More than trade

The European Union and New Zealand are miles apart, but they have been relatively quick in concluding negotiations for a trade agreement to boost economic relations.

As outlined in a press report by the European Commission on 30 June 2022, the European Union (EU) and New Zealand (NZ) reached a deal on a bilateral trade agreement, only 4 years since the opening of the negotiations. The aim of the agreement is to open economic opportunities for firms and consumers on both sides. The agreement goes beyond traditional rules for import and export since it encompasses norms about investment, intellectual property rights, data flow, public procurement, Māori trade, respect for the Paris Climate Agreement, and core labor rights.

According to the NZ Government, with a focus on trade, the agreement will remove the duties on 97% of NZ’s current export to the EU; eliminate tariffs on foodstuffs as well manufactured goods; and result in larger quotas for annual export of dairy and red meat. In addition, the agreement will allow “NZ service providers to access EU market on an equivalent basis to local and foreign service providers in a range of sectors including education.” According to the European Commission, once the agreement enters into force, NZ removes duties on a range of EU products, such as clothing, cars, machinery, and pharmaceuticals.

Moreover, according to figures from CIRCABC, the agreement will protect geographical indications. Of the 2,146 European geographical indications protected by the agreement, 30% are Italian products such as valpolicella, chianti, grappa, asiago, prosciutto di San Daniele, and prosciutto di Parma. The agreement foresees special rules for nero d'Avola, gorgonzola, grappa, and prosecco. To reduce the risk of Italian-sounding products – that is, giving an Italian image to a quality food product that is not actually Italian, there must be a legible and visible indication of the geographical origin of the product concerned. The agreement will also protect 23 NZ wines and spirits.

In my opinion, the expected impact of the agreement, once in force, will hardly be a game changer under the economic point of view. This is mainly due to the structural conditions of the partners and the content of the agreement itself.

NZ is the 50th largest trading partner in goods of the EU and makes up just 0.2% of its trade. The EU is the 4th largest trading partner in goods of NZ after China, Australia, and the United States of America. This comes with no surprise if we consider the gravitational model of trade according to which the size of trade between two countries is a function of their size and the distance between them. Moreover, according to Hugh Dixon, data manager at Business and Economic Research Ltd, due to the small size of the NZ economy and the type of export (mainly primary goods), the expected effect of a drop in tariffs will generate trade diversion – NZ exporters move exports from lower revenue generating countries to the EU.

The agreement won’t fully open trade in sectors that are economically relevant for the NZ and politically sensitive for the EU: agriculture. The dairy industry, for example, accounts for around 3% of NZ’s gross domestic product and 20% of its total exports. NZ is so efficient in this sector that, during the negotiations, the European Dairy Association declared that granting NZ further access to the EU market would bring “fatal consequences” for the European dairy sector, and the European Commission stated that “increased market access for primary agriculture may negatively affect the standard of living and traditional lifestyle of small farmers in the EU.”

The gravitational model and the relevance of farming industry for both parties make this agreement small in absolute terms. However, the parties made this agreement a priority as shown by the commitment to keep to the schedule of negotiating rounds overcoming the obstacles posed by Brexit, COVID-19 restrictions, and national interests. In announcing the agreement, Ursula von der Leyen, the president of the European Commission, provided a clear explanation for that commitment: “This new agreement between the EU and NZ comes at an important geopolitical moment. Democracies – like ours – work together and deliver for people.”

The call to strengthen ties among like-minded countries is urgent, and trade agreements carry a political value that goes beyond the mere reductions in tariffs.

Jacinda Ardern, New Zealand’s prime minister (left) and Ursula von der Leyen, president of the European Commission (right).

Photo: EC - Audiovisual Service © UE/Dati Bendo, 2022