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

MELATOS, Associate Professor Mark, Private capacity

Subcommittee met at 09 : 00

CHAIR ( Senator McKenzie ): I declare open this public hearing of the Trade Subcommittee of the Joint Standing Committee on Foreign Affairs, Defence and Trade. This is the eighth public hearing of the subcommittee's inquiry into Australia's trade and investment relationship with the United Kingdom. These are public proceedings, although the subcommittee may agree to a request to have evidence heard in camera or may determine that certain evidence should be heard in camera. I remind witnesses that in giving evidence to the subcommittee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee and such an action may be treated by either house of parliament as a contempt. It is also a contempt to give false or misleading evidence to a committee.

In accordance with the subcommittee's resolution that will be passed in a minute, the hearing will be broadcast on the parliament's website and the proof and official transcripts of proceedings will be published on the parliament's website. Mobile phones should be switched off or turned to silent. Those present here today are advised that filming and recording are permitted during the hearing. I also remind members of the media present or listening on the web of the need to fairly and accurately report the proceedings of the subcommittee. I just need a member to move a motion that today's public hearing be broadcast on the parliament's website and that recording and filming be permitted during the hearing.

Mr PERRETT: As one of the three Queenslanders here, Chair, I will move that motion.

CHAIR: I fear that the numbers are against me today! I now welcome Associate Professor Melatos from the University of Sydney. Thank you for your submission. I now invite you to make a brief opening statement and we will proceed to questions.

Prof. Melatos : Thank you very much. I am appearing in a personal capacity as an academic in the School of Economics at the University of Sydney. The main message from my original submission was that there is no need really for Australia to rush into a trade agreement with the UK post-Brexit. I want to just touch on three points at the outset this morning. The first is the difficulty, as I see it, of achieving a negotiated Brexit outcome. In the media you hear a lot, especially with the UK government, of talk about the 'no deal' option or the 'walk away' option as a negotiating tactic, but I do not think that is a very realistic tactic. You cannot just unilaterally walk away from a multilateral trade agreement, just as you cannot unilaterally walk away from a contract. I think the 'no deal' option, as it has been presented, sounds more like a breach of contract, so I do not think it is very realistic.

I only see two possible outcomes from this process: a negotiated exit or the status quo, which is to remain. But the negotiated outcome to me seems hard to imagine for two reasons: the asymmetric bargaining power between the two parties and also their positions. BasicallyI am happy to elaborate on this laterthe UK, as I see it, does not have the ability to force a negotiated outcome, especially on its terms, and the EU, as I see it, does not have the incentive or sufficient incentive to force a deal with the UK.

The second point I want to make is on Brexit creating additional uncertainty, especially in global trade and investment. Brexit will create a precedent for countries, in particular advanced economies, to leave trade agreements and that has implications for how trade agreements will be designed after that in the future. In particular, a potential exit will have to be negotiated over more explicitly and this will add costs to the process. So there is a good chance that Brexit might actually discourage the formation of trade agreements further down the track.

In short, countries will need to be cautious about committing to new trade agreements in the new post-Brexit environment and, in my view, the largest traders are best resourced to resolve these kinds of uncertainties and in any case are going to set the new post-Brexit trade agreement design standards. So, for smaller countries like Australia, there is a reason to wait before moving too far.

The other element of uncertainty will be on how UK bargaining power on trade and investment is affected post-Brexit and it is going to be a stress negotiator, but what we will not know is the extent of that declining bargaining power and the areas in which it is going to be most pronouncedagain, a reason for Australia to wait while larger countries negotiate with the UK, if they negotiate with the UK, on trade deals to sort that out.

Australia's response to Brexit, I think, is to wait for uncertainties in global trade architecture and UK weaknesses to be resolved, at least partly; after that, to design the most flexible trade agreement possible, piggybacking off any UK trade negotiations with larger countries; and, in the meantime, to prioritise negotiating a trade agreement with the EU, which after all we can do now whereas with the UK we have to wait.

