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Overseas trade policy

by Chris Nixon and John Yeabsley

New Zealand began trading with other countries before it had a national government. Its long-term trade challenge, even into the 2000s, was to diversify its exports from agricultural products, and to find new markets.


Early trade – 1840s to 1920s

By the early 1800s New Zealand was already a busy international trader, exporting seal furs, whale oil, kauri spars and flax. Metal goods, clothing and liquor were imported. However, before 1840 trade was not regulated, as there was no national government.

This changed in 1840, and the new government imposed duties and port charges.

From the 1840s to the early 1870s New Zealand traded mainly with Australia (70% of exports in 1865, 44% in 1871). The volume of traded goods was relatively light. In 1853, the first year for which complete export statistics are available, the lead exports were (in order of importance) native timber, wool, grain and kauri gum. By the 1860s the main export to Australia was gold.

Kauri from the Māori

 

In the 1800s New Zealand’s native forests were milled and much of the timber was exported (mainly to Australia), as this doggerel notes:

One summer morn in eighteen one

A ship her anchor cast,

Stole a piece of kauri from the Maori,

And used it for a mast.1

 

New Zealand’s first taxes were duties and tariffs (taxes on imports). From 1840 duty was collected under the New South Wales tariff. In 1841, when New Zealand was made a separate colony, duties were applied at different rates on imports such as spirits, tobacco, flour and sugar. In 1844 the country abolished customs duties only to reinstate them less than a year later.

The duties were primarily for revenue purposes and were not a significant barrier to trade. Premier Julius Vogel attempted to gain reciprocal tariff concessions (where two countries reduce tariffs for each other) with the US and Australian colonies in the 1870s, but was unsuccessful.

Britain’s farm

In the 1870s New Zealand exports centred on non-perishable sheep products (wool and tallow), native timber and gold. The country’s economic fortunes picked up with the advent of refrigerated shipping in the 1880s. Refrigeration meant that meat and dairy products could be transported as far as Europe.

This trade became concentrated on the UK, which took all that New Zealand could produce. This spurred the development of farming to meet the demand. Within five years at least 170 shipments of meat and dairy products had been sent to Britain. By the mid-1890s more than 80% of New Zealand exports were sold there.

Export eggs in one basket

From the 1870s until the 1950s New Zealand’s trade focused on Britain, and its economic ties with other countries waned. New Zealand’s trade with Australia and the US shrank. Australia took 20% of New Zealand’s exports in 1880, but by 1920 it had shrunk to 5%. A trade agreement with the new Australian Commonwealth was not signed until 1922.

By contrast, Britain took more than 80% of New Zealand exports in 1920. Of the country’s four main exports – frozen meat, butter, cheese and wool – only wool went to a variety of markets.

New Zealand’s Preferential and Reciprocal Trade Act 1903 gave British imports lower tariffs than imports from other countries. There was some expectation that Britain would do the same for New Zealand’s exports to Britain but, despite fierce debate, Britain remained committed to free trade.

Few exports, many imports

New Zealand exported a narrow range of commodities – particularly agricultural produce. This was a high-risk strategy, which was highly successful – at first.

Meanwhile, the range of imported goods was much more diverse, and from a variety of sources. Both Australia and the US were important sources. At no point up to the 1920s did the UK supply more than 70% of New Zealand’s imports.

The impact of war

During the First World War New Zealand began a purchasing agreement (known as ‘the commandeer’) with Britain. It guaranteed prices in return for New Zealand sending all of its exports of meat and dairy produce to Britain, and increasing production as much as possible. However, the British economy faced difficulties in the 1920s. The New Zealand government set up the Meat Board and the Dairy Board in part to ensure the profitable marketing of its produce in the British market – not always successfully.

