Situation and Outlook for New Zealand Agriculture and Forestry (August 2008)
Issues facing the primary sectors
3 New Zealand-China Free Trade Agreement
New Zealand is the first developed country to negotiate a free trade agreement with China. The historic signing of this agreement on 7 April 2008 represents our biggest and most successful bilateral trade agreement since the Australia–New Zealand Closer Economic Relations Agreement (CER) was signed 25 years ago.
The significance of the New Zealand–China Free Trade Agreement is apparent when viewed against the line-up of other countries wanting to negotiate preferential trade agreements with China. It gives New Zealand exporters the opportunity to be ahead of the pack and reinforces existing market share. This is particularly important in areas such as milk powder and wool, where China is already New Zealand’s largest international customer.
The trade agenda
The best way to avoid being disadvantaged, and protect our interests as a small, open and trade-dependent economy, is to vigorously pursue the path of multilateral trade negotiations. In addition, bilateral agreements provide preferential treatment and, if New Zealand is not party to these, then our exporters run the risk of being pushed out of the market of a country that has a bilateral agreement with someone else.
Right now, New Zealand has trade agreements with Australia, Singapore, Thailand, Brunei and Chile. New Zealand is also negotiating with the Gulf Cooperation Council (GCC) and together with Australia we’re negotiating with the Association of South East Asian Nations (ASEAN). Our ambition is to have free trade agreements with all our major trade partners.
The rise of China
Reforms carried out since 1978 have transformed China’s economy into a relatively open market that is now significantly engaged in international trade and investment. China’s accession to the World Trade Organization in 2001 strengthened its course of reform and took it further along the path of global economic integration.
China has become an increasingly important market for New Zealand. Total New Zealand exports to China in the year ended 31 March 2008 were $2.0 billion, of which $1.6 billion was for agricultural and forestry products.
China
Over the last 30 years, China’s GDP has increased more than tenfold and growth in real GDP averaged above 9 percent between 1990 and 2004. In 2007, China’s GDP was US$3.2 trillion and, measured on that basis, China was the world’s sixth largest economy. Measured on the basis of purchasing power parity, China was the world’s second largest economy. In terms of investment, China has direct investments in 172 countries and regions around the world, with annual flows of foreign direct investment of US$75 billion.
China is the most populated country in the world, with 1.3 billion inhabitants. Economic growth has done much to improve living standards. The proportion of people living below the poverty line (a measure that assumes people have US$2 per day purchasing power parity) fell from more than 80 percent in 1980 to below 40 percent in 2004. Economic development has been rapid in the coastal provinces and China’s middle class is now estimated to be more than 100 million people and growing. This, coupled with arable land and water resources being relatively scarce, has increased demand for New Zealand’s agricultural products and made China one of our fastest growing markets.
So what’s in it for New Zealand?
While major New Zealand exporters to China pay tariffs on average of around 15 percent, the average tariff on goods from China into New Zealand is significantly lower than that. So the key breakthrough for New Zealand in the New Zealand–China Free Trade Agreement is getting reciprocal access. Right now, China is our fourth largest trading partner, purchasing more than $2.0 billion of merchandise exports and more than $1 billion of services. It is also New Zealand’s second largest source of imports, after our trans-Tasman free trade partner, Australia.
To give the free trade agreement full effect in domestic law, legislation enabling its implementation must be passed by Parliament. The Government’s objective is for the New Zealand–China Free Trade Agreement to come into effect on 1 October 2008. The final step in the ratification process (of exchanging notes with China confirming all domestic procedures) should be completed in time to allow the first year’s tariff cuts by the last quarter of 2008.
The gains
Securing preferential access to China’s economy has the potential to deliver significant gains to our exporters. Estimates of the expected benefits to New Zealanders through additional annual exports (above the value of annual exports that would otherwise take place) are between $225 million and $350 million every year for the next 20 years. The benefits are expected to fall in three main areas of the New Zealand economy:
- Goods - the free trade agreement will result in an annual tariff saving to our exporters of merchandise of $116 million based on current trade.
- Services - the free trade agreement gives New Zealand service suppliers the ability to operate in China generally on the same basis as Chinese domestic suppliers.
- Investment - New Zealand investments in China will get the same treatment and protection that Chinese nationals receive investing in China.
Removal of tariffs, liberalised trade in services and greater protections and provisions for investment will ensure our businesses remain competitive with those from other countries. It will help New Zealanders develop business opportunities in China, giving sound reasons for greater confidence to engage and invest.
Biosecurity
A key issue affecting imports from China of farm and horticultural produce is the ability of Chinese exporters to meet our biosecurity and food safety requirements. The free trade agreement includes a chapter on sanitary and phytosanitary measures that will provide a good framework to progressively address, in an objective and scientific manner, the technical market access requests each party has of the other.
