By Murat Üngör and Samuel Verevis
New Zealand was the first developed country to commence FTA negotiations with China. In November 2004, New Zealand and China launched FTA negotiations and in April 2008, New Zealand became the first OECD country to successfully conclude FTA negotiations with China.
How much do trade agreements matter? In our paper, What Has New Zealand Gained from the FTA with China?: Two Counterfactual Analyses, we employ a novel approach to examine how bilateral trade agreements influence trade and income in the context of the 2008 New Zealand-China free trade agreement (FTA).
In a world first for any developed country, New Zealand entered into a free trade agreement with China in 2008. We seek to answer whether New Zealand’s exports to China increased significantly due to the 2008 FTA, and how the agreement has affected New Zealand’s real gross domestic product (GDP) per capita.
We find that New Zealand made substantial export gains out of this agreement. Exports to China were more than 200 per cent higher in 2013 and 2014 than what they would have been if New Zealand had never signed the FTA with China. We also find that the dairy sector, which is New Zealand’s primary exporting sector, incurred a substantial gain from the New Zealand-China FTA. We do not find a significant or robust impact on New Zealand’s GDP per capita.
11 December 2001: A milestone for global trade
China’s accession to the World Trade Organisation (WTO) in 2001 marked an important milestone for the global economy. In accordance with WTO rules, China committed to liberalise further in order to better integrate into the global economy. Since 2002, China has signed many free trade agreements (FTAs) to strengthen international economic cooperation.
New Zealand has been a key player in the process of global recognition of China.
China oﬃcially started its WTO membership application in 1986. In 1997 New Zealand became the first country to agree to China’s accession to the WTO by concluding the bilateral negotiations component of that process. China was formally accepted on 11 December 2001.
New Zealand was also the first developed country to commence FTA negotiations with China. In November 2004, New Zealand and China launched FTA negotiations and in April 2008, New Zealand became the first OECD country to successfully conclude FTA negotiations with China.
On 7 April 2008, Chinese Premier Wen Jiabao and New Zealand Prime Minister Helen Clark witnessed the signing of the New Zealand-China FTA in Beijing, which came into force on 1 October 2008.
Hence, it is important to understand how the FTA with China has affected the New Zealand economy.
Two important research questions
In our paper we ask the following questions:
- Have New Zealand’s exports to China increased significantly because of the 2008 FTA?
- How has the FTA with China affected the per capita income of New Zealand?
These are two important questions as China has emerged as the most important trade partner of New Zealand.
China has become New Zealand’s top commodity export destination in recent years. New Zealand’s export share to China was slightly less than 2% in 1979, and this share tripled by 2008 at almost 6%. Only five years after that New Zealand’s share of exports to China tripled again, to almost 21% in 2013. Exports to China increased from around US$ 90 million in 1979 to a little higher than US$ 11 billion in 2019.
We investigate the causal effect of the 2008 New Zealand-China FTA on exports from New Zealand to China and GDP per capita in New Zealand using a novel method that focuses on estimating the counterfactuals.
The method we use is the synthetic control method (SCM), which was introduced by Abadie and Gardeazabal (2003) and extended by Abadie et al. (2010, 2015). This technique enables us to estimate the New Zealand economy without the FTA with China (“Synthetic” New Zealand) and compare it to the New Zealand economy with the FTA (“Treated” New Zealand).
Why do we need “Synthetic” New Zealand?
What would have happened to the New Zealand economy if New Zealand did not sign the 2008 FTA with China? We cannot answer this question using the New Zealand data for the post-2008 data, because New Zealand signed a FTA with China in 2008. In other words, we have no post-2008 observations on New Zealand where the FTA with China was not signed.
So, what did we do?
We created a control group by synthesising the performance of countries similar to New Zealand. We used a combination of other OECD countries to construct a “synthetic” New Zealand, which resembles relevant economic characteristics of the New Zealand economy before signing the FTA with China.
Our “synthetic” control New Zealand consists of countries who did not sign FTAs with China. Hence, our research provides a counterfactual scenario for the evolution of the New Zealand economy in the absence of this FTA.
The subsequent economic progress of this “synthetic” New Zealand without the FTA with China is compared to the actual experience of the New Zealand economy.
Our findings and their importance
By exploring the ‘what if’ counterfactuals, this research dissects the magnitude of bilateral trade agreements on New Zealand exports and explores the gains from trade, both at the aggregate and sector levels. We find that New Zealand exports to China were more than 200 per cent higher in 2014 than what they would have had the FTA never been signed. New Zealand’s food and live animals exports to China were more than 180 per cent higher in 2014 than the counterfactual.
While we find substantial export gains, owing to sectors such as dairy products, we do not find significant or robust impact on GDP per capita of New Zealand.
This research is one of the first (if not the first) study that provides a systematic quantitative analysis of the 2008 New Zealand-China FTA on the economic performance of New Zealand with several counterfactual comparisons.
What about policy makers?
New Zealand has become increasingly reliant in both concentration and trade with its Asian neighbours, so quantifying the effect of a downturn in the China economy and its spill over effect on a smaller nation would be extremely useful for policy makers.
China is New Zealand’s biggest export partner in terms of merchandise goods, and any predicted downturn in the Chinese economy would have implications for New Zealand’s trade flows.
It is plausible to expect that China will continue to be the major trade partner of New Zealand. Having said that, there is no reason to put all of your eggs into the same basket.
Diversifying export partners and export goods, improving the current agreements and developing new strategic ties are important for the future of New Zealand. This does not mean that New Zealand should reduce its economic transactions. On the contrary, what we are suggesting is to expand the size of current trade agreements with new partners, or by signing new bilateral/multilateral agreements.
