Abbott and Trade

There has been an uproar in the press in both Australia and the UK over the appointment of Tony Abbott to the UK Board of Trade.

In that position Abbott will be providing advice to the UK Government on trade negotiations in the post Brexit era.

Apparently, one the reasons the Conservative government, Boris Johnson in particular, were keen to appoint Abbott to the role was his support for Brexit. Abbott views on the Brexit has been aired in speeches organised by right wing think tanks and in articles in the conservative press in the UK.

Criticism of Abbott’s Social Conservatism

The criticism of the appointment has focused on Abbott’s ultra conservative views. These include his well-documented misogyny, climate change denialism and attitudes to marriage equality.

Self-Proclaimed Trade Expert

However, the appointment has been defended on the basis that Abbott is allegedly an ‘expert’ on trade. The quotes below (in italics) are from a speech Abbott made in London in September 2019 at the Policy Exchange, a right wing ‘Thinktank’ (1).

“And I know something about trade deals because my government did them, trade deals covering almost 50 per cent of our exports – with Japan, with Korea, and with China”.

The supporters of Abbott’s appointment point to the free trade agreements (FTAs) Australia signed with countries during his period as Prime Minister

Let us look at Abbotts role in the FTA’s he signed. Let us not forget the facts.

FTAs typically take years to initiate, negotiate and finalise. They are highly complex and technical. Australia’s FTAs are negotiated by the Department of Foreign Affairs and Trade (DFAT) with a large team of experts including, economists, lawyers ‘in country’ diplomats and industry specialists. These teams work with industry bodies, large corporations, employee organisations, professional bodies, and other groups. The relevant Minister’s oversee the negotiations and can help to resolve any ‘road blocks’.

There is some evidence that the Minister for Trade, Andrew Robb, was instrumental pushing through these FTAs. There is no evidence on Abbott having played a significant, if any role in getting the FTAs across the line.

Ignorant of the Composition of Trading Relationships

The key argument peddled by Abbott is that the UK would be better off trading outside the EU compared to being in the EU.

“So let me reassure anyone in Britain, anxious about the prospect of a no-deal Brexit, that Australia does one hundred billion dollars’ worth of trade with the EU every single year, on the basis of no deal. Sure, we have some trade facilitation arrangements”.

It seems that Abbott has not looked at the goods and services that Australia and the UK sell to the countries in the EU. They are very different. This is critical when trying to predict what will happen if the UK is forced to trade with the EU under the same conditions that Australia does.

Bulk Commodities are Very Different to Manufactured Goods

DFAT has reported (2) that in 2016, Australia exported goods to the value of over $20 billion to the EU. Half of the total, $10.1 billion was to the UK. The key issue is the goods that Australia exports. The top five goods were commodities – coal ($M 2,268) gold ($M 916), Oil-seeds & oleaginous fruits ($M 744), Wine and other alcoholic beverages ($M 591) and Lead ( $M 568).

Of these goods, only wine and other alcoholic beverages are subject to tariffs (3). They are also the only goods that a subject to regulations such as ‘food safety’ and quality standards. The other goods are bulk commodities. They are not subject to tariffs and complex consumer safety related regulations.

The other obvious point is the logistics involved in the transport of the ‘bulk’ commodities. They are transported in ‘bulk’. Coal and lead are shipped from Australia to the EU in very big ships. The ‘paper work’ is simple – the shipment is from company A to company B for $X million. The shipment is ‘homogenous’ e.g. the coal is all the same.

When we look at the what the UK exports to the EU we can see that they are significantly different (4).

In 2019, petroleum and petroleum products were the UK’s single largest export to the EU, valued at £20 billion. These products are primarily transported in bulk i.e. by ship. However, they manufactured goods and would be the subject of tariffs if the UK leaves the EU without a FTA.

It is the other exports from the UK to the EU where the real difference to the Australia’s trading relationship to the EU can be found. Other goods the EK exports to the EU included road vehicles, valued at £17 billion (10% of goods exports to the EU) and other transport equipment valued at £10 billion (6% of all goods exports to the EU). Other goods include Medicinal & pharmaceutical products (£9.2 billion), General industrial machinery & equipment (£6.9 billion), Electrical machinery & appliances (£6.8 billion) and Articles of apparel & clothing accessories (£5.3 billion).

All these goods are ‘advanced’ manufactured items. They would be the subject of tariffs it the UK leaves the EU without a trade deal.

However, tariffs are only part of the story. Most of these goods are the subject of the ‘consumer’ and other standards regulations. To be allowed to be sold in the EU, these UK manufactured items have to meet the EU’s standards. When the UK was in the EU it conformed to EU regulations. This meant that exported goods were not stopped at the borders to be checked and related paperwork examined.

It should also be noted that many of the goods that the UK exports to the EU are components for other items. They are part of a larger supply chain. For example, lights or brakes manufactured in Coventry are export to Munich to be include in a BMW car.

