New Zealand to Sign First Free-Trade Agreement With China

By Tracy Withers


April 7 (Bloomberg) -- New Zealand today will become the first developed country to sign a free-trade agreement with China, giving the island nation's farm exporters unfettered access to the world's fastest-growing major economy.

The agreement covering trade in goods, services and investment will be ratified by Prime Minister Helen Clark and China's Premier Wen Jiabao in Beijing today. Almost half of New Zealand's exports are from agriculture.

China's expanding middle class, estimated to be 25 times the entire population of New Zealand, will be able to satisfy its developing appetite for Western-style foods with Kiwi lamb, butter, cheese and fish. That will help the Pacific island economy, which is slowing as record-high interest rates cool domestic demand.

``Anything that helps on the export side over a number of years is good for the economy,'' said Cameron Bagrie, chief economist at ANZ National Bank Ltd. in Wellington.

New Zealand's Trade Minister Phil Goff said last month the accord, which is only expected to boost exports by 1 percent in the first few years, will create jobs and drive long-term growth in the $104 billion economy.

Details of the agreement will probably be published after it's signed. The deal is expected to contain gradual reductions to Chinese tariffs on New Zealand exports, which according to government figures cost companies about NZ$115 million a year.

Dairy Tariffs

Tariffs on dairy products are as high as 15 percent, while the duty on kiwifruit and meat reaches 20 percent. In return, tariffs of as much as 14 percent on imports of Chinese-made textiles, clothing and footwear will decline to zero over time.

New Zealand's government estimates China's middle class exceeds 100 million people, equivalent to the populations of Spain and the U.K. combined. Just 4 million live in New Zealand.

As incomes increase, Chinese people are spending more on food and consumer goods. Retail sales for January and February climbed 20 percent, matching the fastest pace in nine years, fanned by a 17 percent jump in urban incomes last year.

Pork consumption is growing about 4 percent a year as more Chinese earn enough to afford meat, the price of which doubled in some cities last year.

``China has a growing middle class population looking to increase its consumption of protein such as beef and lamb,'' said Mike Petersen, chairman of Meat & Wool New Zealand, which represents sheep and cattle farmers. ``An agreement that provides for improved meat access will put us in a good position.''

Fonterra in China

Auckland-based Fonterra Cooperative Group Ltd., the world's biggest dairy exporter, last year started a 3,000-cow dairy farm in China with partner Shijiazhuang San Lu Group. China is Fonterra's biggest buyer of milk and cream.

The free-trade agreement is a reward to New Zealand, which was the first nation to sign off on terms for China's accession to the World Trade Organization in 2001.

New Zealand also recognized China as a market economy, rather than a non-market economy, a designation nations including the U.S. use to bar Chinese goods. China will only negotiate free-trade deals with countries that acknowledge it has a market economy, according to the New Zealand government.

``This deal will give New Zealand businesses a distinct advantage over competitors into that market,'' Goff said.

Australia, South Africa and Peru are negotiating free-trade agreements with China. Australian Prime Minister Kevin Rudd visits Beijing this week for talks with Premier Wen. China became Australia's biggest trading partner in July.

Sales to China

New Zealand sales to China rose 8.1 percent to NZ$2 billion ($1.6 billion) in the year ended Feb. 29, making it the fourth- largest export market. New Zealand's global exports total NZ$38 billion and make up 30 percent of the economy. The accord may boost shipments by as much as NZ$350 million a year, Goff says.

To be sure, rising exports won't be enough for the economy to avoid the affect of record-high interest rates on consumer spending and housing this year. Home sales fell to a seven-year low in February and prices have been declining since November.

Economic growth will probably slow to 1.7 percent this year from 3.1 percent in 2007, according to the median estimate of 12 economists surveyed by Bloomberg News. Growth may be even weaker as drought prompts farmers to stop milking their cows and to slaughter sheep they can no longer feed.

Finance Minister Michael Cullen last month said he couldn't rule out the possibility of a recession. Reserve Bank Governor Alan Bollard said March 28 he expects the official cash rate will stay high ``for some time yet.'' It is now 8.25 percent.

``Free-trade agreements normally are net beneficial to the economy, but they are not the panacea for our problems,'' said Darren Gibbs, chief New Zealand economist at Deutsche Bank AG in Auckland. ``The question is not whether there is demand, but whether we can produce more without fanning inflation.''