Key takeaways:
The EU began negotiations by pursuing social and environmental justice, but the NZ-EU Free Trade Agreement will likely carry limited social and environmental benefits
The agreement ultimately emerged in the context of economic crisis with trade embargoes and high inflation
The agreement will diversify trade partnerships and is expected to ease inflation
Some New Zealand exporters will benefit, including beef and sheep meat producers, while other industries will likely lose domestic market share, such as wine and cheese makers
Introduction
In May 2018, the EU Council authorised negotiations for a trade agreement between the Eurozone and New Zealand and, at that time, their agenda was almost utopian. In fact, both the council and the Ardern Government envisaged an agreement that would promote environmentally sustainable and socially inclusive growth, while also benefiting industries and consumers by reducing barriers to investment and exchange.
However, four years and twelve rounds of negotiations later, the trading environment had profoundly changed. The NZ-EU Free Trade Agreement was ultimately signed in July 2022, after years of supply chain devastation caused by the COVID-19 pandemic, and with the immediate threats of rising inflation and trade embargoes stemming from the Russia-Ukraine conflict. By this time, the impetus for the agreement had also shifted. New Zealand’s inflation rate for the June 2022 quarter had reached 7.3% compared with the same time in 2021, representing a 32-year high. In the Eurozone, constituted by the 19 member states of the EU, inflation climbed to 8.6% in the same period, the highest rate since the creation of the Euro currency in 1999. Once the deal was finalised, the New Zealand and Eurozone economies needed to address an emerging economic crisis.
Europe and New Zealand’s economies have overheated as consumers have indulged in spending sprees in the wake of the COVID-19 pandemic. However, this has not been the only factor driving inflation. Some essential products, such as oil and wheat, have become increasingly scarce, and their prices have risen sharply, since the Russia-Ukraine War. Ukraine’s wheat production and trade have been disrupted by the conflict, while Russian petroleum imports have been banned by New Zealand and severely reduced by the Eurozone. Further, the prices of fertiliser, liquid natural gas, aluminium, maize and cooking oil have also risen due to scarcity as a result of the war. To address these issues, both trade partners needed to exert downward pressure on inflation and to diversify trade partnerships, enabling more affordable essential goods to enter their markets.
One impact assessment indicates that the new Free Trade Agreement will be a boon to both parties as they seek to address inflation. Bilateral trade is projected to increase by up to 30%, as importers and exporters are set to avoid €140.0 million in tariffs annually. This outcome would provide consumers with access to more products, while rendering the products less expensive. The impact assessment also estimates that European investment in New Zealand could increase by more than 80%. Such investment would augment capital stock in New Zealand’s industries, stimulating job creation and wage growth. Assuming that this growth did not produce a multiplier effect (with workers spending this influx of wages in ways that would cause prices to rise), such an effect would likely ease inflationary pressures.
Five Winners and Losers
Although trade partnerships are far from a zero-sum game, there will be winners and losers across New Zealand’s various industries. The New Zealand Central Government (Te Kāwanatanga o Aotearoa) spends over NZ$90 billion annually on procurement. The NZ-EU Free Trade Agreement will see Eurozone companies eligible to bid for government projects, potentially reducing revenue in New Zealand’s consulting, road and bridge construction, and document preparation industries, in addition to other service providers. While competition for government tenders would likely make government projects cheaper and more efficient, price-based competition could also reduce profit margins on jobs conducted for the government.
Some local food and wine producers may also suffer from the influx of European competitors’ products. New Zealand’s cheese manufacturers are no small fromagers by global standards, but are dwarfed by the strong cheese-making reputations of Eurozone nations like France and Italy. With more European cheeses on the market at more competitive prices, European products will likely leverage their reputational advantages to wrestle market share from New Zealand producers. Similarly, European wines may threaten local wine makers’ market share once they hit New Zealand’s shores in greater volumes and free of tariffs.
All told, cheese and wine producers, consulting firms, road and bridge construction companies and document preparation service providers are all likely to cede ground to Eurozone competitors in domestic markets as a result of the NZ-EU Free Trade Agreement. While some of New Zealand’s players in each of these industries may benefit from more favourable access to European markets, it is likely that other industry operators will be disadvantaged.
Overall, New Zealand’s industries are projected to benefit from the free trade agreement. New Zealand already exports over 125,000 tonnes of sheep meat to the Eurozone annually. Under the new agreement, the sheep meat quota is set to rise significantly each year, reaching almost 164,000 tonnes after seven years. The current Eurozone beef quota for NZ exports is far lower, at just over 1,100 tonnes per year, but export revenue for this industry will also grow as a result of the deal. The beef export quota will more than triple when the agreement comes into force, with the quota set to rise to 10,000 tonnes after seven years. Further, beef exporters will see tariffs fall by over 60%, leaving greater capacity for profitability. Projections state that New Zealand’s beef producers will attain an additional NZ$117.0 million in export revenue over the first seven years of the deal. New Zealand’s seafood exporters will also benefit from the agreement. Tariffs on seafood will be reduced by 99.5% from day one, before being removed completely over time, saving exporters an estimated NZ$19.6 billion between 2022 and 2029. Similarly, some fruit exports, such as kiwifruit and apples, will have all tariffs eliminated, improving New Zealand’s industry operators’ bottom line.
New Zealand’s education industry may emerge as a more surprising winner. New Zealand will gain greater access to the Eurozone’s vast education market under the free trade agreement. The Eurozone is already New Zealand’s fourth-largest export market for services, and it will likely rank higher in the coming years. Demand for English as an Additional Language courses will represent a huge opportunity to grow industry revenue, in particular after Brexit’s negative effects on trade relations between the Eurozone and the United Kingdom. New Zealand’s native English-speaking labour pool will provide industry operators with a competitive advantage over courses offered within the Eurozone, and the free trade agreement may position New Zealand education providers favourably against competitors from the United Kingdom.
Conclusions
The free trade agreement’s benefits extend beyond New Zealand’s education industry and its beef, sheep, seafood and fruit export industries. As explored above, the agreement is projected to support economic growth more broadly, to diversify trade partnerships and to exert downward pressure on inflation. Although the free trade agreement may not directly address petroleum or wheat prices for either party, it is likely to ease inflation through reducing prices of other items in the basket of goods considered in the consumer price index. And while some industries will suffer losses in domestic revenue and market share, the net economic impact of the NZ-EU Free Trade Agreement is forecast to be overwhelmingly positive for New Zealand’s industries and consumers.
However, recall that the original aims when negotiations first began in 2018 included grand goals to pursue social justice and environmental reform through trade partnerships. These concerns became less paramount than the economic crises New Zealand and Europe were facing in 2022. Ultimately, the free trade agreement has included chapters dedicated to social justice and environmental concerns, addressing themes including gender equality and phasing out fossil fuels. However, despite these efforts, the European Commission’s Trade Sustainability Assessment asserts that ‘the human rights [benefits] are expected to be marginal’, while the agreement’s effects on the environment ‘are expected to be marginally negative’. It appears that social and environmental issues ultimately took a back seat to the macroeconomic difficulties these trading partners faced as negotiations progressed.
When the European Commission first advocated for opening trade negotiations with New Zealand in 2018, it also recommended entering into negotiations with Australia, with similarly idealistic intentions to pursue social justice and sustainability. At the time of writing, these two parties are still locked in negotiations. If Australian representatives learn a lesson from the NZ-EU Free Trade Agreement, it could be that such an agreement, with the reduction of regulations and removal of tariffs as its most significant instruments, will likely create conditions for industries to thrive rather than help society’s most vulnerable groups or the environment.
