So while I think it is a legitimate cause for discussion and concern, it seems to me that neither the British government nor, frankly, the world community has any interest in crashing Brexit as a result of that.

The second issue is about a possible free trade agreement between the UK and Australia. The current government of the UK is desperately keen to sign some trade agreements, and Australia would look to be a good candidate because of the common ties we have and so on. The point I am making is that I can understand why Australians may not be quite as keen as the Brits—you're negotiating with the EU and, until Britain's relationship with the EU is clear, you don't really know what you're signing up to. The next point I want to make is that the amount of difference that a free trade agreement would make to trade is probably relatively small. Certainly for Britain but even for Australia, this trade flow is not among the most important that the countries have. Most of the goods Australia sells to Britain are not subject to trade restrictions already. When it comes to services, half the trade flow is personal travel, and it just isn't affected by trade restrictions. The third biggest component is transportation, which is just carting goods which we choose to trade around the world. It's only in the area of professional services that I think Australia will have a large interest in a free trade agreement, and there you've already made it clear that you think visas are an important part of that. We know that's a little bit of a difficulty in our local political system.

It would be useful to have talks—informal talks can go on quite soon—but neither side should expect this to be a dramatic economic leap forward.

CHAIR: That is very interesting evidence, Professor. I'm very interested in your quote that 'it's perfectly possible but unlikely to be of huge significance economically'. Both countries are talking a big game, but in your learned opinion there is already a mature trading relationship anyway and there isn't a lot to add.

Prof. Winters : Yes. It is a mature trading relationship but it is also a very distant trading relationship in terms of putting stuff on ships—and even planes take 24 hours. It is different in nature to the trading relationship that you have with New Zealand or we have with Europe, where the distances are so much shorter and the time zone is the same and so business is easy. It's not to say that a few million here and a few million there aren't worth worrying about, but they don't compare with the billions that Britain is looking at post-Brexit.

Mr PERRETT: I am interested in the basis for your analysis. We have been asking a lot of witnesses: should we go with the EU or the UK? People have gut feelings as to what might happen, and I think you've done something similar. Looking through the political prism of the UK since Cameron went for the referendum and the recent UK election, does it favour a ready deal because the British Prime Minister would like to wave a piece of paper in the air and say, 'We're reaching out to the colonies.' Could you give us some commentary on that, without prejudicing yourself too much?

Prof. Winters : Are you are talking about the UK-Australia trade agreement?

Mr PERRETT: Yes. That's our main focus.

Prof. Winters : The British government is extremely keen for political reasons over and above any possible economic gains—

Mr PERRETT: I hope you're not putting out press releases saying that because I guess they want to negotiate from some position of mystery and authority.

Prof. Winters : You might be overinterpreting their skill in this game. One of the strange things about the Brexit referendum was that we asked a simple question and then we spent most of the time trying to ask what the answer meant. But one of the answers that one hears pretty frequently is that it allows Britain to spread its wings back to being a global player. In these days the way you more or less manifest yourself as a global player, other than militarily, is through trade and trade agreements. If this government failed to come back with any trade agreement at all, that would look to be a very hollow promise. They have very strong political interest in getting a deal. Who would they get a deal with? They've been to India and had a flea in their ear. China is very big and very difficult to negotiate with. Mr Trump may or may not come good, but we're already getting into an argument about the standards that we might adopt if we get too close to America. Australia, we're old friends and I used to say when I was visiting Australia, 'We can beat you at cricket and we can beat you at trade negotiations.' It seemed very attractive to the British ruling class to deal with Australia. It's very important to them politically.

Mr PERRETT: As you said, half the services is personal travel. Was it you who said, 'It's small beer'?

CHAIR: We had an earlier witness who said that it's pretty small beer.

Prof. Winters : Well, I think that's exactly right. That's not a gut feeling—that's just looking at the numbers. The DFAT site is very useful for the numbers—more useful actually than the British sites. It is a very useful summary of the trade relationship we have.

Mr PERRETT: I was surprised to see that beer is one of the major trading commodities.

Prof. Winters : Beer does figure in it, but whisky is the big, heavy number for the alcoholic beverages.