The final point I want to make is that the UK is currently held up as being an important trade partner of Australia, and it isI think it is something like the fifth largestbut I just caution that that ranking is artificially inflated by its membership of the EU. I think a lot of the value to Australian business of the UK in a trade sense is as a gateway to accessing the EU Common Market and that will not be the case post-Brexitat least it may not be. Thank you very much.

CHAIR: Thank you. We will proceed to questions.

Mr PERRETT: Thank you, Associate Professor Melatos. You say 'don't rush', but when? Is it going to be when the signature is dry on the Brexit arrangements; is that your position?

Prof. Melatos : No. Actually, I would say that it would be beyond that point where we have seen some movement in negotiations between the

Mr PERRETT: From the bigger players.

Prof. Melatos : Yes, that is right.

Mr PERRETT: You make some suggestion about some of the advantages of getting in early before the furniture is set in place. A lot of unknowns are wrapped up in your assessment. Did your assessment change either side of the general election?

Prof. Melatos : I am not sure whether the committee received it, but I put in a very late additional submission yesterday.

CHAIR: No. We have been on the road.

Prof. Melatos : That is okay. In any case, yes, my assessment changed in the sense that I think the negotiated outcome is even less likely, if possible, now than I did before, which is why I led off with that in my opening statement. The bottom line here, as I see it, is that the UK has very little leverage, very few outside options. 'Walk away' is just not an option, as far as I can tell, and the EU basically holds all the aces. The UK is the one who is trying to break the contract and is in a very weak position, as I see it; the EU does not want the contract broken and is in a very strong position. To me, it is very hard to see how an exit could actually be negotiated in that situation. But, of course, there is a democratic mandate from the referendum, so I am not entirely sure; I cannot square that circle, I have to say, just looking at it.

CHAIR: Does the contract not provide for a get-out clause, which would similarly have to be honoured as any other clause within the contract?

Prof. Melatos : Yes. My understanding though is that that get-out clause has not been defined so carefully. I have not read it in detail, so I cannot really comment. To the extent there is a get-out clause and it sets out how you would go about it, there is lots of room there again for disagreement and the question is how that disagreement is going to be resolved. For example, should the UK pay compensation to the EU and how much? That, of course, is one of the issues.

Mr PERRETT: And then how the EU would recoup that in visas or whatever they do and turning the gateway into a narrower entrance, if not a locked door almost.

Prof. Melatos : The EU's ace here is that it has the Common Market access rate and the UK will suffer if it loses that or if that is watered down. That is what the EU has to bargain with. Then the question is what the UK has to trade off against that. I guess they have a financial services rate and the large role they play in that, but this is not something that they would want to give up. It is not something that you would want to trade away; it is kind of the big benefit they have at the moment.

CHAIR: Some of the evidence that we received yesterday indicated surprise at the speed that Australia and, indeed, the UK spoke about signing FTAs with a whole range of countriesnot just Australiaquite quickly post the result of the Brexit vote. In part, do you see that as a response to shore up, if you like, some of the potential risk of leaving the Common Market?

Prof. Melatos : I think there are two things

CHAIR: But the speed at which it was done; it was not sort of this thought through

Prof. Melatos : Yes. I think there are two things here. There is the political necessity, which is that you are leaving the European Union; what are you going to replace it with? Government has to be seen to be proactive about having an alternative strategy. The strategy would be that we have to replace this Customs Union with a whole bunch of other free trade deals somehow. So there is the political necessity to show that, but there is the actual necessity: it needs to be replaced. It would not be the end of the world for the UK just to end up trading on WTO rules and MFN rules with everybody, but it would be a cost; it would not be ruinous, but it would be a significant cost, especially for business.

Dr McVEIGH: Thank you, Associate Professor. You use the terminology in your submission of Australia focusing on what you call its 'late mover advantage'do not rush et cetera. In other evidence that we have received in this inquiry, from industry in particularindividual firms and industry associationsthe suggestion has often been let us proceed and let us proceed as soon as possible, whereas your advice is let us hold back. Your advice is not unlike that of other commentators, other experts and academics who are making submissions to this inquiry. I respect both views, but I just want to get your response, if I may, to industry suggestions that the UK presents an opportunity for us: 'Yes, we have trade or commercial relationship issues with the EU and its members as well, but let's proceed and let's proceed quickly with securing a UK arrangement.' Do you have any comments on that industry comment?

