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A rising tide of protectionism could hit NZ dairy sector hard: NZIER

Wednesday 22nd February 2017

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New Zealand's economy would be hard hit if there is a retreat to protectionism in the global dairy sector, a report from the New Zealand Institute of Economic Research has found. 

"In the current global trading system, the tide of protectionism is rising. Brexit and the initial trade policy proclamations by Donald Trump both point to a challenging environment for further trade liberalisation, at least in the short term," said NZIER in the report for the Dairy Companies Association of New Zealand. Against this backdrop there is an increasing risk that tariffs could be lifted rather than reduced, it added. 

NZIER used a series of models to explore what would happen if average global dairy tariffs increased from their current applied rates to their potential bound rates, and determined it would equate to a 28 percentage point increase in average global dairy tariffs. 

Based on that modelling, increased tariffs would push up global dairy prices by around 0.5 percent making them relatively less attractive to global consumers and leading to a fall in global demand. 

"The demand for New Zealand’s dairy exports drops sharply, which pushes export prices down. The result is a 7.4 percent decrease in dairy export volumes and a 10.2 percent drop in export prices, leading to an overall drop in dairy export revenue of $2.3 billion," it said.

Based on that scenario, nominal GDP would fall by $1.66 billion, and nominal household consumption would fall by $958 million.

"These results outline how important previous tariff reductions have been for the New Zealand economy, and hence the potential costs of moving backwards from the status quo," it said.

On the flip side, if all global dairy tariffs were eliminated, and New Zealand’s milk production is held constant, the value of New Zealand’s dairy exports would increase by $1.3 billion, generating a $1.03 billion increase in New Zealand’s nominal GDP, it said. 

“Trade barriers are a significant cost to New Zealand. Tariffs alone are suppressing the value of our dairy products by around $1.3 billion annually,” said DCANZ chairman Malcolm Bailey. “On top of this, non-tariff measures add over $3 billion in costs to New Zealand dairy exports in the APEC region alone.” 

The report also found the dairy sector contributes $7.8 billion, or 3.5 percent, to New Zealand’s total GDP. Despite the recent drop in global dairy prices it remains New Zealand's largest good export sector accounting for more than one in four goods export dollars coming into New Zealand and dairy export growth has averaged 7.2 percent per year over the past 26 years.

"The dairy sector exports twice as much as the meat sector, almost four times as much as the wood and wood products sector and nine times as much as the wine sector. It generates almost four times as much export revenue as export education," said NZIER. 

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