“We hope that the EU will change their position [...] But I think it’s only fair also that we communicate one other thing, which is that we are ready, if required, to leave on what have been called Australian terms.”
“Could be called Mongolian or Afghan terms as well as Australian.”
As the Brexit trade deal talks with the EU approach the endgame, there’s been much talk about the possibility of the UK moving to trade with the EU on “Australian” terms.
While the UK government has said it wants to have a “Canada-style” trade deal with the EU after the UK leaves the transition period at the end of 2020, this now looks less likely.
The Prime Minister has said the country should get ready for a trading relationship with the EU more like Australia, though that essentially means trading under no free trade agreement with the EU.
On Sunday, Andrew Marr suggested to Michael Gove that “Australian terms” could equally be called “Mongolian or Afghan terms”.
This isn’t quite correct. Afghanistan and Mongolia actually trade on more favourable terms than Australia by virtue of being less developed countries.
But, that aside, what are the exact differences between all these deals and what could any of them they mean for businesses and consumers in the UK?
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How did we get here?
It’s worth just taking a step back and outlining how the EU-UK Brexit negotiations got to this point.
The negotiation process was essentially split into two parts. First the UK and the EU negotiated the terms of withdrawal, and now they are negotiating the terms of a future trading arrangement.
At the beginning of 2020 the UK and the EU signed the withdrawal agreement. This avoided a “no deal” scenario and, as the UK in a Changing Europe (UKCE) think tank writes, “settled the UK’s financial obligations, the status of citizens in both the UK and the EU, and arrangements on how goods trade between Northern Ireland and the EU27 would continue after Brexit.”
Perhaps most importantly, the withdrawal agreement ensured there would be customs checks between Great Britain and Northern Ireland. This avoids the need for customs checks between Northern Ireland and the Republic of Ireland and so prevents the need for a “hard border” on the island of Ireland.
(It is worth noting that the new UK Internal Market Bill, which breaks aspects of the withdrawal agreement and has prompted a legal challenge from the EU, could affect the implementation of the withdrawal agreement.)
The negotiation of the future trading relationship is happening now, during a “transition period”, which is due to end on December 31 2020. Until this point the UK and the EU continue to trade on the same terms as when the UK was a member of the EU.
While the potential failure to agree a new trading arrangement before the transition period ends has also been referred to as “no deal”, it’s important not to confuse that with the “no deal” scenario which was being discussed when the possibility of a withdrawal agreement looked uncertain.
To understand the difference between different trade arrangement options, it can help to start with the basic trading arrangement—what’s often called “WTO terms”.
Most countries are members of the World Trade Organisation (WTO) which sets rules on international trade. There are two basic rules all members must abide by.
Firstly, if countries choose to set tariffs (taxes) on imported goods and services from other WTO countries, these must be applied equally.
This is called the “Most-Favoured Nation” rule and means that, for example, if a country cut the tariff on imports of copper from 10% to 5% for exporters from one country, it would have to set the tariff at 5% for every other country as well.
The second rule is that countries can’t set different rules for foreign and domestic products. For example, if you do not require domestic products to have a warning as to sugar content in food you cannot require it of foreign products.
However there is a big exception. If you are in a customs union (like the EU) or free trade area you can treat products and services from the customs union better than you treat other WTO members.
You can read more about how the WTO works here.
Canada and Australia
While Australia is currently negotiating a free trade agreement with the EU, it does not yet have one. If the UK moved to trade with the EU under “Australian terms”, it would have no favourable access to the EU market. UK businesses would face the EU’s standard WTO tariffs when trying to export to the continent, and EU businesses would face the UK’s standard WTO tariffs when trying to export to the UK.
However, Australia does have some agreements relating to trade and other issues with the EU. For example the EU and Australia have what’s called a Mutual Recognition Agreement (MRA).
This means the EU and Australia recognise each others’ testing bodies. While the countries may have different standards, an MRA means that products certified as EU compliant in Australia can be exported to the EU without needing to be tested on arrival, and vice-versa.
(The UK and Australia have agreed continuity of the EU-Australia MRA once the UK stops following the EU’s trade rules next year.)
This means that if the UK is seeking to negotiate a future trade arrangement with the EU on “Australian terms” this would be similar to, though not exactly the same as, a “no deal” on “WTO terms”. There would be no free trade agreement with the EU, with the possibility of some other arrangements which may ease trade to some extent.
If the UK and the EU fail to agree on even these limited arrangements before the transition period ends, then the UK would end up trading with the EU on less favourable terms than Australia currently does.
By comparison, Canada (which the UK government has suggested as a model for its desired trading relationship) has a free trade agreement with the EU.
This grants Canada almost completely tariff-free trade in goods with the EU, but it still faces more regulatory barriers to trade than EU countries do when trading with each other. The Institute for Government says that Canada’s deal allows “very limited access for services” to the EU market.
You can read more about the Canada-EU trade deal here.
Afghanistan and Mongolia
When Andrew Marr was suggesting that an “Australian terms” agreement could equally be called a “Mongolian” or “Afghan” deal he was actually understating the level of access both countries have to the EU market.
As well as free trade agreements which the EU has with various countries, it also grants certain less developed countries reduced or tariff-free access to the single market.
Afghanistan is classed as one of the least developed countries and so benefits from an “Everything But Arms” arrangement with the EU.
This means Afghan businesses can export all goods except arms and ammunition without tariffs or quotas to the EU.
Mongolia also receives tariff-free access to EU markets for two-thirds of product lines.
This is by virtue of being a lower-income country (though not as low-income as Afghanistan) which has ratified various conventions related to good governance, human rights, labour rights and environmental protections.
Lower developed countries which have not ratified these conventions benefit from tariff reductions or removal on exporting two-thirds of product lines to the EU, but not complete tariff removal on all of them.