New Zealand WT/TPR/S/115
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I. ECONOMIC ENVIRONMENT
(1) INTRODUCTION
1. New Zealand's growth performance in recent years, including the period under review
(1996-03), compares favourably with that observed until the mid 1980s, when the country embarked
on a comprehensive programme of macroeconomic and structural reforms.  Prior to these reforms, the
Government had responded to major external shocks in the 1970s1, by adopting essentially
inward-oriented policies that sought to maintain a high level of economic activity and employment;
these policies continued to insulate New Zealand from the global economy.  By the start of the 1980s,
there was low growth and high inflation together with large fiscal and current account deficits.2
Furthermore, increasingly restrictive regulatory policies in the early 1980s hindered privatesector-adjustment.
2. Macroeconomic reforms in the mid 1980s and early 1990s included granting the Reserve
Bank independence to set monetary policy in pursuit of an explicit inflation target agreed periodically
with the Government.  Measures were also taken to tighten fiscal discipline by making policy more
transparent and ensuring that the Government took more account of the future implications of current
policies.  Structural reforms included:  unilateral dismantling of trade barriers; extensive liberalizationof product, service and financial markets;  widespread privatization of state-owned enterprises;  new
forms of governance in the public sector;  and labour market reforms.
3. Economic growth slowed initially from an average of 2% annually during 1970-83, to 1.7%
annually between 1983 and 1991, but then accelerated to around 2.7% during 1991-02.
3  Much of this
growth was due to a rapid expansion of labour inputs, as labour markets were reformed; labour
productivity improvements have been moderate.  Total factor productivity growth since 1996/97 has
averaged some 0.6% annually.  Real GDP is expe cted to grow by 4% in 2002/03.  Despite this
acceleration in growth, New Zealand's real GDP per capita has continued to slip towards the lower
end of the OECD ranking4;  the hope of making up the ground lost during the past few decades has yet
to be realized, prompting the Government to adopt a more proactive approach to economic policy
after having been largely passive during the period 1984-99. This change in stance has resulted in  a
re-examination of some policies, notably unilateral tariff reform and privatization.  The Government'seconomic objective is to "return New Zealand's per capita income to the top half of the OECD
rankings and maintain that standing."
5
4. One of the major reasons given for growth not being more rapid is the structure of the
economy and its major exports.  Despite considerable diversification since the 1960s, a majority of
merchandise exports are concentrated in agricultural products, for which demand has grown relativelyslowly;  world agricultural markets are also high ly protected and thus distorted, thereby possibly
curtailing New Zealand's exports.
6  It has also been suggested that the agriculture sector's considerable
                                                     
1 These shocks were, notably the oil price increases  and the loss of free access to the U.K. market for
dairy products, owing to the latter joining the European Community.
2 Treasury (2002a), p. 7.
3 These figures are taken from Buckle, Haugh and Thomson (2001).
4 Irrespective of the data source used, New Zealand's ranking among OECD countries has dropped
significantly over time.  On the basis of purchasing power parity (PPP) data for 26 OECD countries, forexample, New Zealand dropped from 6
th in 1974 to 18th in 1979, and more gradually to 20th in 2000.  A Madison
data set (involving 24 countries) shows a decline from 3rd in 1966 to 18th in 1998.  See Mawson (2002), p. 3.
5 Office of the Prime Minister (2002).
6 New Zealand Institute of Economic Research (2001).WT/TPR/S/115 Trade Policy Review
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productivity gains might have been greater if domestic market distortions, such as the single desk
producer board policy, had been eliminated earlier.7  Unlike in other sectors of the economy,
New Zealand only began eliminating the export monopoly of state trading enterprises (STEs) in
certain agricultural products in the late 1990s.  Furthermore, it has been argued that New Zealand's
comparative advantage in resource-based activities has impeded its ability to diversify into more
innovative manufacturing and service activities.8  Other major reasons may include:  New Zealand's
small size and geographic isolation from major markets, limiting the ability of its firms to exploit
economies of scale and to export9;  insufficient private involvement in innovative activity including
investment in R&D;  and the high cost of capital, possibly due to inadequate national saving.10  Some
also believe that New Zealand's monetary policy has been too rigid.11  This is contested by the
Reserve Bank, which cites independent assessment of monetary policy as having found that"monetary policy in New Zealand is currently entirely consistent with the best international practice
of flexible inflation targeting, with a medium term inflation target that avoids unnecessary variability
in output, interest rates and exchange rate".
