Given the Trans-Pacific Partnership (TPP) and several intra-Asian agreements, the EU is focused on large-sized free trade agreements (FTAs) to avoid trade diversion and to maintain Europe’s ability to set the trade policy agenda. The EU is now negotiating with all TPP countries except Australia, New Zealand and Brunei, a blind spot worth US$1.5 trillion in GDP.
The idea of an FTA with New Zealand already enjoys the support of key EU Member States. New Zealand is consistently ranked number one on economic and personal freedom indices, and despite accounting for only 0.2% of EU external trade, New Zealand’s economy is still on par with previous EU FTA partners like Peru and Vietnam. Measured in final consumption, New Zealand is larger than Chile, Malaysia and Singapore.
Agriculture is a sensitivity for some Member States in any trade negotiation. However, the EU has already liberalised New Zealand’s key export items such as sheep meat and wool. On other meats, New Zealand pays half the regular duties. Products with full duties have either strong seasonal complementarities or specialisation, notably on kiwifruit and dairy, and none of New Zealand exports are amongst European sensitivities, e.g. grains or sugar. The existing duty-free treatments and complementarities make a case for an agreement negotiated with relative ease: If an FTA cannot be done with New Zealand, it cannot be done at all.
This is why Brussels is likely to start with New Zealand before Australia, as it often starts with the smaller (and thereby less threatening), more flexible counterpart first. Yet, EU FTAs with Australia and New Zealand (tied to a common market by the Closer Economic Relations agreement with mutual recognition) would have an economic output equivalent to NAFTA. Australia and New Zealand have also concluded the most ambitious FTA with the ASEAN bloc – the AANZFTA. This agreement is a springboard for the EU, similar to how the P4 agreement led to the creation of the TPP for the United States.
But negotiating regulatory issues has proven to be difficult, even with likeminded countries. However, New Zealand already enjoys a high level of regulatory co-operation with the EU on TBT, SPS and data privacy, providing a starting point for negotiation that never existed with other FTA partners. Thanks to the existing level of cooperation, the EU-New Zealand could provide the new template for EU FTAs, including areas where the EU is defensive in other negotiations (e.g. cross-border data flows). Europe needs a third generation FTA model to ensure that Europe’s key offensive issues (including tariffs, GIs and technical standards) are not constrained by the TPP framework. The EU-New Zealand FTA would match the regulatory disciplines of the TPP, as well as open up the door towards Australia and ASEAN. And this door could very well be Europe’s last chance of overtaking TPP.
The EU-New Zealand Relationship
Previous EU trade strategies omitted both New Zealand and Australia as they failed to meet the criteria of having sufficiently high market access barriers worthy of EU’s attention. In the case of New Zealand, there was no pressure from a competing FTA negotiation with the United States (as was the case with Korea) that Europe needed to match, and unlike some parts of South East Asia that also sit on the frontline of China’s supply-chain influence, New Zealand is securely democratic and western oriented (although the country’s exports to China have tripled since an FTA was signed in 2008).
Over the past decade, EU-New Zealand bilateral trade has been stagnating and New Zealand ranked 55th amongst EU imports and 50th in export destinations with total trade. Trade in goods amounted to €7.2bn or 0.2% of total EU external trade (corresponding to about one-hundredth of Europe’s trade with China or the US), while the European market is only second to Australia in importance as a market for New Zealand, closely followed by China, the US, Japan and Korea. Despite this imbalance, the EU enjoys a considerable surplus of €1bn (14%) on its trade. In addition, trade in services amounted to €3.8bn (representing one third of all trade with New Zealand) with total trade amounting to €12bn, with FDI stocks held by the EU amounting to additional €5.4bn.
One should not stare blindly at export numbers alone. These always need to be contextualised. At first glance, the volumes may not seem major – however, even a billion euro trade surplus is not negligible when the total current account surplus of EU28 with the rest of the world is just €76 bn. Furthermore, New Zealand’s market size in economic output GDP is considerable in the region, and sits comfortably on par with or above other countries that the EU has already opened up FTA negotiations with – such as Peru (ratified 2013) or Vietnam (launched in 2012). Even more, GDP does not give the whole picture – by counting what the country actually consumes, a truer measure of market size, New Zealand is at the top amongst the non-G20 TPP countries. Imports from Europe relative to that high level of consumption are however disproportionately low, even considering the distance. While it is true that geographic and cultural distance has a ‘gravity’ impact on trade, economies like Chile and Malaysia – that are similarly distant from the EU – import twice as much from Europe.
GDP, shares of consumption and EU goods and services imports
New Zealand compared to TPP negotiation counterparts with less than US$1 trillion GDP
Source: European Commission, 2013; World Bank, 2013
While exports are not the main rationale for an FTA with New Zealand, it is true that this consumption driven country provides considerable room to expand EU trade even compared to current EU negotiating priorities. New Zealand (with Australia and Brunei) is the only missing piece amongst the TPP signatories. The EU is at risk of losing this billion-euro surplus. TPP would cover 60% of world trade – which is similar to the coverage that the GATT system enjoyed just before Uruguay Round. And if GATT was multilateral then, TPP is the new multilateral today. Aside from the wholesale abolishment of tariffs, TPP is likely to set new standards on services, e-commerce, intellectual property rights (IPRs) and public procurement. The agreement would consolidate supply chains within its signatories and increase intra-firm specialisation. Undeniably it will erode EU firms’ market share at the expense of investment and jobs in the EU – trade diversion from TPP would sharply reduce the entire output gain of TTIP for the EU, while leading French economists have concluded that TPP poses ‘a deadly threat to European exporters of agricultural products’.
 Eurostat, Euroindicators, 32/2015, accessed at: http://ec.europa.eu/eurostat/documents/2995521/6643067/2-20022015-AP-EN.pdf/25f0eb29-3bd2-4926-8ba5-ba8e05cbead5
 Messerlin, 2012