Documents considered by the Committee on 13 November 2017 Contents

40Opening of negotiations for free trade agreements with Australia and New Zealand

Committee’s assessment

Legally and politically important

Committee’s decision

Cleared from scrutiny; further information requested; drawn to the attention of the International Trade Committee

Document details

(a) Recommendation for a Council Decision authorising the opening of negotiations for a free trade agreement with New Zealand; (b) Recommendation for a Council Decision authorising the opening of negotiations for a free trade agreement with Australia

Legal base

Article 281(3) and (4) TFEU

Department

International Trade

Document Numbers

(a) (39048), 12165/17 + ADDs 1–3, COM(17) 469; (b) (39049), 12168/17 + ADDs 1–3, COM(17)472

Summary and Committee’s conclusions

40.1This is the first time that the European Commission has published draft negotiating mandates for EU free trade agreements (FTAs). We welcome this transparency and the opportunity for national Parliaments to scrutinise negotiating mandates from the outset. We trust that in due course, the Government will take a similar approach in the pursuit of the UK’s independent trade policy, given the legitimate public interest in such issues.

40.2Australia and New Zealand each have a number of sectoral agreements with the EU, covering areas of mutual interest such as wine production, animal health and product standards. However, given the common commitment to the multilateral trading system and shared values of democracy and respect for human rights, it is surprising that it has taken such a long time for the EU to initiate trade talks with these two countries. The Commission itself notes that EU businesses find themselves at an economic disadvantage in relation to their competitors (for example, the United States and major economies in the Asia-Pacific region), who have all concluded free trade agreements with Australia and New Zealand.

40.3The Commission’s ambition is for comprehensive FTAs with progressive and reciprocal liberalisation of trade in goods, services and foreign direct investment. The draft mandates seek to remove barriers to cross-border services and public procurement, and to strengthen protection for trade-related intellectual property rights (IPR). As with other EU FTAs, the mandates aim for enhanced cooperation on technical and regulatory frameworks, including aiming for a convergence of standards where appropriate.

40.4The Commission recommends that the negotiations with Australia and New Zealand be opened and conducted in parallel, stating that its consultations with both countries indicated that it would not be politically feasible to negotiate with them sequentially. The Commission’s approach seems sensible.

40.5These will also be the first free trade agreements initiated under the Commission’s ‘fast-track’ process, developed in response to the May 2017 judgement of the Court of Justice of the European Union on the balance of competences in the EU’s free trade agreement with Singapore. The practical consequence of this approach is that non-direct foreign investment and provisions for investor-state dispute settlement have been excluded from the scope of these agreements as these were determined to be areas of shared competence. We will await the Commission’s proposals on how to ensure that the carved-out issues are appropriately dealt with in the context of these two FTAs, given the necessity of their inclusion in some form. The Commission intends that this new approach will require only Council approval.

40.6In terms of the coverage of the proposed FTAs, the UK like other Member States, will have various offensive and defensive interests. At this early stage, the Government has not carried out consultations and assessments of likely impact on UK sectoral interests, and we have instead reflected the findings of the Commission’s impact assessment.

40.7The Minister of State for Trade Policy (Greg Hands) tells us that the proposed mandates are consistent with UK interests. He adds that the UK is expected to have left the EU before either of these FTAs come into force, and “may well have entered into formal FTA negotiations with one or both countries before they do so”.

40.8This unprecedented context raises political sensitivities to which the Government is mindful, and which we fully appreciate. The Government has identified Australia and New Zealand as priority countries with which to commence FTA discussions as soon as the UK is legally able to do so. The Treaty duty of sincere cooperation means that the UK, while able to carry on informal trade dialogues with prospective partners, may not be able to initiate formal trade negotiations while it remains an EU Member State. Current plans for a time-bound implementation period following the expiry of the Article 50 deadline are also likely to carry implications for the UK’s ability to launch its independent trade policy.

40.9Given the context in which the UK will approach consideration of these proposed FTAs, we would appreciate further information from the Government on the following questions:

40.10The European Parliament has already considered these draft mandates, and they are expected to be adopted by the Trade Foreign Affairs Council in the coming weeks. It is important that the UK indicates its strong support for the launch of negotiations with two close political partners. We therefore clear these documents from scrutiny, and draw them to the particular attention of the International Trade Committee.

