China Eliminates All Safeguard Tariffs on Dairy Products from New Zealand

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Posted by Written by Giulia InteresseReading Time:  6 minutes


Image credit: Author with Ai


Effective January 1, 2024, New Zealand's dairy products were granted duty-free access to China, signaling the completion of the planned tariff removal under the China-New Zealand Free Trade Agreement. This milestone presents fresh prospects for businesses and investors in New Zealand's dairy industry, further reinforcing China's position as New Zealand's primary trading ally.

New Zealand has officially announced that all its dairy products now enjoy duty-free access to the Chinese market as of January 1, 2024. This comprehensive access includes the removal of safeguard duties, particularly those affecting milk powder, marking the successful conclusion of a systematic process to eliminate tariffs outlined in the China-New Zealand Free Trade Agreement (FTA). This decision not only signifies the culmination of a gradual journey towards tariff elimination but also underscores the mutual commitment of both nations to promote open trade.

In this article, we will delve into the historical context, analyze the economic implications, and examine the specific effects of the recent tariff removal on New Zealand's dairy industry and its trade relationship with China.

Background

For more than a decade, New Zealand's dairy exporters grappled with the imposition of Chinese tariffs, which originated from the 2008 Free Trade Agreement (FTA) with China. Initially set at 10 percent, these tariffs were activated when predetermined volumes of dairy imports from New Zealand surpassed specified limits.

The primary objective of these tariffs was to shield Chinese farmers from potential spikes in dairy imports, a concern arising from anticipated reductions in out-of-quota tariffs on dairy goods.

Initially, the New Zealand dairy sector, operating below the 100,000-tonne threshold triggering the safeguards, found these measures acceptable. However, the landscape shifted following the 2009 melamine scandal, which eroded confidence in domestically produced dairy products and fueled a surge in demand for imports. As incomes surged, so too did the appetite for New Zealand's dairy offerings, resulting in the triggering of safeguard thresholds at an accelerated pace each year.

The surge in dairy imports resulted in substantial tariff payments. It is estimated that the safeguards led to approximately US$200 million in tariffs paid to the Chinese government, stemming from the sale of skimmed and whole milk powders to China, totaling US$2 billion in the first nine months of 2023 alone.

Recognizing the impact on their dairy industry and aiming to bolster trade relations, former Prime Ministers John Key and Jacinda Ardern prioritized the early removal of these safeguards during negotiations to upgrade the FTA with China. However, despite New Zealand's arguments that the measures were outdated, burdensome for Chinese consumers, and obstructive to trade, Chinese leaders initially approached the matter with caution.

The safeguards, which encompassed liquid milk, butter, and cheese until the conclusion of 2022, and milk powders until the end of 2023, were allowed to lapse as originally agreed upon.

Now, the removal of tariffs, particularly those on milk powders, signifies a significant milestone in the trade dynamics between the two nations, aligning with New Zealand's objective of achieving completely unrestricted trade in dairy products with China.

China-New Zealand FTA


New Zealand made history as the first developed nation to enter into a Free Trade Agreement (FTA) with China. Commencing in 2008 and subsequently updated in 2022, the China-New Zealand FTA underwent revisions "to align it with the latest trade policies and business practices in areas such as e-commerce, government procurement, environmental standards, trade regulations, and competition."

Over the years, this comprehensive accord has played a pivotal role in eliminating tariffs on more than 99 percent of goods exported from New Zealand to China, reciprocated for Chinese goods entering New Zealand.

Beyond tariff reduction, the FTA extends its influence by providing robust mechanisms for dispute resolution, streamlining administrative procedures for bilateral trade, and fostering enhanced market access for both countries. The ongoing evolution of this agreement underscores a commitment to adapting to evolving trade dynamics, ensuring its relevance in an ever-changing global economic landscape.

In addition to the China-New Zealand FTA, the ongoing trade collaboration between the two nations is bolstered by the Regional Comprehensive Economic Partnership (RCEP), an even larger agreement. Signed by 15 Asia-Pacific countries, including China and New Zealand, RCEP stands as the largest FTA in terms of combined GDP, population, and total export value. Its primary objective is to facilitate trade and investment by reducing tariffs and establishing common trade rules.

According to the China FTA Network, the upgraded protocol of the China-New Zealand FTA is aligned with the framework provided by RCEP. This indicates a significant overlap in the scope of the two agreements concerning bilateral trade relations between the two countries.

