Not so ‘Free’ Trade

nz dairyOn 7th April 2008 New Zealand became the first OECD country to sign a free trade deal with China. However this is not the only first with regard to the relationship between the two countries. New Zealand was the first to negotiate a WTO accession agreement with China as well as the first to recognise China as a “market economy”. But has there been any benefit to the New Zealand’s dairy industry?

Since 2012 New Zealand dairy farmers have benefitted little from the reduced tariffs negotiated in the New Zealand – China free-trade agreement. Special protection, allowed under the 2008 deal, has meant that China can now increase tariffs to pre-agreement levels for the rest of 2014. This is designed to protect Chinese farmers from being exposed to cheaper NZ dairy products and the higher tariff is implemented when diary products from NZ exceed levels agreed in the negotiations. However the higher tariff has been introduced every year since the deal was signed in 2008. This year the higher tariff was activated when 127,309 tonnes of NZ milk powder was exported into China. As with any free trade agreement there is no sudden removal of tariffs and quotas from the participant countries as there is usually a weaning off process so that industry can adjust to an environment with no trade restrictions. Under the agreement between China and NZ the tariff on milk powder was scheduled to fall from 5% of export value to 4.2% this year. However by exceeding the allowed volume of milk powder in January the tariff will rise to 10% for the rest of the year.

Cost to NZ Dairy Farmers
It is difficult to estimate the cost to NZ farmers as either some of the Chinese importers will pass on the cost to the Chinese consumers or NZ exporters will pay for it themselves absorbing the tariff as part of their business costs. An approximate value of the lost revenue for NZ dairy farmers is in the ‘tens of millions’ of dollars every year since 2008. The issue for NZ farmers is the agreed volume of milk powder before and after the 2008 agreement. Since 2008 the demand for NZ exports has increased dramatically as increased food safety regulations has seen some of the smaller Chinese producers unable to compete and this has left an opening in the market. Also the local Chinese consumer has lost faith in the Chinese producer with the contamination of milk and milk products which caused the deaths of some infants. Its importance is shown by the fact that in 2013 milk powder accounted for $4 billion of the $10 billion of total exports to China from NZ.

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