Full details of the documents

(a) Recommendation for a Council Decision authorising the opening of negotiations for a free trade agreement with New Zealand: (39048), 12165/17 + ADDs 1–3, COM(17) 469; (b) Recommendation for a Council Decision authorising the opening of negotiations for a free trade agreement with Australia: (39049), 12168/17 + ADDs 1–3, COM(17)472.

Background

40.11The Commission has published, for the first time, proposed negotiating directives for free trade agreements. This follows from Commission President Juncker’s State of the Union address in September where he stated that in the interests of transparency, the Commission “will publish in full all draft negotiating mandates we propose to the Council”.

40.12These are also the first negotiations to be opened under the Commission’s proposed ‘fast track’ procedure, initiated as a response to the May 2017 judgment of the CJEU on the balance of competences in the EU-Singapore free trade agreement. The Australia and New Zealand negotiating mandates are presented as EU-only mandates, as they exclude non-direct foreign investment and investor-state dispute settlement mechanisms—both areas determined by the CJEU as falling within member state competence.

40.13The Commission, in its Explanatory Memorandum, observes that the EU enjoys “excellent political relations and mature trade and investment relations” with Australia and New Zealand “based on shared values of democracy and human rights”. However, despite well-developed trade and investment relations with both countries, and similar approaches to trade policy and the multilateral trade system, the EU does not yet have preferential bilateral trading arrangements with either country. This places EU businesses in comparatively less favourable conditions in accessing these markets then the many countries with which Australia and New Zealand have free trade agreements.

40.14Australia and New Zealand are among the world’s fastest growing developed economies. The EU is the largest foreign direct investor in Australia, and Australia is the EU’s 15th largest export market for goods.599 The EU and Australia already have bilateral agreements on mutual recognition on conformity assessment, certificates and markings, and on trade in wine.

40.15The EU is the second largest foreign direct investor in New Zealand, after Australia.600 The EU and New Zealand have bilateral agreements on mutual recognition of conformity assessments and on sanitary measures applicable to trade in live animals and animal products.

40.16Apart from the value of strengthening economic ties with Australia and New Zealand, the Commission also notes the strategic value of these two countries as a gateway to the Asia-Pacific region. For instance, Australia and New Zealand have FTAs with all the member states of the Association of South East Asian Nations (ASEAN), where the EU is in the process of negotiating trade agreements.

40.17The Commission observes that while the patterns of EU exports to Australia and New Zealand and challenges encountered by EU businesses are very similar, the types of EU goods imports from the two countries are different. This reflects the different export-oriented economic activities of each country: Australia focuses on mining and natural resources, while agriculture (sheepmeat, fruit and vegetables) is the main export for New Zealand.

40.18The documents relating to Australia and New Zealand are identical in substance, as the Commission in its impact assessment has concluded that for political and economic reasons negotiations should be opened up simultaneously with both countries. It states:

“Political level contacts with both countries made it apparent that it is politically not feasible to foresee negotiations for comprehensive trade and investment arrangements with one of them only. The Commission took the political decision to move towards launching negotiations with both countries in parallel.”

The negotiating directives

Scope and objectives of agreement

40.19The proposed negotiating directives are set out as an annex to the Council Decision. The following summarises its key points.

40.20The Commission aims for an “ambitious and comprehensive” agreement providing for “the progressive and reciprocal liberalisation of trade in goods, services and foreign direct investment”. It should “ensure a high level of market access for public procurement, and trade-related intellectual property rights, including geographical indications and strengthen dialogue and cooperation on technical and regulatory frameworks”.

40.21The importance of EU values being embodied in its trade agreements and external action is seen in an emphasis on sustainable development as an overarching objective and on the maintenance of high environmental, labour and health and safety standards.

Trade in goods

Trade in services, foreign direct investment and digital trade

Intellectual property rights and geographical indications

The WTO Agreement on Trade-Related Aspects of Intellectual Property Rights should be built on, and the following issues should be covered:

Public procurement

Trade and competition

Small and medium-sized enterprises (SMEs)

Trade and sustainable development

Regulatory cooperation

Dispute settlement

Other issues

Impact Assessment

Current situation and specific issues

40.22The Commission’s impact assessment, which was conducted at the same time for both countries, has identified the following issues that need to be addressed in the respective agreements:

Sectoral impacts

Agriculture—overview

40.23Australia was the 14th largest market for EU agricultural exports in 2015, and the 19th largest source of EU imports. The top five EU agricultural exports to Australia were chocolate and confectionary, spirits and liqueurs, pasta and biscuits, pork and wine. The EU’s top five imported products from Australia were oilseed (mostly used for bio-diesel production), wine, tropical fruits and nuts, bovine meat and animal fibre (wool).

