Background
3.1
This chapter deals with the tariff outcomes on goods in the Free Trade Agreement between Australia and the United Kingdom of Great Britain and Northern Ireland (AUKFTA). This chapter will discuss:
the goods trade between Australia and the United Kingdom (UK)
provisions of Chapter 2 of the AUKFTA
the UK’s tariff rate quotas (TRQs) and product specific safeguards
some specific product related issues raised during the inquiry.
Trade in goods between Australia and the UK
3.2
The value of goods traded between Australia and the UK has been similar for both countries for an extended period of time, until a substantial rise in the value of Australian goods exports in 2019 and 2020.
Table 3.1: Value of trade in goods between Australia and the UK: 2016 – 2020
|
|
|
|
|
|
|
|
Exports from Australia
|
$10,148
|
$6,149
|
$5,033
|
$15,357
|
$14,924
|
|
Imports into Australia
|
$7,126
|
$6,876
|
$7,230
|
$7,224
|
$7,000
|
|
Balance on goods trade
|
$3,022
|
-$727
|
-$2,197
|
$8,133
|
$7,924
|
Source: National Interest Analysis.
3.3
In terms of economic importance, the UK is far more significant to Australia than Australia is to the UK. The Regulation Impact Statement stated that the UK is Australia’s fifth largest partner in two-way trade. From the UK’s perspective, however, Australia only accounts for 1.6 per cent of the UK’s goods imports and 0.8 per cent of the UK’s goods exports.
3.4
This disparity comes through in some UK commentary on the AUKFTA. The House of Commons International Trade Committee’s report, UK trade negotiations: Agreement with Australia, stated that the impact on the UK of tariff liberalisation in manufactured goods between the UK and Australia is likely to be modest given that such trade is already conducted on a relatively unequal basis.
3.5
The UK Government’s examples of reduced prices for UK consumers of manufactured goods as a result of the AUKFTA was limited to the removal of tariffs on swimwear, surfboards and boots. In terms of benefits for UK manufacturers, the UK Government identified UK fashion and car exports as benefiting from the AUKFTA, even though Australia has a relatively small market for these UK sectors.
Trade in goods chapter of the AUKFTA
3.6
Chapter 2 of the AUKFTA establishes the tariff rates for goods traded between Australia and the UK, and includes some specific rules relating to the rate of tariff reduction, TRQs that permit a certain amount of some goods to enter a country tariff free, and product specific safeguard measures on some agricultural goods exported to the UK.
3.7
Chapter 2 of the AUKFTA for the most part conforms to a standard set of provisions contained in a chapter on tariffs on trade in goods. The chapter, amongst other things:
incorporates article III of the General Agreement on Tariffs and Trade 1994 (GATT 1994), requiring equal taxation treatment for imported and domestic goods alike
prohibits Parties from increasing tariffs unless otherwise provided in the AUKFTA
includes a most-favoured-nation provision permitting the Parties access to lower tariff outcomes if such outcomes are negotiated in another agreement
permits Parties to either negotiate accelerating tariff reductions or to unilaterally reduce tariffs
prevents either Party from imposing a tariff on a good that has been temporarily transferred from one Party to the other for the purposes of repair or alternation
permits consultations if a Party believes a non-tariff measure in the other Party is adversely affecting its trade, provided the non-tariff measure is not covered by a consultation mechanism in another AUKFTA chapter
unless otherwise provided in the AUKFTA, states that a Party shall not adopt or maintain any prohibition or restriction on the importation of any good of the other Party, nor the export of goods to the other Party except in accordance with article XI of the GATT 1994, as incorporated into the AUKFTA
limits non-tariff fees and charges to cost recovery only, and prohibits such fees from being used for indirect protection of domestic goods or as a revenue source (excluding export taxes, customs duties, and charges equivalent to an internal tax or other internal charge applied consistently to all goods of the same sort within the Party)
requires Parties to publish online a current list of the fees and charges it imposes for the importation or exportation of a good
prohibits Parties from providing export subsidies
contains in Annex 2A a tariff schedule for Australia and the UK.
Committee on Trade in Goods
3.8
The Parties would establish a Committee on Trade in Goods, the functions of which include reviewing and monitoring the implementation and operation of Chapters 2, 3 (trade remedies), 4 (rules of origin) and 5 (customs procedures and trade facilitation); and facilitating trade in remanufactured goods.
