Impact assessment

Impact assessment of the FTA between the UK and Australia: executive summary (web version)

Updated 10 May 2022

Read the full impact assessment of the Free Trade Agreement between the United Kingdom of Great Britain and Northern Ireland and Australia (PDF, 4,275KB).

The Department for International Trade (DIT) has negotiated a free trade agreement (FTA) between the United Kingdom and Australia.

It is a deep and comprehensive agreement which aims to enhance the historic trading and investment relationship between the 2 nations. It aims to build upon long-lasting economic and cultural links. It is expected to bring long-term economic benefits for both nations, support UK jobs and provide opportunities for growth in sectors all around the UK.

The agreement aims to support the reorientation of the UK’s trading relationships towards the emerging markets in the Indo-Pacific region. It represents a major step in our accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), one of the world’s largest FTAs.

The agreement aims to forge stronger ties between the UK and Australia.

It could help to increase collaboration in areas including:

• services trade
• intellectual property (IP)
• animal welfare
• trade for development
• women’s economic empowerment
• the environment

This impact assessment sets out our assessment of the economic, social, and environmental impacts of the agreement.

The agreement

The UK-Australia FTA is the UK’s first trade deal negotiated from scratch since leaving the EU. It fulfils the government’s manifesto commitment to secure a free trade agreement with Australia, which is an important and like-minded trading partner for the UK.

UK public support for a UK-Australia free trade agreement continues to be high. DIT’s public attitudes to trade tracker (PATT) shows that 65% of people support one.^{[footnote 1]} Only 5% of people are opposed to a deal.

This is a deep and comprehensive agreement, going further than any UK or Australian FTA has before in several areas, such as innovation and procurement.

The agreement includes the first ever dedicated innovation chapter of any FTA in the world. This ensures that the agreement will continue to support emerging trade opportunities and innovative technologies throughout its lifetime.

It secures more legally-guaranteed access to Australian procurement opportunities than Australia has ever previously offered in a trade deal. This is expected to provide around £10 billion of new legally-guaranteed procurement opportunities each year.

The agreement removes tariffs on all UK exports to Australia, as well as removing and reducing regulatory barriers.

It includes an ambitious agreement on business mobility which will make it easier for UK professionals to travel for work.

The agreement maintains high standards on issues that DIT’s PATT shows matter to UK consumers, such as food standards and animal welfare.

For example on food standards, the agreement does not create any new permissions for imports from Australia and hormone-treated beef will continue to be banned. All food and drink products imported into the UK will have to comply with our import requirements. The UK’s independent food regulators (the Food Standards Agency and Food Standards Scotland) will continue to ensure all food imports meet our high standards.

On animal welfare, the agreement includes non-regression and non-derogation clauses on animal welfare standards. This means both countries are committed to not lowering their animal welfare standards.

As well as removing barriers to trade, the agreement aims to support closer cooperation between the UK and Australia to raise global standards. This will be possible through bilateral cooperation in fora including the World Trade Organization (WTO) and the G20.

The impact of the agreement

Trade between the UK and Australia was worth £13.9 billion in 2020, having grown steadily between 2010 and 2019.^{[footnote 2]} The top UK goods exports to Australia are chemicals and manufacturing, while the top services exports include insurance, pensions, and finance. UK exports to Australia already support over 100,000 jobs in the UK. Import demand from Australia is expected to grow by 30% in real terms over the next decade.^{[footnote 3]}

Greater access to Australian markets and reduced regulatory burdens on goods and services are therefore expected to bring extensive opportunities for UK businesses and consumers.

Macroeconomic impacts

Our analysis shows that bilateral trade between the UK and Australia could increase by the equivalent of around £10.4 billion in the long run. This increase is compared to projected levels of trade in 2035 (in today’s prices) without the agreement.^{[footnote 4]} This is based on a central estimate of a 53% increase in trade resulting from the FTA. The increase is driven by reductions in regulatory restrictions to goods and services trade, tariff reductions, income and supply chain effects as the UK economy grows.

