Impact assessment

Impact assessment of the FTA between the UK and New Zealand executive summary (web version)

Published 28 February 2022

Read the full impact assessment of the Free Trade Agreement between the United Kingdom of Great Britain and Northern Ireland and New Zealand.

The Department for International Trade (DIT) has negotiated a free trade agreement (FTA) between the United Kingdom (UK) and New Zealand.

It is a modern and comprehensive agreement which aims to enhance the long-lasting trading and investment relationship between the 2 countries. This agreement will remove tariff and non-tariff barriers to make trade easier. The agreement is estimated to generate long-term benefits for both countries, support UK jobs and provide opportunities for growth in sectors across the UK.

The agreement aims to strengthen existing ties between the UK and New Zealand.

In addition to boosting goods and services trade, it could help to increase collaboration in areas including:

• digital
• intellectual property (IP)
• animal welfare
• trade for development
• trade and gender equality
• consumer protection
• the environment

This agreement is also another step towards UK accession to the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), of which New Zealand is an important member. The CPTPP free trade area is populated by half a billion people with a joint gross domestic product (GDP) of £8.4 trillion in 2020. Accession would deepen the UK’s access to this sizeable market.

This impact assessment sets out our assessment of the economic, social, and environmental impacts of the agreement.

The agreement

Following the conclusion of the UK-Australia FTA, the agreement with New Zealand is the UK’s second trade deal negotiated from scratch since leaving the EU. This agreement fulfils the government’s manifesto commitment to secure a free trade agreement with New Zealand. It also contributes to the commitment of having 80% of UK trade covered by FTAs.

This is a modern and comprehensive agreement, with elements that go further than the UK or New Zealand have committed to before.

The agreement removes tariffs on all UK exports to New Zealand at entry into force, worth more than £17 million in annual tariff reductions, and removes and reduces regulatory barriers.

It includes a commitment new to New Zealand’s FTAs, securing access for business persons employed by a UK enterprise to provide services under contract in specified sectors when travelling to New Zealand. This includes, but is not limited to audit, legal services and management consultancy.

The agreement will increase investment opportunities in both countries, making it easier for UK investors to expand their footprint and become more profitable in New Zealand. Raising screening thresholds for UK investors will lead to savings for UK businesses, who owned £900 million worth of foreign direct investment in New Zealand in 2020.^{[footnote 1]}

The agreement promotes trade in environmental goods and services, with the largest environmental goods list with liberalised tariffs in any FTA to date. It removes tariffs on goods such as electric vehicles and wind turbine parts. The Environment chapter affirms our commitments under the Paris Agreement,^{[footnote 2]} including the temperature goals, and contains ambitious commitments on transitioning away from fossil fuels. Further environmental commitments are also included, for example on fossil fuels, to end electricity generated from unabated coal and take steps to eliminate harmful fossil fuel subsidies where they exist.

It includes a Consumer Protection chapter, the first of its kind under the UK’s new trade deals. This represents an important milestone in how FTAs promote consumer trust and welfare. It prioritises the importance of promoting access to redress mechanisms, and commits both countries to protecting consumers against commercial activities that are misleading, fraudulent, deceptive and unfair.

UK public support for a UK-New Zealand free trade agreement is high. DIT’s Public Attitudes to Trade Tracker (PATT) shows that 64% of people are in support of a deal, while only 5% oppose.^{[footnote 3]}

The agreement maintains high standards on issues that the PATT shows matter to UK consumers, such as food standards and animal welfare.

For example, on food standards, all food and drink products imported into the UK will continue to have to comply with our import requirements. Hormone-treated beef from the rest of the world will continue to be banned. The UK’s independent food regulators – the Food Standards Agency and Food Standards Scotland – will continue to ensure all food imports meet our high standards.

On animal welfare standards, the agreement includes non-regression and non-derogation clauses. This means both countries are committed to not lowering their animal welfare standards.

As well as removing barriers to trade, the agreement will see the UK and New Zealand working more closely together to raise global standards. This includes through increased bilateral cooperation and in multilateral fora including the World Trade Organization (WTO).

The impact of the agreement

UK and New Zealand trade was worth £2.3 billion in 2020, having grown 13% between 2014 and 2019^{[footnote 4]}. UK goods exports to New Zealand are highest in the machinery, manufacturing and chemical sectors, while the top services exports include insurance, telecommunications, and intellectual property. Import demand for New Zealand is expected to grow by 41% in real terms between 2019 and 2035.^{[footnote 5]}

Greater access to New Zealand markets and reduced regulatory burdens on goods and services are therefore expected to bring extensive opportunities for UK businesses and consumers.

