Lost in the shadows of TPP - Korea/NZ free trade agreement now effective

Thursday 25 February 2016

Author: Rebecca Rose

Korea is one of New Zealand’s most promising trade partners. The long awaited Free Trade Agreement (FTA) between New Zealand and the Republic of Korea (Korea) took effect on 20 December 2015. But its importance for New Zealand seems to have been lost in the shadows of Christmas and the Trans-Pacific Partnership (TPP).

We look at the FTA’s highlights, and what it means for New Zealand below.

Key points

  • Korea is the world’s 13th largest economy. It is a high-income, high-technology country. The new FTA gives New Zealand access to over 50 million consumers.

  • The FTA remedies the high tariffs that have hampered many New Zealand exporters, with tariff reductions occurring over the next 15 years.

  • Two tariff cuts have now occurred under the FTA – the first on 20 December 2015 and the second on 1 January 2016. Total duty savings for New Zealand exporters from those two cuts is estimated at over NZ$100 million.

  • The next tariff cut occurs on 1 January 2017. Between now and 2030, tariffs will be removed progressively from approximately 98% of New Zealand’s current exports to Korea. The NZIER estimates that this will add around NZ$4.5 billion to New Zealand’s GDP.

  • The deal makes New Zealand more competitive with countries such as Australia, Canada, Chile, Singapore and the United States, which already have FTAs with Korea. As such, it should see trade volumes between New Zealand and Korea increase markedly in coming years.

  • The dairy, meat and kiwifruit industries benefit most under the deal. But wine, buttercup squash, cherries, avocados, apple juice, processed/dried deer velvet, salmon, live eels and most forestry products will also have tariffs removed. Further benefits exist for other industries, including the natural products, education, film and television, and ICT industries.

  • Korea is not party to the TPP but has showed interest in joining.

Korean market’s importance

During the last 20 years, Korea has gone from a developing nation to one where consumers have high (and growing) spending power.

In 2014, Korea was New Zealand’s sixth largest export market and eighth largest market for imports. Total two-way trade between New Zealand and Korea exceeded NZ$4 billion, with a fairly even split between exports and imports. Tariffs on New Zealand exports totalled about NZ$230 million.

As an emerging market, scope exists to further expand and enhance relations between the New Zealand and Korea.

Who benefits most and who misses out?

The main industry winners under the deal are:

  • dairy (duty savings of around NZ$89 million annually on cheese, butter, milk powder and infant formula in particular),

  • kiwifruit (45% tariff to be phased out completely by Year 6 of the FTA), and

  • red meat (current tariffs on beef (40%), sheep meat (22.5%), offal (18%) and meat preparations (30 – 72%) all to be removed by 2030).

To a lesser extent, the FTA also helps the competitiveness of New Zealand exporters of wine, buttercup squash (in season), cherries, avocados, apple juice, processed/dried deer velvet, salmon, live eels, race horses, aluminium and most forestry products.

The FTA’s investment rules are designed to boost investment flows between New Zealand and Korea.

New Zealand producers who use imported Korean components or capital equipment in the production of their goods will benefit from the FTA’s phase out of tariffs on 92% of New Zealand imports by value. For such producers, the lower cost of imported Korean products will improve New Zealand firms’ costs and competitiveness. Additional direct benefits exist for New Zealand consumers through cheaper products.

Businesses likely to be disappointed by the deal include exporters of:

  • frozen deer velvet (accounting for 75% of the NZ$20 million of velvet exports) – completely excluded from the FTA,

  • dried (processed) deer velvet – included in FTA, but phase out period for 20% tariff is 15 years,

  • frozen squid (accounting for 28% of New Zealand’s NZ$50 million seafood exports to Korea) – 22% tariff continues to apply,

  • milk powder and mussels – permanent tariff rate quotas (TRQs) capped at around 1,950 and 3,999 tonnes in 15 years respectively,

  • honey, live abalone, apples, pears, persimmons, capsicums and onions – said to be excluded due to Korean domestic sensitivities and/or plant health concerns.

Bell Gully comments

The FTA is a high-quality agreement with a lucrative export nation. It covers both goods and services traded between the two countries, and reinforces New Zealand’s attractiveness as an investment location.

Undoubtedly, the FTA makes the trading of goods easier through its agreed rules on customs, rules of origin, sanitary and phytosanitary measures, standards and technical regulations. Its inclusion of more streamlined and transparent procedures for visas and travel is also a good thing for New Zealand service providers. Likewise, the scope for businesses in both countries to cooperate more and create new opportunities in areas of mutual interest such as agriculture, education, trade facilitation, science and technology, and film and television is welcomed.

The FTA builds on New Zealand and Korea’s strong economic and political ties. It falls short of the results achieved under the NZ-China FTA. But it should see considerable growth in New Zealand exports to and investment links with Korea in the next 10 years.

The challenge now for New Zealand businesses is to make the most of the deal’s benefits and to engage with Government about any further mechanisms needed to maximise the opportunities it presents.

If you would like to discuss any aspect of the Korea/NZ FTA in relation to your business, please contact the lawyers featured or your usual Bell Gully adviser.


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

For more information
  • Ian Gault

    Partner & Deputy Chairman Auckland
  • Willy Sussman

    Partner Auckland
  • Rebecca Rose

    Senior Associate Auckland
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