CHAIR: Those clearances served you well at the end.

Prof. Winters : Yes, indeed.

CHAIR: How would British farmers respond to cheaper beef, lamb, dairy, sugar penetrating the British market? Are they likely to take their tractors to Whitehall?

Prof. Winters : They will be upset. Already there is some debate about what farm policy will be in the future. The government has made some short-term promises, but it's been moderately canny about what it's promising, say, for 10 years from now. Farmers in Britain have less political power than they have on the Continent and they tend to exercise it rather quietly. While one could be sure there is a lot of lobbying and while it's the case that farmers are well represented in constituencies that vote Conservative and therefore this government might feel that it needs to tread relatively carefully, it seems to me that there will be some lobbying but there won't be a complete destruction of the political process. I think the most likely way in which farmers will influence the politics is through these marginal constituencies in which there are significant numbers of farm workers. In truth agriculture is a pretty small sector for the UK parliament.

CHAIR: What about financial services and the service economy? Do you see opportunities there both for Australia and Britain because of our shared history of professions and accreditation?

Prof. Winters : The financial services sector is a very arcane sector of which I do not have a great deal of direct expertise, but clearly there is scope for further cooperation between the UK and Australia in the area of financial services. We should say however that if you go back 10 years financial regulation was pretty global. It is tracked back a bit since the financial crisis but it's not particularly clear what different countries can do bilaterally. There can be some recognition, but you have to recognise that if, for instance, Britain is going to work very hard to maintain so-called equivalence with the EU—this process whereby the European Union declares that British regulations are equivalent to EU regulations and, therefore, British financial institutions have access to the European market—and if Britain signs up to that sort of regime, it has rather little scope then to sign up to anything different with anybody else. So I suspect, in the area of finance, in some sense—a little bit like in the area of food safety—Britain has to decide which way it's going to jump, and once it's decided which way it's going to jump the scope for dealing around the detail is probably rather limited.

Now, I don't think you mentioned the professional services. I think that's an area where there is room for more collaboration and more cooperation. It spills over into the migration regimes—about visas. But that is perfectly within the gift of the British government. Indeed, it already is. You don't have to have Brexit to change regulations relative to Australian professional services. So, while the initial reaction to more visas for professional services was a little bit cool, it seems to me that is an area where there might be some movement.

Mr PERRETT: Could you expand on that matter of financial services again? I know it's not your area of expertise. If the city of London is such a gateway for those 430 million people on the other side of the English Channel, could you just explain why the UK might do things slightly differently? Do you think global opportunities might open up if they were unshackled from Europe? Is that what you're saying?

Prof. Winters : No. I think the situation with the financial services is more a question of what we can persuade the European Union to give us than a question of what we want. At the moment, London is essentially the financial centre for the European Union. Any bank established in London is regulated in London, and every other European Union country accepts that. It doesn't impose any further regulations. That is part of the single market. The EU is pretty clear that if you leave the European Union you cannot have passporting. It is possible there'll be a political deal to work something out, but I think that's pretty unlikely, and I think the financial sector has accepted that it's pretty unlikely.

Mr PERRETT: I think Frankfurt and Paris and a few others might be trying to do their bit to say, 'Bye, bye London.'

Prof. Winters : That's exactly right. The other centres are keen to get a slice of the action, but also, in a sense, it's a little bit about sovereignty. Remember that the European Commission and the European Central Bank had already made an attempt to prevent London from being the centre for clearing euro transactions, and actually it was only the European Court of Justice that stood in their way. We are withdrawing very explicitly, very obviously from the European Court of Justice. Once we're outside, they won't be able to save us from that. So I think it's more that the Europeans feel they've got some rents to earn by attracting financial services sectors. This is part of the way that financial regulation is now becoming a little bit more national. They have banks; they want to regulate them themselves. They want to know who's going to rescue them if things go wrong. They want be able to supervise their books. You have to have immense faith in whoever's doing that, and most countries do that by doing it themselves. So I think the worry is that the Europeans would feel this is a very important function—essentially, a sort of state function—that the Europeans should carry out for themselves. To subcontract it to the Brits means that a huge amount of faith and trust has to be placed there. Now, it is possible. They have this process called 'equivalence'. Equivalence occurs when the European Union says, 'We believe that your regulations are equivalent to ours and actually are as well enforced. Therefore, we will treat your regulation as if it were our own regulation.'

