Welsh Government – written evidence (AUT0050)

 

Does the agreement in principle published on 17 June 2021 deliver on UK interests, including those of the devolved nations? What are the costs and benefits? How reliable do you find the DIT’s assessment of the potential impacts of the proposed agreement with Australia, either as set out in the strategic approach or elsewhere?

 

As we have yet to see the exact details of the UK-Australia FTA, we cannot comment fully on if it will deliver on our interests as a Devolved Government. However, the Agreement in Principle (AIP) document does suggest the deal will deliver against some of our interests, particularly with regards to inclusion of provisions that affirm each country’s commitment to tackle climate change, including under the Paris Agreement; provisions recognising the importance of high-levels of animal welfare and combatting anti-microbial resistance; and, potentially in terms of services liberalisation. The inclusion of these provisions could have benefits in terms of alignment to Welsh Government policy priorities and could benefit some of our service sectors. In terms of industrial goods, the full liberalisation of UK originating goods should help to increase exports of those goods that currently incur tariffs in trade with Australia. This includes goods like transport equipment; machinery; automotive; and some medical devices. However, these goods will need to fully comply with rules of origin arrangements in order to benefit from the preferential tariffs agreed in the deal, which could be an issue for businesses reliant on wider EU27 supply chains. For industrial goods that already have zero tariffs for trade between UK and Australia, the benefits are less clear.

 

We do have significant concerns regarding agricultural market access for sensitive products, such as beef and sheep-meat, and the potential risks for our own producers, which we set out below. 

 

In terms of DIT’s published assessment, which was set out alongside the strategic approach, the assessment is intended to model the impact of a generic FTA with Australia based on key assumptions, rather than the specific details of the agreed deal.  The potential impacts on Wales are not modelled with sufficient detail and do not provide a sufficient range of outcomes to enable Welsh Government to assess the likely impact of the AIP itself. For example, the increase in TRQs given to both beef and sheep-meat (detailed in the AIP) may lead to a significant increase in Australian imports of both of these products, resulting in negative impacts on Welsh producers, the wider Welsh economy and Welsh society given the integral nature of the Welsh agricultural sector in rural communities. The published assessment was not based on the figures in AIP and we have seen no further assessment that suggests that there will not be a significant increase in lamb or beef imports. Whilst we assume this will be included in a further impact assessment for the signed deal, we would hope that modelling was used in order for DIT to be satisfied that the offer made to reach AIP would not cause significant harm to Welsh producers.

 

We believe the potential impacts given in the strategic approach could overlook the potential for significant impacts on Wales. Box 4 of the strategic approach suggests that Australian producers may be able to supply domestic retailers and downstream producers at lower cost than domestic producers….As other UK sectors expand, resources may move from the agriculture and semi-processed food sectors. Capital and labour which was used in agriculture and semi-processed food may, in the long run, be reallocated to expanding sectors (p.59). This approach could have a negative impact on some rural Welsh communities and does not consider how the potentially displaced agricultural sector of rural Wales will reallocate to other expanding sectors. The analysis further suggests that ‘employment is estimated to fall in the semi-processed foods and agriculture sectors, compared to the baseline’. The modelling assumes no overall changes in UK employment, with a movement of labour between sectors (p.67). We feel this assumption is likely to be flawed when considering the socio-economic situation in Wales and is likely to affect Wales in ways in which the modelling does not consider, including having a significant impact on rural communities as agricultural employment reduces. 

 

How can the specific interests of the devolved nations of the UK be best protected as part of the negotiation of a UK-wide trade deal with Australia?

 

Genuine, meaningful engagement between the UK Government and the Devolved Governments is key to ensuring that the UK Government understands the specific interests of each of the Devolved Governments and can seek to protect them during any trade negotiations.