Macroeconomic impacts

Our analysis shows that bilateral trade between the UK and New Zealand could increase by the equivalent of £1.7 billion in the long run. This increase is compared to projected levels of trade in 2035 (in today’s prices) without the agreement.^{[footnote 6]} This is based on a central estimate of a 59% increase in trade resulting from the FTA. The increase is driven by reductions in regulatory restrictions to trade, tariff reductions, and income and supply chain effects as the UK economy grows.

This assessment also shows that UK gross domestic product (GDP) could increase by around £0.8 billion in the long run. This is when compared to projected levels of GDP in 2035 (in today’s prices) without the agreement.^{[footnote 7]} The estimate indicates the value of a 0.03% increase in GDP (as a central estimate) as a result from the FTA in 2035. The estimate is subject to a high degree of uncertainty.^{[footnote 8]}

In the central estimates, take home pay for UK workers is estimated to increase by around £200 million in the long run. This is when compared to 2019 estimates of wages without the agreement. This is based on a central estimate of a 0.03% increase in wages.

These estimates are based on certain assumptions about the global economy and the UK-New Zealand trade relationship, and are subject to various forms of uncertainty. Our sensitivity analysis varies some of the main modelling parameters used in the analysis. However, it does not account for the full range of factors that could determine the impact of the agreement. It suggests the estimated impact on long run GDP could vary between 0.02% and 0.03% (0.023% and 0.034% respectively, to 3 decimal places). However, as the analysis does not capture important sources of uncertainty, the actual long run impacts could fall outside of this range. The point estimates and ranges presented do not represent precise estimates; they represent an indication of the direction of impacts and broad orders of magnitude. The sources of uncertainty are discussed in section 7.

Businesses will benefit from the elimination of tariffs on 100% of New Zealand’s tariff lines at entry into force.^{[footnote 9]} As a result, duties on UK goods exports to New Zealand could fall by around £17 million annually. Amongst the benefiting businesses are also small and medium sized enterprises (SMEs), who are well-represented in sectors that benefit the most from the agreement. Consumers could also benefit from the removal of tariffs on UK imports of New Zealand goods. From the day the agreement enters into force, tariffs on 96.7% of tariff lines for UK imports from New Zealand will be zero. Most of the remaining tariffs are gradually reduced to zero over time. This boosts access and also increases choice for businesses seeking to source inputs from New Zealand. However, this will also open up some UK businesses to increased competition from New Zealand exporters.

Sectoral impacts

A wide range of sectors may benefit from access to provisions in the agreement, while some sectors could face increased international competition.

Our analysis shows services sectors are expected to make the strongest contribution to the estimated growth in Gross Value Added (GVA) on a 2019 basis.

On services, the largest contributions in absolute terms come from 3 main sectors. These are wholesale and retail services (+£105 million), public services (+£82 million), and other services (transport, water, dwellings) (+£82 million). This is driven mainly by income and supply-chain effects as other parts of the UK economy, particularly manufacturing, grow as a result of the agreement. Reductions in regulatory restrictions to trade in services are also central driving factors.

On goods, the largest contributions come from the UK’s advanced manufacturers, with expansions in the manufacture of machinery (+£46 million) and motor vehicles (+£43 million). This is driven by reductions in tariffs and non-tariff measures.

The economic benefits of FTAs do not arise without reallocation of resources within the economy (sometimes referred to as the gains from greater specialisation). The process of economic adjustment gives rise to adjustment costs for affected sectors, businesses, and their employees. The overall structure of the UK economy remains broadly unchanged by the agreement. However, part of the gains results from a reallocation of resources away from agriculture, forestry, and fishing (around -£48 million) and semi-processed foods (around -£97 million). This supports growth in the services sectors set out above, as well as certain manufacturing sectors.

Just as the UK is competitive in the business and financial services sectors, New Zealand is a competitive producer of agricultural products. The modelling suggests the potential for the deal to increase import competition for some agricultural products, notably cattle meat (beef/sheep). The potential and scale of any long run increase in imports are uncertain (box 2). Increased imports of these products could bring benefits for consumers across the whole UK via lower prices and increased choice. However, there is a risk that any adjustment costs which do arise are borne by firms facing competition from foreign imports in areas with highly concentrated production.