12
5. Since 1999, the Government's response to these issues has been to introduce a more
"proactive"  growth and innovation framework  to  encourage the New Zealand economy to move into
higher value-added activities by focusing on i nnovation as a key driver of sustainable growth.
Recognizing that exporters suffer from problems of small scale and distance from their main markets,
measures have also been taken to support them through export promotion and credit programmes
(Chapter III (3)(vi) and (vii)).  At the same time, the decision was taken to suspend several previous
liberalization programmes, including unilateral tariff reform (up to 2005, pending a review) and all
further privatization of state assets;  indeed the Government recently re-nationalized the Accident
Compensation Corporation, repurchased a majority (80%) shareholding in the privatized AirNew Zealand, and established Kiwibank, operated by the state-owned New Zealand Post.  It is not
clear how this pause in liberalization can contribut e to further gains in productivity and growth.
                                                     
7 See for example, IMF (2002), which argues that the cooperative structure and monopsonistic nature
of a significant part of New Zealand's most efficient sector (agriculture), may have prevented New Zealand fromfully benefiting from its comparative advantage.  Similarly, a New Zealand Treasury Working Paper concludedthat the benefits of deregulation of the producer boards outweighed the risks.  These benefits were, inter alia ,
efficiency gains through competition by producer board s for the supply of products;  greater opportunities for
and incentives to innovate;  and more flexibility and responsiveness to market signals.  In addition, the study
found that deregulation of producer boards in other countries, such as Australia, Israel, and South Africa, wasfollowed by higher export growth rates of the products concerned (Sinclair, 1999).
8 Ballingall (2002) shows that of the 50 sectors in which New Zealand has a revealed comparative
advantage, only five are not based on agricultural, horticultural or forestry industries.  Skilling (2001) arguesthat New Zealand's "sector and skill bias" of technological change, and its comparative advantage in agriculture
as well as its size and location have prevented companies from benefiting from technological changes, which is
found in manufacturing and increasingly in services.
9 Recent analysis, for example, points out that in 2001 only 0.064% of all firms and 0.73% of
manufacturers exported more than $NZ25 million worth of goods (around 78% of total exports)(Simmons, 2002).  Furthermore, exports tend to be concentrated in primary products where economies of scale
have been built up, including through the state trading enterprises.
10 OECD (2002a), pp. 15-16.
11 Recently, the New Zealand Finance Minister reportedly criticized the central bank's conduct of
monetary policy ("Minister attacks 'tough' New Zealand bank", Financial Times , 26 June 2002).
12 Independent Review of Monetary Policy commissioned by Government of New Zealand, conducted
by Lars Stevenson.  The Reserve Bank also points to the recent IMF Article IV review of New Zealand, which
praised the skilful conduct of monetary policy in New Zealand and considered that the inflation targeting
framework had served the country well.New Zealand WT/TPR/S/115
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(2) RECENT ECONOMIC DEVELOPMENTS
6. During the period under review (1996-03), Ne w Zealand, one of the world's more open
economies, has experienced two external shocks:  the Asian crisis in the early part of the period, and
the global slowdown in 2001, as well as adverse climatic conditions.  However, the economy emerged
from the Asian crisis and a severe drought largely unscathed and has proved to be remarkably resilient
over the past year or so in the face of the gl obal recession.  Since 1996, real GDP (production-based)
has grown at an average annual rate of 2.8%; in 2001/02 the growth rate was 3.2% and a rate of 4% is
forecast for 2002/03 (Table I.1).13  Moreover, at 5.6% in 2001/02, unemployment was at its lowest
level in more than a decade.  Inflation remains low, at 2.8%, and in line with the Reserve Bank's
target, although domestic real interest rates seem to be relatively high. The authorities note that while
real interest rates may be higher than in other countries, they are currently lower than their averageover the last decade.
Table I.1
Key economic indicators, 1996-03
1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03a
Average annual growth rate (%)
Real GDP (1995/96 prices)
Expenditure-based 3.2 2.9 0.1 5.3 2.2 3.4 3.6
Production-based 3.4 1.4 0.4 4.9 2.5 3.2 4.0
Private consumption (1995/96 prices) 4.5 2.2 2.5 3.8 1.7 2.8 3.7
Government consumption (1995/96 prices) 1.5 8.8 -2.2 7.3 -2.1 3.8 3.9
Gross domestic investment (1995/96 prices) 5.7 -0.9 -3.9 8.2 0.0 4.8 6.1
Private 3.9 -3.4 -8.4 8.2 2.1 5.3 ..
Productivity (annual percentage change)
Labour productivity 0.6 2.0 1.3 2.7 0.5 0.7 ..