 

Currently there is positive engagement between the Department for International Trade and the Devolved Governments on FTAs as they are negotiated. However, this predominately focuses on areas that are understood to be devolved. We also require access to information on reserved areas and an understanding of UK Governments positions and red-lines before negotiations take place. This would allow us to better understand where these areas intersect with devolved areas or areas of particular interest to us and ensure that UK Government is aware of any sensitivities for Devolved Governments. For example, one of our key interests in all FTAs relates to tariff liberalisation for sensitive agricultural goods. However, as the setting of tariffs is a reserved matter, limited information is shared with Devolved Governments and we were unable to have meaningful discussions with UK Government on this issue before an AIP was Australian was reached. This lack of discussion makes it difficult for us to ascertain whether our interests in this area are being protected as negotiations progress.

 

 

 

The UK Government has presented an FTA with Australia as a “gateway” to joining to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). To what extent is a bilateral FTA with Australia required for accession purposes? How might a trade deal with Australia help the UK join the CPTPP?

 

A bilateral FTA with Australia is not required as part of the accession process for the UK joining CPTPP, although it should serve to aid the accession process if the bilateral FTA with Australia, or an FTA with any other CPTPP member, contains provisions that mirror or are aligned with those found in the CPTPP agreement.  However, we also have concerns that the UK’s intention to join CPTPP may also serve to hinder the individual bilateral FTA negotiations with CPTPP members; because CPTPP members may be reluctant to go further than existing CPTPP provisions in their bilateral FTAs in certain areas, given they know the UK is seeking accession.

 

What effect could a UK-Australia trade deal have on the UK’s future ability to negotiate deals with other countries, and to what extent does it set a precedent for future negotiations?

 

The UK-Australia FTA will be the first wholly new FTA entered into by the UK and we have concerns about the precedent the deal could set. This is particularly the case when considering the significant increase in market access offered for agricultural goods to Australia at AIP. We believe other countries will seek similar increases in agricultural market access and we have significant concerns around the potential cumulative impacts that this will have on Welsh producers, especially when negotiating with countries that have lower agricultural standards than ourselves.

 

However, elements of the AIP document could set a positive precedent and there are key provisions included that we would want replicated in other deals. For this reason, we were pleased to see in the AIP document, the agreement to include provisions affirming commitments to tackle climate change with specific reference to the Paris Agreement, provisions on combatting anti-microbial resistance and provisions recognising the importance of high levels of animal welfare protection and non-regression.

 

The Department for International Trade’s (DIT) preliminary impact assessment that outlines the gross value added (GVA) of a UK-Australia trade deal on regions in the UK. The impact assessment suggests that the trade deal could increase GVA in Scotland, the North East and North West of England, the West Midlands, the South East and London, in particular. It also indicates that Northern Ireland might experience a fall in output. How do you evaluate these assertions? We would be especially interested in detailed economic analyses on these points.

 

DIT’s assessment, published alongside its strategic case, presents only the high level impacts for Wales, and fail to provide sector specific estimates at the Wales level.  Whilst, overall, Wales is expected to experience a small positive benefit from an FTA with Australia, the expected impact on different sectors will vary.  By considering the UK sectoral estimates, and what portion of the net benefits or costs estimated for the UK could be attributed to Wales, we are able to infer what the Wales specific impacts may be.  At the UK level, agriculture is found to be one of the most adversely affected sectors, with a fall in UK output of more than 0.5% expected within the sector over the long term.  Given the relative importance of the sector in Wales compared to other parts of the UK, this supports our fears that Wales’ farmers and food producers will be disproportionately impacted. 

 

The lack of detailed Wales-level trade data, along with limited economic modelling capability for Wales of the type used within DIT’s published assessments, means the Welsh Government has been unable to conduct or commission CGE modelling to assess the direct impact of a UK-Australia FTA on Wales. However, lack of sight of the detailed agreement has also limited our ability to assess the impact on Wales.

 

What are the economic consequences for farmers and the agriculture and food industries of a deal with Australia? We would be particularly interested in any detailed economic analyses on these points.

 

In addition to our response to Q.1, standards in Australia in areas such as animal welfare could give Australian farmers an unfair advantage when competing with our own producers, who would risk facing unfair competition from cheaper Australian imports. This would have economic consequences for our farmers and the wider agriculture and food industry.

 

As per response to Q.1 and Q.5 we have not had access to the full detail of the deal that would enable further economic analysis.