3.9
The Committee on Trade in Goods may form technical working groups to consider any matter relating to Chapter 2 that creates disruption or affects trade between the Parties.
Tariff outcomes
3.10
Tariffs are administered using the International Convention on the Harmonized Commodity Description and Coding System (HS Convention). The HS Convention established a detailed commodity classifications system, called the ‘harmonised system’, which is used as a basis for negotiating tariff reductions during trade negotiations, amongst other things. Each type of good is assigned a classification number, allowing parties to agree on the tariff rates applicable to that good.
3.11
Unless otherwise provided for in the AUKFTA, Parties shall reduce or eliminate tariffs in accordance with their respective schedule to Annex 2A (tariff commitments).
Annex 2A - Tariff schedules
3.12
Annex 2A contains the tariff reduction schedules for Australia and the UK. Each Party provides notes for interpreting the schedule, and a schedule listing the products in the harmonised system.
Tariff schedule – Australia
3.13
Australia’s tariff commitments are listed in Annex 2A, Part 2A-2, schedule of tariff commitments of Australia. For Australia, tariff reductions to zero on entry into force (EIF) of the AUKFTA apply to a range of foods, building materials, chemical products, textiles, manufactured metal products, machinery and vehicles. The tariff rate prior to EIF is generally 5 per cent. Tariff reductions over five years after EIF apply to some iron and steel products, and reductions over six years apply to some cheese and curd. For the majority of products, the existing tariff rate is zero and remains so on EIF.
3.14
Australia’s notes for interpreting its schedule include that:
the interpretation of the schedule shall be governed by the Customs Tariff Act 1995
for the purposes of implementing the tariff reductions, the first reduction would take place on EIF, and following reductions would progress in equal annual instalments, the annual instalments shall take place on the first day of each year.
3.15
Australia has three categories for the elimination of tariffs:
B5—removal of tariffs in five equal annual instalments
B6—removal of tariffs in six equal annual instalments.
Tariff schedule – UK
3.16
The UK’s tariff commitments are listed in Annex 2A, Part 2B-4, schedule of tariff commitments of the UK. For the UK, apart from a number of agricultural goods, the majority of goods are already tariff free or would be so upon EIF. For a small range of goods, tariffs would remain in place.
3.17
The UK’s notes for interpreting its schedule include that:
the schedule shall be interpreted in accordance with the laws and regulations of the UK
for the purposes of implementing the tariff reductions, unless tariffs remain in place, the first reduction would take place on EIF, and following reductions would progress in equal annual instalments taking place on the first day of each year.
3.18
The UK has the following categories for the elimination or reduction of tariffs:
B4—removal of tariffs in four equal annual instalments
B5—removal of tariffs in five equal annual instalments
B6—removal of tariffs in six equal annual instalments
B8—removal of tariffs in eight equal annual instalments
B9—removal of tariffs in nine equal annual instalments
C11—retention of the base rate tariffs for the period of 10 years, followed by the elimination of tariffs after that
E—retention of the base rate (in other words, no tariff reductions).
3.19
According to the House of Commons International Trade Committee report, products with no tariff reduction are:
… pork, poultry, eggs (including certain egg products) and long-grain rice.
Matters of interest
3.20
The Committee examined a number of matters in relation to Chapter 2 of the AUKFTA in greater detail:
UK TRQs and product specific safeguards
economic capacity limits to exploiting benefits
UK tariff rate quotas and product specific safeguards
3.21
The UK’s tariff schedule also includes some product specific provisions in addition to tariff reductions and elimination:
TRQs: permit a certain quantity of a good (a quota) to be imported before that good’s tariff starts being applied. The UK has committed to an increase in the TRQ on certain goods.
Product specific safeguards: enable the UK to impose certain conditions on certain imported goods when there is a concern that local producers of that good might be threatened by cheaper imports.
UK tariff rate quotas
3.22
The House of Commons International Trade Committee report described TRQs in the AUKFTA as a means of assisting UK agricultural producers to adapt to the liberalisation of tariffs, by phasing in liberalisation over varying periods for several sensitive products.
3.23
Section 2B, Part 2B-2, Subsection 2B-2-1 sets out the TRQs that the UK would apply to certain Australian goods over time. Most TRQs would increase as time passes, in other words, the quantity of an Australian good exported to the UK that would be tariff free would increase.