Capital productivity -0.2 -1.4 -2.7 1.6 -0.6 -0.5 ..
Total factor productivity 0.3 0.8 -0.1 2.3 0.1 0.3 ..
Money supply
M2 (annual percentage change), as at end-March 8.8 -5.2 19.6 -2.5 9.8 12.2 ..
GDP per capita ($NZ '000) 25.9 26.5 26.7 27.8 29.4 31.3  31.8
Unemployment (%)  6.8  7.5  7.5  6.7  5.7  5.6 5.7
CPI (June 1999=1000) (annual percentage change) 1.1 1.7 -0.4 2.0 3.2 2.8 ..
Labour cost index (June 2001=1000) (annual percentage change) 2.2 1.9 1.7 1.4 1.8 2.0 ..
Real effective exchange rate (1995=100)b107.4 110.3 94.4 91.0 83.3 81.7 ..
Market rate (1995=100)b104.8 101.0 81.8 80.7 69.7 64.1 ..
US$/$NZc0.693
90.633
30.526
80.519
70.441
00.418
7..
Interest rate (%)
Six months deposit rated7.95 7.71 4.84 5.50 6.13 5.06 ..
New Zealand dollar funding (M3 institutions)e6.23 7.43 4.23 5.34 5.07 4.42 ..
Table I.1 (cont'd)
                                                     
13 The Treasury's latest monthly economic indicators for September 2002 suggest that the New Zealand
economy grew by 4.7% on an annualized basis over the first half of 2002, compared with 3.3% during the
second half of 2001 (Treasury, 2002c).WT/TPR/S/115 Trade Policy Review
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1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03a
Per cent of GDPf
Gross national savings 17.6 16.9 16.2 14.9 16.5 19.2 ..
Gross domestic investment 21.5 20.5 19.3 19.6 18.9 18.9 ..
Operating government balanceg1.9 2.5 1.7 1.4 1.2 2.2 ..
Basic balance 1.9 1.4 0.5 0.3 1.1 1.7
Revenue 35.5 35.7 35.7 34.1 34.6 34.2 ..
Expenditure 33.6 34.3 35.2 33.8 33.5 32.5 ..
Net surplus attributable to state-owned enterprises, etc. 0.1 1.2 1.2 1.0 0.1 0.4 ..
Net public debtg25.9 24.1 21.3 20.0 17.5 16.8 ..
Balance of trade and payments
Merchandise exports 21.5 21.9 22.5 23.1 27.4 27.2 ..
Merchandise imports 20.5 20.5 21.1 23.8 25.4 24.6 ..
Merchandise trade balance 1.0 1.4 1.4 -0.6 1.9 2.6 ..
Services balance -0.4 -1.1 -1.1 -0.3 -0.1 0.6 ..
Income, net -7.5 -6.4 -4.9 -6.1 -6.9 -5.5 ..
Current transfers, net 0.9 0.5 0.4 0.4 0.4 0.2 ..
Current account balance -6.1 -5.5 -4.1 -6.6 -4.6 -2.1 ..
Capital account balance 1.5 0.1 -0.4 -0.4 -0.2 1.1 ..
Financial account balanceh4.1 6.3 2.8 3.9 4.8 4.2 ..
Exports of goods and non-factor services 28.3 28.3 29.8 31.1 36.2 35.9 33.1
Imports of goods and non-factor services 27.8 28.0 29.5 32.0 34.4 32.8 31.5
.. Not available.
a Estimates.
b Based on calendar year;  eg. 1996/97 should read 1996.c Calculations are based on monthly averages:  April-March.
d Calculations are based on monthly averages:  July-June
e Weighted average, as at June (e.g. 6.23 represents interest rate as at June 1997).f Calculations are based on expenditure-based GDP.
g Year ended 30 June.
h Due to methodology and data collection changes, the financial account statistics for 2001 onwards are not directly comparable
with the statistics for earlier periods.
Source: Data provided by the authorities of New Zealand;  Statistics New Zealand [Online];  Reserve Bank New Zealand
[Online];  Treasury [Online];  and IMF, International Financial Statistics .
