London (CNN Business)The United Kingdom’s first new trade deal since Brexit is a sobering reminder of the mammoth task it faces as it seeks to compensate for losing the economic benefits of EU membership.
The deal announced Tuesday with Australia is the first bilateral trade agreement the United Kingdom has negotiated from scratch since it left the European Union last year. Britain has also struck deals with Japan and Norway, but they were based on existing agreements negotiated by the European Union.
The United Kingdom’s ability to set its own trade policy has been billed by the government as a major benefit of Brexit. But the Australia deal is only expected to boost the size of the UK economy by 0.02% over 15 years, increasing GDP by £500 million ($704 million) compared to its 2018 level, according to the Department for International Trade.
By comparison, Britain’s new trading relationship with the European Union is expected to lead to a long-run loss of output of around 4% compared to remaining in the bloc, according to a previous forecast by the UK Office for Budget Responsibility, which produces economic projections for the government.
The deal with Australia comes as the UK government struggles to get along with the European Union, its most important trading partner. Ongoing tensions between the two sides concerning trade with Northern Ireland escalated at the G7 meeting over the weekend, increasing the risk of a trade spat just six months after Brexit was finalized.
The United Kingdom has unilaterally extended grace periods on some checks on goods crossing into Northern Ireland, which the European Union argues contravenes the Brexit deal that came into force this year. Experts say that if UK Prime Minister Boris Johnson wants to deliver real trade benefits, he should focus on reducing tensions with Brussels.
“You can’t be ‘global Britain’ if you’re not managing your most important international relationship,” Simon Usherwood, a professor of politics and international studies at The Open University in England, told CNN Business.
“Other countries looking in will ask themselves, ‘Why would we want to make deals with a country that doesn’t appear to stick to the terms of deals it’s already made? Not just any deals but ones with it’s closest and biggest trading partner?’,” he added.
UK hopes for much bigger deals with countries such as the United States and India have also taken a knock given US President Joe Biden’s desire to focus on domestic issues and a devastating coronavirus wave in India.
The Australia deal
The details of the Australia deal have yet to be announced and implementation is not expected to begin before next year, but some British businesses and trade experts are already pouring cold water on UK trade secretary Liz Truss’s assertion that the deal “delivers for Britain.”
UK farmers and other food and drink producers are anxious that the deal could allow cheap agricultural imports, including meat, and set a dangerous precedent for negotiations with other major agricultural exporters, including the United States, New Zealand, Canada and Mexico. They also say negotiations were rushed.
“The risks here are enormous for the whole food and drink supply chain and, in the absence of any formal impact assessment to suggest the contrary, we remain hugely concerned at the impact on sensitive sectors of our industry,” representatives from Scotland’s farming, supply chain and food industries said in an open letter to Truss last week.
The UK government said in a statement on Tuesday that British farmers will be “protected” because tariff-free imports will be capped for 15 years. Yet the government has previously acknowledged that “Australia has a strong comparative advantage in its exports of livestock meat” and may be able to supply UK retailers “at lower cost than domestic producers.”
Even if imports are phased in over a longer period they could still cause the demise of “many, many beef and sheep farms throughout the UK,” according to Minette Batters, President of the National Farmers’ Union (NFU) of England and Wales.
The union is concerned that UK farmers will struggle to compete with countries that have considerably larger, more productive agricultural sectors and, in some cases, lower environmental and animal welfare standards.
“The bigger risk is the cumulative effect of all these trade deals … that is really at the heart of our concerns,” said Nick von Westenholz, director of trade and business strategy at the National Farmers’ Union. A trade deal that puts farmers out of business would also undermine the UK government’s “leveling up” agenda to boost investment into areas outside major cities, Von Westenholz added.
Not a replacement for EU trade
According to the UK government, the deal with Australia will cut tariffs on products such as cars, Scotch whisky, biscuits and ceramics, boosting a trading relationship that was worth £13.9 billion ($19.5 billion) last year.
It will also make it easier for Brits under the age of 35 to travel and work in Australia and lower the price consumers pay for goods such as Jacob’s Creek wines.
“This is global Britain at its best — looking outwards and striking deals that deepen our alliances and help ensure every part of the country builds back better from the pandemic,” Johnson said on Tuesday.
But British businesses were quick to point out that the deal is not nearly enough to counteract what the United Kingdom gave up when it chose to exit the European Union, which accounts for 47% of UK trade worth over £660 billion ($927 billion) a year.
“Trade with Australia represents only around 1.2% of the UK’s total, so whilst a deal will have welcome benefits it will not offset the ongoing issues with trade to the European Union,” William Bain, head of trade policy at the British Chambers of Commerce said in a statement.
“We welcome an ambitious trade policy if it will open new opportunities for our producers,” added the representatives from Scotland’s trade bodies.
“That said, we should be under no illusion that the EU market remains the most important export market, with it being the destination of two-thirds of all food exports. The new trading arrangements post-Brexit with our biggest export market, on our doorstep, have made this market more costly, complex and high risk to supply to.”
Into the unknown
The UK government said Tuesday that the deal with Australia takes it a step closer to joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), an 11-country trade pact that includes New Zealand, Mexico, Canada and Singapore.
“Membership will create unheralded opportunities for our farmers, makers, innovators and investors to do business in the future engine room of the global economy,” according to Truss.
But several trade experts have pointed out that even membership of the CPTPP won’t balance out the negative impact of leaving the European Union.
The CPTPP is “nothing like the European Union, because [the EU] is an open market,” said David Henig, UK director at the European Centre For International Political Economy. In other words, joining the pact may lead to reduced tariffs on some goods but it is not as beneficial as membership of the EU single market, which also removes other barriers to trade.
The risk is that, in its eagerness to strike new trade deals and prove that leaving the European Union was worthwhile, Britain gives too much away. That already appears to be the case when it comes to the deal with Australia.
“We don’t have all the details so far but judged in terms of exports it looks to be a fantastic deal for Australia,” said Dmitry Grozoubinski, a former trade negotiator for the Australian government and director of Geneva-based trade consultancy ExplainTrade.
“The deal immediately provides significantly better access to the UK market than Australian producers of beef, lamb and dairy enjoyed in the past, and only ramps up from there,” he told CNN Business. “We have far fewer details on what the UK managed to extract by way of concessions in exchange, however.”