Agriculture fares well
Agriculture is one of the sectors in our economy that benefit the most, as approximately 75 percent of our exports to China are in our primary sectors. A large proportion of this trade is in agricultural products, including dairy, meat, fruit, vegetables, skins and hides, and wool.
Dairy
In the year ended 30 June 2007, dairy exports were valued at more than $320 million, more than one-sixth of New Zealand’s total exports to China. Tariffs on all dairy products will be reduced to zero over terms ranging from 5 to 12 years, depending on the specific product. Infant formula and casein with tariffs between 6 and 12 percent will go to zero over five years. Whole milk powder and skim milk powder with tariffs of between 10 and 12 percent will go to zero over 12 years – these powders currently represent the bulk of the trade. There is also a mechanism called a special safeguard and a mid-term review that are in place for these more sensitive dairy products. However, in practical terms, the effect of these additional measures is expected to be limited, as they will apply only if triggered and for a finite period.
Wool
China is our second largest market for wool, taking more than 25 percent of New Zealand’s total wool exports by value, with exports valued at around $170 million (the EU is our largest market, comprising 40 percent of exports by value). China currently provides for access via a tariff quota for all countries, where the tariff rate inside the quota is 1 percent or 3 percent (depending on the product) and the tariff rate outside the quota is 38 percent. China has maintained its global quota for wool but in addition will open up a tariff-free country-specific allocation for New Zealand of 25 000 tonnes, which covers approximately 75 percent of New Zealand’s current exports. This quota exclusively for New Zealand wool will grow at 5 percent per year for eight years, to a maximum of 36 936 tonnes by 2017.
Wool tops will be treated similarly but on a smaller scale. (A wool top consists of similar-length wool strands that are laid parallel to each other and is a step in the process of converting raw wool into woollen yarn.) China has maintained its global quota for wool tops, but in addition will open up a tariff-free country-specific allocation for New Zealand of 450 tonnes, which is equivalent to approximately 120 percent of New Zealand’s current exports. This quota exclusively for New Zealand wool tops will grow at 5 percent for eight years, to a maximum of 665 tonnes by 2017.
Figure 3.1: New Zealand agricultural and forestry exports to China, years ended 31 March 1996-2008
Note
1. FOB – free on board: the value of the goods at the port of export and loaded onto a vessel for transportation out of the country of origin.
Source Statistics New Zealand.
Other primary products
Tariffs on fish and other seafood products will be eliminated over five years. Fish and other seafood products have an export value of $90 million and amount to 4 percent of our total exports to China.
Deer velvet, apples, vegetables and wine (beer already enters duty-free) all have tariffs in the range of 6 to 20 percent and these will be phased out over five years.
Tariffs on beef and sheep meat and edible offal, which are all in the range of 12 to 20 percent, and on sheepskins (14 percent), will be phased out over nine years. Raw hides and skins with a tariff of 5 percent or less will become duty-free when the free trade agreement takes effect, and tariffs between 5 and 14 percent for raw hides and skins will be phased out over five years. Most raw hide and skin products are in the category of elimination over five years.
There’s a 20 percent tariff on kiwifruit headed for China, but under the free trade agreement this will be phased out in equal steps over nine years. China is our 10th largest kiwifruit market, comprising $16 million. Exports have grown strongly, from zero in 1995 to $8 million in 2005, and over the last two years the value has almost doubled.
Wood products
Trade in forest products represents approximately 25 percent of our exports to China. For our largest forest product export items (logs, sawn timber and wood pulp), the current tariff is zero, with 80 percent of the trade already entering duty-free. The free trade agreement binds these existing favourable conditions. The agreement also secures immediate elimination of tariffs on a limited number of engineered wood products where tariffs are either 4 percent or 7.5 percent.
Tariffs will remain in place for some wood products, including paper and paperboard products with tariffs of either 5 percent or 7.5 percent, and specific types of engineered wood products, including specific types of fibreboard and plywood, with tariffs of either 4 percent or 7.5 percent. In total, these products account for approximately 4 percent of current exports to China. China will not make tariff reductions under the free trade agreement for these products because, as part of China’s accession to the World Trade Organization, it agreed that any preferential commitments on wood and paper products in a free trade agreement must then be offered to all members of the World Trade Organization. So, for these few products, China will not make any reductions at this stage.
The free trade agreement will serve to facilitate trade in food and fibre products in both directions. Over time, New Zealand growers and farmers can expect to see more competition from Chinese goods, and Chinese producers can expect the same. Trade facilitation and mutual economic benefit is what multilateral and bilateral free trade agreements are all about.
- For more information on the New Zealand-China Free Trade Agreement, go to:
http://www.chinafta.govt.nz
http://www.nzte.govt.nz/section/14722.aspx
Contact for Enquiries
Monitoring and Evaluation
PO Box 2526
Wellington
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