New Zealand to negotiate free trade agreement with Russia, Belarus and Kazakhstan

New Zealand will begin negotiations for a free trade agreement with Russia, Belarus and Kazakhstan in early 2011, Prime Minister John Key said at APEC this weekend.

The New Zealand Institute of Economic Research (NZIER) said although the immediate benefits from any deal would small - about NZ$27 million a year - the longer term strategic benefits of a deal would be substantial for New Zealand.

"Given the negotiating resources required to make it happen in a fiscally constrained environment, the question might be asked: is an FTA all really worth it for a measly $27 million? The answer is “Absolutely”," NZIER Deputy Chief Executive John Ballingall said in a report titled New Zealand-Russia FTA: Another BRIIC in the wall.

"This is because an FTA with RBK is not really about the immediate gains that we would get from tariff removal. Harder to quantify and longer term benefits include:

Goodwill. An FTA is a chance to cosy up with the world’s 12th largest economy. This is useful in a political economy sense – it is good to have global superpowers well disposed towards ;New Zealand. Taking the opportunity to show a willingness to engage with RBK, when other countries are not, could well have significant pay-offs down the track.

Brand awareness. The trade relationship will grow over time – RBK has a growing number of wealthy consumers looking to enjoy high quality food and beverage products. We want New Zealand products to be ‘top of mind’ when RBK consumers go to their supermarkets, and the publicity and goodwill that an FTA negotiation will deliver will be help this.

Exporting expertise. We have technology and knowledge in the agricultural sector that RBK needs to develop its own primary products. We can sell this intellectual property and know-how at a premium.

Future proofing. An FTA now will ensure that New Zealand’s exporters are never disadvantaged relative to our competitors who will also want to service this growing demand. And should RBK start to sign FTAs with other, bigger economies in Europe and elsewhere, there may be valuable opportunities for New Zealand to be tacked onto these agreements at relatively low cost

Peer pressure. It increases the pressure on countries, such as Japan, to negotiate high quality FTAs, not just with New Zealand but countries with whom New Zealand has signed high quality FTAs.

Dynamic gains. Our modelling results are from a scenario where all tariffs and on-tariff barriers between New Zealand and RBK are reduced to zero immediately. In this respect, it’s over-optimistic. However, this estimate of benefits is from goods liberalisation only. It doesn’t take into account the gains from services liberalisation, investment liberalisation and other dynamic gains from trade.

Here is the initial release from the Prime Minister's Office:

Negotiations on a free trade agreement between New Zealand and Russia, Belarus and Kazakhstan will start early next year, Prime Minister John Key announced at the APEC Summit in Japan today.

“Free trade deals offer real benefits for jobs and economic growth in New Zelaand and I am very pleased to be able to announce the start of negotiations on this FTA,” says Mr Key.

“The Government has an ambitious trade agenda and trade has been identified as one of our six drivers of economic growth.

“Russia is also one of the world’s emerging powerhouses, with Brazil, India and China.  It is the 12th largest economy in the world and the world’s fifth-largest food importer, with food imports reaching US$30 billion in 2008.

“An FTA with Russia would give us an improved position in that market.  New Zealand’s exports to Russia grew 267 per cent from NZ$51 million to NZ$187.1 million between 2000 and 2009. There is further strong growth potential, not only in food and beverage exports but also in agritech, specialised manufacturing and clothing.”

Mr Key says Russia is an important member of APEC, and will host the summit 2012.

“Taking the initiative to have this FTA will position New Zealand well.  It will further integrate us regionally, and will also complement our existing FTAs and those under negotiation such as the Trans Pacific Partnership.

“New Zealand is highly experienced in international trade negotiations, with a history of high quality FTAs, and is therefore an attractive partner for Russia,” says Mr Key.

Today’s announcement followed a meeting between Trade Minister Tim Groser and Russian Economic Development Minister Elvira Nabiullina in Japan last week.

Questions & Answers

Why is New Zealand interested in an FTA with Russia?

