Trading arrangements and their influence on New Zealand's welfare with particular reference to NAFTA

Abstract

This thesis looks at the estimation of trade creation and trade diversion resulting from a trade agreement, as a means of determining the net gains from bilateral trading agreements.

In particular this study looks at the actual and potential influence of the New Zealand Australia Free Trade Agreement (NAFTA) on New Zealand imports in terms of trade creation and trade diversion effects. A separate study was made and a set of estimates derived for ten different import commodity groups.

A partial equilibrium approach was used which involved deriving a New Zealand excess demand function for each of ten broad import commodity groups. From this trade creation and trade diversion resulting from tariff induced price changes was calculated. Estimates of trade creation and trade diversion were found for: tariff changes over the 1950-1972 period and the 1966-1972 period, for a 25 percent cut in the 1950-1972 average tariff, and a complete movement to free trade with Australia.

A movement to free trade was found to be necessary before values for trade creation became significant. However trade diversion was found to remain negligible even on a move to free trade. Welfare gains in general outweighed the welfare losses. This was particularly apparent for those commodity groups of most importance in New Zealand's import trade with Australia.

It would seem New Zealand has nothing to lose from granting an across the board tariff concession to Australia and may expect the benefits of reciprocal action by Australia towards New Zealand's exports.