New Zealand WT/TPR/S/20 Page 77 - WTO Documents Online

New Zealand WT/TPR/S/20Page 77

IV. TRADE POLICIES AND PRACTICES BY SECTOR

(1) Overview

1. New Zealand's trade and sectoral reforms have helped make it one of the world's most openand dynamic economies. At the time of its previous Trade Policy Review in 1990 New Zealand wasin the midst of vigorous economic reform. It had removed most import licensing requirements,implemented initial tariff cuts, greatly reduced subsidies, and commercialized or privatized many State-owned enterprises. The rapid pace of reform has subsequently been maintained. Protective importlicensing and other quantitative trade measures have now been abolished, whereas just over a decadeago nearly all imports required licences. Substantial reductions have brought tariffs to near the OECDaverage; previously, tariff levels were triple those in most other OECD countries. Direct productionor trade-related assistance to agriculture and industry has been eliminated. With few exceptions, State-owned commercial operations have been placed on a commercial footing; many of these operationshave been privatized, with revenues applied to the public debt.1

2. Reforms have touched all areas of the economy, with the primary and services sectors beingopened along with - and often in advance of - the industrial sector. This has positive implicationsfor the efficient allocation of resources across sectors, but is also important because of intersectorallinkages. The increased efficiency resulting from reformin services is important to the farming industry,for example, because services such as transport and finance account for substantial shares of farm costs.

3. The most important remaining trade measures are of two types: tariffs and the single-sellerexport marketing boards in agriculture. The average tariff of 6.2 per cent is moderate, but the averagefor lines with non-zero rates exceeds the OECD average, indicating a greater unevenness in the tariff.2

The extensive protection provided a handful of industries comes at a cost to others, particularly thosewith export interests.3 New Zealand has a schedule in place to greatly reduce remaining tariffs by2000; a review in 1998 is to determine how to move towards the elimination of tariffs under a furtherunilateral tariff reduction programme.

4. New Zealand's strategy for economic growth includes maintaining an open and competitiveeconomy to increase the flowof information and ideas, to increase efficiencyand to stimulate innovation.It is not clear that this strategy has been fully followedwith respect to the exportmarketing of agriculturalproducts, however. Marketing boards influence or control the export of some 80 per cent of the exportsof agricultural products, which comprise half of merchandise exports. There are no plans to eliminatethe export monopolies that have been granted to several of these boards.

1Important domestic reforms have also been implemented, such as in the labour market and the public service,easing the move of productive resources to more profitable uses or otherwise increasing economic efficiency.

2According to the Ministry of Commere (1994a), in 1993 New Zealand's average tariff rate for those linessubject to duty was, at 16.6 per cent, the second highest among OECD countries and well above the OECD averageof 10.6 per cent. While New Zealand's rates have been cut more rapidly than those in other countries, in 1996the average m.f.n. rate for lines subject to duty, now equal to 14.6 per cent, is still probably among the highestin the OECD.

3Estimates cited by the authorities suggest that the 1996/97 tariff effectively imposes a tax of some 5 percent on New Zealand's export sector (Ministry of Commerce, 1994a).

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(2) Primary Industries

5. New Zealand's economy is largely resource-based. Primary industries, including farming,fishing, forestry and mining, account for about 11 per cent of GDP and some 13 per cent ofNew Zealand's total exports of goods and services. These numbers, however, tend to understate theimportance of the sector; for example, if inputs into processed goods are taken into consideration,then primary products comprise at least a quarter of exports.4

6. Farming, the largest part of the sector, has contracted slightly in recent years, while the otherprimary industries have grown rapidly. From 1984 to 1995 the GDP share of farming fell from7.3 per cent to 5.2 per cent; however, the share of forestry and logging increased from 1.2 per centto 3.9 per cent, that of mining and quarrying increased from 0.8 per cent to 1.1 per cent, and thatof fishing increased from 0.3 per cent to 0.4 per cent. The expansion of these industries has beendriven by export demand. The export volume of forestry products, as measured by the roundwoodequivalent, increased by 22 per cent from 1991 to 1995; as the available wood supply is anticipatedto nearly double by 2005, the volume of exports is expected to continue growing. The fish sectorproduces predominantly for the export market; some 80 per cent of production was exported in 1995,accounting for about 5.5 per cent of New Zealand's merchandise exports.

7. Market-oriented reforms in the primary sector, particularly in agriculture, were at the forefrontof economywide reforms begun in the mid-1980s. The rôle of the Government in the sector has beensharply curtailed. The outstanding exception is the continued use of marketing boards for the exportof a number of important agricultural items, including apples, pears, kiwifruit and dairy products.

(i) Farming

8. Farming contributed 5.0 per cent of GDP in 1995/96, down from 6.1 per cent in 1991/92,and accounts for some 9 per cent of employment (Table IV.1).5 Farming is at the heart of the agro-industrial sector, which also encompasses farm inputs and the transport, processing, distribution andretailing of farm products. The agro-industrial sector employs 17 per cent of the labour force; itcontributes 15 per cent of GDP and 54 per cent of merchandise exports.

9. New Zealand's farming industry is primarily livestock-oriented, with animal products responsiblefor some two thirds of the value of agricultural production. Within the livestock industry, since 1991the share of dairy has increased while that of wool has declined. Dairy production accounted for31 per cent of the total value of agricultural output in 1995/96, while wool (8 per cent), sheep andlambs (9 per cent) and beef (12 per cent) also held important shares. Vegetables, fruit, nuts and otherhorticulture together added 13 per cent of total agricultural output.

4In 1991, 14 per cent of exports were farm products embodied in processed food; processed food productscomprised 35 per cent of exports and farm-product content was 40 per cent of the cost of the products. Similarly,about 2 per cent of exports were primary products incorporated in textiles and clothing exports. Data basedon Inter-industry accounts for 1990/91 in Statistics New Zealand (1995b).

5Ministry of Agriculture (1996).


Table IV.1

Agricultural production and exports, 1990-96a

($ millions)

Product 1990 1991 1992 1993 1994 1995 1996c

Wool 1,252 832 793 737 724 933 864

Wool exports 1,424 1,044 1,173 985 1,134 1,322 1,099

Sheep and lambs 865 885 845 1,037 1,216 1,120 953

Lamb exportsMutton exports

958136

978172

1,177171

1,209180

1,085166

1,044d

1531,139d

198

Cattle 1,187 1,376 1,443 1,559 1,540 1,394 1,137

Beef and veal exports 1,092 1,284 1,451 1,419 1,384 1,161 1,054

Dairy products 2,166 1,641 2,235 2,536 2,569 2,585 3,270

Dairy exports 2,534 2,485 2,897 3,369 3,563 3,473 3,717

Fruits, vegetables, nuts and otherhorticulture 1,201 1,257 1,402 1,374 1,269 1,337 1,351

Fresh kiwifruit exportsApples and pears; nashi exports

Total fruit and vegetable exports

539218

999

520305

1,069

506335

1,167

370349

1,026

381320

1,076

321491

1,195

263534

1,291

Agricultural services 731 760 807 873 950 1,006 993

Otherb 945 838 835 989 1,248 756 631

Total agricultural output 9,284 8,488 9,274 10,135 10,515 10,246 10,336

Total agricultural based exports 8,784 8,752 9,993 10,267 10,559 10,815 10,583

Agriculture's share of GDP (per cent) 6.4 5.4 6.1 5.8 5.6 5.2 5.0

Agriculture-based exports, share oftotal merchandise exports (per cent) 60.5 58.1 58.2 56.3 55.2 53.5 52.6

a For production, year ending 31 March; for exports, year ending 30 June.

b Includes change in the stock of livestock, sales of live animals and non-farm income.c Preliminary.

d Total sheepmeat.

Note: Production figures refer to farmgate values while export figures refer to processed products.

Source: Ministry of Agriculture (1996).

10. The farming industry has close economic links to other industries, particularly food manufacturingand transport. Also, as an export dependent industry producing relatively undifferentiated products,farming is influenced by the macroeconomic situation, and particularly exchange rate movements.Thus, farmers and farm groups take an active interest in trade policy and its sectoral aspects, and havebeen a force behind the Government's economic reforms. Prior to the 1984 elections the FederatedFarmers, the major farm lobby group, sought measures to "create an environment conducive to economicgrowth and sustainable low inflation with a minimum of Government intervention in the economy",including limits on export incentives, the introduction of a floating exchange rate régime, labour marketreforms, the removal of all import licence requirements, the reduction of tariffs, and liberalization


of the transport sector.6 During a 1994 review of tariff policy, the group called for the completeelimination of tariffs by July 1997.

11. Another matter of fundamental importance to New Zealand's farming industry, given the highshare of exports in total production, is access to foreign markets and the impact of other countries'agricultural subsidies in third markets. While the Uruguay Round Agreement on Agriculture is ofgreat value to New Zealand, substantial market access restrictions and subsidies still remain, and arelikely to do so even after full implementation of the Uruguay Round. Based on economic studies,the authorities believe that such remaining distortions will cost New Zealand the equivalent of some2 per cent of GDP annually.

(a) Agricultural policies

12. New Zealand's agricultural industry is market driven, with very liberal import and domesticpolicy régimes. This is the result of a rapid dismantling of agricultural support with the start of reformsin the mid-1980s. Agricultural subsidies as a share of GDP were reduced from 3.8 per cent in 1983to 0.9 per cent in 1987 and 0.1 per cent in 1994. New Zealand's producer subsidy equivalent (PSE),a measure of assistance to farmers, fell during this period from its peak of 33 per cent to 3 per cent,a figure much lower than that of any other OECD country.7 However, the export of a number ofproducts, including dairy products, continues to be controlled by marketing boards.

Import policies

13. Tariffs are the only means of intentional import protection for New Zealand's agriculturalproducts.8 No import licensing is used, there are no tariff quotas or similar trade-restrictive devices,and all import-related powers once held by producer boards have been eliminated.9 Tariffs are generallylow, with m.f.n. rates averaging 1.5 per cent and a maximum rate of 10.5 per cent for farm-levelagricultural and livestock products (ISIC 11) (Appendix Table IV.1). Imports of most agriculturalproducts, including live animals, beef, sheepmeat, butter, cheese, fresh fruit and most cereals, enterduty free. Moderate tariff rates remain on some manufactured food products (section 3), althoughthese are scheduled to be reduced; by 2000, all m.f.n. tariffs on primary, semi-processed or processedproducts of agriculture, forestry or fisheries will be 5 per cent or less. Although most New Zealandagricultural industries are open to international price signals as a result of this liberal import policy,sanitary requirements, which according to the authorities are justified under the WTO Agreement onSanitary and Phytosanitary Measures, have the effect of partly isolating the New Zealand markets foreggs and live, fresh and frozen poultry meat from the world markets for these products.10

6New Zealand Federated Farmers (1984).

7According to the authorities, agricultural support was granted partly to compensate farmers for protectionin other sectors of the New Zealand economy.

8Sanitary and phytosanitary measures are discussed in Chapter III(2)(vi).

9The last such restriction, the control of the Hop Marketing Board over imports of hops, was eliminatedon 1 January 1995; the Apple and Pear Marketing Board's control over apple and pear imports had been revokeda year earlier.

10OECD (1995a).


Domestic policies

14. New Zealand does not provide any production-linked support to farmers nor any subsidiesfor the use of agricultural inputs. The Government has progressively reduced its involvement in domesticsupport measures, and remaining public sector services are generally provided on a user-pays basis.Virtually all irrigation schemes have recently been privatized.11 Meat inspection and certification isprovided on a fully user-pays basis by the Ministry of Agriculture. Government extension andconsultancy services to farmers, and some aspects of the monitoring of farm sector performance, havebeen privatized.12 Remaining support for public sector services is limited to animal welfare and pestand disease control; Government expenditure in these areas in 1994/95 was $52 million.

15. The Government retains several agri-environmental policies and programmes with objectivesthat include sustainable development, soil conservation and water quality.13 The authorities estimatethe total cost of agricultural environment-related programmes, including the $52 million cited above,at some $140 million, with about 40 per cent of this relating purely to environmental protection andthe rest attributable to safeguarding agriculture against environmental forces, such as pests and floods.While these policies and programmes remain important, the authorities also note that the environmentalbenefits of agricultural policy reform have been substantial, and have included the reduced use offertilizer and pesticides; an increase in afforestation, due largely to planting on former farmland;and, as a result of a decline in sheep numbers, a less intensive use of hill-country pasture.

16. According to the authorities, climatic disaster relief, which is partly community-funded, isthe only potential source of direct payment to farmers. The authorities are of the view that disasterrelief programmes can encourage unsustainable land use and contribute to environmental degradation,and the Government has therefore reduced its rôle in this area.14 In general, farmers are expectedto use private insurance or manage their own risks, and the Government has reduced its commitmentaccordingly in recent years.

17. Under the Commodity Levies Act 1990, industry organizations may, following a referendum,impose compulsory levies on commodities in order to undertake certain activities or to provide fundsfor the organization. Eligible activities include research, market development, market promotion, andhealth measures, but exclude trading or commercial activities. As at July 1996, commodities and theirmaximum levy rates included: asparagus (0.15 per cent), avocados (3 per cent), eggs (5 cents perchick), export squash (0.15 per cent), fresh tomatoes (1 per cent), processing tomatoes (0.15 per cent)and winemaking grapes (1.5 per cent).

18. Two marketing boards retain active or latent powers to regulate the domestic marketing ofsome products; these powers are currently under review. The Hop Marketing Board controls the

11Among the 50 irrigation schemes, one remains under the ownership of the Crown. Negotiations on salesof the other schemes took place in 1988-90, and payments and other obligations were completed in 1996.

12The Government contracts for the provision of monitoring and policy-advice services with the firm thatit privatized. The privatization of services in 1996 was preceded by a user-pays approach initiated in 1988 andthe commercialization of a business unit within the Ministry of Agriculture in 1991. Government expenditurein this area has fallen from $28 million in 1988 to $3 million in 1996.

13OECD (1995b).

14OECD (1995b).


domestic (and export) marketing of hops, while the Raspberry Marketing Council has the authorityto, but does not currently, fix domestic marketing quotas or otherwise control the domestic market.No other marketing boards have active or latent powers with respect to domestic marketing.