7. While agriculture accounts for under 6% of New Zealand's GDP, it accounts for over 60% of
its exports of goods (Chapter IV(2)).  Export earnings thus depend to a great extent on international
commodity prices and market access.  In 2001, New Zealand benefited from higher world prices for
its agricultural exports, notably dairy and meat products, and a relatively weak real exchange rate,
which boosted export incomes.  Dairy prices appear to have fallen since then, due in part to the
reversal of previous subsidy reductions by the European Union and the United States, although
improved market access to the Canadian, Korean, and U.S. markets may continue to boost exports.14
8. As a result of these favourable terms of trade and exchange rate conditions, New Zealand's
current account deficit  narrowed from 6.6% of GDP in 1999/00 to 2.1% in 2001/02;  the deficit is
                                                     
14 Improved market access has been provided by Canada, which increased import quotas for
New Zealand beef;  in addition, following a recent ruling under the WTO's DSU, the United States (WTOdocument DS177/12, 2 October 2001) agreed to remove safeguard restrictions on New Zealand's beef and lamb
exports;  New Zealand was also a third party in the case brought by Australia and the United States against
Korean measures on imports of fresh, chilled, and frozen beef (WTO document DS161/12, 24 April 2001).New Zealand WT/TPR/S/115
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expected to widen to over 4% of GDP in 2002/03.15  New Zealand runs a persistent deficit on its
current account mainly due to a deficit on investment income.  Persistently high current account
deficits leave New Zealand vulnerable to external shocks and possible loss of investor confidence,
which in turn, could lead to sharp falls in the exchange rate and rises in interest rates.16  While the
current account deficit of 2.1% of GDP recorded in the year to March 2002 was at a 13-year low,
New Zealand's obligations to the rest of the world have continued to increase;  its net external debtremains among the highest in OECD countries, at 76% of GDP.  The current account deficit reflects
the persistently low level of private savings, re quiring net foreign investment to bridge the gap.
9. New Zealand's success in withstanding recent external shocks is undoubtedly the outcome of
prudent macroeconomic policies and the far-reaching structural reforms mentioned above, which have
greatly increased the flexibility of the economy in responding to such shocks.
(3) M
ACROECONOMIC POLICY DEVELOPMENTS
(i) Monetary and exchange rate policy
10. The Reserve Bank of New Zealand (RBNZ), the central bank, has three main functions:
operating monetary policy to maintain price stability;  meeting the currency needs of the public;  and
promoting the maintenance of a sound and efficient financial system.17  The Bank's authority and
accountability are based on three key documents, the Reserve Bank of New Zealand Act 1989, the
Policy Targets Agreement (PTA), and the Bank's Funding Agreement.
11. Under the Reserve Bank of New Zealand Act 1989, the RBNZ is required to manage
monetary policy independently in order to maintain overall price stability.  Since 1988, it has followed
a policy of inflation targeting.  The inflation target is achieved through managing the overnight
interest rate, which in turn influences short-term interest rates and thus spending, saving, and
borrowing by the public and businesses.  Decisions on short-term interest rates, along with many otherfactors, may also influence the exchange rate, and therefore prices of imports and exports as measured
in New Zealand dollars.  The operational details of the inflation target are set out in a separate Policy
Targets Agreement (PTA) between the Governor and the Minister of Finance, thereby imparting a
high degree of transparency to monetary policy.  The PTA is reviewed periodically.  The main
changes in the PTA during the period under review involve the relaxation of the inflation target.  InDecember 1996, the target was widened to keep future CPI inflation between 0 and 3% (from between
0 and 2%), and changed again to between 1% and 3% on average over the medium term in
September 2002.
18  This brought the overall target more in line with New Zealand's inflation
outcomes in recent years and that of other inflation-targeting countries such as Australia, Canada, and
the United Kingdom.19
12. A further significant change in the December 1999 PTA was a provision whereby, in pursuing
its price-stability objective, the RBNZ "shall seek to avoid unnecessary instability in output, interest
                                                     
15 According to the Monthly Economic Indicators pu blished by the New Zealand Treasury, annualizing
the seasonally adjusted current account deficit for the September 2002 quarter would yield an annual current
account deficit of about 4.3% of GDP.  The deficit for the September 2002 quarter appears to have widenedmainly due to a drop in the goods balance caused by a decline in export prices and an increase in importvolumes (Treasury, 2003).
16 Treasury (2002a), p. 10.
17 Reserve Bank of New Zealand (2002a), p.4.
18 Inflation is measured by the Consumer Price Index, as calculated by Statistics New Zealand.
19 Reserve Bank of New Zealand (2002b).WT/TPR/S/115 Trade Policy Review
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rates and the exchange rate".  This was reinforced in the September 2002 PTA.  Such provisions have
made explicit the Bank's long-standing willingness to trade-off some degree of short-term inflation
variability against less volatility in economic activity.  This flexible approach in deciding how the
Bank responds to shocks in the economy and variations in inflation around the target was further
reinforced in the September 2002 PTA, with the explicit requirement that the Bank take a
forward-looking, medium-term approach to achieving price stability.20
13. The policy of inflation targeting has resulted in inflation falling from an average of nearly
12% in the 1980s to 2.1% in the period 1991-00.  Since 1996, inflation has, by and large, been kept
well within the earlier 0-3% target range;  it was 2.8% during the past year.  Real interest rates are
currently a little below 4%, the level the Reserve Bank considers to be broadly "neutral".