Footnotes
    • J. B. Condliffe, New Zealand in the making: a survey of economic and social development. London: Allen & Unwin, 1930, p. 117. Back

Depression and war

Worldwide protectionism flourishes

Following the Wall Street share-market crash of 1929, and the related commodity-price slump, many economies protected their producers from foreign competition. In March 1932, after 90 years of free trade, even the British government imposed a 10% tax on most ‘foreign’ (non-British Empire) goods. No tariffs were imposed on goods from the dominions – self-governing members of the British Empire such as New Zealand – pending discussion with them.

The Ottawa Conference

The Ottawa Conference, held in mid-1932 in the Canadian capital, aimed to reconcile the new British trade policy with the dominions’ wish to have favoured access to the British market. The British offered preferential treatment on products imported from the dominions, but only up to a point. Britain wanted to protect its own farmers, and it did not want to forego all trade with ‘foreign’ (non-British Empire) nations such as Argentina, which were important markets for British exports. Britain therefore demanded reciprocity from the dominions – if New Zealand wanted secure access to the British market for its dairy and meat exports, in return it had to consider increasing preferential access for British imports.

The Ottawa agreement, and subsequent agreements, introduced a system of political tinkering to continually adjust the volumes of agricultural exports from New Zealand and other dominions into the British market, depending on market conditions and on Britain’s trade arrangements with foreign countries. New Zealand had to engage in frequent lobbying to make sure its position was not undermined by these adjustments. Lobbying Britain was a key feature of New Zealand international trade from the 1930s to the 1970s.

Trade dependent

 

As a small economy, with a small domestic market, New Zealand’s fortunes have always relied on what it could sell overseas. As early as 1915 it was recognised that ‘[f]rom the very earliest times New Zealand has inevitably been dependent upon foreign intercourse for its development and progress’.1

 

Import licensing

A surge in imports in the late 1930s led the Labour government to restrict imports by requiring importers to have a licence to bring in goods. They also placed controls on the buying and selling of foreign currency. Their aim was to protect the domestic economy and prevent a rise in unemployment.

However, licensing also became a protectionist measure, with licences being few or non-existent for goods that were also manufactured in New Zealand. It became a central part of trade policy for 50 years. Licensing was defended on the grounds that it protected New Zealand employment and encouraged industrial development, but it was a barrier to negotiating trade agreements with other economies.

The Second World War and after

War caused many temporary disruptions in trade patterns, but some economies grew. By the end of the war the US was the world’s leading economy, accounting for around 50% of total world production in 1945. The US wanted open trade, with lower tariffs and less import licensing. It was sceptical of preferential agreements such as the British Empire’s, and New Zealand’s import licensing and exchange control regime.

Footnotes
    • New Zealand Official Yearbook, 1915, p. 354. Back

The post-war economy

General Agreement on Tariffs and Trade (GATT)

Talks held in 1948 established the General Agreement on Tariffs and Trade (GATT). This was a broad agreement amongst participating countries to negotiate reductions in barriers to world trade. New Zealand was one of 23 foundation members. For New Zealand the promise of GATT was that trade in agricultural produce would be freed up. This would make New Zealand produce cheaper overseas, and so more people would purchase it.

There were eight GATT ‘rounds’, beginning in 1947, but the first six (up to 1967) mainly tackled manufacturing tariffs, and agriculture was seen as a sideline. In fact, in 1955 the US secured a waiver from the GATT’s already weak agricultural provisions.

Butter for buses

 

Economic historian John Singleton summed up New Zealand’s dependence on trade with Britain after the Second World War: ‘New Zealand had a trading relationship in which butter and lamb were effectively swapped for Vickers Viscounts and Leyland buses.’1

 

Britain remains important

New Zealand’s major trade focus continued to be protecting its access to the British market. From 1944, with its own food resources severely depleted, Britain again committed itself to buying New Zealand’s exportable surplus of meat, butter and cheese. The agreements were renegotiated for seven years in 1948. However, bulk purchasing ended a year early, in 1954, as production recovered in the UK. The circumstances of the 1930s returned – New Zealand was anxious for secure access to the British market.

British imports

Britain also remained an important source of New Zealand’s imports. In the 1950s more than 50% of New Zealand produce received no preferential treatment in Britain, yet 90% of British goods got preferential treatment in New Zealand.