Export policies

19. Most of New Zealand's agricultural output is exported, either directly or indirectly, makingthe export marketing structure potentially important for the national economy. For some products,particularly dairy (25 per cent) and kiwifruit (27 per cent), New Zealand accounts for substantial sharesof world trade. Its export marketing structure may thus affect parts of the world market for theseproducts.

20. New Zealand has neither agricultural export taxes or subsidies.

21. Five entities exercise export market monopolies for their products (Chapter III(3)(iii)). Theseare the Apple and Pear Marketing Board, the Dairy Board, the Hop Marketing Board, the KiwifruitMarketing Board (other than to Australia) and the Raspberry Marketing Council.15 The HorticultureExport Authority licenses exporters in accordance with export marketing strategies developed by producerand exporter groups. In addition, the Game Industry Board, the Meat Producers Board and the WoolBoard have regulatory authority that includes export marketing and licensing; however, they do notexercise their potential control over export operations.16 Each of the above bodies is a statutory entitythat, with the exception of the Horticulture Export Authority, operates without government assistanceand isdirectly or indirectlyproducer-controlled. In sum, these entities directly control, or arepotentiallyable to influence, the export of about 80 per cent of NewZealand's agricultural and horticultural exports.This export marketing structure, and especially the rôle of single-seller export marketing boards, hasbeen criticized on several grounds, particularly that of efficiency (Box IV.1)

22. In many cases the Boards' activities require exemptions from provisions of New Zealand'scompetition legislation, the Commerce Act (Chapter III(5)(ii)). This exemplifies the exceptional characterof the Boards withinNew Zealand's otherwise very competition-oriented framework. The DairyBoardAct 1961: (i) allows the Dairy Board to prohibit, restrict and control the export of any other entity;(ii) gives the Board special powers in the acquisition and marketing of dairy products for export; and(iii) sets formulae for the determination of prices paid by the Board to dairy product manufacturers.The Apple and Pear Marketing Act 1971 contains exemptions from the Commerce Act allowing theBoard: (i) to establish export standards for apples and pears; (ii) monopoly powers over the exportingof these products; and (iii) to fix prices for the apples and pears that it purchases. Export-relatedpowers of the Meat Producers Board and the Wool Board are expected to be made explicitly exemptfrom parts of the Commerce Act by the Producer Board Acts Reform Bill currently being consideredby Parliament.

15The Apple and Pear Board, Dairy Board and Kiwifruit Board can grant export consent to other entities;however, to date, exports by other entities have not accounted for a substantial share of exports of the respectiveproducts.

16The Wool Board and Meat Producers Board do, however, set export standards for their respective products,and the Meat Producers Board does control the export of meat to restricted access (tariff-quota) markets. TheProducer Board Acts Reform Bill would eliminate the export marketing powers of the Meat and Wool Boardsto acquire and sell products. The export licensing powers of the Wool Board would also be eliminated, but theMeat Board would retain its powers to restrict exports, particularly to those countries that have market accessrestrictions.


Box IV.1 New Zealand's single-exporter marketing boards

New Zealand's single-exporter marketing boards seek to maximize export returns for the benefit ofdomestic producers. Proponents of the single-seller approach argue that in the highly-distorted worldmarkets for agricultural products, a single seller able to set differential prices will be able to generatehigher revenues and to pass these on to producers.

This may be the case for a single seller exporting a product into a market protected by a bilateral tariff-rate quota. Under competition, the product would be exported from New Zealand at or near the worldmarket price. A monopsonistic exporter, however, could probably sell at a higher price; economic rents- the difference between the world market price and the distorted internal price in the protected market -could then be collected mainly by the exporting country rather than the importing country. This situationmay exist for exports of butter to the European Union (EU) and of beef to the United States, but thereare few other examples involving New Zealand. Even when this is the case, the importing country mayset the in-quota tariff at high rates, so as to effectively collect these economic rents as tariff revenue.

The single-seller approach might also be advantageous to New Zealand if it were the only, or thepredominant, exporter on the world market. New Zealand is not, however, a "large" exporter on theworld market for any broad product categories. A 1993 Ministry of Agriculture report stated thatNew Zealand's export share on world markets suggested "exporters are not in a position to influencegreatly the returns received for their primary products on world markets" (MAF, 1993). This reportnoted that other factors also determined whether New Zealand exporters could influence their prices.However, the notion that New Zealand might exercise market power to positively affect its export priceshas been challenged by many observers, and the authorities have indicated that the Dairy Board is a"price-taker" in all markets and for all products.

The advantages to New Zealand of single-seller boards may thus be doubted, while there are probablyseveral disadvantages of such boards.

First, the system can lead to allocative inefficiency. Producer returns may be based on a bundle ofproducts rather than just those products sold by the producer to the marketing board. This bundle couldconsist of several different farm-level products, or of a mix of farm-level products and elements ofmarketing, packaging, processing and other services engaged in by the board. In either instance, afarmer receives a price based on some average of the components of the bundle, rather than a price equalto the additional revenue that his production would bring. These distorted market price signals can leadfarmers to allocate their resources inefficiently.

A second possible disadvantage, noted by MAF (1993), is that statutory monopolies face lesscompetition. This may reduce incentives to contain costs of preparing and processing products forexport. The influence of competition on efficiency has been an important motivation behind reforms inother areas of the economy. This factor has not, however, received widespread attention in the exportmarketing of agricultural and horticultural products.

It has also been suggested that monopolistic marketing boards, by preventing or restricting entry intoexport marketing, may suppress the use of other strategies and thus reduce innovation. Examples ofmissed marketing opportunities have been cited, although it remains difficult to assess the economic costsof reduced innovation.

Source: Hussey (1992); Kerr (1996); Ministry of Agriculture and Fisheries (1993); OECD (1996).

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23. The objective of the Apple and Pear Marketing Board is to maximize the total long-term exportincome of the domestic apple and pear industry. Its main functions under the Apple and Pear MarketingAct 1971 are to acquire, export and market all New Zealand-grown fresh apples and pears that meetits export standards and to set the prices paid to growers for export-standard apples and pears. TheBoard sets prices for various sizes and varieties of apples and pears based largely on its expected returnfor the size and variety of the fruit on the world market. It may permit other traders to undertakeexporting; such consent is conditional on the fruit, country of destination, and sometimes the specificexport customer. In this case, charges are levied, largely based on the size of the export shipment,to recover the Board's processing and other costs, to a limit of $12,000 in charges.17

24. Under the Dairy Board Act 1961, the New Zealand Dairy Board controls almost all dairy productexports.18 Dairy exports accounted for 18 per cent of New Zealand's merchandise exports in 1995/96.While the Board may grant export permission to other entities, and guidelines for doing so have beenpublished, some 99 per cent of dairy exports are undertaken by the Board itself.19 The Board purchasesdairy products from New Zealand's several producer-owned co-operative dairy manufacturers and setsexport prices and quantities for each product and export market.20 The manufacturers purchasecompetitively from dairy farmers. The Board sets the price it pays to manufacturers as follows:quarterly, on the basis of manufacturing costs and its expected export returns from all dairy products,it calculates a guide price for fluid milk; this price is then adjusted for the cost of producing eachdairy product, and for any incentive/disincentive that the Board wishes to build-in to influence investmentor innovation.21 Annually, based upon actual receipts, a final accounting is made with each manufacturer;in practice the difference between the initial and final prices received by the manufacturers may beas high as 20 per cent, depending on movements in world prices over the season.

25. A recent OECD report notes that the Dairy Board's exclusive export control has had a clearimpact "on the structure of the existing industry and the behaviour of individual firms" because thecurrent arrangement not only restricts export marketing by domestic firms but also effectively restrictsthe ability of overseas firms to process New Zealand milk for export.22 The report notes that severalproposals have been made for reform, including: (i) the liberalization of the entitlement to export,by allowing co-operatives direct access to international markets; and (ii) privatization of the Board,with shares being allocated to existing producers. This latter approach would be relatively simple,given that the producers, through their ownership of the co-operatives, are already indirect owners.

26. The Kiwifruit Marketing Board exercises full control over kiwifruit exports, other than toAustralia. It sets export standards and acquires domestically produced kiwifruit that meets thesestandards. The prices it sets for export-standard kiwifruit are principally based on expected market

17Apple and Pear Marketing Board (1994).

18The Board's export control is limited to products with greater than 30 per cent by weight of dairy products.

19The Board has over 70 fully-owned subsidiaries, associate companies and agencies and is the world's largestmultinational dairy marketing entity (Statistics New Zealand, 1995a).

20OECD (1996).

21Thus, if the Board expects a future price rise for a particular product it may try to bring about an increasein production capacity by raising its offer price for the product.

22OECD (1996).


returns minus costs, but also on other factors, including the maintenance of stability in the industry.At the end of each season the Kiwifruit Marketing Board makes final payments to (or recoveries from)growers, thereby balancing its books for that year.

27. Horticultural producergroups formulate exportmarketingstrategies,whichmay includeplacingconditions or limitations on exports. The Horticultural Export Authority grants export licences inaccordance with the marketing strategy. Exporters that do not comply with the agreed export marketingstrategy are subject to the loss of their export licence (Chapter III(3)(ii)). The Horticulture ExportAuthority does not require an exemption from the Commerce Act.

28. The Government keeps the Boards under constant review and this has led to changes in recentyears, including inownership structures, improved accountability to farmers and producers, the removalof controls over imports, reduced controls over domestic marketing, and increased transparency ofexport consent guidelines for the Apple and Pear Marketing Board and Dairy Board. However, nosubstantial changes have been made to export-related powers and no such changes are being proposedfor the single-exporter marketing boards.

(ii) Forestry

29. Forestry is among New Zealand's fastest growing industries, with its share of GDP more thandoubling, to 2.5 per cent, in the ten years to 1993. Processing and manufacturing of forestry productsaccounted for another 2.8 per cent of GDP. Forestry and first-stage processing accounted for1.5 per cent of employment as at February 1996. Planted-production forest area grew at an annualrate of 7.5 per cent in the 1970s and 4.4 per cent a year since 1980. As a result, with these plantingscoming to maturity, production increased by some 55 per cent from 1989 to 1995.23 Supplies fromplanted production forest, which account for 97 per cent of total production, are expected to increaseby 70 per cent from 1995 to 2005.

30. Export volumes increased by 82 per cent in the period 1989 to 1995 and now account for overthree fifths of production. Primary and semi-processed forestry products accounted for 13 per centof merchandise exports in the year to December 1995, with Japan, Australia and Korea jointly accountingfor some three quarters of the total export value. With rapid increases in production and little expansionin domestic demand, the volume of forestry products exported is expected to rise sharply, perhapsdoubling by 2005. The authorities are of the view that the expected growth in global demand for woodproducts, the environmental benefits, and the advantages of land-use diversification and carbonsequestration make clear the benefit of a further expansion of planted forests, including the continuedintegration of forestry and farming.24

31. There has been substantial privatization of forestry cutting rights for planted forests. The majorreasons for the privatization of State-owned forests were the perceived conflict of interest betweenthe functions of the Forest Services. Additionally, by allowing private companies to purchase cuttingrights and thus gain more certainty over their wood supply, these vertically-integrated companies havebeen encouraged to increase their investment in processing facilities.25

23Production is measured in terms of roundwood equivalent. Data are based on the statistical releases ofthe New Zealand Ministry of Forestry; annual figures refer to years ending 31 March.

24Ministry of Agriculture and Ministry of Forestry (1994).

25Ministry of Forestry (1995).


32. The ownership and control structure of the forestry industry is undergoing change. About36 per cent of planted forests are owned by two public companies, 16 per cent by private companies,13 per cent by State-owned enterprises, and 33 per cent by a mix of private ownership, Maori leasesand local authorities. The State had held 48 per cent of the planted forest area in 1990 when theprivatization of forestry assets was begun; by 1995, this had declined to 19 per cent. The State'sinvolvement in the industry is now limited to the ownership of forests by four State entities, the largestof which, the Forestry Corporation of New Zealand (FCNZ), manages 12 per cent of the total plantedarea; it also has substantial processing assets.26 In August 1996, the Government announced the saleof FCNZ to a consortium for some $2.0 billion, with net proceeds of $1.6 billion, after coveringliabilities, to be used to reduce Government net foreign currency debt. A successor to the New ZealandForest Service, the New Zealand Forestry Corporation (NZFC), was established in 1987 as a State-ownedenterprise as part of a restructuring process to isolate commercial activities from non-commercialfunctions such as research, training, and regulation (Brown and Valentine, 1994). The NZFC wasrenamed Crown Forestry Management and now manages 24,000 hectares of planted forests.

33. Other than the control of some forestry assets, New Zealand has no specific forestry-relatedpolicies other than environmental measures.27 The provision of loans and grants to encourage forestryhas been discontinued, including the Forest Encouragement Grants and Loans which could be usedto clear natural forests and were discontinued in 1984. Tariffs are the only means of import protection;and m.f.n. rates are low, averaging 0.5 per cent for forestry and logging products. Tariffs on woodproducts and paper products (ISIC 33 and 34) are substantially higher, ranging to 25 per cent(Section 3(iii)).

(iii) Fishing

34. Fishing accounted for some 0.4 per cent of New Zealand GDP in 1993. Four fifths of productionis exported; seafood exports accounted for 5.5 per cent of total merchandise exports in the year endingJune 1995. Exports rose from about $10 million annually in the 1970s to $1.2 billion in 1995, andare expected by the industry to reach $2.0 billion by 2000. Australia, Japan and the United Statesare the major markets, each being the destination for about a third of New Zealand's seafood exports.However, the industry is diversifying its markets, with exports to Hong Kong, Chinese Taipei andSpain growing in importance.

35. The Government's primary policy objective for the sector is to set the framework for thesustainable use of fisheries resources. This is implemented mainly through the Quota ManagementSystem (QMS), begun in 1986. Commercial fisheries are managed under the QMS through the useof Individual Transferable Quotas (ITQs), which apply to 31 species groups in ten geographic areas

26The FCNZ was created in 1990, after the first round of asset sales, and combined seven Crown forestscovering 170,000 hectares.

