Does New Zealand have too many free trade agreements?
New Zealand's participation in numerous free trade agreements (FTAs) could lead to a “spaghetti bowl effect”, causing additional costs for exporters due to overlapping agreements and divergent rules of origin.
New Zealand has been a strong advocate for free trade and has signed 14 regional and bilateral FTAs to date, with others under negotiation. The nine bilateral FTAs are with Australia, the United Kingdom (UK), China, Singapore, Malaysia, Thailand, South Korea, Hong Kong, and Taiwan. The five regional trade agreements New Zealand is part of are the:
- Regional Comprehensive Economic Partnership (RCEP)
- Comprehensive and Progressive Partnership for Trans-Pacific Partnership (CPTPP)
- Pacific Agreement on Closer Economic Relations (PACER) Plus
- European Union-New Zealand FTA (EU-NZ FTA)
- Association of Southeast Asian Nations (ASEAN) Australia-New Zealand FTA (AANZFTA).
Most of New Zealand’s bilateral FTAs are with East Asian countries, many of which are also members of the AANZFTA, the RCEP, and the CPTPP. The RCEP members include 10 ASEAN countries and five Asia-Pacific countries (China, Japan, South Korea, Australia, and New Zealand). The CPTPP includes 11 countries: Japan, Australia, Brunei, Canada, Chile, Malaysia, Mexico, Peru, Singapore, Vietnam, and New Zealand. The overall goal of these FTAs is to increase trade through preferential tariff arrangements.
Table 1: New Zealand's FTA partners
| Region/Country | Effective from (Year) | Overlap in rules of origin |
|---|---|---|
| Australia | 1983 | Y |
| Singapore | 2001 | Y |
| Thailand | 2005 | Y |
| China | 2008 | Y |
| Malaysia | 2010 | Y |
| Hong Kong | 2011 | N |
| Taiwan | 2013 | N |
| South Korea | 2015 | Y |
| UK | 2022 | N |
| AANZFTA | 2010 | Y |
| CPTPP | 2018 | Partially |
| RCEP | 2020 | Y |
| PACER Plus | 2018 | Partially |
| EU-NZ (not in force) | 2022 | N |
Source: Ministry of Foreign Affairs and Trade (2023)
The spaghetti bowl effect
All the FTAs, as shown in Table 1, can overlap, and each of the FTAs can have different rules of origin (RoO). This leads to the spaghetti bowl effect where the web of overlapping FTAs becomes more complicated and difficult to navigate, which adds additional levels of complexity. If exporters find these rules too complex and unwieldy to use, they may export their products without seeking preferential tariff treatment.
Each of these New Zealand FTAs has different RoO that reflects each trading partner's specific needs and priorities. For example, New Zealand exporters to Australia must produce five different certificates of origin (CoO) if they want to avail themselves of preferential tariffs, under the five different agreements (Australia-New Zealand FTA, RCEP, CPTPP, AANZFTA, and PACER) that New Zealand currently has with Australia.
Although Australia is New Zealand’s strategic partner on all bilateral and regional fronts, the trade potential is still unrealised (Figure 1). New Zealand’s average export and import growth with Australia has been negative over the last decade, except in 2021. Although there is no clear evidence that the spaghetti bowl effect impedes exports to Australia, the need for New Zealand exporters to produce several CoO for preferential market access under different FTAs is not only a cumbersome process, but also increases trade costs, especially for micro, small, and medium enterprises (MSMEs). It is worthwhile mentioning that 97 percent of New Zealand businesses are MSMEs.
As the number of FTAs increases, the potential for a spaghetti bowl effect also increases. Evaluating the spaghetti bowl effect in New Zealand's FTAs would involve analysing the complexity and overlapping nature of the various agreements, and assessing their potential impact on trade.
One way to test the spaghetti bowl effect would be to analyse the number of FTAs that New Zealand has entered into, and the extent of the overlapping provisions in these agreements. This analysis could include an examination of the RoO for different products under each agreement, as well as any other regulatory measures or provisions that may overlap between agreements.
Another approach would be to survey businesses that export to countries with which we have multiple FTAs. The survey could identify any challenges or barriers businesses face in complying with the different RoO and other provisions of each agreement. This could provide insights into the potential impact of the spaghetti bowl effect on business and trade flows. A comparative analysis of New Zealand's FTAs with those countries could be conducted to determine the extent to which the country's agreements are more, or less, complex and overlapping than those of other countries. This could help identify best practice and areas for improvement in New Zealand’s FTA strategy.