NZ / China - Free Trade Agreement

After 15 rounds over the past three years a Free Trade Agreement (FTA) was signed between New Zealand and China on 7th April 2008. As a proponent of Free Trade I welcome the agreement.

Over the coming weeks I will delve a little deeper into international trade, FTA, and what this means for New Zealand consumers and business. Read below for a little of the ideology.

A Free Trade Agreement (FTA) involves the elimination or reduction of tariffs agreed upon by the member countries.

Trade Creation and Trade Diversion

The most obvious advantage of an FTA is that the economies exports can enter its FTA partner’s economy without tariffs having to be paid. Whether or not a nation experiences an increase or decrease in welfare due to the elimination of its own tariffs largely depends on the extent of trade creation and trade diversion.
Trade creation relates to the increased quantity of imports due to the elimination of tariffs on imports from member nations. As well as consumers receiving cheaper imported goods, the increase in imports also leads to a reallocation of resources away from the production of goods that the nation is relatively less efficient in producing favoring output in which they have a comparative advantage. Thus trade creation increases the efficiency of resource allocation.

Trade diversion arises when the formation of an FTA causes imports to be sourced from a member country that is not the worlds lowest cost producer. This reduces efficiency.

Free trade relationships that do not involve New Zealand can still impact on New Zealand’s economy. New Zealand may be at a price disadvantage if competing in markets where the competition has a FTA.

Both Winners and Losers

Although benefits from trade are received by a country they are not distributed evenly amongst it. Those who work or own the industries that we are relatively inefficient in comparison to China, such as textiles and manufacturing and textiles, will suffer the most while those in the efficient industries of agriculture will benefit the most. It is here that we should pause and think about the effect that this has on New Zealand's largest exporter, Fonterra. The Dairy industry has averaged NZ$363 million of export over the few years, of which Fonterra accounts for 95%. Knowing that they have a lot to gain from these tariff phase outs. However, China still has some mechanisms to delay reductions if exports exceed a certain quantity but this is still better than the current situation.

If you are an export then try the Tariff Finder to see how you will be affected.

Public officials must weigh up the gains and losses. One way would be to help displaced workers by offering retaining subsidies and relocation grants. Will the government help these displaced workers ... I guess only time will tell.