There are two problems with that. One is that it's quite a difficult thing to achieve and it's entirely within the gift of the European Union. It's their decision. Essentially, it's not a negotiation. We present a technical rule book and they say, 'Yes, yes, yes; you're in.' The other problem is that they can withdraw it at 30 days notice. So if you build the whole of your headquarters operation and your clearing operations in London on the strength of equivalence, you are pretty vulnerable to a change in the wind. Even if Britain got equivalence, it's not clear that that would, as it were, settle everything in the city and that everything would stay in the city. My guess is that financial institutions will all want to have a legal footing in the remainder of the European Union, even with equivalence, just so that, if things were to fall apart, they could move a bit more quickly.

Mr PERRETT: They really need the world's best negotiators for this Brexit process. The more we hear of the tar paper that they've got lying around the place—it's unbelievable! I hadn't heard of that.

Prof. Winters : I'm sure you wouldn't expect me to comment.

CHAIR: Especially without the protection of privilege.

Prof. Winters : Exactly.

CHAIR: One of the aspects of your submission that lit up our lives was your discussion around the sheepmeat exports. I guess that was a great surprise to this committee. We were quite outraged when we heard that New Zealand had this incredible quota and that somehow, for decades, we'd let that stand. Could you talk us through in a little more detail your proposition—what you're saying that issue is; your warning around how the WTO schedule interplays with that; and how you think, projecting forward, this might resolve itself.

Prof. Winters : The WTO plays into this particular tariff rate quota because it was one that was agreed in the Uruguay Round. You all look as if you're too young to remember much about the Uruguay Round, but it was a very fiercely fought negotiation. Agriculture constantly looked as if it would derail the round, and it was settled in the last few days. So it was a very finely balanced negotiation in the end, and part of the outcome was that, while there was less liberalisation of agricultural markets than certainly Australia and many other countries had hoped for, there was this commitment that, even if you kept fairly high tariffs on a number of goods or other barriers, it would let a quota of goods in essentially tariff free. The EU negotiated that Europe-wide. That's the important thing. It included the UK and the rest of the EU—the EU as it was then.

The question is: how do we divide that up? A quota that doesn't bind, as with the New Zealand case, is essentially playing no role. If the New Zealanders have the right to send 225,000 tonnes of sheepmeat to the EU 15—I should say we don't know what the quota is for the enlargement; it's still within the WTO because it hasn't been agreed.

CHAIR: Really? How do we find that out?

Prof. Winters : I guess you can find it out through governmental processes, as members of the WTO. I presume your delegate there will have seen the proposition. When the European Union was enlarged, the European Union went back and said to the WTO, 'We're bigger now; we have to enlarge the quota a bit. We'll enlarge it by this amount.' No-one's agreed. It's not rejected; it's just not accepted. It's still there in the papers to be negotiated. So I can only do this for the EU 15, where the number was accepted and certified.

The New Zealanders aren't filling their quota by a mile, and so it just doesn't do anything. My view, my advice to the British government, is: you just say to the New Zealanders, 'Well, you're not using it; you haven't ever used it. Frankly, we're not going to do anything about it.' Australia is different. You've got this small quota of 18½ thousand tonnes, and it is almost perfectly exhausted. I have spent quite a lot of time working on non-tariff barriers and this clearly looks like a quota that is binding. You could sell more. You did agree to 18½ thousand in the Uruguay Round. I think it is important to remember, and I did put it in the evidence, that I do not think this is the time to reopen old scores. I think you should just accept with the Uruguay Round how we are going to make it work in this slightly new circumstance. The difficulty you have is that in some years you send a bit more of your 18½ thousand to the European Union and in some years you send a little bit more to the UK. If we were to put a rigid division between the EU and the UK, say 8,000 and 10,000, some years you would want to sell more than 8,000 to the EU and some years you would want to sell more than 10,000 to the UK.

