The referendum held in the United Kingdom (‘UK’) on 23 June 2016, in which Britain elected to leave the European Union (‘EU’), led to an earthquake response. The pound slumped to decade lows against the US dollar, the yield on UK bonds feel to record lows, and the Financial Times Stock Exchange 100 share index sank. Not only were the UK markets hit, but the Eurozone also felt the shockwaves, experiencing dropping share prices and market volatility.
It is likely that the aftershocks will be numerous and unpredictable. Much will depend on the relationship that the UK and EU are able to negotiate in the coming years, particularly with regard to the UK’s future access to the EU Single Market. However, this is subject to great uncertainty, as trade negotiations will take place in an environment of political and economic flux due to upcoming elections in a number of key European governments, such as Germany and France. Such changes will likely play a key role in the outcome of Brexit negotiations.
Other than UK’s negotiations with the EU concerning their future relationship, high on the UK’s agenda is its future trade and investment relationships with extra-EU countries. Concerning this, UK Prime Minister, Theresa May, and Australian Prime Minister, Malcolm Turnbull, have already flagged their interest in negotiating – and indeed, fast-tracking – a UK-Australia trade agreement. This article examines the legal framework and issues underlying future trade negotiations and the likely implications for Australia.
UK’s current position on trade and investment matters
As a Member State of the EU, the UK is subject to two main trade and investment restrictions arising from the EU’s exclusive competence over commercial policy matters pursuant to Article 207 of the Treaty on the Functioning of the European Union (‘TFEU’). First, its ‘intra-EU bilateral investment treaties’ (‘intra-EU BITs’), which are trade agreements between the UK and current EU Member States, were to be phased out of operation. It had been argued for some time that intra-EU BITs could be incompatible with EU law.
Second, given Article 207 of the TFEU, extra-EU relationships are exclusively within the competence of the EU, as reflected by the process of negotiations followed for the Transatlantic Trade and Investment Partnership (‘TTIP’) and the recently concluded Comprehensive Economic Trade Agreement (‘CETA’). For the UK’s trade agreements that were concluded before 1 December 2009, the Regulation (EU) 1219/2012 of the European Parliament and the Council of 12 December 2012 establishes transitional arrangements.
Future treaties concerning trade and investment matters
The second restriction raised above poses significant ramifications for the UK concerning recently negotiated treaties and future treaties pertaining trade and investment.
Regarding recently negotiated treaties such as CETA, it is likely that these treaties would apply provisionally to the UK so long as the UK remains a Member State of the EU (Burgstaller and Zarowna, Possible Ramifications of the UK’s EU Referendum on Intra- and Extra-EU BITs (October 2016), p 572). However, the part that the UK would be able to play in current negotiations for deals such as TTIP is ambiguous.
As for negotiations with extra-EU countries, while the UK has expressed great interest in commencing trade talks with countries such as Australia and USA as soon as possible, Article 207 of the TFEU presents a significant fetter. As highlighted by Burgstaller and Zarowna (p 573), it is unlikely that the UK can commence negotiations with States with which the EU has already completed investment agreements, or are currently negotiating an investment agreement. This position has been recently flagged by Australia’s Minister for Trade, Tourism and Investment, Steven Ciobo, who ruled out negotiating a trade agreement with the UK government until the UK’s departure from the EU has been formally completed (Payne, Australia Has Just Dealt a Massive Blow to the UK Government’s Brexit Plans (25 October 2016)). Ciobo made the statement on the basis that he had received advice telling him that entering formal talks before the completion of Brexit would be illegal.
UK-Australia Relations: Future Challenges and Opportunities
Given that the UK is an important trade and investment partner of Australia, a future trade and investment agreement is well on the cards. According to statements released by May’s government, the aim was – prior to the roadblock identified by Ciobo – to draft a UK-Australia deal for signature by 2019 (Khan, Australia Rules Out Starting Trade Negotiations (26 October 2016)). This would likely increase the trade between the two countries, which is already substantial with Australian government trade figures indicating that in 2014, Australia exported A$8.3bn to the UK and imported A$12.4bn. Further, the UK is the third largest source of foreign direct investment in Australia, and the second most popular destination for Australian foreign direct investment flows abroad (Austrade Economics, Beyond Brexit: Potential Implications for Australian Trade and Investment (July 2016), p 17).
However, despite the valuable opportunity that Australia has to strengthen ties and the positive attitudes that both governments have voiced to a potential agreement, the Australian government will need to be keenly monitoring and responsive to the continued uncertainty and shifting goal posts that the UK faces. These include:
- uncertainty concerning the relationship that the UK and the EU would adopt, and most relevantly the level of access that the UK would have to the EU’s Single Market;
- continued challenge and uncertainty over the operation of Article 50 of the Treaty on the European Union (‘TEU’), which designates the process for a Member State to leave the EU, and thus severe lack of clarity as to when the UK would formally commence Brexit negotiations, let alone finish these negotiations; and
- political challenges relating to striking trade deals in the EU, as reflected in the recent issues with the finalisation of the CETA negotiations.
Though, as identified by Austrade Economics, Australia is not considered to be one of the economies most exposed to Brexit fallout, it would be prudent of Australia to keep abreast of these developments, if only to know how best to forge a future relationship with both the UK and the EU.