The lack of sustained development on world trade liberalisation has influenced the increasing attention that regional free trade agreements (FTAs) continue to receive. New Zealand is a small economy and as a result, one of its major objectives is to become a more vigorous player in the international economy through higher levels of exports. The focus on exporting is especially important in New Zealand, where the small size of the local market renders exporting a crucial developmental scheme.
Beginning in 2000, this is focus on exporting is symbolized in the winding up of FTAs with individual countries such as China, Singapore and Thailand, as well as part of a wider network of countries (such as the ‘P4’ which consists of New Zealand, Singapore, Brunei and Chile). In addition, several negotiations are currently underway to implement additional trade pacts (Battisti, 2008).
Like in other small-size economy countries, small and medium enterprises in New Zealand are the backbone of the country’s economy and makes up a considerable percentage of the business population. As such, the SMEs sector plays a crucial role in bringing about social cohesion and economic growth and development. As a matter of fact, 99 percent of all companies (there are roughly 400,000 economically viable businesses in New Zealand) have less than 100 employees whereas 84 percent of the businesses have less than 5 employees (Ministry of Economic Development, 2007). These statistics apparently show the reliance of the New Zealand economy on the SME sector. It is therefore important for New Zealand to participate in regional trade agreements.
Discussion and Analysis
New Zealand Should Participate in Regional Trade Agreements
New Zealand would benefit greatly from participating in regional trade agreements due to its small economy. Even though the SME firms play a significant role in the domestic economy of New Zealand, very few of them are engaged in export: Only 16 percent of New Zealand enterprises earn income through the export of their commodities and services, with the majority (12 percent) of these businesses being small or micro in size.
A large portion of the export sales are low in terms of scale. Approximately half of all exporters in the country earn not more than 5 million New Zealand dollars per year from their exports. Of the firms which sell their goods outside the country, (vis-à-vis those that sell their services outside the country), 88 percent of them generate not more than 1 million New Zealand dollars per year from the exports and in total they make up not more than 3 percent of the value of all goods exported. “Only 592 New Zealand firms export more than NZ$ 5 million worth of products a year, with these firms responsible for 90 percent of exports,” (Ministry of Economic Development, 2007, p. 36).
Primary products lead the export sector of New Zealand firms which are inclined to generate less revenue than services or processed products. In addition, primary products are more vulnerable to price changes. The low rate of exporting manufactured goods is because New Zealand is not richly endowed with technology compared to the standard OECD country (OECD, 2004). In addition, even though the trade intensity of New Zealand has grown during the last fifteen years with regards to diversification and value, its exports continue to constitute only 29 percent of New Zealand’s total domestic revenues (Statistics New Zealand, 2005). According to the international benchmark, New Zealand’s performance in export is still wanting.
Nevertheless, as a small economy New Zealand depends strongly on international trade as export performance is viewed as directly affecting the economic growth. The local market is simply too small to steer adequate economic growth. To worsen the situation, the geographical distance between New Zealand and the major world markets increases the challenges of penetrating and competing in the international markets. These challenges can be solved by New Zealand entering into regional trade agreements. Such trade pacts enhance the economic growth of a country because they reduce both the trade and non-trade barriers (Battisti, 2008).
Regional Trade Agreements (FTAs) would enhance the access of New Zealand exporters and investors to overseas markets. They would also minimize the barriers that hinder trade and would guarantee the maintenance of current access. A study conducted by Battisti (2008) shows that majority of the SMEs interviewed in the study concerning their perceived significance of FTAs argues that the major barriers to trade they currently face are not tariffs or market access.
This finding of the study supports a strategic viewpoint on the competitive strategies most often practiced by SMEs. This viewpoint asserts that majority of SMEs implement niche approaches: instead of competing face-to-face with big and well-established firms, they would rather seek out expert opportunities and existing gaps in the market (Katz, 1970; Porter, 1985; O’Gorman, 2000). The assertion suggests that SMEs try to distinguish their business from each other and from large firms.
This puts a big focus on independently customized services and goods as well as a marketing strategy that emphasizes on exceptionality and segregation from average business offerings. These strategic approaches are apparent in New Zealand’s SMEs and give explanations as to why tariffs and market access are not considered as the major challenges for New Zealand SMEs.
For majority of New Zealand’s SMEs, exporting very early in their business is important in the achievement of growth. The success of export businesses is highest in fields of “technological innovation, high quality products and the development of niche markets through differentiation,” (Battisti, 2008, p. 281). SMEs in New Zealand have an inconsistent reliance on exports. Even among the firms with a high reliance on exports, the common scenario is that small enterprises are content with small markets. This implies that it is less common for small enterprises to be hindered by market access than the large exporters.
As a result, instead of strengthening ties with current markets, majority of the small firms are extremely flexible in their exporting activity. This means that firms may have the ability to shift products wherever the most favourable opportunities lie instead of being dependent on market access. Moderately small quantities can also translate into the opportunity to serve particular market niches that provide access to markets that might be inaccessible to large exporters.
