The economic impacts of the 2008 NZ-China Free Trade Agreement

New Zealand was the first Western developed country to sign a free trade agreement with China, and it came into force in 2008. At the time, the New Zealand government estimated an increase in exports to China of between NZ$225 million and NZ$350 million (between US$180 million and US$280 million), and Ministry of Foreign Affairs and Trade (MFAT) estimated an increase of 0.25% in GDP. How did things actually turn out?

That is the question addressed in this 2021 article by Samuel Verevis (MFAT) and Murat Üngör (University of Otago), published in the Scottish Journal of Political Economy (ungated earlier version here). Now, the challenge with this sort of exercise is that we can observe what happened to New Zealand with the FTA in place, but we cannot observe what would have happened if there had been no FTA (the counterfactual). And that is a problem, since what we really want to know is the difference in outcome between what really happened and the counterfactual.

Verevis and Üngör solve that problem by using the synthetic control method. Essentially, they use a weighted average of the outcomes of other countries (donor countries), that closely follows the trends in the New Zealand data before the FTA came into force in 2008, and then use the same weights to create a 'synthetic New Zealand' counterfactual for the period after 2008. The key assumption with this approach is that there isn't some other change that affected New Zealand differently from the donor countries at the same time as the FTA came into force.

Verevis and Üngör first look at the effect on New Zealand exports to China. The results are summarised in Figure 3 from the paper:

The black solid line is actual New Zealand exports to China (in nominal US dollar terms). The red dashed line is the counterfactual created using the synthetic control method. The vertical dotted line reminds us that the FTA came into force in 2008. Notice that, prior to 2008, the two lines follow each other closely. That is what we should expect with this method, since the synthetic control is designed to closely mimic New Zealand data. After 2008, the lines diverge dramatically, with actual New Zealand exports to China far higher than the counterfactual. Verevis and Üngör note that:

In the post-intervention between 2009 and 2015, NZ's actual exports to China were more than 120%, on average, higher than the synthetic counterparts.

Eyeballing Figure 3, the increase in exports was in the order of US$6 billion at its peak, so the government's expectations of US$180-280 million wildly underestimated the trade impact of the FTA. What about GDP though? Verevis and Üngör's preferred results for GDP actually show a decrease, as shown in Figure 7 from the paper:

Verevis and Üngör estimate that:

In the post-intervention era, the 2009–2017 period, the synthetic real GDP per capita was 4%, on average, higher than the actual GDP per capita.

However, there is good reason to doubt that there was such a negative impact of the FTA on GDP. The Global Financial Crisis (GFC) also occurred in 2008-2009, alongside this FTA coming into force. Verevis and Üngör argue that the GFC affected all countries, so is not a problem for their analysis. However, they acknowledge that the GFC didn't affect all countries equally. And when, in a robustness check, they exclude all Eurozone countries and Iceland, they find no significant impact of the FTA on New Zealand GDP per capita. Overall, I take from this that there is limited evidence in favour of a GDP impact of the FTA (in either direction). Of course, the concurrent GFC critique also applies to their earlier analysis of the impact on exports to China. When Verevis and Üngör re-run the analysis of exports while excluding Eurozone countries, the impact is smaller, but there is still a very large positive impact of the FTA.

Ultimately, what can we take away from this study? The NZ-China Free Trade Agreement increased trade between New Zealand and China, but didn't really impact income in New Zealand (at least on average). Why might the value of exports to China increase but GDP remain unaffected? Verevis and Üngör show that exports to the rest of the world were largely unaffected, so it wasn't simple substitution from exporting to other countries to exporting to China instead. It's quite possible that the increase in exports to China was offset by an equivalent increase in imports from China, leaving net exports unchanged. Unfortunately, Verevis and Üngör don't look at imports, so we are left to guess.

Finally, an 'upgraded' FTA between the two countries came into force in 2022. Given that many of the trade frictions had already been removed by the original agreement, the upgraded FTA likely had a smaller impact. In terms of GDP, it probably wouldn't be too much of a stretch to think that the impact will be similarly imperceptible to the impact from the original agreement.