27The Resource Management Act 1991 is designed to promote the sustainable management of all natural andphysical resources. The Act does not target activities but rather environmental effects, and is implemented byRegional and District Councils, which develop policies and plans for their areas. Options available to Councilsare discussed in New Zealand Forest Owners Association (1994). In addition, commercial forestry interestsand environmental and other groups have signed several agreements, including the New Zealand Forestry Accordin 1991 and the Principles for Commercial Plantation Forest Management in New Zealand in 1995. See alsoMinistry for the Environment (1991).


of New Zealand's Exclusive Economic Zone (EEZ).28 ITQs, which are fully transferable, are specifiedas a percentage of the Total Allowable Commercial Catch (TACC) for each species group and geographicarea. TACCs are set annually by the Minister of Fisheries after consultation with interested groups;179 TACCs are active. In most cases, ITQs were allocated to fishermen on the basis of demonstratedhistory anddependency on the fishery. Owners of ITQsmust beNew Zealand residents orNew Zealandcompanies that are less than 25 per cent foreign-owned.29

36. New Zealand provides no direct support to the fisheries sector. The last remaining indirectsubsidization of the fishing industry was removed in 1994 with the Fisheries Amendment Act, whichgave Government the authority to recover from the industry costs associated with providing fisheriesmanagementandconservationservices,enforcingfisheries legislation,andconductingrelevantresearch.Earlier, and particularly in the 1970s, Government loan guarantees were provided for the purchaseof fishing vessels, and to make aquacultural and processing investment. This was partly in responseto the perception that the many licensed foreign fishing vessels then working off New Zealand's coastrepresented a forgone opportunity for New Zealanders. Since then, the domestic fishing fleet has grownsubstantially and the use of foreign vessels chartered by New Zealand companies remains common.The size of licensed foreign fleets has dropped markedly. In 1983, 59,087 tonnes were harvested fromthe New Zealand EEZ by foreign licensed vessels. By 1995, this figure had dropped to 37 tonnes.

37. Foreign fleets can be licensed for New Zealand waters under New Zealand's bilateral agreements,which are in effect with Japan, Korea and Russia. In 1993/94, such access was limited to tuna species,and licensed fishing activity has been steadily falling in recent years, and is likely to be zero in 1996.

(iv) Mining

38. Mining and quarrying accounted for 1.5 per cent of New Zealand's GDP and 0.5 per centof employment in 1993. About three quarters of the sector's value added, and one quarter of itsemployment, is in the extraction of crude petroleumand, particularly, natural gas; New Zealand exportstwo thirds of its output of crude oil and condensate, but imports 80 per cent of its domestic consumption.Crude oil is exported because New Zealand's oil refinery is configured to handle crude oils heavierthan those produced domestically. The mining of minerals accounts for about a quarter of sectoraloutput, primarily gold, silver, and sand, rock and gravel. Imports of mineral products accounted for5 per cent of merchandise imports in 1993, some four fifths being crude petroleum or condensate.Exports of these products, also primarily consisting of crude petroleum or condensate, were 2 per centof New Zealand's merchandise exports.

39. Tariffs on imports of most mining products are zero and there are no other import restrictions.The only substantial tariffs are in the area of stone quarrying, clay, and sand, where m.f.n. rates average3.1 per cent; imports of these products account for 1 to 2 per cent of all mining and quarrying imports.No direct financial assistance is provided the industry. Tax concessions are offered to miners of certainminerals, including gold and silver; these allow the deduction of all exploration and developmentexpenditure in the year incurred.30 The authorities estimate that the cost of the tax concession scheme,in terms of forgone government revenue, is $7 to $10 million a year. A similar régime is provided

28New Zealand's EEZ, which was expanded in 1978 to 200 miles, is among the largest in the world.

29Under the Fisheries Act 1996, the Minister of Fisheries may allow a quota owner to have foreign ownershipof up to 40 per cent of its shares, subject to certain criteria.

30This deduction would otherwise be treated as a capital expense and be written off over a number of years.


for petroleum mining (allowing the immediate deduction of exploration and development expenditure),and a less generous régime is in place for coal mining (allowing the amortization of capital expenditureover the expected life of the mine). According to the authorities, the tax revenue forgone becauseof the petroleum mining scheme is small and no revenue is forgone because of the coal mining scheme.

40. The Government began in 1984 to separate its commercial activities from its policy and regulatoryfunctions in the sector. With the exception of the markets for electricity and gas, where reforms areprogressing, markets throughout the sector have been deregulated. The Coal Corporation ofNew Zealand is the only remaining State-owned enterprise involved in prospecting, exploration ormining; it operates on a commercial basis. Price controls on petroleum products were eliminatedin 1988; those on gas were among the last to be removed, having been lifted in 1993.

41. All petroleum, gold, silver and uranium inNew Zealand is owned by the Crown; othermineralsare either in Crown or private ownership. The extraction of Crown-owned minerals is controlled bypermits for prospecting, exploration and mining. Permits are allocated by the Ministry of Commerceeither non-competitively (based on an acceptable frontier offer or the first acceptable work programmeoffer) or competitively (based on staged work programme bidding or cash bonus bidding). Land owners(or occupiers) have an effective right of veto over the extraction of non-petroleum minerals, whichmay be overruled only for reasons of national interest. In the case of a permit for petroleum miningwhere the land owner and permit holder cannot reach agreement, an arbitrator may be appointed.

42. The Resource Management Act and other legislation requires certain environmental safeguardson prospecting, exploration and mining. Environmental controls are effects based, requiring all extractorsof minerals to avoid, remedy or mitigate the effects of their activities on the environment. The gas,petroleum and other mining industries are subject to the Commerce Act, including the threat ofregulation if market dominance is abused.

43. Special levies are applied on several mining and energy products. These (and the use to whichthe revenues are put) are: natural gas and coal (Energy Resources Levy (ERL), used for generalgovernment revenue); compressed natural gas and liquefied natural gas (excise tax, earmarked forthe Transport Fund, the Accident Compensation Corporation levy and the petroleum fuels monitoringlevy). Apart from the ERL, other levies and taxes listed apply to fuels sold for transportation purposes.All such levies and taxes are applied equally on domestic and imported products.

(3) Manufacturing

44. The New Zealand manufacturing sector accounted for 21 per cent of GDP and 18 per centof employment in 1995. Manufactured products comprised 86 per cent of total merchandise exportsand 96 per cent of total merchandise imports. The composition of New Zealand's manufacturing sectorand its international trade in manufactures reflects its strength in primary production. One third ofmanufacturing is in foodprocessing;manufactured food products comprise41 per centofmanufacturingexports (Table IV.2). Pulp and paper products account for 6 per cent of manufacturing value addedand 6 per cent of manufacturing exports. Imports of manufactured products are concentrated inmachinery and equipment (27 per cent), transport equipment (20 per cent), and petroleum and basicchemicals products (22 per cent).


Table IV.2

Share of manufacturing value added, wages and trade, by production group and industry(Per cent)

Share ofmanufacturing

value added


wages


imports


exports

1987 1993 1987 1993 1995 1995

Food, beverages and tobaccoMeat and meat products

Dairy productsOther food

Beverages, malts and tobaccoproducts

28.410.3

3.47.4

7.3

33.08.0

6.08.4

10.5

26.1...

...

...

...

27.9...

...

...

...

5.80.3

0.44.1

1.1

40.915.6

15.68.9

0.9

Textile and apparel 8.4 6.0 10.1 7.6 6.7 8.8

Wood and wood products 6.3 6.3 7.3 7.5 0.9 6.9

Pulp and paper products, printing andpublishing

Paper and paper productsPrinting and publishing

11.6

4.67.0

13.6

6.47.2

13.0

...

...

14.5

...

...

4.5

2.71.8

6.8

6.40.4

Petroleum, chemical, plastics andrubber products

Petroleum, coal and basic chemicalsRubber, plastic and other chemical

manufacturing

15.1

8.5

6.6

12.1

4.7

7.4

9.8

...

...

10.9

...

...

24.8

22.1

2.7

11.8

10.2

1.7

Non-metallic minerals 3.6 3.2 3.6 3.3 1.5 0.4

Basic metals 2.9 4.7 3.4 5.0 3.7 11.2

Fabricated metal products, machineryand equipment

Fabricated metal productsMachinery and equipment (incl.

prof. and scientific equip.)Transport equipment

22.7

7.2

9.95.6

20.2

6.4

9.04.7

25.8

...

...

...

22.3

...

...

...

49.6

2.0

27.120.5

11.7

1.5

8.61.5

Other manufacturing 1.0 1.0 0.9 0.9 2.5 1.4

... Not available. Estimates have not been made for these industries for the years indicated.

Source: Statistics New Zealand (1995), "New Zealand System of National Accounts"; and WTO Secretariat calculations based on dataprovided by New Zealand authorities.

45. The tariff is virtually the only source of import protection for manufacturing; m.f.n. ratesare moderate and declining. The tariff reductions of 1 July 1996 lowered m.f.n. tariffs for manufacturedproducts from an average of 7.5 per cent to the current average of 6.5 per cent (Appendix Table IV.1).Only a few industries continue to be protected by average m.f.n. tariffs of over 10 per cent: theseare textiles, apparel, footwear and leather; furniture; paper containers and boxes; rubber products;and certain fabricated metal products.31

31Industry definitions are based on the International Standard Industry Classification (ISIC). Tariff rateswere matched to the ISIC industries using the WTO Secretariat's concordance from the Harmonized System(HS) to ISIC.


46. The July 1996 tariff reduction appears to have reduced tariff escalation. Rates on unprocessedproducts of the manufacturing sector fell slightly, from 1.2 to 1.0 per cent, while average tariffs onsemi-processed products fell from 4.1 to 3.6 per cent and those on processed products were reducedfrom 9.6 to 8.4 per cent. Nevertheless, tariff escalation remains important, and tends to protectprocessing activities at the expense of primary and semi-processing activities. As rates for primaryand semi-processed products are now quite low, future tariff cuts will have their greatest effect onprocessed products and will thus diminish the remaining tariff escalation (Chapter III(2)(i)(b)).

47. Future tariff cuts will also reduce the margins of preference given to imports from preferentialtrading partners, including Australia, Canada, SPARTECA countries and developing countries receivingGSP treatment (Chapter III(2)(i)(k) and (2)(ii)). As imports from Australia and SPARTECA countriesenter duty free, the average preference margin for manufactured imports from these countries equalsthe average m.f.n. tariff, 6.5 per cent. Australia accounts for 22 per cent of New Zealand'smanufactured imports and SPARTECA countries account for 0.3 per cent of imports. The averagetariff on imports from Canada, which accounts for 1.5 per cent of manufactured imports, is 2.9 per cent,3.6 percentage points less than the average m.f.n. rate. Preference margins under New Zealand's GSPscheme for developing countries are less than those for Canada; imports from least-developed countriesenter duty free.

48. New Zealand's manufacturing sector was heavily protected by import licensing and high tariffsuntil the mid-1980s. Controls on the import of most manufactured goods were eliminated during theperiod January 1987-July 1992. However, the initial tariff reductions of 1986 and 1987 affected onlygoods for which there was not an industry plan (Chapter III(2)); thus, in 1988 average m.f.n. tariffsfor pulp and paper products, textiles and apparel, footwear, machinery, transport equipment, andmiscellaneous manufactures remained above 20 per cent.32 General tariff reductions of two thirds weremade from 1988 to 1996; smaller reductions have been made for "sensitive sectors", namely textilesand apparel, footwear, motor vehicles and components, and tyres.33 In 1993, effective protection,according to estimates by the Ministry of Commerce, was highest in transport equipment, followedby apparel and footwear, and textiles. These estimates suggest that such protection came mostly atthe expense of the food processing industries; printing and publishing; petroleum refining; basicmetals industries; and professional equipment.

49. The elimination of import licensing and the reduction of tariff rates has encouraged domesticmanufacturers to bring their production patterns more into line with New Zealand's apparent comparativeadvantage. Thus, as measured by value added, between 1987 and 1993 textiles and clothing and basicchemical manufacturing contracted by 16 and 35 per cent, respectively; food, beverages and tobaccomanufacturing expanded by 37 per cent, wood and wood products by 18 per cent, and paper and paperproducts by 39 per cent. The share of manufactured output that is exported has also increased markedly.From a share of 32.7 per cent of production in 1984/85, exports rose to 42 per cent of productionin 1992/93, the last year for which data are available. Most of this growth has been in the above notedareas where value added has expanded.

32Ministry of Commerce (1994a).

33The effective protection of apparel and footwear products is actually estimated to have increased as a resultof tariff reductions made between 1990 and 1993, because tariffs on inputs were being reduced relatively morerapidly than tariffs on the products produced by these industries (Ministry of Commerce, 1994a).


(i) Food, beverages and tobacco manufacturing

50. The share of New Zealand's food manufacturing industries34 in manufacturing value addedrose from 28.4 to 33.0 per cent in the period 1987 to 1993. This was based on a 37 per cent increasein the sector's value added, led by rapid growth in dairy-product manufacturing (110 per cent), raisingits share inmanufacturing from3.4 to 6.0 per cent, andbeverage and maltmanufacturing (70 per cent).35

The share of meat and meat products in manufacturing declined slightly, but in 1995 it still accountedfor 8.0 per cent of manufacturing value added.

51. Over half the production of the food manufacturing industries is exported, including nearly90 per cent of dairy products.36 Processed food exports in 1995 totalled $8.9 billion and accountedfor 41 per cent of totalmanufacturing exports and 35 per cent of allmerchandise exports. Meat productsand dairy products each accounted for 38 per cent of the exports of food manufacturing industries,followed by fish and fish products (11 per cent) and fruit and vegetables (5 per cent). Dairy productsmay be exported only by the New Zealand Dairy Board, or entities authorized by the Board; othermarketing boards may also directly or indirectly influence exports of certain products (section 2(i)(a)and Chapter III(3)(iii)).

