UK trade prize moves closer, but pitfalls remain

The launch of free trade talks with the UK gives the Government a useful symbol of its commitment to the post-Covid recovery - but it is fair to assume negotiations will not be entirely smooth sailing, Sam Sachdeva writes

Analysis: After a difficult few days related to some British imports - of new Covid-19 cases rather than Cornish pasties - Prime Minister Jacinda Ardern must have jumped at the chance to front some good news about our relationship with the UK.

Appearing alongside Trade and Export Growth Minister David Parker and British High Commissioner Laura Clarke at the formal launch of talks for a new free trade agreement, Ardern waxed lyrical about the chance to remove tariffs from our kiwifruit, manuka honey and onion exports.

New Zealand has been high on the UK’s list of FTA targets for some time, yet it only gained the freedom to negotiate on January 31 after finally exiting the European Union.

At the first round of talks in July, both sides will be able to find some common ground on their frustrations with the EU.

Parker last week hit out at a paltry agriculture access offer by the Europeans in their own bilateral talks with New Zealand, casting doubt on any hopes of a resolution in the near future.

News of the UK discussions may offset some of the bitter taste in the mouths of our exporters, bringing an opportunity to start from a blank slate with a country more culturally similar than the EU bloc.

But talks with the UK may hit similar obstacles when it comes to the spectre of New Zealand’s agricultural exports flooding foreign markets.

'Protecting UK market a priority'

In a major consultation process carried out by the UK’s Department of International Trade,  several British submitters said “protecting the UK market should be a priority with no reduction of tariffs on food and agricultural products imported from New Zealand”.

Lamb and sheep meat exporters were a particular concern, with fears “that an FTA could lead to a flooding of the UK market with New Zealand imports, which could have an adverse effect on UK businesses”.

Kiwi negotiators are well aware of the difficulties they are likely to encounter, but are approaching talks with a degree of optimism if Parker is to be believed.

"We always run into issues on agricultural access. Having said that, I think the United Kingdom is expressing the view that they've wanted to be more open with the rest of the world after Brexit than before, so we're hopeful in respect of those negotiations.”

British government modelling of the deal’s potential impacts offered up two different scenarios: while ‘Scenario 2’ covers full tariff liberalisation, ‘Scenario 1’ assumes the UK maintains protections for sensitive sectors like dairy and meat, while both scenarios appear to assume no tariff reductions at all for sheep meat.

The modelling does make clear the two varied approaches are purely hypothetical at this stage, but they show the stakes at play for New Zealand negotiators.

The more conservative Scenario 1 could lead New Zealand’s annual GDP to grow by 0.14 percent, or roughly $400 million - but the more wide-ranging tariff reductions and other trade liberalisation under Scenario 2 would increase that to 0.35 percent, or nearly $1 billion.

But in either scenario, the UK expects the impact of an FTA on its own GDP to be “close to zero”, something it says is unsurprising given the relative size of the two economies.

British Prime Minister Boris Johnson has staked his reputation on the UK's ability to hold its own - including on the trade front - in a post-EU world. Photo: Getty Images.

Instead, the benefits on the British side of the deal appear to be slightly more symbolic, with UK Prime Minister Boris Johnson keen to show that his nation can not just survive but thrive in a post-Brexit world.

“Our future success as a country depends partly on using our newfound status as an independent trading nation to strengthen ties with old allies beyond Europe,” the UK’s formal FTA strategy document says.

“An ambitious, wide-ranging FTA with an old friend like New Zealand is a powerful way for us to do that and make good on the promise of Brexit.”

Johnson’s government is not quite in that world yet, however.

While the UK has formally left the EU, negotiations on a permanent agreement have not yet wrapped up, with the December 31 deadline for the end of the transitional period drawing ever closer.

Parker said the status of those negotiations complicated New Zealand’s own hopes of a swift deal with the UK, as some areas could not be finalised until the UK-EU outcome was known (most likely so that New Zealand does not end up in a worse position than expected).

At least the process for approval on the British side will be less complicated than the byzantine structure of the EU, and with preliminary scoping talks having taken place despite a block on formal negotiations, it is not unreasonable to hope a deal with the UK could be wrapped up far more swiftly.

CPTPP, TRQs both in play

But while Australia, which has also launched trade talks with the UK this week, has expressed a desire to conclude negotiations by the end of the year, Parker was unwilling to be so bold - perhaps wisely, given the slippages in estimated finish dates for the EU deal.

Then there is the UK’s interest in joining the 11-nation CPTPP trade deal, reiterated this week although yet to be formally initiated.

Potential British accession is not likely to have any effect on New Zealand’s bilateral talks, and could in fact give Kiwi negotiators some leverage (any CPTPP member has effective veto rights over prospective members).

Also still in play is how New Zealand’s tariff rate quotas (TRQs), set under World Trade Organisation rules to allow a certain level of imports at lower tariffs, will be divided between the EU and UK following their post-Brexit deal.

The Government here raised its objections with the proposed solution shortly after taking office in 2017, but there seems to have been minimal progress since talks on an alternative path moved to the WTO in Geneva.

That does not directly affect the FTA talks, but it is again an example of the difficulties Kiwi negotiators may encounter in the months ahead.

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