Russia’s population is 142 million and Moscow is Europe’s largest city.  Russia offers a wealth of opportunities for New Zealand exporters.  Its food imports exceeded US$30 billion in 2008, making Russia the world’s fifth-largest food import market. There is a sizeable potential market for New Zealand’s high-quality products in Russia.

Russia is the 12th largest economy in the world.  From 1999 until the onset of the global financial crisis, Russia’s growth was similar to India’s and China’s.

An FTA with Russia could present a unique opportunity for New Zealand to future-proof its relationship with an emerging economic powerhouse.  While New Zealand’s current trade with Russia is relatively modest, the relationship is one which has strong potential, given time. 

Why is Russia interested in an FTA with New Zealand?

Russia is increasingly looking to the dynamic Asia-Pacific region as a driver for future economic growth.  New Zealand is an attractive partner for Russia as it is strategically well placed in the Asia-Pacific region due to its track record in securing high quality and comprehensive FTAs.  New Zealand and Russia also have essentially complementary economies.  As a high quality and reliable source of food production, New Zealand offers real value to the developing Russian market. 

What is the status of New Zealand’s trade with Russia? 

New Zealand’s exports to Russia grew 267% from NZ$51.0 million in 2000 to NZ$187.1 million in 2009.  The average annual growth rate over this period was 23.1%.  

Does Russia currently impose high tariffs on products of interest to New Zealand?

In 2008, between 10.9% and 27.3% of Russia’s imports from New Zealand are estimated to have entered duty free.  The remaining trade is estimated to have paid duty of between NZ$28.45 million and NZ$39.66 million.

What are the particular areas of opportunity for New Zealand firms in the Russian market?

New Zealand’s exports to Russia, while increasing over the last decade, have not kept pace with the rapid increase in overall Russian imports, particularly of agricultural products (up around 500% since 2000).  With a huge population and a growing sector of wealthy consumers, there is high demand for luxury goods, in particular for high-quality food and beverage products.  This presents an excellent opportunity for New Zealand firms. 

Russiais also looking to further develop its agricultural sector.  This presents opportunities for New Zealand through exports of our agriculture systems, and through exports of agricultural, forestry and construction equipment.  

There are many other sectors where significant opportunity in Russia is well matched by capability in New Zealand.  These include clothing and specialised manufacturing.  A number of services areas, including ICT, education and tourism also offer potential for New Zealand services.

Why is New Zealand interested in an FTA with Kazakhstan and Belarus?

Russia, Kazakhstan and Belarus are in the process of forming a Customs Union, with a unified tariff and customs territory.  By 2012, the countries aim to create a single economic space.  The three countries therefore take joint decisions on matters such as free trade agreements.  

Kazakhstan and Belarus have a combined population of 25 million and GDP of just under US$200 billion in 2008.  Both enjoyed average growth approaching 10 per cent in recent years.  An FTA would present scope to grow New Zealand’s exports from their current low levels (NZ$1.5 million combined in 2008). 

What has been the process that has led to this stage in the relationship with Russia?

Positive indications of interest were received from Russia following informal contacts between Trade Minister Tim Groser and Russian officials late last year, followed by discussions between Foreign Ministers McCully and Lavrov. 

Further political-level discussions were then held between Russia and its Customs Union partners Kazakhstan and Belarus on the idea of a trade agreement with New Zealand.  Following these positive discussions, the parties decided to start scoping discussions towards a formal commencement of FTA negotiations. 

What happened during these scoping discussions?

The decision by Russia and its Customs Union partners to commence these discussions is a very significant step.  It clearly indicated a political readiness to proceed towards a formal trade agreement with New Zealand, subject to a satisfactory outcome of the scoping phase.

During this phase, the Customs Union countries and New Zealand set out the overall scope and ambition for an FTA and agreed on the steps for initiating formal negotiations.

What are the next steps?

MFAT officials will in the next few days call for public submissions on a potential FTA.  These will be taken into account in formulating New Zealand’s negotiating position.  Formal negotiations are expected to commence in early 2011.

(Updates with NZIER comments)