52. The Uruguay Round results on increased market access and reduced export subsidies onagricultural products are important to New Zealand, particularly for its dairy products.37 This isparticularly so with respect to the market access and export subsidy reduction commitments of theEuropean Union (EU) and the United States. New Zealand's country-specific tariff quota on butterinto the EU increased by almost 50 per cent, from 51,380 tonnes in 1994 to 76,667 tonnes as from1996; its in-quota tariff, however, has more than doubled, from ECU 408.6 to 868.8 per tonne. Anin-quota tariff reduces the economic rents that may accrue to New Zealand because of the quota. Ifthere was not an in-quota tariff, New Zealand's Dairy Marketing Board could sell amounts up to thequota limit at a price near the internal EU price. With the in-quota tariff, the import price could bereduced to approximately the internal EU price minus the in-quota tariff rate. This weakens one ofthe main arguments for having a "single-seller" dairy exporter (Box IV.1). The EU has also increasedits global cheese access, for which New Zealand expects to be very competitive. In addition,New Zealand has received increases in its country-specific access for cheese to the United States andbutter to Canada, and secured country-specific access for prepared edible fats to Japan. Reduced volumesof subsidized dairy exports, particularly EU cheese and United States skimmed milk powder, are alsoexpected to benefit the New Zealand dairy industry.

53. Tariff cuts on 1 July 1996 reduced New Zealand's m.f.n. tariff average for manufactured foodproducts from 5.5 per cent to 4.9 per cent. These cuts were greatest on the relatively high tariff itemsin the sector, including bakery products (from 11.5 per cent to 9.4 per cent), soft drinks (9.8 per centto 8.4 per cent) and cocoa, chocolate and sugar products (9.7 per cent to 8.1 per cent). The lowest

34ISIC 31; these industries include food products, animal feeds, beverages and manufactured tobacco.

35Rapid growth in these industries actually started in late 1986, with value added in 1987 28 per cent higherthan the previous year. Because of confidentiality concerns, the figure for beverage and malt manufacturing alsoincludes tobacco product manufacturing; however, the latter accounts for a small share of the total.

36Statistics New Zealand (1995b). Figures refer to 1990/91.

37New Zealand feels that, among its industries, "The dairy industry will probably be the largest beneficiaryof the export subsidy disciplines negotiated in the Uruguay Round" (Ministry ofForeign Affairs and Trade, 1994).


tariffs in these industries are those on refined sugar, imports of which are duty free.38 The July 1996tariff cuts also helped reduce tariff escalation in the industry. Rates on fully processed and semi-processed products fell from 6.2 to 5.6 per cent and 5.8 to 4.9 per cent, respectively; those onunprocessed products fell from 1.1 to 0.9 per cent. The greater reduction on highly processed itemsis important because these products account for four fifths of non-preferential imports of manufacturedfood products. Other than tariffs and sanitary and phytosanitary requirements, no border measuresapply to imports of processed food items.

(ii) Textiles, clothing and footwear

54. The textiles, clothing and footwear (TCF) industries (ISIC 32) accounted for 6 per cent ofNew Zealand's manufacturing activity in 1993, down from 8.4 per cent in 1987. According to theauthorities, these industries have faced a difficult adjustment over the past decade. Imports increasedfrom $300 million in 1988 to $1,150 million in 1993, mainly as a result of the progressive removalof import licensing. This required domestic firms to improve their competitiveness, or leave the industry.With many firms exiting, investment in the textiles sector fell from $19 million in 1988 to $3 millionin 1992, and that in clothing fell from $46 to $29 million.

55. New Zealand does not restrict imports of TCF through import licensing or other quantitativebarriers.39 Tariffs are the only means of import protection. M.f.n. tariffs, however, average12.9 per cent, nearly triple the average for all other goods, and range as high as 30 per cent.40 Tariffsare highest for wearing apparel, at 26.6 per cent, followed by products of knitting mills (23.7 per cent),carpets and rugs (21.9 per cent) and footwear (17.8 per cent). Many of the tariff lines, such as thaton leather clothing, include alternative specific rates, which are used if the duty revenue from applyingthe specific rate would exceed that from applying the ad valorem rate. This occurs most frequentlyfor relatively low-priced products, thus increasing protection for the domestically produced, competingitem.

56. Tariffs for TCF products tend to rise with, and protect, the level of processing. All unprocessedTCF products (accounting for 38 tariff lines) have m.f.n. rates of zero, while tariffs on semi-processedproducts (506 lines) average 4.4 per cent and rates on processed products (634 lines) average20.4 per cent. However, escalation will be reduced with the implementation of planned tariff cutsduring the period 1997-2000.

57. Because TCF products were subject to industry plans, tariffs on these products were not reducedin line with the general tariff reductions of 50 per cent between 1988 and 1992 and a further one thirdfrom 1993 to 1996. Rather, tariff reductions on TCF products were effected more cautiously. Tariffs

38This combination of low rates on sugar and relatively high rates on sugar-based products appears to givesubstantial effective protection to activities such as chocolate and beverages manufacturing.

39The removal of import licensing for TCF goods began with the implementation of the 1985 review of theTextile Industry Development Plan. Licensing requirements were eliminated for imports of textiles and clothingfrom Forum Island Countries in 1988 and Australia in 1989. Imports of textiles from all other countries weresubject to licensing until 1991; clothing imports from other countries were the last products subject to importlicensing, with restrictions eliminated in July 1992.

40New Zealand's average m.f.n. tariff is 6.2 per cent; excluding TCF, however, the average is 4.8 per cent.The tariff reduction of 1 July 1996 cut the average m.f.n. tariff for TCF by over one percentage point, from14.0 per cent.


on footwear remained at about 45 per cent, with some exceptions, until 1992, and were phased downto 25 per cent (children's sizes) and 30 per cent (adult sizes) by 1996.41 From 1989 to 1992, m.f.n.tariffs on clothing were reduced from a range of 40 to 65 per cent to 40 per cent; these rates weresubsequently reduced by a quarter, to 30 per cent, in the period 1993-1996. For textiles, most ratesover 30 per cent were reduced to 30 per cent in the period 1988 to 1992. Thereafter, with someexceptions, textiles became subject to the general tariff reduction programme, and rates were reducedby a third from July 1993 to July 1996.

58. As part of the 1997-2000 tariff reduction programme, m.f.n. tariffs on TCF products are tobe substantially reduced. Most rates on clothing and adult footwear will be progressively loweredfrom the 30 per cent rate introduced on 1 July 1996 to 15 per cent on 1 July 2000; rates on children'sfootwear will be cut from 25 per cent to 15 per cent. Rates on carpets will be reduced from the current23 per cent to 15 per cent; those on most textiles (including knitted and woven fabrics, twine andcordage) will be reduced from 20 per cent to 10 per cent and rates on yarns will be cut from 13 per centto 5 per cent.

(iii) Wood and paper products

59. New Zealand's wood and paper products industries (ISIC 33 and 341) accounted for 12.7 per centof manufacturing value added in 1993, up from 10.9 per cent in 1987. Much of this expansion tookplace in paper products, the share of which increased from 4.6 to 6.4 per cent. Wood and paper productsaccounted for 13.4 per cent of manufactured exports and 3.6 per cent of manufactured imports in 1995.

60. Tariffs are the only means of protection or assistance to the industry. M.f.n. tariffs are atmoderate rates, with the average tariff on imports of wood products having been reduced from 6.7 to5.5 per cent on 1 July 1996; concurrently the average tariff on paper products was cut from 9.1 to7.6 per cent. New Zealand will reduce its tariffs on pulp, paper and printed matter to zero by 2004,as part of its tariff-reduction commitments in the Uruguay Round.

61. The authorities expect particularly strong growth over the next five years in the wood productsindustry, based on increased wood production from planted forests (section 2(ii)), increased investmentin forest-based industries, and increased market access for New Zealand's exports as countries implementtheir Uruguay Round commitments. Implementation of these commitments will reduce the averagetariff applied by developed countries on imports of forestry products from 3.5 to 1.1 per cent.New Zealand may also benefit from the expanded scope of tariff bindings by many developing Asianeconomies.

(iv) Motor vehicle manufacturing

62. Motor vehicle production (ISIC 3843) contributes about 2 per cent of the manufacturing sector'svalue added.42 The industry has undergone substantial restructuring in recent years, partly as a resultof the progressive removal of import licensing and reductions in tariffs. Imports of motor vehiclesincreased by nearly 80 per cent from 1987 to 1992, reaching a value of $1.9 billion, equivalent tonearly double the domestic output. During this period, employment in motor vehicle assembly fell

41Tariffs on adult footwear were actually increased from 45 to 55 per cent for one year on 1 July 1991.

42Motor vehicle manufacturing comprises roughly half of the transport equipment manufacturing sector;this sector accounted for 4.7 per cent of manufacturing sector value added in 1993, down from 5.6 per cent in1987. Data are largely drawn from Ministry of Commerce (1994a).


from 4,300 to 2,300 and employment in motor vehicle component manufacturing fell from 3,000 to1,500. Investment in these areas remained steady.

63. Import licensingrequirements formotorvehicles andcomponentswereprogressivelyeliminatedbetween 1985 and 1989. Tariffs, however, remained high: m.f.n. rates on passenger cars and lightcommercial vehicles remained at 55 per cent until July 1988 and were cut to 35 per cent by July 1992.From 1988 to 1990, tariffs on commercial vehicles were reduced, and those on heavy commercialvehicles were eliminated. Tariffs on passenger vehicles were progressively reduced to 25 per centfrom July 1993 to July 1996. Tariffs on components were phased down to 35 per cent for originalequipment and 20 per cent for replacement parts by 1992. These tariffs were subsequently reducedto 25 per cent and 12.5 per cent, respectively, on 1 July 1996. With the final instalment of tariffreductions under the 1993-96 programme, on 1 July 1996 the average m.f.n. tariff in all categoriesof motor vehicles fell from 10.7 per cent to 9.8 per cent.

64. Under the 1997-2000 tariff reduction programme, tariffs on replacement parts are to beprogressively reduced from 12.5 to 10 per cent and tariffs on original equipment components are tobe reduced from 25 to 15 per cent. For passenger and commercial vehicles, tariffs will be reducedto 15 and 5 per cent, respectively.

(4) Services

65. New Zealand's services sector accounts for about 62 per cent of GDP and 65 per cent of totalemployment.43 External trade in services comprised 23 per cent of New Zealand's total trade in 1995and has increased slightly more rapidly than merchandise trade over the past five years. New Zealandis normally a small net importer of services, with net imports equivalent to 0.8 per cent of GDP inthe year ending March 1995. Services exports are equivalent to over 7 per cent of GDP, up from6 per cent in 1990.44

66. The size of the services sector gives it special economic importance: as two thirds ofNew Zealand's productive resources are employed in services, their efficiency and productivity arekey determinants in the nation's economic welfare. The sector, moreover, plays a much greater partin New Zealand's export performance than its share of total exports would suggest. Most of theeconomy, including the export of goods, intensively uses services. For example, in the foodmanufacturing industry, which accounts for one third of total exports, services comprise 40 per centof direct input costs.45 To the extent that such costs can be reduced, through open internationalcompetition and increased productivity, this will be reflected in the enhanced competitiveness of sectorssuch as food manufacturing.

67. Given this clear importance of services, the authorities placed the sector at the forefront ofNew Zealand's structural reform. In general, competition is now relied upon, with direct regulationlargely absent under what is termed the "light-handed" approach to regulation. Virtually all key State-owned enterprises have been placed on a commercial footing, and many have also been privatized.Particularly given New Zealand's relatively small market, the openness of services markets tointernational competition has been vital to establishing the desired levels of economic competition.

43New Zealand Treasury (1996b), p. 23.

44Services exports rose by 8 per cent a year from 1990 to 1995.

45Based on inter-industry transactions data for 1990/91 in Statistics New Zealand (1995b).


68. New Zealand relies on competition law in areas where market failure might arise, such as withvertically-integrated natural monopolies in basic telecommunications. Even here, New Zealand haseschewed the use of industry-specific regulation: there is, for example, no telecommunications regulatorybody. Instead there is a combination of free domestic and foreign market entry, the application ofcompetition policy, and the use of indirect regulation to enhance the operation of the market by, forexample, seeking to ensure that adequate information is made available to consumers and competitors.

(i) Commitments under the General Agreement on Trade in Services (GATS)

69. New Zealand actively participated in the Uruguay Round services negotiations. It made manycommitments in a broad range of service industries; these are summarized in Annex IV.1, as per theServices Sectoral Classification List (SSCL). New Zealand also undertook one horizontal (i.e. cross-sectoral) commitment and specified three horizontal limitations; these, and m.f.n. exemptions aredescribed below.

70. By accepting the GATS, New Zealand agreed to provide m.f.n. treatment in all GATS sectorsother than those in which it took a GATS Article II (m.f.n.) exemption. These sectors are: audiovisualservices, interpretation services, and maritime services; in addition, in all sectors, New Zealand hasan m.f.n. exemption on the right of entry of natural persons. The audiovisual services exemption relatesto a preferential measure applied to Canada, France and the United Kingdom and concerns financialand tax concessions and simplified requirements for the temporary entry of skilled personnel.46 Itsobjective is to support the domestic film industry and to share benefits with other countries with similarpolicies. The m.f.n. exemption for certain translation services reflects the policy of giving morefavourable entry conditions to Japanese nationals with the requisite skills as interpreters. Its purposeis to help develop tourism.47 The maritime services exemption, which is fully explained below(section 5(v)(a)), reflects preferential treatment for certain Commonwealth personnel. The exemptionfor the entry of natural persons for all sectors relates to New Zealand's policy of providing favourabletemporary entry conditions for 20 Kiribati and 80 Tuvalu nationals a year. The purpose is developmentassistance by providing income, job skills, on-the-job training and work experience.

71. One of New Zealand's horizontal limitations is in the area of national treatment for theestablishment of commercial presence; it concerns approval from the Overseas Investment Commissionforcertain foreigndirect investments (Chapter I(4)). NewZealand'shorizontalcommitmentguarantees,in market access, the entry and temporary stay of certain employees of service suppliers with acommercial presence in New Zealand; it is limited to the following categories of employees: executivesand senior managers; specialists or senior personnel; installers and servicers; and service sellers.New Zealand's other horizontal limitations relate to: (i) enterprises currently in State ownership, and(ii) special treatment for Maori indigenous interests.