In 1958 New Zealand negotiated an agreement that gave it the option to reduce the preferential treatment given to British imports. However, it did not use this option because it was nervous of losing market access, and high levels of preferential treatment for British imports continued until the late 1960s. The net benefit of this arrangement to Britain in the early 1960s has been estimated at $540–$617 million per year (in 2008 terms).

New markets

Nonetheless, New Zealand did look for new markets. A market for meat was developed in the US, and in 1958 New Zealand signed a trade deal with Japan. In return for lower tariffs on Japanese imports and removal of other trade barriers, New Zealand received concessions for its exports of wool and meat to Japan. In 1965 New Zealand signed a free trade agreement with Australia, the first significant agreement since 1922. It worked for some products, such as cars from Australia and carpets from New Zealand, because those products didn’t threaten domestic industries in the other country. However, most other products were more politically fraught. Vested interests on both sides of the Tasman ensured that little progress was made in freeing up trade.

Footnotes
    • John Singleton, ‘New Zealand, Britain and the survival of the Ottawa Agreement, 1945–77.’ Australian Journal of Politics and History 43, no. 2 (1997), p.178. Back

New Zealand, Britain and the EEC

Britain looks to join the EEC

In 1961 Britain announced that it was seeking to join the European Economic Community (EEC). It was a logical move for Britain, but in New Zealand it was greeted with dismay. The founding EEC nations had agreed on a ‘common agricultural policy,’ which effectively excluded outside producers from the European market. They justified this by arguing the need to secure food supply in the event of war or other disruption, and to sustain rural communities. If Britain joined the EEC it would have to sign up to the policy, and that would mean an end to New Zealand being able to export agricultural products to Britain.

Fight for life

What followed over the next 10 years was a trade policy coup. A country of less than 3 million people negotiated concessions (in the form of access quota rights to the British and European markets) from a powerful group of countries with a population of over 200 million.

To do this New Zealand needed Britain’s support. It was gained by playing on New Zealand’s wartime contribution, the strong cultural ties between the two countries, and the impact on the British consumer – New Zealand was a low-cost producer, so food prices in the UK were likely to rise if New Zealand produce was excluded from the market.

In mid-1961 the British government agreed that it would not enter the EEC unless New Zealand’s ‘vital interests’ were protected. But what those vital interests were was yet to be agreed. Negotiations started and stopped throughout the 1960s. Britain’s third application to join the EEC was submitted in 1969.

Luxembourg agreement

Agreement with the EEC was reached in 1971, but only after Britain had secured a special arrangement (the Luxembourg agreement) for New Zealand’s butter, cheese and lamb trades. The deal was for a limited period, and had to be revisited regularly over coming years, but it gave New Zealand time to diversify after Britain became a full member of the community in 1973.

In 1970 Britain took more than 90% of New Zealand’s butter exports and 75% of cheese exports. The Luxembourg agreement reduced the butter quota by roughly 17% and the cheese quota by roughly 68% over 5 years. Quantities were reduced further after 1977, to about half the 1973 levels. New Zealand continued to have butter quotas in the 1980s and 1990s – although at much reduced levels.

British exports to New Zealand

Britain had long been New Zealand’s main supplier of imports, but this was slowly declining – from 48% in the late 1930s, to 43% in 1960, and down to 30% in 1970. This was due partly to the recovery of other economies after the war, and their ability to compete on price and quality with British exporters. But it was also a by-product of Britain’s EEC membership. When Britain entered the EEC all bilateral agreements between New Zealand and Britain had to be terminated. Preferential treatment of British imports into New Zealand ended in 1977.

In 1980 imports from Britain had fallen to 14.5%. In 2007 they were less than 3%. In the late 1930s Britain took more than 80% of New Zealand exports. By 1960 it took 53%, which reduced to 36% in 1970, and 5% in 2007.