Effective from January 2022, RCEP is anticipated to boost New Zealand's GDP by approximately US$2.0 billion. Particularly noteworthy is the fact that, under RCEP, New Zealand's services exporters and investors have gained access to markets in China and ASEAN countries that are not part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) for the first time.

Economic impact

The elimination of tariffs marks a significant milestone for New Zealand, as it now enjoys unrestricted free trade with China in dairy products. This development aligns with earlier forecasts, with an estimated additional revenue of US$350 million anticipated as the FTA reaches its full effect.

This policy shift has far-reaching implications across New Zealand's dairy sector. With all dairy products now able to enter the Chinese market duty-free, the industry is poised for increased export volumes and fresh revenue opportunities.

The impact of this strategic move is already tangible following the expiration of safeguard measures on December 31, 2023. Observations of price increases in the Global Dairy Trade auction indicate a surge in demand from China. While tariff removal plays a significant role, proactive measures by the Chinese government to stimulate the economy through increased spending further amplify this demand.
Given the dairy industry's pivotal role in New Zealand's economy, its performance significantly influences the country's overall economic outlook. The elimination of tariffs is expected to positively affect the dairy payout – the income received by farmers for their products. This, in turn, is likely to boost morale among farmers and foster a positive outlook for the industry's future.

China-New Zealand trade relationship

China maintains its position as New Zealand's foremost trading partner, dominating both imports and exports of goods. Data from China's Ministry of Commerce (MOFCOM) reveals that bilateral trade in 2022 neared US$25.2 billion, marking a 1.8 percent increase from the previous year.

Within this robust trade relationship, Chinese exports to New Zealand experienced a significant surge, amounting to US$9.2 billion, representing a notable 7.4 percent year-on-year growth.

Meanwhile, imports from New Zealand to China totaled nearly US$16 billion, showing a slight decline of 1.1 percent compared to the previous year.

New Zealand’s dairy exports to China

In 2022, New Zealand's dairy exports to China amounted to NZ$7.2 billion (US$4.4 billion), reflecting a slight decline of 5 percent compared to the previous year, primarily attributed to pandemic-related lockdowns. However, the subsequent six-month period until June 2023 witnessed a remarkable rebound, with export values surging by nearly 10 percent year-on-year.

This resurgence, indicative of the sector's resilience, was facilitated by targeted recovery efforts, a clear policy vision, and the relaxation of COVID-related restrictions.

In 2023, China proactively increased its stockpile of dairy products in anticipation of consumer demand. This strategy, combined with a dedicated effort by the Chinese government to promote dairy consumption through health and science education initiatives, played a vital role in sustaining and bolstering the demand for dairy products.

The case of infant formula


New Zealand's export earnings from infant formula have demonstrated remarkable resilience and growth prospects. In the fiscal year ending December 2022, the country's revenue from infant formula exports alone reached NZ$1.44 billion. This growth momentum persisted into the first half of 2023, witnessing a remarkable 59 percent surge, driven by increased export volumes and enhanced product value.

Furthermore, disruptions in the global infant formula market, stemming from Abbott Laboratories' plant closures in the US, presented an opportunity for New Zealand manufacturers to highlight their dedication to quality, health, and hygiene, effectively filling a void in the market.

Despite these impressive strides, the infant formula market in China encounters challenges, including a declining birth rate and stricter government regulations. The introduction of more rigorous registration requirements in February 2023 necessitates re-registration for all infant formula manufacturers under stringent conditions.

Nevertheless, New Zealand manufacturers' reputation for quality positions them favorably in the market. They are encouraged to leverage this advantage to further penetrate and expand their presence in the Chinese market for their products.

Conclusion

The removal of tariffs and the subsequent duty-free access for New Zealand's dairy products in the Chinese market signify more than just a policy shift. It represents the culmination of years of negotiation efforts and a cautious, gradual approach. This milestone, especially the elimination of tariffs on milk powders, serves as a tangible symbol of the shared commitment between New Zealand and China to promote unrestricted trade.

In dismantling these safeguard duties, both nations have emphasised their dedication to fostering a trade environment conducive to growth and mutual benefit. This significant development further strengthens their economic collaboration and paves the way for enhanced bilateral relations.