(ii) Agreement with Australia

72. The Protocol on Trade in Services to the Australia-New Zealand Closer Economic RelationsAgreement was signed in 1988 and entered into force on 1 January 1989. The Protocol calls for freebilateral services trade for all sectors not inscribed on a negative list and is applied automatically toany new services (Chapter II(2)(iv)). The Parties' respective negative lists have been considerably

46New Zealand is willing to consider extending this preference to other countries with which cultural co-operation may be desirable and which are willing to exchange preferential treatment.

47This measure may be extended to other countries.


shortened since 1989. Sectors fully or partially represented are: (i) for Australia, telecommunications,airport services, domestic air services, international aviation (passenger and freight services), coastalshipping, broadcasting and television (short-wave and satellite broadcasting), basic health insuranceservices, third-party insurance, workers' compensation insurance and postal services; and (ii) forNew Zealand, airways services, telecommunications, and postal services. It is the expectation of theParties that further sectors will be removed from the negative list over time.

(iii) Telecommunications

73. The communications sector accounted for 3.3 per cent of New Zealand's GDP in 1993, upslightly from 2.9 per cent in 1987. Value added in the sector grew by some 11 per cent in the yearto June 1995, led by rapidly growing activities such as cellular services. The Government's objectiveis that the sector "establish and maintain efficient markets in telecommunications goods and services."48

74. The Telecommunications Act 1987 deregulated part of the sector and subsequent amendmentsto the Act opened the sector completely to competition in 1989. The sector now consists of two majorcompetitors, Telecom and Clear, and many smaller firms that are active in some areas, such as datatransmission. Telecom, the former State-owned enterprise, owns and operates much of the country'stelecommunications network; it is under a legal limitation not to increase basic residential rates inreal terms, a limitation made necessary, according to the authorities, by Telecom's dominant position.Clear competes with Telecom in most services areas, and has a substantial share of the long distanceand international markets.

75. Telecommunication reform came early in New Zealand's structural adjustment effort. Froma situation in 1987 with a monopoly State-owned enterprise (SOE) that covered nearly all aspects oftelecommunications, the sector progressed through corporatization of the SOE and the establishmentof Telecom, deregulation of virtually the entiremarket, and Telecom's subsequent privatization in 1990.The New Zealand approach indicates that even in sectors with considerable scale economies and othercomplexities, techniques can be found to facilitate and encourage competition.

76. The establishment of a liberal telecommunications régime appears to have brought a numberof positive results, including an improvement in the standard and range of service, the rapid introductionof new technologies, greater variety, higher productivity, and lower prices.49 Thus, Telecom greatlyincreased investment while modernizing its network during the late 1980s and early 1990s. This hasled to a high share of digital switches (98 per cent) and a commitment to be fully digitalized by 1998.On the services side, the waiting time for a new telephone connection has been reduced from six weeksto two days. While in 1988 only 76 per cent of payphones were operational at any one time, this figureis now 98 per cent. Productivity, measured by the number of lines per Telecom employee, has alsogreatly increased, moving from 86 in 1990 to 214 in 1994.50 Prices have fallen, creating businessand consumer savings; from 1990 to 1994, residential prices fell by 7 per cent in real terms and theaverage price charged per minute by Telecom for long distance calls fell 55 per cent, in nominal terms,

48Ministry of Commerce (1994e).

49de Boer and Evans (1995), Galt (1995), and Ministry of Commerce and the New Zealand Treasury (1995).

50The OECD average (based on latest available data) moved from 150 in 1990 to 168 in 1992.


from 1988 to 1994.51 Despite these price reductions, Telecom has enjoyed a moderate return on capitalin recent years and Clear is now also showing signs of a moderate return.

77. The benefits of these developments are felt beyond the telecommunications sector. For example,productivity improvements have not only brought improved service but have also facilitated lowertelecommunications prices and hence business costs. Thus, telecommunications reform has also hadan important effect on the competitive position of New Zealand's exporters and its import-competingfirms.

78. New Zealand has made GATS commitments in relation to value-added services (Annex IV.1)and is a participant in the ongoing WTO negotiations on basic telecommunications. According to theauthorities, no current policies would require change in the event that New Zealand were to make newcommitments in the sector.

Sectoral overview and the impact of reform

79. Prospective entrants intoNew Zealand's telecommunicationsmarket faceno legal restrictions.52

Prior to 1987, the New Zealand Post Office held a monopoly in public telecommunications services.53

That year, the Post Office was split into three entities, including the Telecom Corporation ofNew Zealand, Ltd. (Telecom),54 each "corporatized" under the State Owned Enterprises Act and expectedto operate as "successful businesses" (Chapter III(5)). Regulatory policy and advice functions weretransferred to the Department of Trade and Industry, which subsequently became the Ministry ofCommerce. The Telecommunications Act 1987 provided for the deregulation of the market fortelecommunications customer premises equipment over the period October 1987 to April 1989.Amendments to thisAct in 1988 led to the removal of all legal restrictions on entry into the New Zealandmarket by 1 April 1989.55 According to the Ministry of Commerce and the New Zealand Treasury,New Zealand became at that time "the first member of the OECD to introduce full competition to allsectors of the telecommunications industry."56 Since the privatization of Telecom in September 1990,the major telecommunications policy issue in New Zealand has been the conditions for interconnectionof competitors to the network owned and operated by Telecom.

51Prior to reform, the long distance rate structure was correlated closely to distance, although costs are muchmore closely correlated to the volume of traffic along a route; competition has led to especially sharp reductionsin prices on the main routes.

52Ministry of Commerce (1995c) and Galt (1995).

53At that time, the only other suppliers of telecommunications services were certain State-owned enterprises,such as New Zealand Rail, that maintained facilities for their own use.

54The other entities formed were the Post Office Bank and the New Zealand Post.

55Other provisions of the Telecommunications Act relate to regulatory powers regarding internationaltelecommunications services and the promotion ofcompetitive conditions with respect to land. A service providerthat provides telecommunications services to at least ten persons or cable broadcast services to at least 500personsmay be designated as a network operator by an Order in Council of the Governor General, upon therecommendation of the Minister of Commere. This designation allows access to certain lands in order to laycables or construct lines; it is not a requirement for the provision of services (Ministry of Commerce, 1994f).

56Ministry of Commerce and the New Zealand Treasury (1995).


Privatization and universal service requirements

80. Telecom was sold by the Government in September 1990 to a consortium of Ameritech andBell Atlantic of the United States and two smaller domestic partners for NZ$4.25 billion; the entireproceeds wereused to retire Government debt. The sale was madepurely on commercial considerations,subject to the Kiwi Share obligations in Telecom's Articles of Association.57 The requirements onTelecom by the Kiwi Share are: (i) to maintain a local free-calling option for all residential telephonecustomers and to limit increases in the standard telephone (pre-GST) rental, including free local calling,to increases in the consumer price index (Telecom has regularly reviewed prices to keep them at ornear the permitted level);58 and (ii) to maintain rural line rental rates at or below standard rates. TheKiwi Shareholder restricts the ownership share of any single foreign party to 49.9 per cent and mayrequire half of Telecom's Board of Directors to be New Zealand citizens. Subsequent to its privatization,shareholding in Telecom has been considerably diversified with more than 50 per cent of its stock soldto private New Zealand and foreign investors.

The regulatory régime and interconnection

81. New Zealand's liberal regulatory régime rests on the basis that competition is the best formof market regulation.59 Thus, for example, entry is not legally restricted and prices are not regulated.The authorities recognize that Telecom holds a dominant position as the owner and operator of thelocal loop. Insteadof an industry-specific regulator, however, with respect to access to essential facilitiessuch as telecommunications networks, reliance is placed on Telecom and its competitors to negotiateinterconnection agreements. This is the environment in which New Zealand's key telecommunicationsinterconnection dispute has been litigated (Box IV.2).

82. While the New Zealand approach has raised some difficulties, the authorities are of the viewthat general competition law can address the specific competition issues of the sector, including disputesover interconnection to telecommunications networks.60 The environment in which these negotiationstake place has three basic features: competition law, disclosure requirements, and the threat of furtherregulation.

83. First, Section 36 of the Commerce Act, New Zealand's main competition law, makes it illegalto use a dominant market position to restrict, prevent, or eliminate competition in a market. The Actis enforced by the Commerce Commission and through private legal action (Chapter III(5)(ii)).

57The Minister of Finance holds the Kiwi Share.

58Telecom has developed optional tariff packages.

59The exception, for international services under particular circumstances, is discussed below.

60Advantages to this approach may include: saving the cost of an industry-specific regulator; allowing theconcentration of expertise in the Commerce Commission; the development of precedents in the Court systemthat may usefully guide conduct in other industries, which may be of particular importance in a smaller countrywith relatively few relevant legal precedents; promoting a consistent approach across industries; reducing therisk of an industry-specific regulator being "captured" by interests of the industry; and speeding the resolutionof disputes, since under the New Zealand legal system many decisions of a regulatory body would nonethelessbe brought before the Courts and because lay assessors with specialist expertise may sit along with Judges inthe High Court to hear Commerce Act cases (Galt, 1995).


Box IV.2 New Zealand's telecommunications interconnection dispute

Clear Communications was incorporated in August 1990 and concluded a long-distance interconnectionagreement with Telecom in April 1991. It also offered domestic and international toll services, the latterinitially through the resale of Telecom's services and then through its own services. In order to operatelocal telephone services, Clear sought an agreement with Telecom for local interconnection. When noagreement was reached, and Clear thus failed to fulfil a contractual obligation to a customer, Clearinitiated legal proceedings in August 1991.

Telecom initially sought a levy on access to its network on the grounds that some of the costs it incurredbecause of its general service (Kiwi Share) obligations should be shared by other telecommunicationsservices providers. Subsequently, Telecom also argued that under the Commerce Act its interconnectionprice could lawfully include the profit it would forgo by providing an intermediate component,interconnection, at a competitive price rather than the final service at a monopoly price. Clear arguedthat Telecom should price access to its market only at the incremental cost of providing that access. TheHigh Court issued a decision in December 1992 that held for Telecom. The Court of Appeal inDecember 1993 ruled for Clear.

On appeal, New Zealand's final appellate Court, the Judicial Committee of the Privy Council, ruled infavor of Telecom in October 1994. It concluded that the rule Telecom proposed for pricinginterconnection, known as the Efficient Component Pricing Rule or the Baumol-Willig Rule, was notanti-competitive under the Commerce Act. The Privy Council was of the view that the monopoly profitsaccruing to Telecom under this rule would be competed away in the long run by the entry of new firmsinto this market and markets for similar services. The two parties have continued to negotiate since thePrivy Council decision, but as at August 1996 had not reached agreement.

Following the decision of the Privy Council, the Ministry of Commerce and the Treasury issued a jointDiscussion Paper on the Regulation of Access to Vertically-Integrated Monopolies. It notes that theTelecom v. Clear interconnection dispute has raised three particular concerns: the appropriateness of theBaumol-Willig rule, which was developed in a context where final prices were controlled, forNew Zealand's market; the handling of Telecom's costs stemming from general service obligations, inthe event the Baumol-Willig rule is not retained; and the reliance on the courts and the Commerce Actfor the resolution of interconnection disputes.

Local access is the only interconnection issue not satisfactorily resolved through the liberal regulatoryapproach. Agreements have been reached in areas such as international services, customer premisesequipment, resale, and cellular services.

Source: Ministry of Commerce and the New Zealand Treasury (1995); and Blanchard (1995).

84. Certain information disclosure requirements are in place under the Telecommunications(Disclosure)Regulation 1990, promulgatedunder the Telecommunications Act. These aim to "facilitateeffective competition in the provision of telecommunication goods and services."61 They are viewedby the authorities as an important part of New Zealand's competition policy, because in an imperfectlycompetitive market the dominant firm's competitors and any potential entrants may otherwise lacksufficient planning information. Thus, the regulations require Telecom to make available financialstatements, including for its principal operating subsidiary, and to disclose prices, terms and conditions

61Ministry of Commerce (1994g). In addition, following a 1990 request from the Ministry of Commerce,Telecom publishes semi-annually certain service performance indicators, such as connection times, payphoneavailability, and information on billing disputes.


under which it supplies certain goods and services. This requirement was extended to the actual termsand conditions of its interconnection agreements by a 1993 amendment to the Regulations.

85. Finally, negotiations between the integrated monopolist and its competitors take place underthe threat of further regulation if the monopolist's dominant position is abused. Part IV of the CommerceAct provides for the imposition of price controls either: (i) generally, (ii) on particular firms, or (iii) onparticular products and services, if the Minister of Commerce feels that the conditions of effectivecompetition are absent. The Government signalled its intentions in this respect in a December 1991statement, which noted that interconnection was the critical competition issue in the sector and that"if it proves necessary, the Government will consider the introduction of other statutory measures orregulation."62

86. As a network operator, Telecom sets standards for equipment attached to its network, but indoing so is subject to the Commerce Act (Chapter III(2)(v)). Under the Telecommunications Act anynetwork operator has the right to approve the attachment of equipment to its network.

International competition safeguards

87. Generally, New Zealand telecommunications providers are free to negotiate agreements withoverseas operators as they see fit, although operators must register with the Secretary of Commerce.However, New Zealand thinks that "competitive suppliers of international telecommunications servicesare potentially vulnerable to the actions of overseas operators who may be in a position, on accountof barriers to market access in their own markets, to play one supplier off against another, to thedetriment of telecommunications users in New Zealand."63 The authorities are concerned that foreignmonopolists, when seeking to set rates and conditions of service with multiple New Zealand operators,will exploit their bargaining advantage.

88. In response, New Zealand maintains safeguards in the form of reserve powers that may beexercised by the Secretary of Commerce under the Telecommunications (International Services)Regulations 1994.64 The 1994 Regulations allow the Secretary of Commerce to require that in anagreement between a registered New Zealand operator and an overseas operator: (i) termination feesbe set at a rate fixed by the Secretary of Commerce, and (ii) the domestic operator's share of traffictoNew Zealand from that overseas operator equal the domestic operator's share of traffic to the overseasoperator (i.e., proportional return requirements).65 The reserve powers have not been exercised todate.

62Statement of the Government of New Zealand, 9 December 1991, cited in Ministry of Commerce (1994e).

63Ministry of Commerce (1995d).