Difficult times – the 1970s and early 1980s

Price setting and subsidies

In 1973 the New Zealand economy faltered as export prices fell and the price of oil went through the roof. All of New Zealand’s oil supply was imported.

The European Economic Community (EEC) came to dictate world prices in livestock products through the Common Agricultural Policy subsidy regime. When subsidies rose, world prices fell by that amount. US traders, with a similar set-up, could match these prices, but unsubsidised exporters, such as New Zealand, faced depressed prices and uneconomic competition. From 1979 New Zealand set minimum prices for its own producers to ensure their viability – it was a form of income support which was a subsidy in all but name.

The General Agreement on Tariffs and Trade (GATT) Tokyo round of trade talks (1973–79) was disappointing for New Zealand. The talks covered goods that accounted for 90% of world trade, and negotiations ranged more widely than previously. Agricultural trade was meant to feature in the final agreement, but this did not happen as the US drove a quick deal with Europe and Japan to finish the round well before the 1980 US presidential election.

Diversifying trade

In the years after Britain joined the European Economic Community (EEC), trade diversification was a major preoccupation for New Zealand. A manufacturing beef trade (lean beef to blend with US domestic beef for hamburgers) into North America developed in the 1960s. Sales of casein (a milk protein) to the US increased, taking advantage of the unique lack of protection on this dairy product – a loophole classified it as an industrial product.

A second oil shock took place in 1978. Deals that bartered oil for sheep meat were made with Iran, and markets in other oil-producing states were also developed. Agreements were signed with state trading organisations in the Soviet Union and China. New Zealand also had some success in expanding markets in Japan, particularly for aluminium, fish, wool and kiwifruit. In 1980 no single market took more than 20% of New Zealand’s exports. Diversifying the product range took longer and was still ongoing in the 2000s.

CER with Australia

The Australian government tired of the product-by-product negotiations required under the 1965 trade agreement and pushed for a simpler arrangement. New Zealand had little choice but to agree. The Closer Economic Relations (CER) agreement was signed in 1983, and allowed New Zealand and Australian businesses to trade in each other’s market as domestic rather than foreign producers. This meant that Australian goods were exempt from New Zealand’s import licensing regime.

The focus of the agreement was ‘outward-looking’. It allowed for participation by other countries, and it did not impose a common external tariff, which gave New Zealand and Australia flexibility in future trade negotiations with other countries. It transformed New Zealand trade policy, which had been grounded in a narrow, reactive view of the place of New Zealand in the world economy.


Trade liberalisation – 1980s and early 1990s

The end of the two-sided policy

New Zealand’s reduced dependence on Britain, the removal of preferential treatment given to British imports, and the signing of the Closer Economic Relations trade deal with Australia in 1983, showed a trend towards removing trade barriers – including its own.

The Labour government elected in 1984 took further steps. It ended government assistance to farmers, and set a timetable for ending import licensing and reducing tariffs. It aimed to encourage free trade and remove protection from uneconomic industries.

New Zealand could now take a consistent stand in its international negotiations, particularly the General Agreement on Tariffs and Trade (GATT).

The Uruguay round

The role of GATT had been to reduce (manufacturing) tariffs to the point where they averaged roughly 4–5%. By comparison, tariffs on agricultural products had been neglected. An agricultural trade war between the US and the European Economic Community (EEC) culminated in overproduction with ‘mountains’ of butter and ‘lakes’ of milk that had no market. The trade war created the right conditions for sensible rules to be applied to agriculture. The Uruguay round of trade talks (1986–94) was the longest, most comprehensive and ambitious round ever undertaken. There were 14 issues to resolve; the most difficult negotiation was about agricultural trade.

The Cairns Group

A pivotal preparation for the Uruguay round was the forming of the Cairns Group of nations (New Zealand, Argentina, Australia, Brazil, Canada, Chile, Colombia, Hungary, Indonesia, Malaysia, Philippines, Thailand, and Uruguay). This group of relatively unsubsidised agricultural exporters wanted agriculture to be the core issue. Collectively, they hoped to carry enough weight in the negotiations to affect outcomes on agriculture.