Nonetheless, real interest rates in New Zealand appear to be higher than in its main trading partners,which is reflected in the relatively high cost of capital.
21
14. The Reserve Bank also issues New Zealand's currency, the New Zealand dollar, which is
independently floating.  Its exchange rate is determined on the basis of supply and demand in the
foreign exchange market.  The Reserve Bank manages foreign exchange reserves to enable
intervention in the foreign exchange market, should a serious crisis ever make this necessary.22
New Zealand's real effective exchange rate increased between 1996 and 1997 but has since been
declining (Table 1.1).  While the real exchange rate  has firmed somewhat during the past year or so, it
remains below its past long-term trade-weighted average (85.2 in the January quarter compared with a
15-year average of 93.7, according to the IMF), which is perhaps not surprising in view of
New Zealand's persistent current account deficit.
(ii) Fiscal policy
15. New Zealand's fiscal policy continues to operate within the framework set out in the Fiscal
Responsibility Act 1994.23  Its main features are the principles of responsible fiscal management
together with stringent reporting requirements in order to enhance transparency.  Under the Act, the
Government is obliged to run an operating balance on average over a "reasonable period of time"
(which has been interpreted as the business cycle) an d to bring debt down to prudent levels.  It is also
required to ensure that tax rates are reasonably stable and predictable.  Governments set their ownfiscal goals and are required to demonstrate the consistency of these goals with the Act.
16. The new Government modified several of its predecessor's objectives shortly after coming to
office at the end of 1999.  In particular, the long -term aim of reducing government operating spending
                                                     
20 Other significant changes in policy practice involved the adoption of the Monetary Conditions Index
(MCI) in June 1997, and its subsequent abandonment in March 1999, as it tended to imply an overly mechanical
policy reaction to shocks of different types.  In 2000, the Government commissioned an independent review ofthe operation of monetary policy.  For the most part, the subsequent report commended the framework andexecution of policy, finding the current approach consistent with best international practice.  Several of itsrecommendations were implemented, although the main on e – to change from a single decision maker to a
committee – was not.  One recommendation being implemented is contained in the Reserve Bank Amendment,
which is currently before a select committee of Parliament.  The bill retains the Governor as a member of theReserve Bank's Board, but removes him as chairman in favour of a non-executive chair, and requires that theBoard issue its own annual report assessing the performance of the Governor;  the bill also removes deputygovernors from the Board.
21 OECD (2002a), p. 110.
22 IMF (2001).
23 OECD (2002a), pp. 51-59.New Zealand WT/TPR/S/115
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to within 30% of GDP was replaced with a long-term objective of keeping spending at around 35% of
GDP.  This reflects a change in its stance concerning the appropriate size and role of government.
17. Throughout the period under review, the Government has maintained an operating surplus
ranging from 1.2% to 2.5% of GDP.  The Government expects the budget to register a surplus of
1.8% of GDP in 2002/03.24  Most of the current surplus is being set aside to help pay future
pensions.25  Notwithstanding some additional capital requirements, including student loans and its
purchase of an 82% majority stake in the national carrier Air New Zealand in January 2002, the
Government's gross debt remains slightly below its long-term target of 30% of GDP, although this is
not high by OECD standards.26
(4) STRUCTURAL MEASURES
18. Despite strong growth in recent years, New Zealand is concerned that it has not yet been able
to raise its per capita income to the OECD average level.  The main challenge for government policy
therefore has been to raise productivity and economic growth further.  To meet this challenge, the
measures taken thus far have opened most sectors of the economy to competition.  The present
Government intends to maintain this liberal stance , but has also indicated that further reforms will
only be undertaken on a reciprocal basis and will take into account adjustment costs.  Thus, in 1999the unilateral tariff liberalization programme was suspended until 2005 with a view to reviewing
further tariff reductions, including in the context of APEC, the latter on a reciprocal basis.
19. There is also a belief that in order to raise productivity and economic growth, New Zealand
must take advantage of higher value-added activities;  thus, the Government appears to have taken a
more interventionist approach in an attempt to support such activities.