Lots of Trucks Crossing the Channel

Many people that have travelled to the UK and Europe will have crossed the English Channel by ferry. They will have seen the goods trade between the UK and the EU in action. It can also be seen when crossing the North Sea.

Every hour, hundreds of semi-trailers (aka lorries) are transported by ferry. These trucks are carrying the goods noted above. While the UK has been in the EU, the transport of these goods has been seamless. The trucks drive on the ferries in the UK and drive off at the other end, with no more complications than a family in a car or an aging Australian on a bicycle.

If the UK leaves the EU without an FTA, this will all change. The trucks will be bstopped at the borders to be checked and related paperwork examined. This will cause delays.

This is not to mention the probability that many EU manufactures e.g. the motor manufactures will decide not to source components from UK manufactures because they are more expensive as a result of the imposition of World Trade Organisation (WTO) tariffs that would automatically be levied in the absence of a FTA .

The UK manufacturers of ‘finished’ vehicles would be one of the hardest hit industries in the case of a ‘no deal’ in that WTO tariffs of 10 per cent would be imposed on cars, rising to as high as 22 per cent on vans and trucks. Also as noted above, border controls would also threaten to disrupt just-in-time supply chains.

A study by the Society of Motor Manufacturers and Traders (SMMT), the UK trade body, estimated that for cars and vans alone, a hit to demand caused by a 10 per cent tariff could reduce production by three million vehicles over five years, costing UK factories €52.8 billion.

Trade in Services

Abbott’s ignorance is not restricted to physical goods when it comes the difference between Australia’s and the UK’s trade with the EU.

Australia’s major services exports to the EU were personal travel services (excluding education-related) i.e tourism ( $M6348 ), other business services ($M3182) and education-related travel services ($M713 M).

The export of services is $M10,530 which is less than half the value of the goods exports. As noted above, more than half of the services ‘exported’ to the EU are tourists visiting Australia.

The UK’s exports of services to the EU to the UK are really significant. In 2018, the UK’s single largest service export to the EU was ‘other business services’, valued at £35 billion; this represented 29% of all UK service exports to the EU. This category includes legal, accounting, advertising, research and development, architectural, engineering and other professional and technical services.

The trade in ‘other business’ services is facilitated by the fact that the firms e.g. the large accounting and law firms, are providing their services into the EU ‘common’ market for those services. The staff in those firms and move freely between offices in Europe and the UK. The qualifications of the staff are accepted across that market. This will not be the case when the UK leaves the EU without an FTA.

Financial Services

Other UK ‘services’ exported to the EU included financial services, valued at £26 billion (22% of service exports to the EU). These exports will be significant impacted when the UK leaves the EU.

“The UK financial sector’s relevance to the rest of the EU is also pronounced. British banks lend nearly $1.4 trillion to EU companies and governments. Much of the financial activities carried out in Europe are either directly or indirectly performed out of London (87% of US investment banks’ EU staff are employed in London”.

By far and away the most important issue related to the export of financial services to the EU is ‘passporting’.

“Passporting is the process whereby any British-based financial institution, be it banks, insurance providers, or asset management firms, can sell their products and services into the rest of the EU without the need to obtain a license, get regulatory approval, or set up local subsidiaries to do so”.

As the piece referenced below (7) notes, “a recent report estimated that nearly 5,500 firms in the UK rely on passporting to conduct business with the EU”. There are various ways that UK could continue to operate in the EU without the ‘passporting’ arrangements that currently apply. However, there appear to be no doubt that leaving the EU without a FTA will have a negative impact of the UK’s financial industry.

One thing that can be said with certainty. That is that the UK would gain nothing by looking to Australia’s finance industries dealings with the EU as a indicators of what might happen when it leaves the EU with ‘no deal’.

Wanting to Return the Past

Abbott appears to be yearning for the days of the ‘British Empire’ and the trading relationship of that time.

“A full economic partnership between Britain and Australia – restoring the almost completely unrestricted commerce that we enjoyed for 150 years, and allowing Britons and Australians, once again, properly to experience each other’s wonderful countries and lives”

Let us look at the facts.

It is true that from its days as a collection of British colonies through to the late fifties, Australia had very strong trading and cultural relationships with the UK.

These included a very high proportion of the Australia’s imports coming from the UK, in the form of many manufactured products including the motor vehicles, machinery, textiles and finished apparel. Australia was also open to immigrants from the UK. Australian citizens had relatively open access to the UK.

If we move forward to today, things have changed significantly.

Australia is placed twentieth in the list of the countries that import goods from the UK with annual imports running at around $5.4 billion per annum this amounts to around 1% of the $469 billion of the goods the UK exports each year. This compares with the EU which currently takes over half of the UK goods exports.

If we look at the goods that the UK exports, top of the list is cars. Let us not forget that the Japanese company Nissan. It is the largest car manufacturer in the UK it has a huge plant in the Sunderland area in the North East of England. In the event that the UK forms a closer trading bond with Australia post Brexit, it is highly unlikely that Nissan will export cars from Sunderland rather from its plants in Japan and South East Asia.

