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New Zealand Summary

New Zealand's recent unilateral reduction of trade barriers has made it one of the most open economies in the world. Just three years after announcing in 1984 that all tariffs would be cut to zero, the government reported that 93 percent of its proposed reforms had been completed, and instituted a multi-year program to address the remaining reforms. [1]

Due to a relatively small domestic market and the structural impacts of the reforms, trade is foremost among New Zealand's political interests and comprehensive market access for agricultural goods a top priority in multilateral negotiations. While its economy has traditionally been dominated by agriculture, the market reforms have highlighted the importance of agricultural export performance in determining New Zealand's economic success. New Zealand's small size presents limitations in building economies of scale, thus the pressures imposed by liberalization have forced New Zealand to exploit a niche cost and quantity advantages, particularly in meat and dairy production. While this increased specialization has made New Zealand's exports more robust in the face of competition posed by world markets, such focused dependence has increased its vulnerability to sluggish growth in demand for primary agricultural commodities.

It is clear from the case of New Zealand that the full benefits of reform require a long period of adjustment, the support of the multilateral system - particularly through market access - and a sustained effort.

Tariff Liberalization

As an integral part of its package of comprehensive market-oriented reforms initiated in the mid 1980s, New Zealand unilaterally reduced many barriers to trade. In particular, tariffs were cut considerably and non-tariff barriers in the form of quantitative restrictions were eliminated. With the elimination of quantitative restrictions, tariffs have become New Zealand's main trade policy instrument. Tariffs have been reduced sharply, with the average applied Most Favored Nation (MFN) rate down to 4.1% in 2002. Under a phase-out programme, applied MFN tariffs were due to be reduced further, to an average of 3% by 2000 and removed between 2001 and 2006. However, in 2000, further unilateral tariff reductions were suspended for five years, and further tariff reductions are more likely to be motivated by multilateral, regional or bilateral agreements. [2]

Trade Agreements

As an original Member of the WTO and a small open economy, New Zealand is committed to a rules-based system for the sake of promoting and safeguarding its trade interests. It participates actively in the WTO, grants at least MFN treatment to all WTO Members, and has submitted several proposals in the Doha Development Agenda negotiations, particularly concerning further liberalization of agriculture, strengthening of trade rules, and better integration of WTO rules with other priorities, such as sustainable development. As a member of the Asia Pacific Economic Cooperation (APEC) forum, New Zealand aims to meet the 2010 deadline for removal of trade and investment barriers, on a reciprocal basis.

Australia remains New Zealand's main trading partner. In addition to its well-established agreement with Australia, the Australia New Zealand Closer Economic Relations Trade Agreement (ANZCERTA), New Zealand has stepped up bilateral trade negotiations with other neighbouring countries. Thus, it signed a Closer Economic Partnership (CEP) agreement with Singapore, which entered into force in January 2001, and is negotiating bilateral agreements with Hong Kong and China as well as a trilateral 'Pacific three' agreement with Chile and Singapore. [3] The CEP aims to reduce barriers to trade in goods, services, and investment, including technical and health-related barriers. The ANZCERTA has also undergone further changes since 1996, including harmonization of food standards, revision of the government procurement agreement, and further integration of air services through an open skies air services agreement, which incorporates the single aviation market arrangements between the two countries. New Zealand also maintains trade preferences on some goods with Canada under the Trade and Economic Cooperation Agreement. Furthermore, concern has been expressed that what prospects there might have been of an FTA with the United States might have been derailed by NZ's decision not to support the US-led war in Iraq.

Agriculture

New Zealand's economy has traditionally been concentrated in the agricultural sector, due to its substantial comparative advantage in producing such goods. Agricultural reform is thus a crucial issue for New Zealand in multilateral trade negotiations. New Zealand's farmers, who were once highly dependent on government supports, now require open market access abroad for their exports. At their peak in 1984, subsidies amounted to 30 percent of total agricultural output.[4] Having unilaterally eliminated its own farm subsidies during the 1980s, the NZ government is well positioned to lobby for agricultural reform across the board in the WTO. As a member of the Cairns Group of 17 small and medium-sized agricultural exporting countries, New Zealand is pressing specifically for the wholesale dismantling of tariffs and subsidies within three years. Non-tariff distortions in New Zealand's own agriculture sector, including export monopolies granted to state-trading enterprises, remain. Now recognized to have hampered efforts to improve productivity, they are gradually being removed.

