Ideasroom

High trade hopes between old allies

The NZ-UK trade talks that launched recently offer renewed hope and optimism for an agreement that benefits these historical allies, writes Dr Asha Sundaram 

The UK’s entry into the European Economic Community, the precursor to the European Union (EU) in 1973 triggered a sense of abandonment in New Zealand, combined with uncertainty about a future in which the parent-child relationship between the two countries had been severed.

The UK had been a destination for almost 30 percent of New Zealand’s exports before 1973. After 1973, bilateral agreements between the UK and New Zealand ended and EU trade policies effectively excluded exporters from outside the EU. What followed was a period of turmoil for New Zealand trade. Oil prices rose and prices for New Zealand’s primary agricultural exports fell, partly because large agricultural exporters like the EU and the US subsidised agriculture.

The world looks very different today. By adopting an agenda of trade liberalisation in the 1980s, playing a founding role in the establishment of the World Trade Organization (WTO) and demonstrating leadership in negotiating bilateral and regional trade agreements, New Zealand has secured a place in the world economy as a dominant exporter of dairy and meat products to a diversified group of countries.

In 2018, New Zealand’s top three trading partners were Australia, China and the US, each accounting for 18 percent, 20 percent and 11 percent of New Zealand exports and 16 percent, 15 percent and 12 percent of imports respectively. In comparison, New Zealand exports and imports to the UK accounted for a mere 4 percent each.

It is not surprising that the UK’s share of New Zealand trade is lower than that of Australia, China and the US. The gravity model of trade, inspired by Newton’s law of gravity, suggests that trade between two countries is directly proportional to their economic sizes and inversely proportional to the distance between them. China and the US are the largest economies in the world, while Australia is New Zealand’s closest neighbour. Gravity would thus point to an NZ-EU trade agreement as a priority for New Zealand. While the EU and the UK are equally distant from New Zealand, the EU is a substantially larger economy and in 2018, accounted for 8 percent and 15 percent of New Zealand exports and imports respectively.

Sadly, NZ-EU negotiations for a free trade agreement soured in early June after New Zealand accused the EU of protecting its agriculture by denying New Zealand exporters adequate market access. New Zealand’s disillusionment with NZ-EU trade talks comes at a time when the UK is looking to establish its role as a global player in a post-Brexit world. In this context, the NZ-UK trade talks that launched recently offer renewed hope and optimism for an agreement that benefits these historical allies.

An NZ-UK trade agreement will not come easy. New Zealand will seek to secure the removal of tariffs, address non-tariff barriers to trade, streamline customs and regulatory procedures and enhance co-operation in digital trade and climate sustainability. Agricultural market access for New Zealand exporters of dairy and meat is likely to be a sticking point. Add to this the complication that the outcome of a UK-EU trade agreement is as yet unknown and could determine how New Zealand exports will fare in the UK market.

The UK, in turn, will want market access in services, particularly in finance and insurance. Finance and insurance services are the UK’s largest export, accounting for about 12 percent of its total exports. New Zealand must rein in any urge to be protectionist and view this as an opportunity for its consumers and businesses to avail of financial and business services at competitive prices. Besides, engagement between companies in the two countries can foster mutual learning of international best-practices and technological advances in services, facilitated by cultural and institutional similarities. Such learning is crucial to improving New Zealand’s competitiveness in services, paving the way for export growth in a sector touted to be the most dynamic component of global trade.

In a post-Covid-19 world that will also have to contend with disruptions from extreme weather events due to climate change, countries will look to diversify their supply chains and trade relationships. While an NZ-UK trade agreement is desirable and should be pursued, New Zealand must continue its efforts to negotiate other bilateral and multilateral trade agreements. This applies not just to the NZ-EU trade agreement, but also to the Regional Comprehensive Economic Partnership (RCEP) that includes countries like Indonesia, Thailand, Malaysia and Vietnam, and bilateral agreements with large Asian economies like India.

These emerging markets boast of rising demand for New Zealand’s dairy, meat and fruit exports from a growing middle-class and can support export growth among small and medium enterprises and Māori business. In fact, in 2018, Indonesia, Thailand, Malaysia and Vietnam jointly accounted for 5 percent of total New Zealand exports and India accounted for 3 percent. An outward-looking and comprehensive trade strategy will bolster New Zealand’s aspirations to ensure that trade works for all.

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