Fool's Gold? The Free Trade Agreement between Australia and the UK

Amid great fanfare, the Free Trade Agreement (FTA) between the UK and Australia was signed in December last year. The FTA was politically important to the leaders of both countries: to Boris Johnson, it was proof that post-Brexit Britain was redefining its trade relationships with the rest of the world, while Scott Morrison eagerly presented it as a significant win for Australian farmers.

It’s likely, though, that the FTA’s potential impact on trade has been overstated. Australia accounts for less than 2% of the UK’s imports; just over 2% of Australia’s imports come from the UK.

Australia’s major imports are things like machinery, fuel and cars – few of which come from the UK, so it’s doubtful that the FTA will do much to increase those imports. And as for Australian agricultural exports, the UK actually imports relatively little food, except from Europe. The FTA probably offers scope for some Australian agricultural sectors (especially beef producers) to increase sales to the UK, but there’s no great need for them to pursue that opportunity – Australia’s main customers remain China, Japan, the USA, Indonesia and South Korea, all of which are a good deal closer to Australia than the UK. Distance matters when you’re shipping produce – the greater the distance, the greater the cost and risk. The largest Australian agricultural export to the UK is wine, largely thanks to England’s enduring (if puzzling) fondness for Jacob’s Creek, and that market is unlikely to be much affected by the FTA. In fact, Australia’s major export to the UK is gold, which doesn’t need refrigeration in transit. Probably this wasn’t what DFAT meant when it described the FTA as a “gold standard free trade agreement”.

A great deal has been made of the fact that, under the FTA, 99% of Australian exports to the UK will be duty free. That’s certainly good for Australian exporters, but the figure before the FTA was 89%, so the benefits are incremental rather than dramatic.

None of this is to say that there isn’t meaningful economic activity between Australia and the UK. There is, and it mostly takes the form of investment. The UK is the third-highest foreign investor in Australia, after the USA and Japan. In 2020, UK entities invested $123 billion in Australia. Actually, that number may be understated, since $40 billion also came from Bermuda and another $22 billion from the British Virgin Islands, and it’s a fair guess that much of this represents the stakes of tax-averse British investors. For perspective, in 2020 China was only the sixth-highest investor in Australia, at $44 billion.

It's common for free trade agreements to include a chapter dealing with investment, and the FTA is no exception – it’s Chapter 13. But it’s difficult to understand why.

Generally, investment agreements are put in place in order to stimulate the flow of foreign investment. The host country promises to treat protected investors in certain privileged ways, so as to encourage them to put their capital at risk. These protections usually extend beyond the legal rights of the host state’s citizens. To take only one example among many, most treaties promise “fair and equitable treatment” – something which Australian businesses can’t claim as a matter of law. If Australia’s Parliament passes a law, it can be challenged in Australians courts on the basis that it’s unconstitutional, but not on the basis that it’s unfair. A protected foreign investor, however, might be able to bring a claim under the treaty.

And that brings us to the problem with Chapter 13 of the FTA. All of the standard promises are there: investors can expect “fair and equitable treatment” and “most favoured nation” treatment. Their investments won’t be expropriated (or subjected to equivalent measures) without compensation. And they’re promised the right to repatriate the proceeds of their investments.

And not one of those promises is worth the paper it’s printed on.

That’s because of what isn’t in the FTA, which is an investor-state dispute mechanism. Most investment treaties provide a right, where a breach of their protections occurs, for individual investors of one country to bring a claim against the host state – almost always in international arbitration. This is far from being a perfect system, but it gives each promised protection some weight, because it can be enforced. But not in the FTA. Australia could decide tomorrow to pass laws discriminating against investors from the UK, and while that might cause a diplomatic incident, and might be economically ill-advised, there’s not a thing that an individual investor could do about it. There’s no claim that can be brought in any Australian court, because the treaty hasn’t been (and won’t be) incorporated into Australian domestic law by an Act of Parliament. The FTA does have a dispute mechanism dealing with disputes arising between the UK and Australia, but none empowering individual investors to bring an action. And it almost never happens that a state agrees to prosecute a dispute to protect a single investor.

Now, there are plenty of sound reasons for states to avoid investor-state dispute provisions: they allow investors with deep pockets to challenge legislation or executive decisions that have an adverse impact on them, and no government wants that. So whoever decided to exclude investor-state dispute mechanisms from the FTA was acting rationally. What is less rational, though, is to set out a string of promises in Chapter 13 that can be broken on a whim without any meaningful consequence. No sensible investor would place any reliance on Chapter 13 which, like much else in the FTA, amounts to a lovely gesture with not a great deal of substance.