Negotiating was difficult – even getting agriculture onto the agenda was contentious. The Cairns Group paid a key role in keeping negotiations going. While the outcome was relatively modest, the real success of the round was to subject the largest countries – who were ambivalent about freer trade in agriculture – to relatively equitable rules governing agricultural trade.

A new organisation

An agreement, signed in 1995, established a new organisation, the World Trade Organization (WTO), to oversee GATT and other agreements. The WTO had greater powers to enforce free-trade rules and a clearer mandate to promote free trade. The scope of what trade rounds covered also expanded. By the early 2000s it included intellectual property, investment, trade in services and agriculture, as well as trade in manufactured goods.


Diversification since 1990

WTO and APEC

With World Trade Organization (WTO) negotiations unable to accomplish all that New Zealand sought in international agricultural trade, regional and bilateral deals (agreements between two countries) were explored as well.

Asia–Pacific Economic Cooperation (APEC), a forum for Pacific Rim economies to discuss trade and economy in the region, first met in 1989. Through the 1990s there was an expectation that the association might foster mutual trade liberalisation. However, by the early 2000s this had not happened.

The rise of East Asia

The biggest change in New Zealand’s trading patterns in the 1990s and 2000s was the increased significance of China. China’s participation in world trade grew after it embarked on economic liberalisation in 1978.

In 1988 China took 4% of New Zealand’s exports, and was the source of 1% of imports. In 2007 it was the destination for 5% of exports and the source of 13% of imports. Including Taiwan and Hong Kong, these figures were 9% and 16% respectively.

The other significant new trading partner was South Korea, which took 4% of New Zealand’s exports in 2007, and was the source of 3% of imports.

Bilateral free trade agreements

New Zealand has concentrated on bilateral agreements with individual APEC economies. Such agreements were achieved with Singapore (2001), Thailand (2005), and, most significantly, with China (2008). In the early 2000s New Zealand was seeking a trade deal with the US. These agreements were not without controversy. Some activists drew other issues, including human rights, into the debate, particularly in relation to countries such as China.

In 2005 an agreement between Brunei, New Zealand, Chile and Singapore was signed, focusing on freer trade between these countries. There have also been attempts to develop regional trading agreements, such as linking the free-trade group Association of South East Asian Nations (ASEAN) with Closer Economic Relations (CER), Australia and New Zealand’s free trade agreement.

CER in the 2000s

Under the CER agreement (1983), Australia became New Zealand’s biggest trading partner, a status it had last held in the 1860s. In the early 2000s New Zealand was keen to increase the coverage of the agreement into the services area – for example insurance and investment. However, Australia’s priorities were negotiating agreements with Asian and North American economies. In 2003 net benefit from further integration with the Australian economy was estimated at between NZ$192 and $448 million each year.

New Zealand’s place in world trade

In 2007 New Zealand’s share of world trade was 0.21%. In 1950 the figure was 1%. Interpreting this as a decline would be misleading, as there was much less world trade in the 1950s, and New Zealand’s economy was still heavily export-oriented in the 2000s. With such a small proportion of world trade, New Zealand’s bargaining power was limited, and international trade policy agendas were set by others.

By the 1990s no single nation dominated New Zealand’s export statistics. The country has diversified, but in the early 2000s New Zealand’s main exports were still commodities such as meat and dairy products. Prices for such commodities are set by international markets, not producers.

Trade policy in the 2000s

In the 1990s and 2000s New Zealand was one of the freest traders in the world. Its trade policy in the 2000s was to keep all options open and negotiate with countries individually or in groups with the aims of gaining market access and fewer trade barriers.


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How to cite this page: Chris Nixon and John Yeabsley, 'Overseas trade policy', Te Ara - the Encyclopedia of New Zealand, http://www.TeAra.govt.nz/mi/overseas-trade-policy/print (accessed 18 August 2019)

Story by Chris Nixon and John Yeabsley, published 11 Mar 2010