Brexit may be bad for sharemarkets in the short term, but it could present an opportunity for more liberal trade in the long run. The Australian government is negotiating a Free Trade Agreement (FTA) with the European Union (EU) but it may be better to put that on a very slow track because there are advantages in completing an FTA with the UK first.
The UK is not a member of the Eurozone and has adjusted to the impact of the 2008 global financial crisis, putting it in a manageable position. The UK is Australia’s eighth largest two-way trading partner and accounts for around 25% of the total trade of the EU’s 28 members with Australia. Services account for around half of Australia’s trade with the UK.
Germany’s total trade is smaller: it is Australia’s tenth largest trading partner and services contribute less than a quarter of the total value of trade. OECD analysis shows Germany protects its services industries more than the UK.
There are advantages to Australia’s completing an FTA with the UK first. It would be quicker and easier than negotiating with the EU and more likely produce better access for Australian services businesses to the UK market. As a member of the EU, the UK is obliged to follow a common EU position. Greater German restrictions on foreign services suppliers would make the EU position as a whole less liberal.
Historically, the UK has been a leading advocate of free trade in Europe. If it’s freed of the requirement to support consensus in the EU, it is likely to be even more liberal outside it.
As demonstrated in Australia’s latest FTAs and the Trans-Pacific Partnership Agreement (TPP) a leading focus for opening markets today is to remove restrictions on foreign services business, such as banking and accountancy. Traditionally, trade liberalisation has focused on reducing trade barriers - tariffs. Most tariffs on goods worldwide today are low. This is also feature of the Trans-Pacific Trade and Investment Partnership (TPIP) which the EU and the US are struggling to complete.
The World Trade Organisation (WTO) annual report records that around one fifth of world trade is services. Services also contribute to the cost of producing products that are traded, for example with transport or IT. Providing competitively-priced services is now a critical element globally in getting returns from international trade.
Once outside the EU, the UK would have positive influence in enhancing global efforts to open services markets. About 50 members of the WTO (total membership is 162), which generate most of the global services traded, have been pushing to further open services markets. The EU is key player in that process.
But its negotiating modus operandi is that it only presents positions which are consensus among all member states. Outside the EU and acting as an independent party to the WTO, the UK would be likely to take significantly more liberal positions.
OECD analysis shows that the UK and Netherlands loosened regulation to create the most open services sectors in the EU. The services markets of other major EU economies (Germany, France and Italy) are more regulated.
Australia and New Zealand have also been leaders in this sphere. The ANZCERTA free trade agreement between them was the first trade agreement to commit to fully open services between two economies.
Australia could retain goodwill with the EU by extending, on an interim basis, its standing policy now in FTAs to provide freedom to invest up to a billion dollars. Australia can commit to making it permanent when a full agreement is negotiated with the EU later.
What the Brexit result should do is focus the EU on the very deep problems in its own backyard - the Eurozone. While Greece’s incapacity to meet its financial obligations has drawn most attention, Spain and Italy still have mountainous debt respectively equivalent to 150% and 200% of GDP and record unemployment.
German monetary policy has shaped this circumstance. It prospers while standards of living in the southern tier of the Eurozone fall.
With luck, Britain’s intention to withdraw will return the focus of members of the Eurozone to its highly fragile financial situation. This is the problem in the EU and they and we should all be focusing on it, not the Brexit result.
This piece has been altered since publication to correct the percentage of total trade between Australia and EU members accountable to the UK.
Authors: Alan Oxley, Chair, APEC Study Centre, expertise international trade law, economics, Asian regional development, RMIT University