40.24The Commission observes that EU-New Zealand agricultural trade is asymmetric, reflecting the historical relationship, as evident in special arrangements for the import of New Zealand butter and cheese in the UK’s EU accession treaty. Due to this context, while New Zealand is not a major market for EU exports, New Zealand is the 11th largest source of EU imports. The top five imported products were sheep meat, wine, fruit, animal fibre (wool), and casein. The EU’s top five exports to New Zealand were pork, milk powder and whey, food preparations, wine and preparations of vegetables, fruit or nuts.

40.25Economic modelling carried out for the impact assessment shows that in an EU-Australia FTA, EU exports of dairy, and to a lesser extent—fruit and vegetables, would increase. EU imports of ruminant meat, sugar, rice, and oil seeds would see a significant relative increase.

40.26An EU-New Zealand FTA would result in a long-term increase of EU exports of pork, as well as dairy products. EU imports from New Zealand of dairy, ruminant meat, and fruit and vegetables would see significant relative increases.

Sugar

40.27Australia is a significant global sugar exporter. However EU-Australia trade is limited due to the current high EU import tariff and the limited tariff rate quote available to Australia.

40.28The Commission’s economic modelling shows that under a fully liberalised FTA, Australian sugar imports to the EU could grow by 124%. However, the Commission states that given the current low volume of trade in this area, the actual projected increased trade would not be significant. Nonetheless, the impact assessment points out that stakeholder contributions into the public consultation “showed major differences on the desirability of liberalising cane sugar imports into the EU”.

Fruit and vegetables

40.29Australia and New Zealand both export significant quantities of fruit and vegetables to the EU. Australia mainly exports nuts, while New Zealand exports apples, kiwifruit and onions. The Commission’s analysis envisages an increase of up to 20% in Australian exports and an increase of up to 39% in New Zealand exports.

40.30EU exports of fruit and vegetables are likely to see a more modest increase of around 9% to Australia, and minimal change (around 2%) to New Zealand. The Commission notes that the impact of increased imports from the two countries should be seen in the context that they are counter-seasonal, so that “a certain amount of New Zealand’s produce is not directly competing with EU domestic production, but rather with produce from other Southern hemisphere producer countries”.

40.31The Commission expects the FTAs to address anti-dumping and SPS measures imposed by Australia and New Zealand on EU exports of various vegetable products (e.g. canned tomatoes, preserved peaches).

Dairy

40.32New Zealand is the world’s largest dairy exporter, accounting for one third of global trade in dairy products. It enjoys significant preferential access to the EU at present through tariff rate quotas for butter and cheese. However, the Commission notes that these are not fully used because the in-quota tariffs remain high.

40.33The EU exported €203 million (£186.7 million)603 of dairy products to Australia in 2015 and €51 million (£46.91 million) to New Zealand. The impact assessment estimates that there is likely to be a significant increase (up to 49%) in EU dairy exports to Australia and increase of up to 29% in its exports to New Zealand. New Zealand dairy exports to the EU could rise by up to 134% under an ambitious FTA, while a possible 87% increase in imports from Australia would not be economically significant given the low base at present.

40.34The Commission expects that the FTA negotiations will provide the framework in which to address measures by Australia and New Zealand that negatively impact EU exports, for example, biosecurity measures on certain cheeses and insufficient protection of dairy products.

Beef and sheepmeat

40.35The EU’s trade with both Australia and New Zealand in meat is significant. EU meat exports (primarily pork) to Australia amount to €258 million (£237.29 million) , and €70 million (£64.38 million) to New Zealand. Beef and sheepmeat imports from Australia are worth €338 million (£310.87 million), and sheepmeat and beef exports from New Zealand are worth €1.14 billion (£1.05 billion).