64These regulatory powers are considered by the authorities to be transitional. The 1994 Regulations replacedthe 1989 Regulations, which had similar objectives but took a more direct approach. Under the earlier regulations,for example, there were parallel accounting and proportionate return of traffic requirements for all registeredNew Zealand operators contracting with the same overseas operator.

65According to the Ministry's Compliance Statement, the Secretary will be particularly interested in situationswhere: (i) two or more domestic operators use different accounting rates or methods with the same overseasoperator and receive shares of traffic from that overseas operator dissimilar to their shares of outgoing trafficto that operator; (ii) the domestic and overseas operator are related, leading, for example, to transfer pricing,(iii) a domestic operator receives particularly favourable terms and conditions, and (iv) large volumes of trafficare routed over international leased circuits.


89. The 1994 Regulations apply to international public switched services and leased circuits. TheSecretary of Commerce is obliged to register any applicant that provides public switched services toor from New Zealand. In determining whether to register applicants for leased circuits, the Secretarywill consider regulatory conditions in the overseas country concerned, and in particular whether theyare broadly equivalent with those of New Zealand; consideration will extend, for example, to whetherresale to third parties is permitted in the other country and whether interconnection to the public switchednetwork in that country is possible.66 The authorities have indicated that they will favourably considerregistration applications for the provision of services using leased circuits between New Zealand and,bilaterally, Australia, Sweden, the United Kingdom and the United States. Other countries will beconsidered for addition to the list upon request.

State of competition in New Zealand telecommunications

90. Active competition now exists in all parts of New Zealand's telecommunications sector, althoughit remains relatively limited in the provision of local telephone service, where it has only recently begunand remains limited to certain geographic areas.67 The first part of the sector in which deregulationwas introduced, namely the supply of customer premises equipment, is now subject to considerablecompetition, with some 190 companies having received approval for their equipment to be connectedto the Telecomnetwork (Chapter III(2)(v)). Indomestic toll (long-distance) services,Clear has emergedas a major competitor and holds about 20 per cent of the market, with the remainder virtually all heldby Telecom. All telephone customers have access to at least one alternative long distance andinternational carrier. Clear and Telecom hold market shares for international services similar to theirlong-distance shares; a third firm is active in providing international service via satellite. At leasteight firms have been registered as international operators. Telstra and Sprint are major providersof international service to corporate customers, and there are several callback service operators. Incellular services, BellSouth New Zealand holds 15 to 20 per cent of the market, with Telecom holdingthe rest; a cellular frequency has been awarded to a third firm, Telstra, which has yet to initiateservice.68 While Telecom's network is the largest, several smaller networks exist, having been purchasedfrom former government agencies such as New Zealand Rail. These are operated commercially, withcapacity often leased to resellers, of which at least four exist.

91. The authorities are satisfied with the overall level of competition in the sector under the liberalregulatory approach. They attribute the success of this approach to several key factors, including:(i) the absence of regulatory entry barriers; (ii) the absence of industry-specific foreign investmentlimitations, other than that placed on Telecom through its Kiwi Share obligations; (iii) the privatizationof Telecom; (iv) the option to use the provisions of general competition law; and (v) the disclosurerequirements placed on Telecom, particularly with respect to interconnection agreements.

66Ministry of Commerce (1995d).

67Clear has recently introduced local telephone service in the central business districts of the main cities.

68Some commercial frequencies and spectrums are allocated by the Ministry of Commerce according tocompetitive bids. Six radio spectrum auctions have been completed since the Radiocommunications Act wasintroduced in 1989. Initially these were sealed-bid, second-price tenders in which the highest bidder won therights but paid the amount bid by the second highest bidder; this was later changed to a first-price system. Incellular communications, the management rights to the spectrum suitable to AMPS technology is wholly heldby Telecom; BellSouth and Telstra hold management rights for GSM cellular technology. Thus "there iscompetition in the overall provision of cellular services but not within the cellular technologies concerned" and"consumers cannot transfer between operators without also exchanging cellphones" (Ministry of Commerce, 1995e).


Remaining issues

92. Two issues remain in the sector. First is the successful implementation of local interconnectionagreementsunder the"light-handed" regulatoryapproach. Unsatisfactory results in telecommunicationswould not only affect the telecommunications sector but could also affect other areas with vertically-integratedmonopolies. In light of the PrivyCouncil decision inTelecom v. Clear, the authorities carriedout a review of inter-connection issues, including extensive consultations with interested parties. TheGovernment decided at the conclusion of the review to continue to rely primarily on competition andthe Commerce Act to achieve its objectives in the telecommunication sector. The Government stated,in announcing its decision, that: (i) it would be very concerned to see a firm delaying negotiations,or otherwise attempting to restrict competition; (ii) it would be concerned if the Baumol-Willig pricingrules were to be applied in the future; (iii) the signing of the Clear/Telecom interconnection agreementin March this year had resolved the major outstanding dispute in the sector and might act as a frameworkfor future interconnection agreements; and (iv) where the Government is not satisfied that the partiesare negotiating in good faith, the Government will resume regulatory action, such as initiating aCommerce Commission price control enquiry, or, if circumstances warrant, directly imposing pricecontrol. The Government also indicated that it was concerned about slow progress in introducing numberportability and would be seeking a further report on this issue from officials. Carriers have sinceindicated their agreement to introducing both 0800 and local number portability, but with pricing termsfor local number portability still to be resolved.

93. The second issue concerns New Zealand's international-services competitive safeguards.New Zealand has not used these to restrict trade and it should continue to show restraint. A favourabledevelopment would be furthermarket-oriented telecommunications reform in other countries, obviatingthe concerns that have led New Zealand to maintain these safeguards.

(iv) Financial services

94. New Zealand's financial services sector, including banking, insurance andsecurities, accountedfor some 5.4 per cent of GDP in 1993, down from an average 5.7 per cent in 1987-1989, and for about6.4 per cent of employment. Some three quarters of the sector's economic activity is in banking.Financial services in New Zealand underwent vigorous market-oriented reforms in the mid-1980s.Remaining regulation is for prudential purposes or to facilitate competition. Policy objectives areachieved primarily through generic framework legislation, such as the Securities Act, the FinancialReporting Act, and duties imposed on directors under New Zealand companies law.

95. The highly regulated régime in place until 1984 had its effect throughout the economy.69 Inthe three years preceding reform, bank lending and deposit rates were controlled and reserve requirementsof trading banks were used to restrain bank lending and perhaps to ensure demand for governmentsecurities.70 Resulting distortions encouraged disintermediation - a shift in deposits toward non-bankfinancial institutions - and trading banks responded by rationing their available credit, concentratingit on large, established customers. The shortage of credit for new firms and the relatively high costsimposed by the inefficiency of the sector raised costs for the production sectors, including importersand exporters. The regulatory régime reduced competition and led to resource misallocation.

69Massey (1995).

70The trading banks were the most important of several categories of bank, each with delineated statutoryfunctions; despite a declining share, trading banks still held the majority of private sector credit in 1980.


Disintermediation, combined with technological developments that effectively opened internationalfinancial markets, also undermined the efficacy of monetary policy.71

96. These factors contributed to the urgency of opening the sector to competition, and in 1984the sector became among the first in the economy to be reformed. Change was rapid and dramatic:within nine months "the financial system went from being the most to possibly the least regulated withinthe OECD."72 Interest rate controls were abolished in July 1984; credit growth guidelines and reserveasset ratios were phased out in August and September 1984; and certain rules limiting the term andrate of overseas borrowing were eliminated in October 1984.73 In March 1985, a 70 per cent foreignownership limit on financial institutions was abolished. In 1986 the Reserve Bank was given the authorityto register new banks, each of which had previously required individual Acts of Parliament, and theNew Zealand banking market was effectively opened to overseas banks.

97. Since deregulation, an expanded range of financial instruments has been offered. Competitionhas led to reduced lending margins. Deregulation appears to have helped both consumers and businesses,by reducing borrowing costs and making available a broader range of toolswithwhich tomanage interestrate, exchange rate, and other risk.

(a) Insurance and insurance-related activities

98. The regulation of New Zealand's insurance industry relies largely on market-based disciplinesand incentives, and on generic rules. All insurance business is covered by two pieces of legislation,both prudential in nature; separate, additional legislation addresses life, mutual, and marine insurance,respectively. The Insurance Companies (Ratings and Inspections) Act requires insurance companiesto obtain a rating from an approved rating agency. Rating agencies are approved by the Registrarof Companies, and ratings are provided to the Registrar and disclosed to customers before they enteror renew a contract.

99. The Insurance Companies Deposit Act 1953 sets out prudential requirements for deposits offunds by insurance companies. Since 1974, a standard deposit of $500,000 is required to be paid byinsurance companies commencing business, whether they be local or foreign-owned. These depositscomprise the main prudential requirements. The Act also requires detailed annual reports and financialstatements of all insurance companies; life insurance companies must also make an annual actuarialstatement.74 All insurance companies are subject to other areas of legislation, including business law,competition law, and consumer protection law.

100. New Zealand's value added tax, the GST, applies to insurance products other than life insurance.The income tax applies to life and non-life insurers and insurance transactions.

71Massey (1995) notes that "deregulation was considered essential to the authorities' macroeconomic strategy."

72Massey (1995).

73The Reserve Bank subsequently developed open market operations in January 1985.

74In addition, the Insurance Intermediaries Act 1994, administered by theMinistry of Justice, regulates certainactivities of insurance agents and brokers, including how brokers may use insurance premiums, payments dueto the insured, and the operation of client accounts.


101. New Zealand's insurance industry is lightly regulated.75 New entrants do not need to beregistered, the only requirements being the rating and deposit requirements discussed above. Entryis not subject to national ownership or management requirements, requirements to involve certainreinsurers, or obligations other than those directly related to prudential supervision. There are norequirements to invest assets in particular activities or location restrictions on re-insurance. Norestrictions are placed on the products that insurance companies may offer and there are no approvalprocedures for new products. Agents and brokers are not restricted to dealing with certain companiesor individuals.76 Foreign-based insurance companies operate freely under the same regulatory controlsapplied to domestic companies. Foreign companies may organize themselves as they see fit.

102. The Government's liberal regulatory régime is complemented by a measure of self-regulation.The Insurance Council, for example, has adopted consumer information requirements for its members,and the Life Office Association has a statutory relationship with the Securities Commission andindependent review authority over its members. Life offices must comply with the Life OfficeAssociation Code of Practice, and are exempt from the prospectus and investment statement disclosurerequirements of the Securities Act. The Investment Product and Adviser (Disclosure) Bill currentlybefore the Parliament would remove this exemption.

Government involvement in the insurance industry

103. Traditionally, the Government was directly involved in most areas of insurance, often throughgovernment-backed mutual and life insurance funds. Over the past several years, the Governmenthas largely withdrawn from fire insurance and life insurance. Additionally, the rôle of the EarthquakeCommission (EQC), a Crown entity, is being narrowed as a result of the Earthquake Commission Act1993; after December 1996, non-residential property and some types of personal property, includingmotor vehicles, will no longer be covered, and caps have been placed on residential property coverage.EQC coverage is automatic upon the purchase of fire insurance through private companies, whichcollectpremiums for the EQC. The EQC must hold its reserves primarily in New Zealand Government Bondsand Treasury Bills.

104. Insurance for personal injury to New Zealand residents and visitors is provided through theAccident Rehabilitation and Compensation Insurance (ARCI) scheme. The scheme is administeredby the Accident Rehabilitation and Compensation Insurance Corporation (ACC), a Crown Agency witha government-appointed Board. The scheme is funded by employers, workers, vehicle owners andusers, the Government, and users of the scheme; participation is compulsory.

Structure of the insurance industry

105. According to the authorities, the Government does not monitor the structure and compositionof the insurance industry. Thus, figures are not generally available on the importance of foreigncompanies in the industry. However, according to data from Adams (1994), the life insurance industryis closely integrated with overseas insurance markets, particularly in Australia and the United Kingdom(UK). Two thirds of the life insurance companies in New Zealand are branches or subsidiaries ofmultinational corporations, and in 1992 Australian entities (64 per cent) and UK entities (30 per cent)accounted for most of the premium income. In addition, many smaller domestic life insurance companies

75According to Commerce Clearing House Australia, Ltd. (1991), New Zealand's insurance industry is themost unregulated market in the western world.

76The traditional New Zealand system of a network of agents for each insurance company is now complementedby networks of international and local insurance brokers and an expanding network of independent agents.


increasingly reinsure with multinational reinsurance companies. There are over 30 fire and generalinsurance companies operating in New Zealand, ranging from large multinationals to small specializedfirms. According to the authorities, the presence of foreign companies is significant.

(b) Banking

106. The Reserve Bank is responsible for promoting the soundness and efficiency of the financialsystem.77 An emphasis on market control disciplines through disclosure lies at the core of the approachtaken to bank supervision. Market participants, rather than the Reserve Bank, appraise the risk exposureof each registered bank and, apart from certain exceptions, including minimum capital requirements,detailed rules and guidelines for banks have been eliminated. Appraisal by markets is based on publiclyavailable information, particularlymandatoryquarterly disclosure statements, which include, inter alia,financial statements, credit ratings and details on significant risk exposures.78 Disclosure strengthensincentives for bank managers and directors to manage their own business risks and to behave prudently.The emphasis on disclosure also reinforces the perception that the management and directors of a bankhave the sole responsibility to manage a bank's affairs. The authorities feel that this helps to reduceany perception that banks can never fail and that the Government has a responsibility to rescue a bankin distress.

107. The Reserve Bank continues to have responsibility for supervising the banking system; it isresponsible for registering banks, and monitors banks through their public disclosure statements. TheReserve Bank has wide-ranging authority to respond to financial distress or bank failure. The ReserveBank of New Zealand Act 1989 addresses the Reserve Bank's powers regarding registration andsupervision. The Reserve Bank's "Statement of Principles - Bank Registration and Supervision", whichreplaced the 1992 Principles in January 1996, elaborates on the Act.

Bank registration

108. Banking activity is not restricted: no legal requirements pertain to the activity of banking andthe supply of banking services is not legally restricted to registered banks. Nor are there limitationson the types of activity that registered banks may undertake. Instead, banking supervision inNew Zealand turns on the use of the word "bank" and on the Reserve Bank's registration of banks.