3.24
TRQs would be allocated by Australia to producers or exporters using TRQ certificates up to the relevant quantity for each TRQ. On the year of EIF, the TRQ quantities are to be calculated as a pro-rata proportion of the annual TRQ.
3.25
Subsection 2B-2-2 contains a list of the goods to which a TRQ applies and the quantity of Australian originating goods that would be permitted to enter the UK free of tariffs. The table below details the UK’s TRQ provisions.
Table 3.2: UK tariff rate quota provisions
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|
|
|
|
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Beef
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35,000
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10
|
110,000
|
|
Sheep meat
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25,000
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10
|
75,000
|
|
Milk, cream, yogurt and whey
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20,000
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5
|
20,000
|
|
Butter
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5,500
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5
|
11,500
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|
Cheese and curd
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24,000
|
5
|
48,000
|
|
Wheat and meslin
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80,000
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4
|
80,000
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|
Barley
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7,000
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4
|
7,000
|
|
Broken rice
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11,500
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4
|
11,500
|
|
Sugar
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80,000
|
8
|
220,000
|
Source: AUKFTA.
UK product specific safeguards
3.26
According to the House of Commons International Trade Committee report:
Under the Agreement, the UK Government will be able, within limits and only during a transitional period, to take measures to protect UK agricultural producers from the consequences of liberalising trade with Australia.
3.27
These measures are called ‘product specific safeguards’, and they are set out in Section 2B, Part 2B-3. Products to which specific safeguard measures apply are also identified with the code ‘PSS’ in the notes of the UK’s Annex 2A schedule of tariff commitments.
3.28
Product specific safeguards apply to:
Beef – from the start of year 11 to the end of year 15 after EIF, the UK may increase the tariff rate of Australian beef to 20 per cent for any year, if the quantity of imported Australian beef exceeds a trigger quantity. The trigger quantity is 122,000 tonnes in year 11 increasing to 170,000 tonnes in year 15.
Sheep meat – from the start of year 11 to the end of year 15 after the EIF, the UK may increase the tariff rate of Australian sheep meat to 20 per cent for any year, if the quantity of imported Australian sheep meat exceeds a trigger quantity. The trigger quantity is 85,000 tonnes in year 11 increasing to 125,000 tonnes in year 15.
3.29
In addition, if the quantity of Australian sheep meat imported into the UK from year 11 to year 15 is equal to or greater than 95 per cent of the TRQ quantity for two consecutive years, the TRQ quantity in the following year would be reduced by 25 per cent.
3.30
The provision may be related to an issue discussed by the House of Commons International Trade Committee report. According to that committee, the UK National Farmers’ Union (NFU) was concerned that TRQ volumes would be measured according to ‘shipping product weight’ rather than ‘carcass weight equivalent’ which accounts for the fact that not all parts of an animal’s carcass are consumed. The NFU argued before the committee that the difference between these methodologies meant that a relatively small volume of high value imports, such as steak cuts, entering under the TRQ, had the potential to significantly disrupt domestic markets and negatively impact UK farmers.
3.31
The UK’s product specific safeguards reflect a broader concern by agricultural producers in the UK that Australian agricultural imports pose a risk to UK agriculture. Agricultural producers in the UK were particularly concerned that Australian production costs for beef may be 2.5 times lower than those in the UK, and for sheep meat, 65 per cent lower. The NFU stated that the year one beef quota in the AUKFTA was equivalent to 10 per cent of the ‘UK import requirement’, and the year 10 quota was equivalent to 30 per cent of the ‘UK import requirement’.
3.32
The House of Commons International Trade Committee report noted that because Australia was not a major export market for UK agricultural products:
This makes it likely that the majority of benefits from the liberalisation of trade in agricultural products will go to Australian exporters (and potentially UK consumers), while the costs will be borne by UK agri-food producers.
3.33
According to the National Farmers’ Federation (NFF):
At present, the UK is not a large market for Australian agricultural exports, a legacy of the restrictive EU [European Union] import regime from which the UK has now departed. This is unlikely to change significantly as any imports from Australia will only help fill any gaps evident between UK domestic production and overall consumption.