40.36As with dairy products, the large volume of New Zealand’s sheepmeat exports to the EU have historical antecedents, and benefit from a large tariff rate quota. New Zealand accounts for around 85% of EU sheepmeat imports (Australia accounts for around 10%). However, the Commission notes that New Zealand does not fill its sheepmeat tariff rate quota, which is only 60% utilised at present. The reason for this, according to the Commission, is that New Zealand exporters pursue more lucrative export opportunities in Asia and elsewhere.

40.37Under an ambitious FTA, New Zealand beef and sheep meat exports to the EU are projected to grow by 25%. While this is statistically significant given the large starting volume, the Commission does not believe that such an expansion will occur, due to the current unfilled sheepmeat quota.

40.38In addition, as with fruit, seasonality is a factor in the sheepmeat market. The lambing season is counter-seasonal in the Southern hemisphere, and a significant proportion of New Zealand sheepmeat exports are chilled, fresh lamb. The Commission notes that:

“while there is an overlap, the impact on EU domestic producers is less significant than the overhead trade figures would suggest, while EU consumers benefit from the year-around supply of chilled lamb.”

40.39Australia is also a major beef (and sheepmeat) exporter, with its main markets being Asia and the United States. Australian beef and sheepmeat enjoy preferential access to the EU through tariff rate quotas; these exports are likely to see a fivefold increase under an ambitious FTA.

40.40The impact assessment sees a possible 1.2% decrease in EU output in the ruminant sector as a result of the combined impact of fully liberalised FTAs with Australia and New Zealand. However, the Commission points out that the under-used tariff rate quotas by New Zealand point to a likelihood that this effect may not materialise.

Alcohol

40.41EU trade with Australia and New Zealand in alcoholic beverages is also significant. EU exports to Australia are worth €559 million (£514.13 million), and those to New Zealand worth €60 million (£55.18 million). EU imports from both countries is almost exclusively wine, and worth €485 million (£446.07 million) from Australia and €369 million (£339.38 million) from New Zealand.

40.42The EU and Australia have a wine agreement which protects geographical indications, but does not liberalise tariffs. The Commission estimates that bilateral trade will increase modestly under FTAs, but will have no significant impact on EU output.

Chemicals including pharmaceuticals

40.43EU exports of chemicals to Australia and New Zealand are significant, amounting to 19% of total EU chemicals exports in 2015 in the case of Australia, and 14% of total EU exports in the case of New Zealand.

40.44The Commission forecasts that the bilateral trade of chemical products will grow significantly, with EU exports by up to 20% to Australia and up to 27% to New Zealand. Imports from Australia, worth €600 million (£551.84 million), could grow by up to 11%, and imports from New Zealand, worth €200 million (£183.95 million), could increase by up to 27% under a fully liberalised FTA.

Transport equipment

40.4523% of EU transport equipment exports, worth €7.1 billion (£6.53 billion), went to Australia in 2015. Bilateral trade in this sector is forecast to grow significantly under an FTA, with EU exports increasing by up to 52% and Australian exports by up to 16%, although the latter from a much smaller base.

40.46The elimination of Australia’s 5% import duty on cars is expected to contribute to a significant increase in EU car exports to Australia. The Commission notes that this duty is in practice applied only to the EU since its competitors in this sector all have FTAs with Australia.

40.47The export of transport equipment is the EU’s most important area of trade with New Zealand, and accounts for 28% of the EU’s exports in this sector. Under an FTA, EU exports could grow by up to 44%, from a current value of €1.3 billion (£1.2 billion).

Machinery and electric equipment

40.48EU exports of machinery to Australia, currently 24% of total EU exports in this sector, are expected to see “a very large overall gain in export value”. While the impact assessment envisages only a minimal (0.2%) rise in relative sectoral output, EU exports to Australia are forecast to rise by up to 61%. While Australian exports to the EU could increase by up to 10%, the economic modelling predicts that Australia’s machinery sector could be one of the most negatively affected under an increased liberalisation scenario, with output reduced by around 2%.

40.49EU exports of machinery to New Zealand amounted to 26% of EU exports in this sector, and are calculated to grow by up to 62% under a fully liberalised FTA. As with Australia, New Zealand’s machinery sector would be the most negatively affected under the FTA, with a projected 2.9% decrease in output.

Services

40.50The impact assessment points out that constraints in economic modelling mean that gains in services trade from FTAs are underestimated. This is because of the challenge in assessing the impact on cross-border services of a reduction of non-tariff barriers. The Commission explains that:

“this is mainly due to the nature of service trade liberalisation, which usually takes place through binding, i.e. a commitment by the negotiating partner not to raise the levels of existing barriers, thus removing uncertainty in terms of risks for economic operators.”

