Australia-EU free-trade deal faces testing final hurdle

Australia-EU free-trade deal faces testing final hurdle

Australia should be able to wrap up a free-trade deal with the European Union but might yet struggle to clear the final hurdle in the Continent's 27 capitals, the bloc's former top trade negotiator has warned.

Cecilia Malmström, who was the EU Trade Commissioner until the end of last year - leading the free-trade agreement (FTA) talks with Canberra - said it was getting harder for Brussels to push agreed deals through European national governments.

She warned of an increasing demand among European politicians to link trade deals to climate and sustainability goals, and of the ongoing sway of the Continent's protectionist farm lobbies.

Canberra and Brussels held another round of talks last week, their second of the year and the first virtual round.

EU chief negotiator Helena König said at the outset of the latest round of talks that it was vital to maintain "continuity and momentum", as removing barriers to trade was "needed more than ever in the current situation".

Germany is about to take over the rotating six-month presidency of the EU, and recently issued a statement saying it would prioritise the FTAs with Indonesia, Australia and New Zealand, aiming to wrap them up by 2021.

Ms Malmström, who is now a visiting professor at the University of Gothenburg, said that although the discussions on agriculture and on climate and sustainability would potentially be tough, a deal was doable.

"Australia is a friend, a partner, an ally – I think this will continue and I don’t see any risk of this not being concluded," she told The Australian Financial Review.

"But there is a problem politically to get agreements ratified now. Countries like the Netherlands have had big problems in their national parliaments."

FTA refuseniks

The Dutch Senate is preparing for a knife-edge ratification vote on the Canada-EU free-trade deal, CETA, which was agreed in 2016.

"If you vote out CETA, the treaty will be dead," EU Trade Commissioner Phil Hogan told Dutch senators last week. "There is no plan B."

In February CETA barely scraped through the Netherlands' lower house - in a country usually seen as a stalwart proponent of free trade. Politicians fretted that it didn't do enough to ensure trade met climate and other sustainability goals.

Earlier this month, the Financial Times reported that the Dutch and French economics ministers had produced a joint paper suggesting the EU should consider jacking up tariffs against trading partners that failed to meet sustainable development commitments.

“Trade policy instruments can provide additional leverage for the implementation of international environmental and labour standards,” the proposal reportedly said.

Meanwhile, France and Ireland have refused to ratify the deal the EU struck with the Mercosur group of South American countries last year, ostensibly on environmental grounds but also following rearguard action from the two countries' powerful farm lobbies.

"There is this feeling that trade must be much more sustainable, that trade has to take a greater responsibility to fulfil the Millennium Goals," Ms Malmström said.

"We have moved in that direction, the whole world, basically. That is combined with the large agricultural sector that is always worried about competition."

Another emerging political trend in Europe is "national economic sovereignty": the desire to reshore supply chains, restrict foreign investment and takeovers, and beef up companies into "European champions" capable of taking on US and Chinese rivals.

On Tuesday (AEST), German Chancellor Angela Merkel and French President Emmanuel Macron released a blueprint for EU post-pandemic recovery calling for "a resilient and sovereign economy and industrial base".
"This is an ideological division we’ve had in Europe for some time, but there is now an increased focus on this industrial sovereignty, protectionism, which is very worrying," Ms Malmström said.

"The whole trading system will change after this, we already see that the value chains and the distribution chains are being diversified and many big and small companies who are exporters are trying to lessen their dependency on Asian markets."

Although some reshoring might be driven by automation and artificial intelligence, which was reducing the cost of onshore production relative to the cheap-labour markets such as China, Ms Malmström said that shift in comparative advantage wouldn't be universal.
"To think that without trade we can recover, that’s illusion. To go back to self-sufficiency – we are beyond that. This is very dangerous rhetoric," she said.

"If the EU wants to have a role in strengthening and reforming the multilateral system, it has to be credible in its own backyard. So we’ll see where this ends."