3.34
UK modelling of the impact of the AUKFTA estimated that the long-term impact on UK primary producers may not be that significant: about 0.7 per cent of annual gross value added, and for semi-processed food producers, 2.65 per cent of annual gross value added. Further, the UK Secretary of State in January 2022 stated that the UK accounted for just 0.1 per cent of Australian red meat exports, with Australia exporting 75 to 80 per cent of red meats to the Asia-Pacific.
3.35
The NFF did not anticipate red meat obtaining a significant market share resulting from the AUKFTA, but stated:
[t]here will be tangible benefits for Australian producers. As an example, Australian beef producers who may receive a premium from the sale of high value product in the United Kingdom. Still, with less than 1% of total beef imports to the United Kingdom coming from Australia in 2020, it is unlikely that there will be a massive redirection of exports in this area.
3.36
Australian Pork Limited was similarly circumspect in its assessment of the future of Australian pork in the UK market:
At present, Australian pork export markets are relatively small and the UK–FTA [free trade agreement] does not provide obvious market access opportunities for the Australian pork industry.
3.37
The Australian Red Meat Industry was more positive, arguing that access to the UK for beef and sheep meat from EIF of the agreement exceeded the available annual access the Australian industry had to the UK for the past 50 years.
3.38
The capacity of Australian businesses to take up opportunities offered by the AUKFTA is discussed more broadly below.
Committee comment
3.39
The Committee notes that the AUKFTA includes product specific safeguards that apply to Australian beef and sheep meat exported to the UK, and that some of these safeguards are triggered by imports lower than the UK’s TRQ commitments. The Committee’s UK counterpart, the House of Commons International Trade Committee, found the UK’s product specific safeguards reflect a concern by UK agricultural producers that Australian agricultural imports pose a risk to UK agriculture. The Committee notes that, while the UK’s product specific safeguards are on the face of it, unusual and in some cases novel, Australian agricultural peak organisations did not raise these safeguards as a matter of concern during the inquiry.
Ratification timing
3.40
Both the tariff schedule for Australia and the tariff schedule for the UK state:
Unless otherwise provided in this Section, for the purposes of this Section, the term ‘year’ means, with respect to the first year, the period from the date of entry into force of this Agreement until 31 December of the same year and, with respect to each subsequent year, the twelve-month period which starts on 1 January of that year.
3.41
This provision means there is an advantage to be gained in the timely ratification of the AUKFTA. Participants in the inquiry were keen for Australia to pursue ratification in 2022. For example, the Australian Red Meat Industry advised the Committee that:
We would be [keen] because in that space there is also product that would be arriving this year that can potentially get in for the Christmas demand period. We'd be keen to start moving those business opportunities rather than delaying.
Economic capacity limits to exploiting benefits
3.42
The Committee discussed the UK’s tariff commitments in relation to agricultural products above, but the Committee is also aware that capacity limitations may prevent Australian exporters from making use of these opportunities.
3.43
In relation to exports of beef and sheep meat, the Australian Red Meat Industry advised the Committee that:
… it's clear to say at the moment the Australian red meat industry is not able to fill all of these volumes there ...
3.44
Meat and Livestock Australia stated:
We need to develop business in the UK. As an industry we'll be looking to see what opportunities may arise in the UK. In the short term we won't be utilising all of that access, but longer term we may well do.
3.45
In relation to agriculture more broadly, the NFF stated:
… you're unlikely to see a massive redirection of exports in this area, and it's really about that diversification piece.
3.46
Participants in the inquiry emphasised that the AUKFTA should instead be seen as an expansion in the range of markets, and hence an opportunity for Australian agriculture exporters.
3.47
In relation to beef and sheep meat, the Australian Red Meat Industry discussed the importance of thinking about exports not just in terms of quantity, but in terms of the range of products that might be exported to different markets:
… red meat involves many different parts of the animals. Different markets around the world fill demand for different specifications.
…
I think the range of cuts and items that go to the UK have two phases. One would be a high end, premium space and one is a new area for us which we talked on before which we haven't had before, which is more commodity based, around cheaper ends of the market that may well have a destination there as well.
3.48
Considered more broadly, inquiry participants emphasised the opportunity the AUKFTA provided in terms of permitting Australian producers to follow market demands in the future. According to the Australian Red Meat Industry:
I think what we look for within the FTA is future security of open trade to let markets and consumers drive outcomes. We don't want to be prejudicing what might happen in 30 or 40 years. If you look back, it's nearly 50 years since we've had the construct of the EU put across us. It's very hard to say what the market demands might be in 30, 40 or 50 years time. We're quite happy that was achieved. This is a liberalised outcome, so market forces will dictate what product goes where.