This assessment also shows that UK gross domestic product (GDP) could increase by around £2.3 billion in the long run. This is when compared to projected levels of GDP in 2035 (in today’s prices) without the agreement.^{[footnote 5]} The estimate indicates the value of a 0.08% increase in GDP (as a central estimate) as a result of the FTA in 2035. The estimate is subject to a high degree of uncertainty.^{[footnote 6]}

In the central estimates, take-home pay for UK workers is estimated to increase by £900 million in the long run. This is when compared to 2019 estimates of wages without the agreement. This is based on a central estimate of a 0.1% increase in wages resulting from the FTA in 2019.

These estimates are based on a set of important assumptions about the global economy and the UK-Australia relationship, and are subject to various forms of uncertainty. Our sensitivity analysis varies some of the main modelling parameters used in the analysis. However, it does not account for the full range of factors that could determine the impact of the agreement. It suggests the estimated impact on long-run GDP could vary between 0.06% and 0.10%. However, as the analysis does not capture important sources of uncertainty, the actual long-run impacts could fall outside of this range. The point estimates and ranges presented do not represent precise estimates: they represent an indication of the direction of impacts and broad orders of magnitude. The sources of uncertainty are discussed in section 7.

Consumers and businesses, including small and medium-sized enterprises (SMEs), could benefit from the immediate removal of 95% of existing tariffs on UK imports of Australian goods. Most of the remaining tariffs gradually reduce to zero over time. This boosts access and increases choice for businesses seeking to source inputs from Australia. However, this will also open up some UK businesses to increased competition from Australian exporters. Annual duties on UK goods exports to Australia could fall by around £116 million annually.^{[footnote 7]} SMEs are well-represented in sectors that benefit most from the FTA.

Sectoral impacts

A wide range of sectors may benefit from access to provisions in the agreement, while some sectors could face increased international competition.

Our analysis shows services sectors are expected to make the strongest contribution to the estimated growth in gross value added (GVA) on a 2019 basis.

On services, the largest contributions in absolute terms come from wholesale and retail services (around +£340 million in the central estimates). This is followed by public services (around +£265 million) and business services (around +£210 million). This is driven by reductions in regulatory restrictions to services trade. Income and supply-chain effects as other parts of the UK economy grow as a result of the agreement are also important driving factors.

On goods, the largest contributions come from the UK’s advanced manufacturers, with expansions in the manufacture of machinery (around +£230 million). Followed by motor vehicles (around +£200 million). This is driven by reductions in tariffs and non-tariff measures.

The economic benefits of FTAs do not arise without reallocation of resources within the economy (sometimes referred to as the gains from greater specialisation). The process of economic adjustment gives rise to adjustment costs for affected sectors, businesses, and their employees. The overall structure of the economy remains broadly unchanged by the agreement. However, part of the gains results from a reallocation of resources away from agriculture, forestry, and fishing (around -£94 million) and semi-processed-foods (around -£225 million). This is in favour of growth in manufacturing sectors, in particular manufacture of motor vehicles and manufacture of machinery and equipment.

Just as the UK is competitive in the business and financial services sectors, Australia is a large, competitive producer of agricultural products. The modelling shows potential for the deal to result in lower output for some agricultural sectors as a result of increased competition. The potential and scale of any long-run increase in imports are uncertain. Increased imports of these products could bring significant benefits for consumers across the whole UK via lower prices and increased choice. However, there is a risk that any adjustment costs which do arise are borne by import-competing producers and in localities where production is concentrated.

The agreement therefore includes mitigations which seek to limit the potential for increases in imports in the near-term. The agreement also supports affected producers to enhance productivity and competitiveness over the longer-term. For example, beef and lamb producers will be protected through measures including tariff rate quotas that last 10 years. These automatically apply the UK Global Tariff (UKGT) to imports above a certain volume threshold. From years 11 to 15 a product-specific safeguard will have a similar effect, imposing tariffs (of 20% for beef and sheepmeat) above a volume threshold. A general bilateral safeguard mechanism will provide further protections should industry face serious injury from increased imports as a direct consequence of the FTA. This applies to all products. There are also tariff rate quotas for a range of other products, such as UK imports of sugar, butter, cheese and long-grain milled rice.

