A European Free Trade Agreement (FTA) may present more opportunity than just enhanced trade with Europe.
On 21 June, negotiations formally commenced between New Zealand and the European Union (EU) to agree the terms of an FTA. This FTA was first proposed in 2009 and as such this milestone is a significant event.
New Zealand has a relatively comprehensive FTA network with countries including China, Australia and the ASEAN block of ten Southeast Asian countries. This may present opportunities for EU based enterprises wanting to take advantage of an FTA with us, to sell goods to our other FTA partners 'via' New Zealand in a way that preserves tariff reductions. It goes without saying that this simultaneously provides opportunities for New Zealand.
While most FTA's include a 'direct transit' rule requiring goods to pass directly from one member state to the other, if substantial processes are undertaken in New Zealand then this may be sufficient for the final exported product to be treated as originating in New Zealand for FTA purposes. Whether this is viable will of course be fact dependent and depend on the specific 'rules of origin' included in each FTA. The possible opportunities that this presents for New Zealand should not be underestimated.
The primary benefits of FTAs are the reductions or removal of tariffs imposed on goods traded between partners, with an anticipated increase in trading activity. In some cases, FTAs may provide additional incentives for exporting and importing by way of reduced barriers to trade – for example, alleviating the need to have certain import licences or eliminating import quotas. The economic benefits may be considerable – officials estimate that this arrangement may increase the level of New Zealand exports to the European Union by 10% to 20%, with a GDP increase of between NZ$1.2 and NZ$2 billion. On the other hand, tariffs are intended to protect domestic manufacturers and so there may be challenges for local manufacturers who may find themselves competing against cheaper imports.
The United Kingdom's pending departure from the EU will mean that New Zealand will require a separate bilateral FTA with the UK and officials have indicated they have already established a trade policy dialogue with their UK counterparts, with a view to commencing negotiations at some stage.
The proposed FTA with the EU will be a multilateral agreement, in the sense that it encompasses a number of countries. This will mean that it should be possible for tariff reductions to apply, even if goods are transported through a number of EU countries en route to New Zealand.
Negotiations will focus on a number of aspects, with each member state wanting to balance the benefits of free trade against any adverse impact on their domestic industries. It is possible that some industries may be offered some tariff protection with that protection abating over time. The number of states that ultimately need to approve the FTA will likely make negotiations more complicated than for our previous bilateral agreements.
While it is estimated that because of the number of issues at stake, finalising the European FTA may take several years, New Zealand businesses should be encouraged to start investigating opportunities with potential European counterparts.
Bell Gully will be watching the development of matters with keen interest and assisting clients in respect of all of the legal ramifications. Please contact our team if you would like any advice or assistance in relation to the matters addressed in this client update.