Prof. Melatos : Yes; thank you for the question. The thing to understand is that these trade agreements are not stand-alone; they do not occur in a vacuum. Every trade agreement that you sign potentially has implications for other trade agreements. The UK is unlikely to make significant concessions on trade in agriculture, let us say, or trade in services or movement of professionals. It is unlikely to make a significant concession on that to us, Australia, because, even if it would like to, if it means that the US, or the EU for that matter, is then going to come along down the track and say, 'Well, you gave it to Australia; you now have to give it to us,' it might have been a cheap concession to make, so to speak, in Australia's case, but it may not be at all cheap in the case of extending that concession to others.

The bottom line, as I said in the submission, is that this is a very uncertain situation. Normally, very often it is costly to delay, but, in a case of uncertainty, delay actually means that you have the opportunity to receive more information; it is information revelation, so it is valuable from that point of view. It is true that the benefit of moving early would be that maybe Australian businesses get some preferences before anyone else does, but that would be short-lived. Yes, there might be a benefit there for a few years or so, but again those concessions would invariably be extended to others and perhaps even additional preferences would be extended to others just because they might be in a better bargaining position than us and we would not be in a position to renegotiate, at least not easily. There are some benefits to moving early, but my argument is that by waitingnot waiting indefinitely, of course, but waiting at least for some uncertainty to be resolvedI do not think we lose anything from that.

Mr LITTLEPROUD: I would like you to unpack the statement in here around a weakened UK position opening up more opportunities, particularly for Canada, with respect to negotiating better agreements on agriculture and for the US on intellectual property, IP-type arrangements. Can you give us where that premise has come from and why Australia would not be in a position, particularly on ag?

Prof. Melatos : I have to say, on that, I was just giving an example; I was not giving those as actual examples. However, I would argue that Canada, on agriculture, would have at least as good a bargaining position as Australia vis-a-vis the EU, simply because of its size. On things like intellectual property, I think the US would be much better placed; it would have much more leverage in negotiating with the UK than Australia would, simply because it is the source of a lot of the content.

On agriculture, that statement was not meant to be takenI apologise if it wasas an explicit kind of prediction on agriculture per se. It is supposed to be a more general thing, in that, in general, larger countries are going to have more leverage in negotiating with the UK. In my updated submission, which the committee has not seen yet, I have provided another example of how this might work, looking at the UK negotiating even with the EU on a trade deal post Brexit. UK exports to the EU are something like 13 per cent of the UK GDP or something like that. If you think about exporters wanting to put pressure on government to protect that market access, that is 13 per cent of GDP concentrated in one voting jurisdiction, namely the UK. On the other hand, EU exports to the UK are something like three per cent of EU GDP and that three per cent of potential exporter lobbying is going to be spread out or dispersed over 26 voting jurisdictions and a technocratic, unelected European Commission, which is actually doing a lot of the negotiation. If you are thinking about governments or negotiators sitting down and negotiating deals and not wanting to be swayed by lobbying pressure and so on, which might lead them to take decisions that they would rather not take, the EU, for example, is in a very strong position vis-a-vis the UK.

If you look at the same thing for Australia and the UK, UK exports to Australia are something like 0.4 per cent of UK GDP, so they are very small, and Australian exports to the UK at the moment are something like one per cent of Australian GDP and will probably be less post Brexit. So, if anything, Australia's negotiators potentiallyin the kind of general way I am speaking aboutwould be subject to more concentrated exporter lobbying. That is just an example of what I was thinking about.

CHAIR: Have you looked at the Irish dairy industry?

Prof. Melatos : No, I have not; not directly.

CHAIR: Are there any further questions?

Mr PERRETT: No. We will have a look at the later submission.

CHAIR: Yes; and if we have any further questions, we will get back to you.

Prof. Melatos : No problem at all.

CHAIR: Thank you very much.

Prof. Melatos : Thank you very much for having me.