Tariff reductions for UK manufacturers

The deal will help support UK manufacturing exporters by removing tariffs on industrial goods. Based on historic trade, this amounts to around £100 million per year.^{[footnote 8]}

Impacts on UK nations and regions

The agreement is expected to provide opportunities across the UK thereby supporting the levelling up of UK towns and communities.

In the central estimates:

• the greatest proportional gains are expected in the West Midlands and the North East of England, equivalent to around £195 million and £65 million each year
• the North West and South East of England are expected to benefit by around £190 million and £295 million respectively
• Wales, Scotland and Northern Ireland combined could see an increase in GVA of around £200 million from the agreement

In the central estimates for sub-national impacts, all nations and regions of the UK are expected to increase output because of the agreement. The sub-national impacts are subject to a high degree of uncertainty. Sensitivity analysis shows that the impacts on Northern Ireland and West Midlands are sensitive to assumptions regarding the presence and scale of local economic effects. If large local economic effects occurred, this could increase the net GVA gain in West Midlands and result in a net GVA loss for Northern Ireland.

The environment

The economic improvements and increased trade arising from FTAs can also entail consequences for the environment. Increased economic activity is typically associated with environmental implications for greenhouse gas emissions and other environmental outcomes such as air pollution, water quality and biodiversity.

The analysis suggests that overall greenhouse gas emissions associated with UK-based production are estimated to be largely unchanged from the agreement. However, the agreement is expected to lead to an increase in transport related emissions as a result of the increase in trade with Australia. The estimates suggest that the increase in emissions associated with transport of goods could be between around 0.1 and 0.3 MtCO2e each year. This is a 31 to 40% increase in transport emissions associated with trade with Australia. The estimates do not account for the future decarbonisation of international shipping. This is the form of transport used to carry 99% of goods trade (by volume) between the UK and Australia.

Reflecting this risk, the agreement preserves the UK’s right to regulate to meet its climate commitments. Therefore, nothing in the agreement prevents the UK government taking the domestic action necessary to achieve its commitment to net zero by 2050.

In addition, the agreement includes provisions on the environment. The main vehicle for addressing climate change internationally is via multilateral processes. However, the agreement does include a substantive article on climate change. This article reaffirms both parties’ commitments to the Paris Agreement and the importance of achieving its goals.

Next steps

The predicted impact of the agreement on the UK economy has been assessed using CGE modelling. This modelling provides an indication of the relative orders of magnitude of the impacts. This is a widely used approach to quantify the impacts of FTAs and regarded as the best in class. However, the analysis does not capture the full range of potential dynamic impacts of the agreement and the predicted impacts are inherently uncertain.

Ongoing monitoring and evaluation (M&E) of the implementation and impacts of the agreement is an important part of ensuring that the predicted impacts materialise. They are also an important part of ensuring that the benefits are maximised for businesses, workers, and consumers. M&E activities help to ensure that the new trade opportunities are fully realised. They also help to ensure that the full range of impacts, intended and unintended, are understood and inform future policy development. DIT will monitor the implementation and conduct a comprehensive ex-post evaluation for the agreement (section 8).

1. DIT, public attitudes to trade tracker (September 2021). ↩

2. ONS, UK total trade: all countries, non-seasonally adjusted, January to March 2021. ↩

3. DIT global trade outlook, September 2021 report. ↩

4. 2035 projections for UK total exports and imports are calculated using the methodology described in the Global Trade Outlook. For bilateral trade between the UK and Australia in 2035, it is further assumed that both countries lose market shares of partner import demand in line with their relative loss of global market shares (as projected in the Global Trade Outlook). ↩

5. As with all modelling exercises, both the point estimates and the projections which they are applied to are subject to uncertainty. ↩

6. For context, this amounts to £1.8 billion when compared to 2019 GDP. ↩

7. Once tariff staging is complete, in year 6 of the agreement. ↩

8. Industrial goods defined as non-agricultural goods, broadly defined as HS chapters 25 to 97. ↩