27  The institutional framework
for such a policy has included "refocusing" the Ministry of Commerce into the Ministry of Economic
Development, and establishing Industry New Zeal and, a government agency.  Industry New Zealand
is actively involved in promoting the Governme nt's new "proactive" policy.  The "Growth and
Innovation Framework" has initially targeted biotechnology, information and communication
technologies, and creative industries in which it is believed New Zealand has a comparative
advantage.  Whether the above programmes and choice of sectors turn out to be judicious (in that they
are necessary to correct identifiable instances of ma rket failure and are effective in doing so), remains
to be seen.  In addition, since 1999 there has been a freeze in the policy of privatizing state assets;
furthermore, assets such  the Accident Compensation Corporation, which had been privatized a year
before, were re-nationalized, a majority (80%) shareholding was purchased in previously privatized
Air New Zealand as part of a rescue packag e, and Kiwibank, operated by the state-owned
New Zealand Post, was established.
20. The Government intends to maintain a bala nce between an environment that encourages
competition and the benefits generated through scale and exclusivity in markets.28  Thus, in addition
to New Zealand's overall competition law, competition frameworks have been developed for some
                                                     
24 Treasury (2002b), Table I.4:  Fiscal indicators, p. 53.
25 With spending on public pensions projected to rise from 4.5% of GDP in 2001/02 to 9.75% in
2049/50, based on current projections, new legislation establishing the New Zealand Superannuation Fund wasenacted in October 2000 with the objective of partially pre-funding future pensions.  An independent board hasbeen appointed to administer the fund and determine its investment strategy.
26 Gross debt for the year ended June 2002 was 29.6% of GDP.
27 Intervention is partly based on the observation that, despite creating an environment conducive to
competition, few companies are able to build up the economies of scale needed to export at competitive prices.
28 Treasury (2002a), p. 28.WT/TPR/S/115 Trade Policy Review
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services sectors (Chapter III(4)(v) and Chapter IV(4)).  Efforts have also been made to bring activities
previously exempt from parts of the competition legislation, such as agriculture, into the jurisdiction
of the competition regulator.  Other measures that may have an impact on productivity and growth
include:  tax policy changes that raised the top rate of personal tax from 33% to 39% in 2001,
potentially undermining the immigration policy, which seeks to retain skilled labour in
New Zealand29;  and the replacement of the Employment Contracts Act by the Employment Relations
Act in 2000.
(5) TRENDS AND DEVELOPMENTS IN TRADE AND FOREIGN DIRECT INVESTMENT
(i) Composition of merchandise trade
21. Merchandise exports (f.o.b.) and imports (c.i.f.)  were the equivalent of 31.5% and 34.4% of
GDP in 200130;  the latest figures from Statistics New Zealand show this share to be 27.2% and
26.3%, respectively.  With the economy heavily orient ed towards agriculture, agricultural products
accounted for 60.2% of exports in 2001, down from 62.6% in 1995;  they accounted for 9.8% of
imports (Chart I.1).  Manufactures accounted for 28.4% of exports in 2001, roughly the same as in
1995, and 78.6% of imports, down from 82.4% in 1995.
(ii) Direction of merchandise trade
22. Australia is New Zealand's main trading partner, accounting for 19.4% of exports and 22.3%
of imports in 2001 (Chart I.2);  these shares have changed little since 1995, despite increasingly close
ties between the two countries through the Australia New Zealand Closer Economic Relations Trade
Agreement (ANZCERTA).  Other major trading partners are the United States, the European Union,
and Japan.  Around one third of New Zealand's merchandise trade involves East Asia (including
Japan, China, and Malaysia).
(iii) Composition of trade in services
23. The composition of trade in services (Chart I.3) has changed little very little during the period
under review;  travel, transportation, and business services account for over 90% of both exports and
imports.  Since 1996/97, the fastest growing service exports have included computer and information
services, and travel.31
                                                     
29 The increase partly reversed the trend towards lower personal rates, and was a departure from the
principle of aligning personal rates with the corporate tax rate, which at 33%, is already higher than that of
neighbouring countries, including Australia.  Such a gap also increases the scope for tax avoidance, if not taxevasion.
30 Data based on UNSD, Comtrade database (SITC Rev. 3).
31 On average computer and information service exports grew by over 30% during this period, while
education travel and business travel grew by some 19% and 15%.New Zealand WT/TPR/S/115
Page 9
Chart I.1
Product composition of merchandise trade, 1995 and 2001
1995 2001
(a)    Exports
Other  2.4Manufacture
28.5
Total:   US$13.3 billion Total:  US$15.4 billion
(b)    Imports
Other  0.2
Other semi-manuf.
