New Zealand's current performance
Formal barriers to imports are low, but in many countries they are lower. Around 95% of goods (by value) are imported tariff free, and the free trade agreement with China will increase the range of products that enter New Zealand tariff-free. Even so, New Zealand does not compare that well on total trade barriers with some countries. Over the medium term, tariffs will be further reduced by existing or future FTAs and unilateral reductions.
Overall ease of trading across borders is reasonably low, though not among the very lowest. Table 3 summarises New Zealand’s rankings in a number of cross-country comparisons. These studies generally cover a subset of the sorts of trade costs identified in Table 2. In some areas, such as non-tariff barriers (largely requirements for documentation), New Zealand does not compare that well.
Barriers to service imports are low. Barriers to services come in the form of domestic regulatory regimes that may be horizontal, affecting all services (such as residency requirements for service providers, or non-recognition of qualifications), or sector-specific barriers (such as restrictions on the establishment of off-shore campuses by New Zealand educational providers). New Zealand is one of the world's most open service economies.
- Import Penetration - % of GDP, 2005
- Source: OECD
International market access is relatively poor in some areas. New Zealand exporters face relatively high tariffs, particularly in agriculture. Full global liberalisation of agriculture and food products has been estimated to increase New Zealand's exports of agricultural and food products by 72%. These high barriers make multilateral (i.e. WTO), plurilateral (e.g. TransPac), and bilateral FTAs highly important for New Zealand.
How well connected?
Total exports are lower than other small advanced economies. New Zealand's ratio of exports to GDP is in the bottom half of the OECD, ahead of larger countries such as Australia and the UK, but behind other small economies such as Ireland, Denmark, and Finland. To some extent, this finding depends on how exports are measured and what is controlled for: Nominal exports to GDP are affected by exchange rate movements and have consequently gone through cycles, with the general trend over the past 20 years a slow increase. Real exports to GDP have followed a slow increase. Modelling that takes into account the effect of distance suggests New Zealand exports around what would be expected. The import content in New Zealand's exports is relatively low, probably reflecting the sectoral composition of exports. New Zealand's share of world trade has been roughly constant at around 0.36% since 1990.
Total imports are also lower than other small advanced economies. Import penetration is relatively low compared internationally, and is also low once adjustment has been made for other economic factors, including population, per person income, and transportation costs. This finding may in part reflect the composition of New Zealand's exports (i.e. primary and service exports tend to have lower import content): the flipside is that the domestic value-added content of exports is relatively higher. Regardless of the driver, lower overall imports tend to mean less of the competitive pressure and embodied knowledge that accompany imports.
Proportion of New Zealand's merchandise exports that are to Australia (year ended June 2008)
Source: Statistics New Zealand (2008b)
Goods exports are dominated by food and raw materials, and the level of processing is gradually increasing. Meat, dairy, and other food exports account for about half New Zealand's exports. The proportion of products that are ‘processed' and ‘elaborately transformed' has been gradually increasing in recent years. The composition of exports looks similar to other natural resource-based countries, such as Norway, Australia, and Canada.
Service exports are dominated by travel. Top service exports in 2006 were travel (66%) and transportation (22%), reflecting the importance of tourism.
Main imports include fuels and machinery. Fuels and oils are New Zealand's most valuable imported products. Other significant imports include machinery, motor vehicles, and electrical machinery.
New Zealand's largest trading partners are Australia, USA, China, and Japan. Top destinations for merchandise exports for the year ended June 2008 were Australia (23%), USA (10%), Japan (8%), and China (5%). Top sources of merchandise imports were Australia (20%), China (13%), USA (9%), and Japan (9%).
Proportion of all New Zealand's exports of goods by value produced by 1.4% of exporting firms
Source: NZTE (2007)
Exports are moderately concentrated in product mix and highly concentrated in firms. More advanced countries tend to have more diversified exports. New Zealand's 25 top export products account for 50% of the total value of exports, compared with 29% for the rest of the world. As is the case in many other countries, very few firms earn the large majority of export earnings. In the year to June 2007, 76% of exports of goods by value were generated by just 176 exporting firms (1.4%).