I propose—and we have to do this; we cannot live without settling it—that we should essentially enlarge the quota a bit to give exporters a bit of wriggle room. I have suggested that 10 per cent would be reasonable, and then we just agree on the basis of the last three or five years trade what the division should be. That, I think, is not completely random. The division between the European and the British markets is fairly stable, it is just evolving a bit. So I do not think it is difficult to take the last few years, wind it up a little bit and say, basically, this will allow you to do whatever you would have been able to do had Brexit not occurred, which is what you had agreed to in the Uruguay Round.

The other point to make is that it is a relatively small amount of trade. It is a bit over US$100 million worth of trade and the inconvenience of not being able to split it precisely as you wished to between the UK and the EU is an inconvenience but it is not a disaster. Again, you just should not let this derail the process.

CHAIR: Of the 225,000 tonnes that New Zealand does not fill, what sort of avenues are there for Australia to assist New Zealand with say 200,000 of those tonnes?

Prof. Winters : Probably rather small. Remember that Europe as a whole is relatively protectionist. If you don't sell us the exports, the farmers and therefore the governments on the continent are not unhappy. Trade agreements like this are typically subject to the rules of origin on the tariff-free quota. I have not checked the words but I would be virtually certain that it says that New Zealand has the right to sell lamb of New Zealand origin up to 225,000. Therefore, if you try to ship your lamb to New Zealand to send it on to the UK or to Europe, the customs officers will say that it is not from New Zealand and it violates the quota.

CHAIR: I will check if there are any other questions. Are there any other issues you would like to make us aware of before we conclude?

Prof. Winters : Only just to reiterate that I do think that the relationship between the UK and Australia is a deep and longstanding relationship, and it seems to me that these little irritants about sheep meat or perhaps even little bits of visas here and there should not derail the relationship. If I am perfectly frank, my belief is that Britain will need all of the friends it's got and we look to you guys as almost top of that list. So I very much hope that we can approach these sorts of issues in a technocratic way—for example: here's a little problem; let's get it sorted and out of the way; you Brits have got more to worry about than this. I think that would be greatly appreciated.

CHAIR: Professor, on that note, whilst we want to be quite objective and technically focused about the detail of the agreement, it is your professional opinion that—I do not want to verbal you—essentially, there is not a lot in this for Australia. We did have some evidence earlier in our inquiry about making sure we weren't nostalgic about our approach to this relationship and any potential agreement. I note you nodding, and I note Hansard doesn't pick that up. Could you just expand on your thoughts, please?

Prof. Winters : Yes, I do think this is useful but not fundamental insofar as the Australian economy is concerned. More important for you, not necessarily exclusive of the relationship with Britain but more important for you, is the relationship with the European Union. It's a larger market and, for instance, they drink a very large amount of wine. You have real things to negotiate. In the pecking order of your priorities, the UK is not the top. It's useful to do this. I agree you shouldn't be nostalgic. When I was visiting Australia earlier this year, I heard, still, a sense of hurt about what Brits did to you in 1973 when they joined the European Economic Community.

CHAIR: It's all about the butter!

Prof. Winters : That's right, and I am not proud of that. However, it was 40 years ago. The generations have changed. You have adapted your economy quite remarkably and we've ticked along and changed a bit. It seems to me that there are many issues that, in a sense, are better handled as technocratic issues rather than high politics. High politics can run out of hand at times. We clearly need to have political will to have an agreement between Australia and the UK, or it won't happen. But thereafter, it seems me, working out the details, in a sense, should be relatively quiet, technical work and it will be of some use. But it won't save the British economy if we were to have a serious hit on our trade with Europe, and nor will it transform Australia into a world economic power because you export so much to Britain. That's just not realistic.

CHAIR: Thank you very much, Professor, for your evidence to our committee today.

Mr PERRETT: Thank you very much. Have a good morning, Professor, and we'll see how we go at that cricket.

Prof. Winters : I am looking forward to that. I've enjoyed myself very much, thank you very much.

CHAIR: That concludes today's public hearing. Thanks to all witnesses for your evidence, and the secretariat, broadcasting and Hansard—over and out.

Committee adjourned at 17:12