40.51However, it adds that it is accepted that removing uncertainty through binding positively affects cross-border services trade, and that previous studies have shown that binding can translate to a 3% reduction in trade costs. The Commission notes that ongoing negotiations on a plurilateral Trade in Services Agreement, in which the EU, Australia and New Zealand are all engaged, would, once concluded, also result in a more positive environment for services trade.

Likely overall economic impacts

40.52Under comprehensive FTAs with Australia and New Zealand, the Commission estimates that the gain in real GDP for the EU could be between €2.1 billion (£1.93 billion) (partial liberalisation) and €4.9 billion (£4.51 billion) (increased liberalisation). The higher figure under the preferred option amounts to a 0.02% increase in real GDP.

40.53EU exports to Australia could increase between 16.4% and 33%, while exports to New Zealand could increase between 14.2% and 32.4%.

40.54Australian exports to the EU are forecast to increase between 6.9% and 11.1%, while exports from New Zealand could increase between 10.5% and 22.2%.

40.55The Commission notes that comprehensive FTAs would all contribute positively to long term economic welfare in the EU, Australia and New Zealand. However, trade liberalisation could lead to “some transitional unemployment” in some sectors, namely small farmers in the EU.

40.56In this context, the Commission notes that while the majority of business sector stakeholders who took part in the consultation favour comprehensive FTAs, “the notable exceptions are business stakeholders of some EU agricultural sub-sectors, who are not in favour of full liberalisation of specific products”.

The Government’s Explanatory Memorandum of 3 October 2017

40.57The Minister of State for Trade Policy (Greg Hands) informs us that the Department for International Trade:

“has assessed the proposed mandates in consultation with other interested Departments and no fundamental issues are foreseen from a policy perspective. Our assessment concluded that the provisions currently within the mandates are consistent with UK interests.”

40.58The Minister notes that:

“an additional context is that the UK is expected to have exited the EU ahead of either FTA entering into force, and may well have entered into formal FTA negotiations with one or both countries before they do so”.

40.59The political sensitivities of the situation are clearly well appreciated by the Government. The Minister states:

“In assessing the proposed mandates we have remained mindful to the sensitivities around our known intentions to negotiate UK-Australia and UK-New Zealand FTAs once we have left the EU, and the trade dialogues that we have established with both.”

Legal base

40.60The Government states that the proposals outlined in the draft mandates do not currently impact on Justice and Human Affairs (JHA) considerations. However, the Government will seek to insert a recital to the Council Decision that the Agreement should reflect the special position of the UK and Ireland as regards JHA content, where appropriate.

Consultations

40.61As these are proposals to open negotiations, the Government has not yet opened consultations on the proposals.

Timetable

40.62On 26 October, the European Parliament passed resolutions on the proposed negotiating mandates with Australia and New Zealand. An expected ministerial vote on the adoption of the mandates has been pushed back from 10 November. The mandates are now due to be discussed at a meeting of Trade Policy Committee Deputies on 17 November and will be followed shortly thereafter by COREPER discussions. No revised date has yet been set for adoption of the mandates at the Trade Foreign Affairs Council.

Previous Committee Reports

None.


599 EU-Australia bilateral trade in goods was worth EUR45.5 billion (£41.85 billion), trade in services was worth EUR29.3 billion (£26.95 billion), and EU foreign direct investment stock was worth EUR145.8 billion (£134.01 billion) (2016 and 2015 figures).

600 EU-New Zealand bilateral trade in goods was worth EUR8.1 billion (£7.45 billion), trade in services was worth EUR4.3 billion (£3.96 billion), and EU foreign direct investment stock was worth EUR 9.8 billion (£9.01 billion) (2016 and 2015 figures).

601 Such as the protection and promotion of public health, social services, public education, safety, the environment, public morals, social or consumer protection, privacy and data protection, and the promotion and protection of cultural diversity.

602 The Treaty of Waitangi is an agreement signed by representatives of the British monarch and leaders of most Māori Tribes when Britain first claimed New Zealand as a colony in 1840.

603 €1 = £0.91973 or £1 = €1.08728 as at 1 September 2017.




20 November 2017