New Zealand firms to do not seem to be well connected to emerging international production networks. Use of offshoring has increased in recent years, but still remains in the bottom half of the OECD. Use of offshoring in the manufacturing sector is particularly low while in the services sector it is comparatively higher. Other indicators based on node degree (number of trading partners), node strength (trade value of connections), clustering (presence in triangular trade networks), and centrality (to world trade chains in intermediate products), suggest that New Zealand is around the middle of the OECD. Possible explanations for these findings include the dominance of natural resource production, which may be less amenable to fragmented production across countries, and transportation costs due to distance.
Projected increase in New Zealand's agricultural and food exports if all countries fully liberalised trade in all goods.
Source: Anderson (2008)
Internationalising happens at a relatively earlier stage in a firm's life cycle. Compared with other developed countries, firms ‘outgrow' the domestic market more quickly and need to internationalise from a relatively earlier stage in their growth, with correspondingly lower scale and balance sheet capacity. The pool of people with extensive experience and expertise in internationalising businesses from an early stage in a firm's life cycle is probably relatively small.
Large exchange rate cycles may dampen export development. Firms appear to manage short-term volatility in the exchange rate through hedging, though large-amplitude medium-term exchange rate cycles probably do have an impact on medium-term export development.
Potential adverse consequences
Greater income inequality is driven much more by technological progress than trade. Public perceptions exist that globalisation will result in higher inequality. However, studies tend to find that the main factor driving greater inequality is in fact technological progress.
Offshoring can create transitional pressures, which may warrant limited government support. Globalisation is likely to result in transitional adjustments, as some firms may close in the face of international competition, or some jobs may be offshored to countries with lower production costs or better access to markets. This reallocation of resources is the mechanism that raises overall productivity over the medium term. In the short term, transitional dislocations will occur, and can be mitigated by policies to encourage greater social mobility, to provide opportunities for retraining, and to supply social safety nets.
‘Food miles' is too simplistic as a measure of environmental impact. Some commentators point to long transportation distances from imports as a reason to buy locally. This argument would more correctly consider whole-of-life greenhouse gas emissions, where New Zealand exports generally compare well.
Food supply is likely to be more secure through more rather than less trade. The global food price spikes in 2008 raised concerns among some that reduced self-reliance in food production results in greater risks of food security. This argument does not seem particularly strong: many of the food prices that spiked highest were traded relatively less internationally, such as rice. Over time, freer farm trade is likely to result in greater supply of and more efficient food production.
- According to the World Bank’s World Trade Indicators 2008 (Word Bank, 2008), New Zealand ranks only 43rd of 125 countries for inbound average applied tariffs. New Zealand's indicator is low, at 2.8%, but many advanced economies have even lower.
- Anderson (2008)
- See Figure 4 of Battersby and Ewing (2005).
- De Backer and Yamano (2007)
- See Figure 3.1 of OECD (2008e).
- Hausmann et al (2006) created a measure that aims to capture the productivity level associated with a country’s exports. The measure for New Zealand is similar to Australia, Norway, and Canada.
- Statistics New Zealand (2008b), Table 1.2.
- Lattimore et al (2008)
- NZTE (2007)
- De Backer and Yamano (2007)
- Lattimore et al (2008)
- Fabling and Grimes (2008) found “strong evidence of selective hedging, particularly for AUD exposures”.
- For example, the IMF (2007) found that technological progress explains most of the 0.45 per cent average annual increase in Gini coefficient (a measure of inequality of incomes) from the early 1980s. Trade and financial globalisation and financial deepening contributed a further 0.1 per cent a year each to raising the Gini coefficient, offset by almost equivalent reductions in the Gini coefficient from access to education and a shift of employment away from agriculture.
- Saunders et al (2009) found that “due to the different production systems even when shipping was accounted for [New Zealand] dairy products used half the energy of their UK counterpart and in the case of lamb a quarter of the energy.” The main reasons are that New Zealand tends to use less energy intensive fertilisers, feed animals mostly grass rather than grain, and does not generally house animals.