In coming months, the European Union and Australia will launch negotiations for a so-called ‘deep and comprehensive free trade agreement’. While much of the attention goes to the possibly contentious issues related to agricultural trade, the service sectors are of greater importance to bilateral trade between the two parties. This will need to be reflected in the talks.
The EU is by far the biggest global exporter of trade in services with US$985 billion (AU$1.349 trillion) worth of exports in 2014, representing more than 25 per cent of global exports. If we take intra-EU trade into consideration, EU countries exported US$2.1 trillion of services in 2014, representing more than 40 per cent of all world exports. With such an important share of the EU’s international trade attributed to services, it is obvious that any EU free trade agreement (FTA) without substantial discipline and commitments to services will not make much sense.
The EU is a significant exporter to Australia with a total volume of €48.2 billion (AU$71.63 billion) in 2014, 38.6 per cent or €18.6 billion of which was services exports. Australian exports of services are also significant at €7.8 billion, representing 45.9 per cent of total exports to the EU, even greater than agricultural trade. When we look at the Australian figures, world exports in terms of balance of payment and trade in goods (commodities, agriculture and manufacturing) represent 82 per cent of total exports, leaving trade in services a small 18 per cent.
But the new way of calculating international trade in terms of value added—the Trade in Value Added (TiVA) indicators and database developed by the Organization for Economic Cooperation and Development (OECD) and the World Trade Organization—shows that 46.1 per cent of total Australian exports are services. According to this database, 36.3 per cent of Australian goods exports are services embedded into exported goods. When we look at the same figures for the EU, 60.5 per cent of all EU exports are services, and 39.1 per cent of the value of those exports are services related to goods.
These new elements will need to be taken into consideration during the trade negotiations. The fact that the two parties are major proponents of plurilateral negotiations aimed at a Trade in Services Agreement (TiSA) is a strong signal that negotiators are aware of this, but it will now need to be integrated at the political level in the framework of the bilateral FTA.
The dimension of services will also need to be closely analysed when studying the impact of Brexit on EU trade policy and its possible influence on Australia’s interest in a strong EU FTA. Indeed, many Australian exporters and investors in the EU presently trade via the United Kingdom, and a significant share of EU service exports to Australia come from the UK. This will remain since the UK is a major player in international trade in services, ranking second after the US, representing 6.8 per cent of world trade in services and 15.6 per cent of EU exports in 2014 with US$337 billion.
Taking all of this into account, what should the content of the EU-Australia FTA for trade and investment in services be? By “deep and comprehensive FTA”, the EU understands a trade agreement will include trade in:
- goods: tariffs cuts on manufactured goods (+95 per cent), agriculture and commodities, non-tariff barriers like standards and rules of origin;
- trade in services: cross border trade and movement of people;
- investment: pre-establishment market access including service sectors and post-establishment protection;
- intellectual property rights: copyrights, patents and data flows;
- public procurement: including central, regional, local, and public entity services;
- state-to-state dispute settlement;
- regulatory disciplines and cooperation; and
- a so-called ‘sustainable development chapter’ that will establish rules on labour and the environment.
When we specifically focus on trade and investment in services, we will see the negotiations deal with the following elements: the market access pillar, regulatory disciplines and cooperation, the movement of natural persons and the mutual recognition of qualifications.
Regarding the market access pillar, it is important to underline that the current bidding level of legal international commitments between the two parties are the commitments taken in the framework of the WTO’s Uruguay Round—in particular those taken in the General Agreement on Trade in Services (GATS) in 1995, and subsequently in 1997 for basic telecoms and financial services.
In the bilateral talks, the parties will hopefully adopt the scheduling of market access and national treatment commitments using a negative list approach. This is the preferred method of EU and Australian service industries, as well as of the Australian government, but it is a method that is not well understood and appreciated by the EU member states or the European parliament. The parties should start the negotiations at least at the level of their best tabled offer in the framework of the TiSA negotiations of November 2016. But this could be further improved by replicating or improving on the EU’s commitment to Canada in the recently signed CETA (Comprehensive Economic Trade agreement) and Australia’s commitments in the Trans-Pacific Partnership (TPP)—which is now uncertain.
For market access in services sectors, the parties should aim to remove all equity caps, with negotiated exceptions; bind their current regulatory practises, with negotiated exceptions; and adopt a standstill and ratchet clause for many sectors to ensure future autonomous reforms.
The FTA should include a state-of-the-art investment protection chapter including transparent Investor-to-State Dispute Settlement (ISDS) and it is likely that the EU will insist on including the new EU Investment Court System (ICS).
Another very important element of the negotiations will be public procurement. There is no doubt that the EU will look for increased public procurement market access in the services sectors: construction; architecture and engineering; cleaning and catering in administrations and all public entities; insurance; telecom and IT; security; and the environment. Australia is not yet a member of the WTO Agreement on Government Procurement (GPA), so this will be a test to see the difficulty that will result from the request to access Australia’s sub-federal level.
The parties will also negotiate the adoption of a strong horizontal chapter on disciplines for domestic regulation. That is, transparency of regulation, prior consultation with stakeholders, impact assessment, transparency of licensing requirements and procedures. Like in TiSA, it is also likely that the service chapter or annex will include some sector specific disciplines in regards to telecoms, postal services, energy, environment, maritime and air transport, financial services, e-commerce, cross border data flow and sector specific regulatory cooperation or ‘living agreement’. The disciplines on State Owned Enterprises (SOEs) will also certainly apply to service companies.
The negotiations for the commitments of the so-called “movement of natural persons” are also a key priority for EU and Australian businesses in this FTA. The principle of the matter is to negotiate access to skilled business persons for a temporary period only, not for permanent migration. Economic operators, services and non-services are all interested in getting faster business visa and work permit delivery procedures.
To conclude, in some services sectors, getting access for companies and natural persons is not always sufficient to do business. This is notably the case for professional services like accountancy, auditing, architecture, engineering, law and medicine. It will therefore be important that the agreement try to achieve some mutual recognition in professional qualifications, which could be inspired by the EU-Canada CETA.
Pascal Kerneis is the managing director of the European Services Forum and a lawyer specialising in European law. He is recognised globally for his expertise in international trade in services, having been invited to speak at several WTO ministerial conferences.
Kerneis is a member of the steering committee of the EU-Australia Leadership Forum for which AIIA is an organising partner.
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