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Divide and conquer: Europe's tear is Australia's opening

On the back of Brexit, Australia and New Zealand are scrambling to form a trade deal with the UK. This Frankenstein-esque resurrection of the British Imperial Preference System ought to be met with great scepticism if not outright rejection, as the UK faces its greatest political, economic and social instability since 1945. The deterioration of the motherland, and thus the European project, should signal to Australian policymakers that the final pivot to Asia is imminent. However, that premature assessment would be costly, as the future AUS-EU Free Trade Agreement (FTA) never looked so good.

Asia's rise often shadows the importance of the EU as Australia's second largest trading partner. Additionally, the EU is Australia’s largest source of foreign investment. In 2014, the EU’s foreign direct investment (FDI) in Australia was valued at $169.6 billion and Australian FDI in the EU was valued at $83.5 billion. Total two-way merchandise and services trade between Australia and the EU was worth $83.9 billion.

It is essential to note, that the source of almost half of trade in services and over half of FDI is the UK. Critics contend that as a result of the recent Brexit decision in the UK, the potential FTA is now no longer favourable for Australia and should be put on the back-burner. However, this is a loss for the EU not Australia. The moment the referendum result became clear the EU lost a significant amount of bargaining power. Australia now has a greater capacity to negotiate, as it has less to lose, relative to the EU, which needs new markets and new friends fast.

Politically the EU has no option but to chastise the UK for its withdrawal. Anything less would be a rallying call to other Euro-sceptic states to engage in a spill-back agenda. As a result, the EU economy will experience a downturn due to disintegrated trade diversion. This Machiavellian policy course is something Australia can and should exploit. By providing the uninsured and bleeding EU with a shot of coagulation, in the form of Australia's open market, it will force the EU to accept a less-than-favourable trade deal. From Australia's perspective the less attractive, take-it-or-leave-it FTA is now an opportunity for Australia to demand access to areas previously off limits.

The mineral price plunge highlighted Australia's direction towards a banana republic and reliance on Chinese demand. As our dependence on iron ore can no longer be guaranteed, policymakers must seek diversification. This behoves Australian AUS-EU FTA negotiators to formulate a deal centred around areas of established comparative advantage.

Agriculture is one such area. It currently accounts for just over 13% of Australia's export revenue. Following the sector's neglect by successive governments investment in the sector is desperately needed. ANZ forecasts that the sector will require AUD$600 billion of investment from now to 2050 to improve its productivity and growth. Additionally, the sector needs greater diversification in markets to provide export stability as Asia treads through the almost certain periods of volatility that will characterise China's continued rise. A favourable agreement will engender a strategic, and much needed, redeployment of investment to the agricultural export sector as well as a safe and stable secondary market outside of Asia.

Naturally sceptics to this proposition will argue that Australian producers wishing to export to the EU face high tariffs, import quotas and other non-tariff barriers such as a $US116 billion producer support subsidy. However, Brexit is the sui generis catalyst for a change in the political landscape and Canberra must reassess the new political and economic realities facing Europe. The gates are open with much to take and Australia must get all that it can.

Christopher Arnel is a Teaching Associate at the School of Social Sciences, Monash University.

This article can be republished with attribution under a Creative Commons Licence. Please email with any questions or for more information.

Image credit: Roberto Trombetta (Flickr: Creative Commons)

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