8.6 Iron &
steel
2.2Agriculture
8.6Transport equipment
16.5
Mining
8.8Non-
electrical
machinery
10.9Manufactures
82.4
Chemicals
13.1Office 
machines
& telecom.
10.9Other electrical
machines  4.0 Textiles & clothing
5.3Other electrical 
machines   3.6
Mining
11.3Other semi-manuf.
8.2Transport equipment
16.2
Iron &
steel
2.1Manufactures
78.6
Chemicals
13.2
Total:   US$14.0 billion Total:   US$16.8 billionPer cent
Manufacture
28.4
Other  5.0Other consumer 
goods  4.9Mining
6.5Machinery & transport
equipment  8.2
Other 0.3Other consumer 
goods   4.9
Non-electrical
machinery
9.5Other consumer
goods  11.1Textiles & clothing
5.6Food 
43.9Mining
6.6
Machinery & transport
equipment  6.6
Agricultural raw 
materials
18.7Agric. raw 
materials
13.1Other 
semi-manuf.
7.6
Office machines
& telecom.
9.5Food
47.1Chemicals
7.7Chemicals
7.7 Other semi-manuf.
9.3
Source :  UNSD, Comtrade database (SITC Rev.3).Other consumer 
goods  10.7
Agriculture
9.8Agriculture
62.6Agriculture
60.2WT/TPR/S/115 Trade Policy Review
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Chart I.2
Direction of merchandise trade, 1995 and 2001
1995 2001
(a)    Exports
East Asia
38.5
Middle East
2.0
Korea, Rep. of 
 5.3Other 
East Asia
10.7United States
    9.8
Japan
16.8
Total:   US$13.3 billion Total:   US$15.4 billion
(b)    Imports
Other America
2.8United States
18.7
EU15
21.6East 
Asia
28.8Other 
4.5
China
7.3Japan
10.8Australia
22.3
EU15
19.0East 
Asia
31.1United States
16.2
Total:   US$14.0 billion Total:   US$16.8 b illion
Source :   UNSD, Comtrade database (SITC Rev.3).Per cent
Korea, 
Rep. of
  4.7Other 
East Asia
  11.4East Asia
35.6
China  
4.8Hong Kong, China
2.4
Other America
2.6EU15
13.7United States
14.5
Other 
East Asia  
8.8
Japan
13.9Other East Asia
10.4Australia
21.6Other Oceania  2.9
EU15
16.3
Middle East
2.2Other
America
 6.7 Other America
4.7Other Oceania  3.0
Other Europe  2.1
China
3.5Middle
East
2.4Other
4.2
Middle East
4.2Japan
12.3
Malaysia
2.6Chinese Taipei
2.6China
2.6Hong Kong, China
3.1Australia
19.8 Other
3.7
Australia
19.4Other
4.9New Zealand WT/TPR/S/115
Page 11
(iv) Foreign direct investment (FDI)
24. National saving falls considerably short of domestic investment.  New Zealand is heavily
dependent on net inflows of foreign direct investment to bridge the gap, and has attracted significant
amounts in recent years.  Net inflows of FDI as a pe rcentage of GDP rose from an average 1% in the
early 1980s to 5.8% in 1995/96 (Chart I.4).  There was a marked fall in 1996/97, and although theyrecovered in 1997/98, they dropped by more than half in 1998/99.  While the slowdown in 1996/97
was due partly to the Asian crisis, it was also to some extent the result of the end of a big wave of
privatization, much of which involved purchases of assets by foreign investors.  Inflows increased to
8.4% of GDP in 2000/01, but have been sluggish since then.  There was a small net outflow of FDI in
the year to March 2002.
25. Around 80% of foreign investment appears to have flowed into sectors producing non-
tradeables or to industries producing for the domestic market, with relatively little flowing into export
sectors.
32  As at March 2002, just under 58% of New Zealand's external liabilities were concentrated
in finance and insurance, with 12.6% in manufacturing.  Possible reasons for this are that the "single
desk" powers of producer boards in several primary industries left little scope for foreign investors toenter the market until recently, and FDI in the "farm land" market remains restricted.  In the context of
its plans to encourage innovation and to raise the country's growth potential, the Government attaches
high priority to attracting more FDI.  It es tablished Investment New Zealand, a new investment
promotion agency in 2002.  According to the authorities, the agency consolidated the Government's
existing onshore and offshore investment promotion services, resulting in an improved focus and
                                                     
32 OECD (2002a), p. 140.Chart I.3
Trade in services, 2001/02
Imports
Transportation
25.2Travel
55.5Otherc
3.3Exports
Total exports: NZ$ 10.5 billion Total imports: NZ$ 9.9 billionCommunication
3.9
Businessb
12.1Businessb
28.4
Otherc
2.1
Transportation
34.8Communication
3.0
Travel
31.7Per cent
Source :    Ministr y of Forei gn Affairs and Trade online information.  Available at: htt p://www.mft. govt.nz.b               Includin g insurance, finance, com puter/information, ro yalties and licence fees, and other business services.