With restricted production capacity, small firms are obstructed from penetrating markets in which the ability to satisfy client demand is unlikely. Likewise, the firms tend to customize exporting to markets which have low investment requirements. These factors offer an explanation as to why majority of New Zealand’s exporters depend on the East Asia’s countries for the market of their products.
It is important to note that the reduction of trade barriers through regional trade agreements can increase competition for production in a country. For instance, the trade agreements would make it easier for multinational corporations to set up business in New Zealand thereby limiting the market for the domestic firms. Although this is a disadvantage of free trade agreements, it should not be a stumbling block for the country to enter into such trade pacts. Instead, the government should implement protectionism measures to protect the vulnerable domestic firms from stiff competition. Such measures may entail the relaxation of operating rules and bureaucracies for the domestic firms or the provision of subsidies for the local firms to sustain their production capacities (Feridhanusetyawan, 2005).
Besides providing economic benefits to New Zealand through the reduction of trade and market barriers, regional trade agreements would provide the country with political and social support. For instance, in times of transnational dispute with a different country, New Zealand would likely receive support from its regional trade partners. Such support has been evident for instance during the First and Second World War in which allies were formed based on their economic associations.
The social benefits can arise through the free movement of persons across the countries. As a result, issues of unemployment in one country can easily be solved by easy movement of persons from the other country (Feridhanusetyawan, 2005). On a similar note, regional trade agreements would facilitate technological transfers between the member countries. Capital and technological innovations can be moved from a technologically-intensive country to a technologically-scarce country without incurring high costs. Indeed, regional trade agreements would be extremely beneficial to New Zealand.
New Zealand’s Trade Agreement with Malaysia
As a New Zealand-based company that wants to expand into Asia, I would be happy if New Zealand signed a trade pact with Malaysia for several reasons. First and foremost, Malaysia is a member of the ASEAN Free Trade Area which implies that it has a bigger market for goods and services. A trade agreement between New Zealand and Malaysia would thus provide a large and ready market for my goods and services.
The goods produced by my firm would not only be purchased in Malaysia but also in countries that have free trade agreements with Malaysia. Second, the trade pact would reduce both tariff and non-tariff barriers which exist without the trade pact. What this implies is that goods from New Zealand can easily be exported to Malaysia without having to incur tax and other charges. This would reduce the price of the commodities sold in Malaysia and as a result, the demand for the goods would increase (Suarez-Ortega, 2003).
Third, Malaysia as compared to New Zealand is a more industrialized country. On the other hand, New Zealand is primarily an agricultural producing country. The difference in the dominant sectors between these two countries provides for a beneficial source of trade. The signing of the trade pact between the two countries would make it easy for New Zealand firms to concentrate on the production of agricultural goods.
On the other hand, Malaysia would concentrate on the production of industrial goods. As a result, the two countries can easily trade the different types of goods. As a firm in New Zealand producing agricultural products, Malaysia would be a ready market for my products. On the same vein, my firm and other similar ones in New Zealand would provide a ready market for industrial goods produced in Malaysia. As a result, my firm would be in a position to obtain industrial goods such as machinery at a cheaper price due to the free trade pact. This is consistent with the law of comparative advantage of trade (Suarez-Ortega, 2003).
Regional Trade Agreements and Multilateral Trade Initiatives
Regional trade agreements refer to trade pacts entered into by countries belonging to the same geographical region, for instance, trade agreements between Asia and Pacific countries are an example of regional trade agreements. Multilateral trade initiatives on the other hand refer to trade agreements signed by countries belonging to different geographical regions and countries. Such trade initiatives are open to countries from across the globe as long as they are willing and able to abide by the rules set forth. Despite the difference between regional trade and multilateral trade agreements, they share some similarities.
First, membership in both types of trade agreements is voluntary. Countries willing to participate in the agreements often undergo thorough discussions and negotiations with the potential and actual members. Such negotiations help to clarify any impending issues and lay the rules of the agreement on the table. Only after accepting to abide by the rules do countries become members of the agreements.
This leads to the second factor that makes the two types of agreements similar. Both trade agreements are governed by rules and an overseeing committee. The committee ensures that member countries comply with the rules. It also helps to solve conflicts that may arise between member countries, for instance, when one country breaches its contract with another country (Tumbarello, 2007).
Conclusion and Recommendation
Regional trade agreements are an important economic tool for countries like New Zealand which has a small economy and which relies heavily on primary products. The regional trade agreements would enhance the market for the products the country produces beyond the domestic boundaries. In addition, through regional trade agreements, New Zealand would be able to obtain the products it does not produce on large-scale at relative low prices due to the reduction in trade barriers. These opportunities provided by the trade pacts are the reasons why New Zealand should participate in the regional trade agreements.
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