When it comes to services, the UK’s exit from the EU is likely to have a minimal impact on its ability to export services to Australia.

As noted above the UK exports legal, accounting, advertising, research and development, architectural, engineering and other professional and technical services to the EU. The obvious issue when trying to export these services from the UK to Australia the distance between the two counties. Technology can assist, but does not overcome time differences and inability to travel conveniently when physical interaction between people is required. Compare flying between London and Sydney and taking the Eurostar between London and Paris.

There is also the issue of financial services. Leaving the EU will not have any impact of the ability of UK banks and other financial services companies to ‘export’ to Australia or operate in Australia. When the Labor government deregulated the Australian financial market in the 1990’s many UK banks and other financial companies opened operations in Australia. Many of these left simply because it was not profitable. They are unlikely to try again simple because the UK has left the EU.

Dumped for Good Reason

As noted above, Abbotts appointment has been roundly criticised in Australis and the UK.

One of the of the most searing criticisms came the Caroline Nokes, a Conservative MP who said that “she struggles to come up with words to describe how bad it is”. She went on to say that appointing Abbott as a UK trade representative would be awful.”

All of this criticism prompted the UK Prime Minister, Boris Johnson to defend the appointment and Abbott.

Boris Johnson said Mr Abbott was “elected by the people of the great liberal democratic nation of Australia”, which “speaks for itself”.

Clearly Boris has not followed Abbott’s political career.

Abbott was elected to the ‘blue ribbon’ seat of Warringah which covers the very affluent areas on Sydney’s lower northern shore in 1994. This was after a career in journalism and as a ‘staffer’ for the Liberal Party.

Abbott’s ministerial career in the Howard government was not distinguished. In fact, he was very ordinary as Minister for Employment and the Minister for Health.

In 2009, he narrowly beat incumbent Malcolm Turnbull to become the Leader of the Opposition.

As Leader of the Opposition, Abbott’s aggressive approach earned him several nicknames. His tactics led some to call him “Tear-down Tony” or “Mad Monk” – a reference to his time spent training briefly as a priest. There is no doubt that he was a very effective Leader of the Opposition.

In the September 2013 he led the Liberal-National Party Coalition into Government.

However, he was to prove to be a totally incompetent Prime Minister. His first budget was a disaster. His history gaffes and missteps is too long to list. In September 2015, the Liberal Party had had enough and dumped him as leader. He stayed on in Parliament as a backbencher.

I lived in Mosman which is in the seat of Warringah from 1988 to 2012.

As noted above the area is very affluent and has historically been a very safe seat for the conservative side of politics. I was my experience that people in the electorate vote for the Liberal Party as a ‘matter of course’. In the early days, people voted for Abbott simply because he was the Liberal candidate. As they got to see him ‘perform’ as a minister, they voted for the Liberal despite he was the candidate. He got a lift when he Leader of the Opposition. However, after being dumped as Prime Minster by the Liberal Party, his support in the next election fell in Warringah.

When it came to May 2019 election the good burgers of Warringah had had enough. Abbott lost his seat after suffering a swing of more than 13 per cent against him, propelling independent challenger Zali Steggall into Parliament.

The members of the Liberal Party and the good people of Warringah know Tony Abbot far better than does Boris Johnson.

Summary

The UK government is making a serious mistake appointing Tony Abbott a role on its Board of Trade where he will be providing advice to the Minister for Trade, Liz Truss.

The least of the Liz Truss’s problems with the appointment of Tony Abbott to the UK’s Board of Trade of that he is a homophobic, misogynous, climate change denier.

She will soon find out that he knows ‘jack shit’ about trade, especially Australia’s trading relationship with the EU. Abbott has an absurd notion that Australia’s trading relationship with the EU can used as guide as the how the UK will fair in its post Brexit relationship with the ‘single market.

The government and Boris Johnson need to understand that the Liberal Party of Australia and the voters of Abbott’s former seat (constituency) in parliament dump his for a very good reason. You don’t need to be a Rhode Scholar to work that out.

(1)Abbott’s Speech to The Policy Exchange

https://policyexchange.org.uk/pxevents/speech-by-hon-tony-abbott/

(2)Australian Exports to the EU

https://www.dfat.gov.au/about-us/publications/trade-investment/business-envoy/Pages/january-2018/australia-eu-trade-statistics

(3)Tariffs on Australian Exports to the EU

https://madb.europa.eu/madb/euTariffs.htm

(4)UK Exports to the EU

https://commonslibrary.parliament.uk/research-briefings/cbp-7851/ (Download PDF Report)

(5)Haulage Companies warn of Disruption

https://www.bbc.com/news/uk-54021421

(6)Impact of Brexit on the Car Industry

https://www.independent.co.uk/news/business/news/no-deal-brexit-car-industry-impact-manufacturers-a9116751.html