When the United Kingdom (UK) sought to join the European Economic Community (EEC) in the early 1970s, it stirred a backlash in Australia. Because its prime exporters enjoyed easy access to the large British market, many feared a possible collapse would occur in bilateral trade. Today, the debate over whether the UK should remain in the EU attracts few headlines in Australia. It is not a replay of the previous EEC debate. Nevertheless, a British “no” vote in the 2017 referendum could yet again have negative consequences for the economic relationship between the two countries. This time, however, Australia wants the UK to stay in the grand ‘European Project’ rather than to stay out.
Much has clearly changed since the 1970s. Back then, Western Europe’s Common Customs Tariff and Common Agricultural Policy (CAP) represented substantial trade barriers for Australia’s major exporters. When the UK finally did join the EEC, Canberra not only lost its preferential access to an alternative export market, it also deepened its rift with Brussels. In the years that followed, Australia-EU relations therefore continued to suffer from ongoing trade disputes, several of which ended in international legal proceedings.
Since the 1990s, however, Australia has acquired a much more positive view of the EU and increasingly come to see the advantages of the UK being a member. At the most basic level, the downsides Canberra once saw in the Union have become less important because . . .
- The growth of CAP subsidies as a percentage of EU GDP has declined and there have been substantial changes in how the subsidies are distributed.
- The EU’s decision to move away from direct production and export subsidies has led to fewer market distortions. Third party exporters such as Australia have thus enjoyed greater access to the European market.
- Australia’s exporters have shifted their focus away from Europe and toward the Asia-Pacific region. As a result, trade issues no longer dominate its relationship with the EU as it once did.
- The European market has become more integrated, which has thus altered the economic incentives for countries both inside and outside the Union. Brussels now has the power to regulate a wide range of economic activities, and the harmonization of standards across the Union has streamlined operating environments, created greater legal certainty, reduced risks and lowered transaction costs. Ultimately, this has made the Union as the whole far more attractive for potential economic partners than it once was.
- Finally, the UK-Australia economic relationship did not wane completely. Great Britain is still the largest European recipient of Australian exports and foreign direct investment. It also remains the preferred site for Australian businesses to base their European operations. If you ask ‘why?’ the answer is simple – Australian firms that are well-established in the UK benefit substantially from its position in the common market. Because EU law allows them to operate seamlessly with the other 27 member states, UK membership in the EU now has a value that’s far higher than it once was.
For all the above reasons, Australian businesses no longer want the UK to ‘stay out’ as they once did in the case of the EEC. They definitely want it to now ‘stay in’ the EU. But what if the British public votes itself out in 2017? What’s a possible Plan B?
The EFTA option
If it did leave the EU, Great Britain could retain most of its advantages by joining the European Free Trade Association (EFTA) and either remain in the European Economic Area (EEA) or negotiate a bilateral arrangement similar to Switzerland’s. This option would provide London with a high degree of economic continuity and would be acceptable to Australian businesses as well as to the government.
EFTA membership, however, is far from certain and there are doubts that the Swiss model could be replicated, given the EU’s continuing reservations about this approach. And yes, EFTA membership would allow the UK to conduct a more independent trade policy, which could then potentially benefit Australia, but there is no guarantee that the UK would give priority to Australian interests in an EFTA-type arrangement. Finally, given the long-term decline of the UK as a trading partner, the benefits to the Australian economy of a preferential trade agreement are substantially less today than they were in the 1970s.
So, what is Canberra left with as it weighs the costs, benefits and risks of a UK exit? On balance, it appears that the government believes, at least for now, that the certainty of the status quo is more attractive than the relatively minor benefits and considerable risks associated with London renegotiating its relationship with Brussels.
But from a wider perspective, Canberra’s stance on this issue illustrates how dramatically its ties with the former “mother country” have changed. The value of the UK now lies not in its own markets but in the access it provides to the broader European economy. While Australia will not impact how the UK votes in 2017, this change of emphasis is a fact that London would do well to consider.