c                Includin g construction, personal, cultural, and recreational services, and government services nie.Business travel
6.3Personal
travela
49.2
a                Includin g education, health, and other personal travel services.WT/TPR/S/115 Trade Policy Review
Page 12
more streamlined service delivery.  Other policy initiatives in the 2002 Budget include establishing
the first dedicated offshore investment team in the United States and a strategic investment proposal
that is designed to attract more domestic and foreign investment to high growth and value-added
sectors.
26. The main sources of inbound FDI are Australia,  the United Kingdom, the United States, and
the Netherlands, which accounted for 36.4%, 13.8%, 12.6%, and 12.4%, respectively, of the total
stock of FDI in 2001/02 (Chart I.5);  Australia' s share of total inbound FDI has risen substantially
during the period under review (from around 30% in 1996).  Australia has traditionally been the main
destination for New Zealand's outbound FDI, accounting for over 70% of the total in 1999, up from
46% in 1996, although its share has been declining since 2000.33  Australia's importance as both a
source of New Zealand's inbound FDI and a destin ation for New Zealand's outbound FDI reflects the
proximity of the two countries and historically clos e economic and social ties between them, but also,
possibly, investment diversion as a result of increased integration of the two economies under the
ANZCERTA.
                                                     
33 Australia's share of outbound FDI in 2001 and 2002 was 54%;  the decline is mainly due to the
increasing share of the United States, which rose from 4.3% in 2000 to 18.4% and 14.0% in 2001 and 2002,
respectively (Statistics New Zealand, "Stock of Direct Investment by Country", as at 31 March).0123456789
1995 1996 1997 1998 1999 2000 2001 2002Chart I.4
Net inflows of FDI as a percentage of GDP, 1995-02
Per cent
Note:          Year ended 31 March.
Source :    Statistics New Zealand online information.  Available at: http://www.stats.govt.nz/;  and authorities of New Zealand .New Zealand WT/TPR/S/115
Page 13
(6) PROSPECTS
27. New Zealand has raised its annual GDP growth rate substantially above the level in the
pre-reform period.  As a result of aggressive reforms in the 1980s and 1990s, the economy has
achieved macroeconomic stability and is projected to grow by 4% in 2002/03.  However,
New Zealand remains concerned about having slipped down the per capita GDP rankings among itsOECD partners.  According to the authorities, the key challenge for economic policy is to raise
growth above the OECD average in order to close the per capita income gap.  This would require a
substantial increase in total factor productivity (TFP), which grew at an average annual rate of 0.6%
during the period under review.  This raises the que stion as to the exact role of government and its
economic policy in raising TFP growth.
28. There appears to be a broad consensus that the main source of TFP growth in the long-run is
innovation, particularly in the manufacturing and service sectors.  Thus, the Government has outlined
a new programme to encourage innovation, including through investment in industries such as
biotechnology and information technology, and by attracting skilled migration to New Zealand.
Policies are also being formulated to encourage New Zealand companies to become more exportoriented and to attract foreign investment.  Although government policies have a role in creating an
environment that is conducive to innovation and im proved productivity, it is acknowledged that the
complexity of interactions between economic activit ies places limits on the role governments can play
in raising per capita incomes.
34  It is also not clear how a freeze in certain reforms, such as unilateral
                                                     
34 Treasury (2002a), p. 17.Chart I.5
Share in stock of FDI, by country, 1995/96 and 2001/02
United Kingdom
11.9
United States
29.12001/02 1995/96
Total stock of FDI: NZ$ 49.5 billion Total stock of FDI: NZ$ 48.2 billionOther 
29.3Australia
29.7
United States
12.6Australia
36.4
United Kingdom
13.8Other
24.9
Netherlands
12.4Per cent
Note:        As at 31 March.
Source :    Statistics New Zealand online information.  Available at:  http://www.sats. govt.nz/.WT/TPR/S/115 Trade Policy Review
Page 14
tariff reductions and privatization, can raise productivity and growth and help achieve the
Government's stated objective of increasing New Zealand's per capita income to the top half of the
OECD rankings.  As government intervention is seldom costless, care needs to be taken to ensure that
the benefits of such intervention exceed its costs.