Expanding the size of the cake
On 11 March 2020, the World Health Organization declared COVID-19 as a global pandemic. The outbreak, and still raging, of pandemic COVID-19 has been causing the world great pain and negative impacts on global trade and economy.
Globally, trade-exposed businesses had been among the hardest hit by the coronavirus. Given the relatively successful position of New Zealand in terms of the response to this global pandemic, a natural question arises regarding the initial and long-term economic effects of the COVID-19.
How can, and how should, New Zealand position itself in the post-pandemic world?
New Zealand has been very active to strengthen its economic ties during such uncertain times because of the global COVID-19 pandemic.
On 12 June 2020 the Digital Economy Partnership Agreement was signed in an entirely online virtual signing ceremony by New Zealand, Chile and Singapore. This agreement entered into force for New Zealand and Singapore on 7 January 2021. It is important to acknowledge the importance and adoption of digital technologies to support international trade (Üngör, 2021).
On 17 June 2020 New Zealand and the United Kingdom (UK) formally launched negotiations towards an FTA. In a statement announcing the start of trade talks with the UK, Trade Minister Parker said it made more sense than ever for the two countries to work more closely together in a post-Brexit environment. This FTA can bring new opportunities for New Zealand.
Opportunities for 2021: APEC and RCEP
The Asia-Pacific region is particularly important for economic and foreign relations of New Zealand. The last Policy Quarterly issue of 2020 contains a series of articles examining aspects of the ever-enhancing changing economic integration between New Zealand and the Asia–Pacific.
New Zealand is one of the founding members of the Asia-Pacific Economic Cooperation (APEC), which was established in the late 1980s. APEC is made up of 21 Pacific Rim members; and New Zealand is now chairing APEC in 2021, at a crucial time as the region works to recover from the impact of COVID-19. APEC 2021 will be hosted on virtual platforms, similar to some events being run by the 2020 host, Malaysia.
The Regional Comprehensive Economic Partnership (RCEP) was signed by 15 countries in Asia and the Pacific on 15 November 2020 (Üngör, 2020b). These countries include the ten members of the Association of Southeast Asian Nations (ASEAN) plus Australia, China, Japan, South Korea, and New Zealand. RCEP is arguably the largest FTA in history. The 15 economies cover a market of more than two billion people and 30 percent of the world’s GDP (Üngör, 2020a).
RCEP is an FTA that will complement and build upon New Zealand’s existing FTAs with other countries in the region. According to the Ministry of Foreign Affairs and Trade, the Regional Comprehensive Economic Partnership (RCEP) has the potential to be a game changer for regional trade.
Suggestions for future research
For the New Zealand case, it would be extremely interesting to examine how a small open economy is affected by trade with such a large open economy in terms of productivity, reallocation of resources and labour.
Carefully constructed dynamic multi-country, multi-sectoral general equilibrium models that take into account sectoral linkages between tradable and non-tradable sectors will likely provide many valuable insights for policymakers. Such general equilibrium models will encompass all economic activity in an economy simultaneously – including production, consumption, employment, and trade – and the linkages among them. Such models are comprehensive because they describe all parts of an economy simultaneously and how these parts interact with each other. Caliendo and Parro (2015) and Caliendo, Dvorkin and Parro (2019) are very good examples of such research.
Verevis, S., Üngör, M. (2021). “What Has New Zealand Gained From The FTA with China?: Two Counterfactual Analyses.” Scottish Journal of Political Economy, 68(1), 20-50, https://doi.org/10.1111/sjpe.12260
A brief coverage of our paper was made by the University of Otago on 29 July 2020, which is available at: https://www.otago.ac.nz/news/news/otago741133.html
Abadie, A., Gardeazabal, J. 2003. “The Economic Costs of Conflict: A Case study of the Basque Country.” American Economic Review, 93(1), 113-132.
Abadie, A., Diamond A., Hainmueller, J. 2010. “Synthetic Control Methods for Comparative Case Studies: Estimating the Effect of California’s Tobacco Control Program.” Journal of the American Statistical Association, 105(490), 493-505.
Abadie, A., Diamond, A., Hainmueller, J. 2015. “Comparative Politics and the Synthetic Control Method.” American Journal of Political Science, 59(2), 495-510
Caliendo, L., Parro, F. 2015. “Estimates of the Trade and Welfare Effects of NAFTA.” Review of Economic Studies, 82(1), 1-44.
Caliendo, L., Dvorkin, M., Parro, F. 2019. “Trade and Labor Market Dynamics: General Equilibrium Analysis of the China Trade Shock.” Econometrica, 87(3), 741-835.
Üngör, M. 2020a. “Now’s Not the Time for Protection.” Newsroom, 18 November 2020, https://www.newsroom.co.nz/ideasroom/nows-not-the-time-for-protectionism
Üngör, M. 2020b. “APEC 2021: NZ’s Moment.” Asia Media Centre, 24 November 2020, https://www.asiamediacentre.org.nz/opinion/apec
Üngör, M. 2021. “Digitising the Economy is Bigger than Us.” Newsroom, 15 January 2021, https://www.newsroom.co.nz/pro/digitising-the-economy-is-bigger-than-us
Murat Üngör is a Senior Lecturer in Economics at the University of Otago. His research and teaching are mainly focused on the area of international macroeconomics and trade, with an interest in growth and development.
Samuel Verevis is an economist at the New Zealand Ministry of Foreign Affairs & Trade.
Disclaimer: The views expressed in this article reflect the opinions of the author and not necessarily the views of The Big Q.