What the FTA means for Aus & the UK

The signing of a free-trade agreement between Australia and the United Kingdom is a positive step for deepening the strategic relationship between the two nations.

For Australia, the deal represents the country’s second-most ambitious trade agreement (behind its agreement with New Zealand) in terms of scope and liberalisation of existing trade and investment barriers.

For the UK, it’s the first bilateral trade and investment deal to be signed since the country left the European Union, and forms a key part of the nation’s post-‘Brexit’ free-trade drive.

It’s also a critical step in the UK’s push to deepen its relationships in the Asia-Pacific region, and follows an application to join both the Trans-Pacific Partnership and Comprehensive and Progressive Agreement for Trans-Pacific Partnership.

Though the FTA will improve total trade flows between the UK and Australia, it’s hard to be sure by exactly how much. As with all such trade agreements, there may be increased bilateral trade flows, but some of this could simply be redirected from other countries (a trade-diversion effect).

The agreement covers trade in goods (including agricultural products), trade in services (including a chapter on financial services) and investment flows (both foreign direct investment and portfolio investment) between the two countries. It also adds commitments in a range of other areas typically covered in these treaties.

An important focus of the agreement is on reducing barriers to digital trade. For example, the agreement addresses some existing restrictive practices such as requirements for paper-based trade documents. The deal also contains a commitment to not impose customs duties on electronic transactions.

Meaningful

For Australia, the deal meaningfully increases the amount of goods by value exported to the UK duty free, up from 89 per cent to 99 per cent.  Tariffs on Australian exports will be reduced over time in sectors including beef, wine, sugar and dairy. For UK exporters, Australian tariffs will be removed on items including cars and alcohol. In 2020, the UK was Australia’s fifth largest goods trading partner, with two-way trade at $A21.9 billion.

The UK was Australia’s third-largest services trading partner in 2019, with two-way trade worth $A9.9 billion. Currently 52 per cent of UK service exports to Australia are delivered remotely, and this is expected to grow strongly under the agreement.

Under the deal, Australian workers will enjoy easier access to visas to work in the UK, helping build on important services trade and commercial interlinkages in key sectors like finance and professional services. This will help to broaden the services relationship between the countries, making it less dependent on travel and tourism. 

The agreement includes some non-discriminatory provisions across services providers, ensuring the UK cannot discriminate in favour of its own service suppliers. This should help Australian services firms in the UK market obtain contracts.

Within financial services there will be increased opportunities for Australian groups in the UK, including the provision for financial services that utilise new technology, or are delivered via new methods. Australian professionals that want to work in the UK will also benefit through improved recognition of qualifications, licensing and registration processes and requirements.

The UK is a very important source of capital in Australia, as the country’s second-largest source of foreign investment. The stock of UK investment in Australia at the end of 2020 was $A738 billion. The UK is also the third largest source of foreign direct investment in Australia, at $A123 billion in 2020.

The agreement includes the most comprehensive investment agenda that either country has agreed. Importantly it will cover both FDI and portfolio investment. The inclusion of the portfolio investment is to help the growing Australian asset management sector.

Both countries will limit any requirement for senior managers or directors of businesses to be resident of the other country, making it easier for SMEs to establish.

The Australian government will also raise the monetary threshold for UK investments requiring Foreign Investment Review Board screening to align with the threshold accorded to Australia’s other FTA partners.

Brian Martin is Senior International Economist & Hayden Dimes is a Rates Strategist/Economist at ANZ