Dairy Processing and Meat Production

New Zealand controls one-third of the world trade in dairy products (slightly more than the EU), with 95 percent of its national production destined for export. Producers currently pay high tariffs to gain access to the US market, which is by far the most lucrative in the industry. NZ dairy processing, however, stands to be severely undercut, in the wake of the Australia-US free trade deal agreement finalized in February 2004. Though NZ would stand to benefit greatly from a similar bilateral deal, many industry affiliates see future WTO negotiations as the best possible means for increased revenues and real trade reform. The Global Dairy Alliance, which represents dairy exporters in Australia, New Zealand, Argentina, Brazil, Chile and Uruguay, has been promoting trade liberalization in the WTO with particular emphasis on the elimination of export subsidies, reductions in domestic support payments to farmers, and increased market access. New Zealand meat-producing interests have demonstrated similar concerns that they might be shut out of the lucrative American hamburger market if Australia and South America were to gain free-trade deals with the US. Though limited under a quota system, beef is the biggest US export market for New Zealand. With little access granted to the EU market, other potential outlets for lower quality meat would be few.

Investment

With national saving falling considerably short of domestic investment, New Zealand is heavily dependent on net inflows of foreign direct investment to bridge the gap. Such inflows reached 8.4% of GDP in 2000/01, but have been sluggish since then. [5] In an effort to attract more FDI, New Zealand has introduced changes in its investment regime and is considering changes to tax policy. As a result of a recent review of foreign investment policy, the Investment Promotion Agency (IPA) was created within Industry New Zealand. The IPA will initially attempt to attract more investment in certain sectors. Currently, New Zealand does not provide any specific tax incentives to attract FDI, although such measures are apparently being considered. In general, foreign direct investment (FDI) is relatively unrestricted, although "national interest" considerations apply to foreign investment in land. Permission must be sought for investment in certain kinds of land and for the acquisition of 25% or more in business or property above $NZ50 million in value. For investment in farmland, additional criteria include that the investment result in, or is likely to result in, "substantial and identifiable benefits" to New Zealand, and that the land be offered for sale on the open market to non-overseas persons unless the requirement is waived.

Services

As one of the world's most open service economies, New Zealand has much to gain and little to lose from a General Agreement on Trade in Services (GATS). It has already made an offer to other WTO members to ensure open markets for sectors such as engineering services, landscape architecture and urban planning, management consulting, personnel supply, convention services, photographic services, interior design services, environmental consultancy, credit reporting and collection, and postal services. Though having specifically ruled out the supply of water, public education, and public health, New Zealand's efforts have set a benchmark for the liberalization programs of other countries. In return, the country's domestic tourism, education, and earthquake engineering services would be among the sectors best poised for export growth from a potential GATS liberalization. Though exports in services are growing rapidly, they still make up only 25 percent of the country's trade receipts.

Conclusion

The recent slowdown in multilateral trade negotiations, stemming from the collapse of the talks in Cancun, could prove costly for New Zealand. With a relatively limited domestic market and few substantial bilateral or regional trade agreements in the pipeline (a FTA with the US stalled when New Zealand did not support the war in Iraq in 2003), progress in the agricultural agenda is critical for a positive economic outlook for New Zealand. Recent statement by the EU and the US have communicated a readiness to proceed in important agricultural reforms, but an agreement has yet to be reached. Efforts to increase diversification for New Zealand's exports, then, will be critical to temper the negative affects of stalled progress in gaining better market access for its agricultural exports.

Last updated June 2004.

[1] WTO Trade Policy Review 2003.
[2] WTO Trade Policy Review 2003.
[3] "Hong Kong Snapshot." Hong Kong Economic and Trade Office, Canada. 3 May 2001.
[4] John Wood, "New Zealand: A Blueprint for Economic Reform," Heritage Foundation Lecture No. 531. June 16, 1995.
[5] WTO Trade Policy Review 2003.


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