 

How might the UK agriculture and food industries approach any new competition that might arise from a trade deal with Australia? What opportunities are there for UK companies that might wish to export more to the Australia under a new deal? We would again be particularly interested in any economic analyses on these points.

 

As previously explained, a lack of access to data and impact analysis means we are unable to identify the exact amount of competition that may arise from the deal. In general we expect that if there was increased competition in the agri-food and food production sectors it would lead to a squeeze on the price that Welsh producers could expect to receive for their produce, a contraction in the sector and a reduction in the number of smaller farms as larger farms take advantage of economies of scale to achieve improved efficiencies. This will lead to a reduction in the level of employment in agriculture, potential negative impacts for rural communities in Wales and for the supply chain supporting agricultural sector.

 

We anticipate that there may be some opportunities, albeit limited, for Welsh food exporters. However until we see the full detail of the deal it is difficult to comment on exactly what these opportunities may be.

 

How might UK businesses benefit from reductions in Australian non-tariff barriers for UK machinery and transport equipment exports, including automotive exports? Do you agree with the Government’s assessment that the deal will support manufacturing jobs across the UK, particularly in the automotive sector? Will it strengthen supply chains?

 

UK businesses are unlikely to see any further reduction in non-tariff barriers in trade with Australia as a result of this agreement that do not already exist, with the exception of possibly having simpler customs paperwork to administer.

 

The UK and Australia already have a separate Mutual Recognition Agreement (MRA) in place to help ease non-tariff barriers to trade. The MRA reduces the administrative and financial burden for businesses on certain goods, since goods covered by the MRA can be tested domestically against the regulations of the respective countries, and then allow for those goods to be sold overseas without subjecting them to further additional testing. The UK-Australia MRA is a rollover of the EU-Australia MRA that was originally agreed between the EU and Australia on 11 November 2005. Similar to the EU-Australia MRA, the UK-Australia MRA covers: automotive products; electromagnetic compatibility (EMC); low voltage equipment; machinery; medical devices; pressure equipment; telecommunications terminal equipment; and good manufacturing practice (GMP) for pharmaceuticals.

 

Rather than the FTA, UK businesses are more likely to benefit from reductions in Australian non-tariff barriers by understanding and utilising the separate MRA, and seeing an increase in scope of the MRA for further industries and goods (such as more coverage for pharmaceutical products). The AIP does state, however, a commitment for both countries to cooperate in future regulations, which may further help reduce barriers.

 

It is not yet clear how the new UK-Australia deal will support manufacturing jobs across Wales. Feedback from industry, including those from the Welsh automotive sector, has stated that the geographical distance between the UK and Australia will make manufacturing processes and supply chains difficult, especially for businesses operating under ‘just-in-time’ processes. The distance between the two countries also means that transportation costs are high, with components and parts taking months rather than days/weeks to arrive. However, as exports of finalised commodities (i.e. finished cars) may increase from the UK to Australia as a result of the final deal, intra-UK manufacturing and supply chains may yet see a benefit over time, as long as other factors across the final deal – like rules of origin arrangements – take into accounts broader aspects of the UK supply chains (i.e. where materials/inputs may come from EU27).

 

 

What environmental protections and support for trade in environmental goods and services would you like to see in the agreement? From your knowledge of the Environment Chapter so far, will the agreement be sufficiently ambitious?

 

As the Welsh Government’s Wellbeing of Future Generations Act requires us to be globally responsible and not cause harm (including emissions) in another country, we welcome the shared commitment to tackle climate change and the Paris Agreement temperature reduction goals detailed in the AIP document.

 

We would like to see the final deal include a high level of ambition across the whole of the environment chapter beyond those aims and targets which are included as part of the international agreements to which both parties are already signatory. Both countries should commit to a chapter on environment that will contain provisions affirming commitments under multilateral environmental agreements such as the Convention on International Trade in Endangered Species of Wild Fauna and Flora.

We would also want to see both countries commit to cooperate in areas such as key technologies in the transition to a low carbon and climate resilient economy. The chapter should also contain provisions to encourage trade and investment in goods and services that support shared environmental objectives.