109. Only those institutions registered by the Reserve Bank may use the word "bank" in their title.The Reserve Bank, in assessing registration applications, attempts to ensure that "only financialinstitutions of appropriate standing, which are able to demonstrate their ability to carry on businessin a prudent manner" qualify for registration.79 In approving an application, the Reserve Bank mustbe satisfied that the applicant's business will substantially consist of providing financial services;80

the Reserve Bank will also have regard to the potential bank's ownership structure, its size, its standing

77The Reserve Bank has broad crisis management powers. These include the authority to recommend tothe Minister of Finance the deregistration of a bank or that a bank be placed under statutory management and,with the approval of the Minister, to give written directions to the bank.

78Bank directors must publicly confirm the adequacy of their bank's risk monitoring and control systems,and are subject to civil and criminal liability for false or misleading statements.

79Reserve Bank of New Zealand (1996).

80The Reserve Bank has not attempted to define "financial services" for these purposes since this type ofservice evolves over time.


on the financial markets and, for an overseas bank, the legal and regulatory requirements in its countryof domicile.81

110. Generally, overseas banks are free to incorporate locally or to establish branches. Locallyincorporated registered banks must have and maintain at least $15 million in capital. All banks mustmaintain capital adequacy requirements consistent with an international standard known as the BasleCapital Accord, developed under the auspices of the Bank of International Settlements. For theestablishment of a branch: (i) an entity must have the status of a bank in its home country; (ii) thesupervisory or disclosure requirements, or the effectiveness of market disciplines, in the country ofincorporation must be adequate; and (iii) the operations of the New Zealand branch must not constitutea predominant share of the bank's total business. When the Reserve Bank is not satisfied on thesepoints, it may require the applicant to incorporate locally; in particular, this would apply to applicantsincorporated in a country that does not apply the capital adequacy framework of the Bank of InternationalSettlements (BIS) or a satisfactory equivalent. No minimum size requirement is applicable to branchesof overseas banks; however, the Reserve Bank must be satisfied that the capital of the bank in its homecountry is equivalent to at least $15 million and that the bank complies with the minimum capitaladequacy and other requirements of the home supervisor.82

111. Directors must attest quarterly to their bank's compliance with its conditions of registration.

Structure of the banking industry

112. The openness of New Zealand's banking industry to foreign competition is evidenced by theindustry's structure. As at 31 March 1996 there were 14 registered foreign-owned banks and twodomestically owned banks. There are no State-owned banks. Four major banks each account for 14to 21 per cent of the industry's New Zealand assets.

(v) Transport

113. The New Zealand transport and storage sector accounted for 5.0 per cent of GDP in 1993,a share that has been steady since the mid-1980s. About a third of the sector's value added resultsfrom road transport activity, a quarter from air transport, a fifth from rail and water transport andthe remainder from support services to the sector. Transport services employed some 5 per cent ofthe full-time work force in 1993. In the year ending June 1995, transport exports accounted for40 per cent of New Zealand's total service exports, or some 9 per cent of total exports. Imports oftransport services accounted for 40 per cent of total services imports and 10 per cent of total imports.Transport services provided to foreigners inNew Zealand are considered tourism exports; they accountfor an additional 10 per cent of total services exports.

114. Economic links between transport andother sectors are important. According toNew Zealand'sinter-industry accounts for 1990/91, transport services make up 4.5 per cent of input costs for meatand dairy manufacturing industries and 8.6 per cent of costs for other food manufacturing industries,such as fruit and vegetables. For paper and paper products manufacturing, the cost share of transportservices equalled nearly 15 per cent. Further, New Zealand's tourism officials have noted the vitalimportance of the transport sector, particularly air services, to tourism (section (vi)). This accordsfully with the observation by Francois and Reinert that due to the intermediate structure of production,

81An applicant may be required to incorporate locally to insulate itself from effects of foreign laws andregulations.

82This will normally require compliance with at least the BIS minima.


services are a major part of production, even for merchandise exportables.83 It is clear that theimportance of efficient transport extends to the export sector.

115. Prior to reform, government intervention pervaded the transport sector.84 The Government,rather than market forces, regulated competition. The number of suppliers in land, rail and air transportwas controlled, as were the routes that each supplier could service. In some cases, rates of returnon capital were directly regulated. The major airlines and two large shipping operations weregovernment-owned and operated, as were the largest passenger and freight transport operators andnearly all ports and airports. Policy favoured some transport modes at the expense of others. Forexample, goods could not be transported by road, except for short distances.85

116. The recognition of transport as an infrastructural service lay behind the comprehensive domesticand external reforms begun in the sector in 1983.86 Reform, which is now complete except for someissues of road transport, was guided by several key principles, including: (i) the establishment ofcompetition within and between transport modes; (ii) ownership and operation of transport systemsby the private sector on a commercial basis; (iii) the clear separation of government policymakingfunctions from regulatory and service-delivery functions; (iv) inter-modal policy neutrality; and(v) safety regulation as a joint operator/government responsibility on a user-pays basis. In line withthese principles, reform encompassed the commercialization of government transport operations, followedas appropriateby privatization, and the repeal of legislationgoverning the supplyand pricingof transportservices. Commercial regulation is now limited to laws, such as the Commerce Act, that affect allbusiness in New Zealand. In many areas, the reduction or elimination of trade and foreign investmentbarriers has raised the level of competition in the market and enhanced the effectiveness of the reforms.On safety, New Zealand has moved toward an audit and monitoring approach, with more responsibilitygiven to transport and other operators in the sector.

117. Transport reform appears to have been successful. Rates fell some 40 per cent in real termsin the five years following the abolition of the railway's freight monopoly.87 Air fares on main domesticroutes fell by 10 per cent, in nominal terms, by the end of 1987, following the entry of Ansett.According to the authorities, this expansion reflects structural reform and generally strong economicactivity, particularly in tourism and foreign trade. Transport has seen substantial investment in thelast two years, including upgrading of port and airport facilities and the purchase of new airplanesand ferries, presaging further sectoral growth.

83Francois and Reinert (1995). The authors note that in Japan, for example, despite the concentration ofexports in transport equipment and other machinery and equipment, the activity composition of exports is actuallyconcentrated in services.

84Ministry of Transport (1995a).

85Initially this distance was 40 miles; later, it was raised to 150 kilometres.

86Ministry of Transport (1995b).

87Until 1990, the rail system was maintained and operated by the government-owned New Zealand Railways,which also operated a network of road passenger services and a national parcel service that competed with privatefirms. The core rail business was hived-off in 1990. New Zealand Rail was subsequently commercialized, thenprivatized in 1993. It was purchased by a consortium led by the American enterprise Wisconsin Central andincluding various New Zealand interests. Restructuring included reduction in staff from 23,000 in 1982 to 6,000in 1991; key operations, including the railway network and the ferry service between the two main islands, werenot substantially altered.


(a) Maritime transport

118. Maritime transport is important for New Zealand's international trade, some 90 per cent ofwhich is carried by sea.88 The vast majority of seaborne trade is by about 30 foreign companies.89

Foreign operators have free access to shipping to and from New Zealand.

119. New Zealand's international shipping competition law is set out in the Shipping Act 1987.The Act exempts liner shipping conferences from anti-trust legislation of the Commerce Act 1986.This reflects the perception of shippers of cargo and shipping companies that there is mutual benefitin carriers combining under a liner conference agreement to provide a joint service. The ShippingAct sets New Zealand's liberal policy on international shipping trades, in keeping with the generalregulatory environment in New Zealand over the last decade. The onus is on shippers and carriersto negotiate the best possible terms - free from, and with limited recourse to, government involvement.While the Act is based on the assumption that fairly negotiated tariffs and terms of contract are a privatematter in which the State should have little or no involvement, there is scope for limited action bythe Minister of Transport in the event of any unfair practice by a carrier.

120. Part II of the Shipping Act 1987 gives to the Minister of Transport reserve powers to take certainregulatory actions in defence of New Zealand's shipping or trading interests. These powers may beused if a foreign government damages those interests by limiting the access of: (i) New Zealand flagcarriers to seaborne cargo, or (ii) New Zealand shippers to the services of carriers of their choice.Measures may be applied only against ships controlled by that foreign government, a national of thecountry of that government, or an enterprise based in that country. The measures might include:(i) restricting, or levying charges on, ships entering New Zealand ports, and (ii) setting the terms andconditions of shipping agreements. These reserve powers have not been used. Any future use would,according to the authorities, be in a manner consistent with the GATS.

121. In February 1995 the Maritime Transport Act 1994 came into effect, substantially openingNew Zealand's coastal shipping trades to foreign carriers engaged in international shipping toNew Zealand. No limitations are placed on the number of ports visited or serviced or the type of cargo,but immigration law effectively limits the time in which foreign ships can carry coastal cargo to 28 days.90

According to the authorities, one year after the introduction of cabotage, foreign operatorswere carrying10 per cent of the total inter-island container trade. Increased competition has reduced transport costsand increased the choice of domestic transport services, particularly for the manufacturing and agriculturalsectors.

122. The corporatization and partial privatization of New Zealand's ports has positively affectedits trade. All 13 major ports were corporatized under the Port Companies Act 1988 and are nowprimarily owned by local authorities, albeit with up to 45 per cent private shareholding. In addition,the Waterfront Industry Commission, which had regulated waterfront employment, was abolished in1989 and replaced with a system of labour relations similar to that in the rest of New Zealand industry.Although there has been a reduction in the workforce of nearly 60 per cent, ship turnaround timeshave been cut in half and freight rates have been significantly reduced.

88WTO document S/NGMTS/W/2/Add.2, January 1995.

89According to the authorities, there are no foreign direct investment restrictions specific to the sector. FourNew Zealand companies, all privately owned, carry some 10 per cent of this volume.

90An Australian-crewed ship could engage in New Zealand coastal trade indefinitely because of provisionson immigration under the CER.


123. New Zealand has a GATS m.f.n. exemption in maritime transport. Under this, officers onNew Zealand ships can be limited to nationals of New Zealand and certain other countries: Canada,Hong Kong, Ireland, India, Malaysia, Pakistan, Singapore, South Africa, and the United Kingdom.The measure, which favours harbour pilots from Commonwealth countries, stems from the 1931Commonwealth Merchant Shipping Agreement; its aim is to promote local maritime recruitment.According to the authorities, the provision on the nationality of officers is likely to be eliminated by1998, and the m.f.n. exemption will then be removed.

124. The Australian Bureau of Industry Economics (BIE, 1995) argues that, despite liberalization,the current practice of trans-Tasman shipping remains an impediment to New Zealand-Australia trade.According to this report, trans-Tasman shipping costs remain high by international standards becauseof a private agreement between major labour unions, the Australian and New Zealand Maritime andStevedoring Accord. Neither Government is party to the Accord, which reportedly seeks to preventnon-Australasian crewed ships from transporting cargo between Australia and New Zealand. Again,according to the report, Australian and New Zealand shipping companies do not actively oppose theagreement because it raises the costs of foreign-crewed ships - which must hire a local crew in additionto the normal crew - by a greater amount than it raises the costs of domestic companies. A jointgovernment study in 1987 estimated that trans-Tasman freight costs could be reduced by up to 25 per centif third-country ships visiting both Australia and New Zealand were allowed to uplift cargo en route.A subsequent joint government study, in 1991, indicated that freight rates on Australasian-crewed shipshad fallen, in real terms, by over 20 per cent in the previous three years.

(b) Air transport

125. New Zealand's air transport sector has been substantially liberalized since 1983. Key reformshave included domestic economic deregulation and the privatization of the former State-owned monopolyenterprise, Air New Zealand, and the elimination of foreign investment restrictions for domestic airlines.91

New Zealand grants no exclusive rights, such as obligations on government entities to employ specifiedcarriers, in the air transport industry. There are no restrictions on, or incentives for, domestic carriersto purchase from particular sources. According to the authorities, New Zealand airlines receive nosubsidies or government guarantees. However, as in many countries, international services continueto be restricted under a régime of bilateral agreements.

Domestic air transport

126. Restrictions on the number of licensed operators offering domestic air services were eliminatedin 1983 for local airlines and foreign-owned airlines incorporated in New Zealand. Certification tooperate on the domestic market is solely on the basis of safety and operational matters and is theresponsibility of the Civil Aviation Authority. There is no economic regulatory body for domesticair transport. Australian airlines do not, as yet, have any special privileges on domestic New Zealandroutes.

127. A statutory 24 per cent limit on foreign investment in domestic air services was revoked in1986, and the Government issued guidelines to the Overseas Investment Commission allowing it toapprove foreign investments up to 50 per cent. This cap was removed in 1988.

91Air New Zealand was privatized in 1989. The maximum foreign investment allowed in Air New Zealandis 35 per cent. According to the authorities, this results from limitations in New Zealand's bilateral air servicesagreements.


128. Major domestic routes are served by three airlines: Air New Zealand, Ansett New Zealandand Mount Cook Airlines. Ansett New Zealand is wholly owned by Ansett Australia, and Mount CookAirlines is wholly owned by Air New Zealand.92 Ten smaller airlines, two of which are owned byAir New Zealand, offer scheduled domestic services on provincial routes. Another domestic airlineis expected to begin operations in competition with Air New Zealand and Ansett in late 1996.

International air transport

129. An airline requires an international air service licence before it may initiate international airservices to or from New Zealand. These licences are issued by the Secretary for Transport, inaccordance with the provisions of bilateral agreements, and specify the route and capacity that an airlineis entitled to operate. In August 1996, 26 international airlines operated scheduled passenger serviceinto and out of New Zealand (six on a code-share basis only); eight of these carriers have begun servicesince 1989. One of these airlines also offers scheduled cargo service; two other international airlinesprovide cargo-only service. Airlines are required to disclose their proposed tariffs to the Governmentonly at the time of their initial application for an international air service licence, and subsequentlyif they wish to increase previously-approved standard fares.

130. The New Zealand Government is party to 30 air-service agreements, and a non-governmentalagreement is in place with Chinese Taipei.93 Key parameters covered by these agreements include:(i) the single (one airline is designated by each party) or multiple designation of airlines; (ii) the tariffrégime; (iii) principles regarding capacity; and (iv) the route schedule. Most agreements limitcapacity;94 in this case, airlines may operate the number of services for which they are licensed; theMinister of transport allocates traffic rights to New Zealand airlines.

