After eight years, the European Union (EU) and Australia have concluded negotiations for a free trade agreement, marking a new chapter in their economic and political relationship. The deal comes at a time of global disruption in the international legal order and presents as a new opportunity for fostering cooperation on critical minerals and enhanced EU engagement in the Indo-Pacific.
Cooperation is one thing. But acknowledging and addressing historical bottlenecks to trade is quite another and the simple problems remain: processing and pricing.
In order for any FTA to succeed and create real economic value, the EU and Australia must acknowledge two things.
First, that Australia is a global powerhouse of minerals extraction. Australia has an abundance of raw materials and long-term political stability supported by the rule of law. This equates to investment certainty.
These benefits come at a price. Australia’s rigorous legislative standards, tightly regulated labour market and the many requirements embedded in voluntary and mandatory codes mean that the country is a high-cost jurisdiction, especially compared to centralised command economies like China, which dominates the global supply of refined critical minerals.
Second, despite making considerable progress, Australia still does not have a large-scale domestic refining capability for what is considered “critical minerals”. Developing a domestic capacity at scale will take years, if not decades, and this is going to be a learning experience. In developing this expertise, Australia must acknowledge that China has a decades-long head start having made a deliberate decision to build native capability and create a global competitive advantage. Australia needs to be clear that this advantage will not disappear.
Australia and the EU will both remain high-cost jurisdictions. Decisions to embed environmental protections and high ethical standards directly come at a price. While governments and societies laud these initiatives, it remains to be seen whether the collective consumer market is prepared to bear the cost of these decisions. Whether mass market consumers will pay higher prices to support the output of a “secure” domestic minerals refining capability has not been tested.
Governments don’t blink at paying $100,000 more for securely sourced rare earths in a fighter jet. Consumers baulk at $100 extra in a smartphone.
Australia’s experience with car manufacturing suggests not. Despite non-tariff barriers such as Australia’s luxury car tax and billions of dollars in direct subsidy, the domestic industry is gone. Consumers looked elsewhere, and industry investment followed.
Australia has tested its market propensity for high- versus low-cost consumer goods production in its experience with car manufacturing, but has Europe done the same? Do its lofty regulatory standards fare well in the face of individual consumer decisions? Judging by the rapid uptake of Chinese electric vehicles in a European market dominated by legacy EU manufacturers, no.
Here a distinction must be drawn between the abstract aims of national security policy and strategic autonomy, and the short-sighted vagaries of consumer demand, especially in the face of highly substitutable and price-elastic goods. While governments might not think twice about paying an extra $100,000 to use securely sourced rare earth components in the purchase of a fifth-generation fighter jet, consumers will baulk at paying an additional $100 for the same benefit in a new smartphone.
The strength of the EU as a bloc is not in microeconomic decisions and individual consumer behaviour. Instead, its expertise lies in negotiating a maze of macro-economic reforms to deliver long-term economic security and strategic autonomy. Herein lies the true benefit of the EU-Australia FTA.
Where critical minerals are concerned, the benefit is not pushing prices down now. It is not about growing GDP now. It is not about delivering cheaper consumer goods now. The benefits are long term, and selling this message to voters takes courage and commitment. So far, so good.
Where critical minerals and an FTA are concerned, the national benefits will be many, but most won’t be realised in this electoral cycle or the next.
Will the long-term outcomes of an FTA offer protection against market domination and manipulation? Yes. Will an FTA provide secure global supply chains for critical inputs to vital defence manufacturing? Yes. Will an FTA create a solid base for long-term economic diversification and domestic capability development? Undoubtedly. This is all predicated on maintaining a long-term perspective and a commitment to recognising that, at least until the industry matures, the outputs will be comparatively more expensive.
So far, the Australian government and the EU have adopted a pragmatic and efficient approach by directly involving industrial operators in policy co-development and using fiscal support and de-regulation to build market confidence and invite capital investment. The bigger challenge is to stay the course.
This research is part of the EU Centre of Excellence in Critical Minerals at the University of Canberra, EUOzCRM – 101176236 – ERASMUS-JMO-2024-COE, co-funded by the EU Erasmus+ Programme. The views expressed are solely those of the author and are independent of sources providing support.