The agreement includes mitigations which place upper limits on the potential for increases in imports in the near-term. For example, beef and lamb producers could be protected through measures including tariff rate quotas (TRQs) and product specific safeguards that last 15 years. These quotas will automatically apply the UK Global Tariff to imports above a certain volume threshold. Beef producers will be protected by a TRQ from years 1 to 10. From years 11 to 15 a product-specific safeguard should have a similar effect, imposing tariffs of up to 20% – above a volume threshold. For sheepmeat, a transitional TRQ will apply from years 1 to 15. Furthermore, in a given year, trade can only occur under this sheepmeat quota once New Zealand’s WTO sheepmeat quota has reached 90% utilisation. A general bilateral safeguard mechanism will provide further temporary protections should industry face serious injury from increased imports as a direct consequence of the FTA. This applies to all products, including those within a TRQ. There are also TRQs for several other products, such as UK imports of butter, cheese, and apples.

Impacts on UK nations and regions

The agreement is expected to provide opportunities across the UK thereby supporting the levelling up of UK towns and communities.

In the central estimates:

• the greatest proportional gains are expected in the West Midlands and the North East, equivalent to around £47 million and £17 million each year on a 2019 basis. The North West and South East are also expected to benefit by around £54 million and £85 million respectively. London is expected to receive the largest absolute gains of around £131 million
• Wales, Scotland and Northern Ireland combined could see an increase in GVA of around £52 million from the agreement

In the central estimates for sub-national impacts, all nations and regions of the UK are expected to increase output as a result of the agreement. The sub-national impacts are subject to a high degree of uncertainty. Sensitivity analysis shows that impacts on certain nations and regions of the UK are sensitive to assumptions regarding the presence and scale of local economic effects. If large local economic effects occurred, this could increase the net GVA gain in the North East, West Midlands and Yorkshire and the Humber. Conversely, similar effects could result in a net GVA loss for Northern Ireland.

The environment

The economic improvements and increased trade arising from FTAs can also entail consequences for the environment. Other things equal, increased economic activity is typically associated with implications for greenhouse gas emissions and outcomes such as air pollution, water quality and biodiversity.

The analysis suggests that overall greenhouse gas emissions associated with the production of goods and services in the UK are not estimated to change from the agreement. However, the agreement is expected to lead to an increase in emissions associated with the transport of goods from increases in trade with New Zealand. The estimates suggest that the increase in emissions associated with transport of goods could be around 0.13 and 0.14 MtCO2e each year. This is roughly a 50% increase in transport emissions associated with trade with New Zealand. This is very small when compared to UK production emissions in 2018 of around 500 MtCO2e. The estimates do not account for the future decarbonisation of international shipping. This is the form of transport used to carry 97% of goods trade (by volume) between the UK and New Zealand.

The agreement includes an ambitious environment chapter, to encourage mutually supportive trade and environment policies. This reaffirms both Parties’ commitments to the Paris Agreement and preserves the UK’s right to regulate to meet its net zero climate commitments. It also contains commitments on a wide range of environmental issues, including fossil fuels, deforestation and marine pollution.

Next steps

The predicted impact of the agreement on the UK economy has been assessed using Computable General Equilibrium (CGE) modelling. This modelling provides an indication of the relative orders of magnitude of the impacts. This is a widely used approach to quantify the impacts of free trade agreements and regarded as the best in class. However, the analysis does not capture the full range of potential dynamic impacts of the agreement and the predicted impacts are inherently uncertain.

Ongoing monitoring and evaluation (M&E) of the implementation and impacts of the agreement is an important part of ensuring that the predicted impacts materialise. They are also an important part of ensuring that the benefits are maximised for businesses, workers, and consumers. M&E activities help to ensure that the new trade opportunities are fully realised. They also help to ensure that the full range of impacts, intended and unintended, are understood and inform future policy development. DIT will monitor the implementation and conduct a comprehensive ex-post evaluation for the agreement (section 8).

1. ONS, Foreign direct investment involving UK companies: 2020. ↩

2. The Paris Agreement done at Paris on 12 December 2015 and adopted by the Conference of the Parties to the UNFCCC at its 21st session (referred to as the “Paris Agreement” hereafter). ↩

3. DIT, Public attitudes to trade tracker (September 2021). ↩

4. ONS, UK total trade: all countries, non-seasonally adjusted, July to September 2021. ↩

5. 2035 projections for UK total exports and imports are calculated using the methodology described in the Global Trade Outlook, (September 2021). ↩

6. 2035 projections for UK total exports and imports are calculated using the methodology described in the Global Trade Outlook. For bilateral trade between the UK and New Zealand in 2035, it is further assumed that both countries lose market shares of partner import demand in line with their relative loss of global market shares (as projected in the Global Trade Outlook). ↩

7. As with all modelling exercises, both the point estimates and the projections which they are applied to are subject to uncertainty. ↩

8. For context, this amounts to £0.6 billion when compared to 2019 GDP. ↩

9. Tariff reductions apply to goods that meet Rules of Origin requirements. ↩