131. New Zealand has open-capacity arrangements with Argentina, Australia, Chile, Cook Islands,Fiji, Luxembourg, the United States, and Western Samoa. The agreements with Australia and WesternSamoa provide for open capacity only for air services between the two countries, not beyond, and theagreement with Chile contains no beyond rights. None of these agreements include cabotage, and somecontain route restrictions and single destination clauses. In total, New Zealand has air servicesagreements with 12 Asian and Pacific Rim States (plus those with Hong Kong and Macau, and thenon-governmental agreement with Chinese Taipei), five European countries, nine Pacific Island countries,and two South American countries (excluding Chile, which is included in the Asia and Pacific Rimtotal).

132. New Zealand considers code-sharing to be a subset of traffic rights and to be automaticallyincluded in any exchange of traffic rights; it seeks to confirm this view in negotiations with its bilateralpartners. Three international carriers have access beyond their New Zealand gateway by way of code-

92As at August 1996, Air New Zealand's proposal to purchase 50 per cent of Ansett Australia was beingconsidered by the Australian Foreign Investment Review Board (FIRB), competition authorities in Australia andNew Zealand having already approved the purchase. The latter's approval was given on condition that, if AirNew Zealand's proposal is approved by the FIRB, News Ltd. (Air New Zealand's prospective 50 per cent partnerin Ansett Australia) will purchase 100 per cent of Ansett New Zealand, thereby ensuring the independence ofthat carrier.

93The New Zealand signatory to the agreement is the New Zealand Commerce and Industry Office in ChineseTaipei. Although not as extensive as a typical air services agreement, the agreement with Chinese Taipei hassimilar parameters to other agreements.

94Maximum capacities are normally in a memorandum of understanding associated with the agreement.


sharing with Ansett New Zealand. Code-sharing policy also extends in some cases to the aircraft ofthird-country airlines; for example, British Airways code-shares with Qantas (an Australian carrier)between Auckland and Los Angeles.

133. No foreign carriers currently have cabotage rights in New Zealand. New Zealand is willingto consider exchanging cabotage rights for rights of equivalent value. The 1992 Memorandum ofUnderstanding (MOU) signed with Australia provides for airlines of either country to operate withfull domestic traffic rights in the other, including the right to carry cabotage traffic. However, theMOU has yet to come into effect in this respect.

134. According to the authorities, New Zealand's international aviation policy seeks to encouragebilateral air-service partners to negotiate liberal agreements in order to increase competition in existingand potential markets. The number and scope of bilateral air-service agreements has increasedsubstantially, particularly with Asian and Pacific Rim States.95

135. Provision is made under the Civil Aviation Act for exemption from New Zealand's generalcompetition law in two situations. First, inter-airline tariff agreements may, subject to statutory criteria,be exempted from the Commerce Act's provisions on restrictive trade practices, including price fixing;the authorities are of the view that "interlining" by airlines benefits consumers. Second, an airlineworried that a competitor may regard a promotional fare as predatory may seek protection from theCommerce Act provisions regarding abuse of a dominant position.96 These provisions apply to domesticroutes only.

136. The air services Memorandum of Understanding signed in August 1992 with Australia envisaged"beyond rights" for designated airlines, and the gradual introduction of additional airlines to trans-Tasmanroutes.97 Subject to consultations, the Understanding also allowed designated airlines to operate withfull domestic traffic rights in the other country (including cabotage). In October 1994,Australia advisedNew Zealand that it would neither allow New Zealand airlines access to its domestic market nor grantbeyond rights other than those in effect in November 1994 (BIE, 1995). Thus New Zealand airlinesare excluded from carrying domestic passengers within Australia and remain limited to the equivalentof 12 Boeing 747 services per week beyond Australia, and this same limit is applied on Australianairlines wishing to carry passengers beyond New Zealand. According to the Australian Bureau ofIndustryEconomics, restrictionson trans-Tasmancivil aviationare among themost important remainingimpediments to New Zealand's trade with Australia.

Related services

137. New Zealand's major airports have been corporatized, as have many aviation-related services.The three international airports (Auckland, Wellington, Christchurch) currently have a mixture of centraland local government ownership, and Auckland International Airport has a small private shareholding.Auckland, the largest, and Wellington are majority-owned by the Central Government. Christchurchis majority-owned by the Christchurch City Council. The Government has indicated its interest inselling shares in New Zealand's airport companies and will address ownership issues at particular airportson a case-by-case basis.

95The number of passengers flown on routes to Asia doubled from 1987 to 1990 and more than trebled inthe five years to March 1996.

96The Commerce Commission has competence in this regard.

97This would allow airlines from one country to fly via the other to destinations outside Australasia.


138. The allocation of slots at airports is determined by airport authorities, based on commercialconsiderations. In the event of a dispute over slot allocation, parties would have recourse to theCommerce Act provisions, but according to the authorities slot availability has not been a problem.Ground handling at New Zealand's airports is open to competition, although the authorities note thatairlines often provide their own; however, at Auckland there is competition between Air new Zealandand a U.S. non-airline company. The Ministry of Transport, in 1987, separated its air traffic controlservices, creating a State-owned enterprise, the Airways Corporation, to operate on a commercial basis,with revenues from users of the system. This has been successful: charges have been halved, yetAirways Corporation earns profits for the Government and is making investments to modernize airtraffic control. Similarly, airport meteorological services were separated from the Ministry and theMeteorological Service established to run on a commercial basis. Tax payer costs for meteorologicalservices have been halved over the past four years, and service has reportedly improved substantially.

(vi) Tourism

139. Tourism is New Zealand's single largest source of export revenue, accounting for some18 per cent of total foreign exchange earnings.98 The sector contributes an estimated 5 to 6 per centof GDP. It is growing rapidly, with international visitor arrivals up from under 600,000 in 1984 to1 million in 1992 and nearly 1.4 million in 1995; from 1993 to 1995, spending per visitor increasedby 44 per cent, to $3,000.

140. Traditionally, tourist arrivals aremainly fromAustralia (29 per centof visitors in1995), Canadaand the United States (together accounting for 14 per cent), Japan (11 per cent) and the United Kingdom(9 per cent). The source of much of the visitor growth since 1992, however, has been Asia, particularlythe Republic of Korea, Thailand and Chinese Taipei.99 The number of visitors from Asia, excludingJapan, increased by 45 per cent in the year to June 1994, by 31 per cent the following year, and by30 per cent in the year to June 1996.

141. Tourism has close economic links with other sectors.100 Expanded air service to Asia has spurredvisits from that region. Tourism activity has contributed to increased occupancy and room rates inNew Zealand hotels, increasing returns for hotel owners and leading to additional construction work.The trade, restaurants and hotels sector grew by 8.4 per cent in the year to March 1996, partly dueto tourism. The authorities have noted a virtuous circle with respect to tourism and economic reform:New Zealand's economic reforms have helped boost tourism, while tourism growth has contributedto growth in other areas of the economy. Despite the relatively liberal approach taken by New Zealand,some bilateral air service agreements remain a constraint on tourism growth.

142. The New Zealand Tourism Board was established by a 1991 Act of Parliament to ensure thatNew Zealand is "marketed as a visitor destination so as to maximize long-term benefits to New Zealand."The Board, financed by the Government, co-operates in joint ventures with the private sector for

98This figure, which in absolute terms is some $4.8 billion, includes $1.3 billion in overseas ticket sales byAir New Zealand.

99Overall, Asia (minus Japan) accounted for half of the growth in 1994/95 and now accounts for some 20 percent of the total. Korea's share of the total growth was 33 per cent, followed by Chinese Taipei (9 per cent),Thailand (8 per cent) and China (3 per cent).

100Satellite accounts for tourism are being established in New Zealand's national accounts. This will allowa more precise calculation of the sector's contribution to the economy and will give the authorities valuableinformation on the relationships between tourism and other sectors of the economy.


marketing activities. In 1991 the Board set a goal of $9 billion in foreign exchange earnings by thesector in the year 2000, nearly double 1995 earnings. Given the current expansion of visitor numbersand average visitor spending, this goal appears to be achievable. If so, this would mean added foreignexchange earnings for the economy equivalent to some 20 per cent of total current earnings, an increaseexceeding the current value of all dairy product exports.


Annex IV.1New Zealand's Specific Commitments under the GATS101

(i) Business services

(a) Professional services

143. New Zealand has bound the first three modes of supply (cross-border supply, consumptionabroad, and commercial presence) without limitation for many professional services. These bindingsapply to legal, accounting, taxation, architectural, engineering102, and veterinary services. Nocommitments have been made in other areas, including integrated engineering; urban planning andlandscape architecture; medical and dental services; and services of midwives, nurses physiotherapistsand para-medical personnel.

(b) Computer and related services

144. Consultancy services relating to hardware installation; software implementation; data processingservices; and data base services have all been fully bound with no limitations. No commitments havebeen made regarding "other" services.

(c) Research and Development services

145. No commitments have been made.

(d) Real estate services

146. This area, consisting of services involving own or leased property and services on a fee orcontract basis, has been fully bound with no limitations.

(e) Rental and leasing services without operators

147. This area, with the exception of "other" services, has been fully bound with no limitations.

(f) Other business services

148. New Zealand has fully bound advertising services, building cleaning services and translationservices, with no limitations. Services incidental to agriculture have been fully bound with no limitations,except that commercial presence for the provision of services incidental to animal husbandry is limitedby a provision that herd-testing services may be supplied only by providers licensed by the Dairy Board,and that the number of licences may be limited.

149. No commitments have been made on the remaining business services, including market research;management consulting; services incidental to fishing, mining, manufacturing and energy distribution;and photographic, packaging, printing, and convention services.

101This annex summarizes New Zealand's specific commitments. It does not contain the same level of detailas the Schedule and is not a substitute for it. Unless otherwise noted, the presence of natural persons is unboundexcept as indicated in the text of the chapter.

102 National treatment of engineering services is limited by the requirement that registered engineers be ordinarilyresident in New Zealand.


(ii) Communication services

150. New Zealand has made full bindings with no limitations in most areas of communicationsservices, except that a national treatment limitation results from the 49.9 per cent shareholding limiton any single overseas entity in Telecom New Zealand. Areas where commitments have not beenmade include electronic mail, voice mail, enhanced value-added facsimile services, voice telephony;data transmission services; telex, telegraph and facsimile services; and private leased circuit services.New Zealand is an active participant in the WTO telecommunications negotiations and these may resultin substantial changes to New Zealand's Schedule.

151. Limitations have been placed in the Schedule for audiovisual services on national treatment(cross-border supply and commercial presence, because of government assistance to support New Zealandfilms and special funding for Maori programming) and market access (presence of natural persons,because of special entry procedures for entertainers).

152. No commitments have been made in the areas of postal and courier services.

(iii) Construction and related engineering services

153. In this sub-sector, New Zealand has bound, without limitations, all areas except the "other"category. The bound activities include general construction work for buildings and civil engineering;installation and assembly; and building completion and finishing. In the "other" category, sitepreparation for new construction (other than pipeline) and the maintenance and repair of fixed structureshave been bound with no limitations.

(iv) Distribution services103

154. Commission agents' services, wholesale trade and retail trade have been fully bound byNew Zealand. No commitments have been made with respect to franchising or other distributionservices.

(v) Educational services

155. Primary, secondary and tertiary eduction in private institutions has been fully bound with nolimitations. No other commitments have been made.

(vi) Environmental services104

156. New Zealand has made no commitments in this area.

103Distribution services consist of commission agents' services; wholesale trade; retailing; franchising;and other distribution services.

104Environmental services include sewage disposal; refuse disposal; and sanitation services.


(vii) Financial services105

(a) Insurance and insurance-related services

157. New Zealand has fully bound, with no limitations, reinsurance and retrocession. It has boundnon-life insurance services, with market access limitations: (i) cross-border supply is bound only formaritime shipping, commercial aviation, space launching and freight, and goods in international transit;and (ii) market access of cross-border supply and commercial presence are limited by: compulsoryworker's compensation insurance funded through a levy on vehicle owners, employers and the self-employed(theAccidentRehabilitation andCompensation InsuranceCommission); the exclusive insurerstatus given the Earthquake Commission for residential property disaster insurance up to certain limits;and the authority given the Apple and Pear Marketing Board to organize compulsory hail insuranceon behalf of growers.

158. New Zealand has made no commitments in the areas of life, accident and health insurance orservices auxiliary to insurance (including broking and agency services).

(b) Banking and other financial services

159. New Zealand has bound all areas of this category in its Schedule. Limitations apply only tomarket access for cross-border supply and to certain national treatment provisions with respect tocommercial presence.

(viii) Health-related and social services

160. No commitments have been made by New Zealand in this area.

(ix) Tourism and travel-related services

161. New Zealand has bound, with no limitations, services in the area of hotels and restaurants;travel agencies and tour operator services. No commitments have been made in "other" tourism andtravel-related services.

(x) Recreational, cultural and sporting services

162. No commitments have been made by New Zealand in this area.

(xi) Transport services106

163. New Zealand has bound, with no limitations, services in the areas of rail transport, commercialroad transport, pipeline transport, storage and warehousing, maritime freight forwarding, the sellingand marketing of air transport services,107 and computer reservation systems.

105Many forms of insurance are required to be purchased through monopoly suppliers; these are discussedin Section (5)(iii). Financial services include insurance and insurance-related services; and banking and otherfinancial services.

106This includes maritime; internal waterways; air; space; rail; road; pipeline; and services auxiliaryto all modes of transport.

107Except the products covered under CPC 01, 02, 211, 213-216, 22, 2399 and 261.


164. In addition, maritime transport108 and air transport have been inscribed in the Schedule butwith some limitations. For international maritime transport, cross-border supply and consumptionabroad are unbound; commercial presence is limited (for the establishment of a fleet to operate undertheNew Zealand flag) and thepresence ofnatural persons is unbound,notwithstanding the commitmentsindicated in the horizontal section. No commitments have been made with respect to space transport,services auxiliary to all modes of transport, or other transport services.

(xii) Other services not included elsewhere

165. No commitments have been made.

108Except the marketing and sales of transport services for products covered under CPC 01, 02, 211, 213-216,22, 2399 and 261.


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