… it is very useful to have a diverse range of markets where farmers can place their products. Ultimately, they will go where the prices are best, where the market opens itself and where there's certainty and security. The UK market is a mature market. It is very competitive over there. We know that the UK producers and UK consumers like the UK produce. The intent of signing and supporting this agreement is to provide another option to Australian farmers across a range of different market segments and products, both food and fibre.
3.50
This view was supported by the Department of Foreign Affairs and Trade:
What we essentially do is create and expand opportunities for our exporters, if you're looking at goods and services … the UK market previously had—and in fact currently has, until this agreement enters into force—quite high barriers to some agricultural exports, particularly beef and sheepmeat, so it's really not much of a viable option for some of our exporters. By eventually eliminating all of the tariffs and quotas on those particular products, it creates opportunity … it is something that creates markets, but it's up to the exporters to take up those opportunities. They do that through their own process of determining what markets might be most profitable or have the best return at a particular point in time.
Wine
3.51
According to Australian Grape and Wine, the UK is currently Australia’s number one export market for wine.
3.52
Australian Grape and Wine advised the Committee that current tariff rates applied to Australian still wines entering the UK are about £2.20 per bottle for wine of less than 15 per cent alcohol by volume and about £3.00 per bottle for wine of greater than 15 per cent alcohol by volume.
3.53
Under the AUKFTA these tariffs would be removed upon EIF for all Australian wine exports to the UK. Australian Grape and Wine believed this would provide a benefit to Australian exporters of approximately $43 million.
3.54
The Business Council of Australia also identified wine producers as one of the industries likely to benefit most from the removal of tariffs in the AUKFTA.
3.55
However, the House of Commons International Trade Committee believed that the price effects of tariff liberalisation on Australian wine would be ‘more than negated’ by recently introduced tax rises in the UK on wine of 13 per cent or more alcohol by volume.
3.56
Australian Grape and Wine advised the Committee that Australian wines have higher alcohol volumes than UK produced wines:
Red wine, for example, has a greater alcohol content than white wine. Most of our red wine going into the UK is between 13 and 15 per cent alcohol by volume. White wines are generally below that. United Kingdom produced wine is generally at up to about 11½ per cent for the majority of their production. If you've got a white wine, it's going to be somewhere between nine to 12 per cent in general, and nine to 13 per cent for some of those bigger chardonnays.
3.57
The Committee noted that the tax rises recently introduced by the UK will apply to all wines, not just Australian wines. Australian Grape and Wine concurred with this assessment:
It will have an impact on the whole wine category, so not just Australian wine but everyone's wine. We know that there will be a substitution effect. But, more importantly, the point you just made was that it favours locally produced white and sparkling wines, which are a specialty of the UK …
Committee comment
3.58
The Committee is of the view that, while the UK tax rise on wines with 13 per cent or more alcohol by volume is intended to substantially benefit UK wine producers, there will be an impact on Australian wine exporters, negating to a certain extent the benefits of the tariff reductions on wine in the AUKFTA.
Sugar
3.59
Currently, there are no sugar exports from Australia to the UK:
They import it from African and Caribbean nations, some of it from Fiji, under protocols that were in place when they were a member of the European Union.
3.60
Raw sugar exported from Australia currently attracts a tariff rate of between £25 and £35 per 100kg. Under the AUKFTA, these tariffs would be reduced over nine years. Australian sugar exports would be granted a TRQ of 80,000 tonnes on ratification. The TRQ would increase to 220,000 tonnes in the final year tariffs are imposed.
3.61
Should the AUKFTA be ratified before the end of 2022:
… ten-twelfths of 80,000 tonnes would be Australia's access to the UK in the first year, which would basically be a couple of cargoes of sugar that year, increasing by 20,000 tonnes a year until year 8.
3.62
The Queensland Cane Growers Organisation (Canegrowers) advised the Committee that the outcome for sugar was:
… an opportunity to develop a relationship, to diversify some of those markets and to see the art of the possible. The Tate & Lyle refiners in the UK are saying that they're keen to be sourcing sustainably and ethically produced raw sugar. They're having trouble sourcing sugar from their traditional suppliers and they are looking to Australia to meet some of their supply needs, so we're quite excited by that.