New Zealand WT/TPR/S/216/Rev.1 Page 73 IV. TRADE POLICIES BY SECTOR (1) INTRODUCTION 1. Since its last Review, New Zealand has continued to lower its average level of tariff protection as well as continuing with deregulation. However varying levels of border protection and state involvement persist in certain sectors, which represent potential impediments to the efficient allocation of resources in the economy. 2. Agriculture, forestry, and fishing accounted for 6.2% of GDP and 7.5% of total employment in 2006/07, which indicates that agricultural labour productivity is substantially less than the level in the rest of the economy. However, agriculture's total factor productivity growth exceeded that of the wider economy and the sector is very competitive internationally. Consequently, it remains an integral part of New Zealand's economy, accounting for over 60% of its merchandise exports in 2007. The Government provides very little support to the sector with the Producer Support Estimate (PSE) being 0.7% (the lowest in the OECD); support is provided in the form of sanitary barriers, especially for poultry and eggs, disease and pest control, or relief against climate disasters. Average applied MFN tariffs in the sector have declined, and no imports are subject to non-tariff barriers, such as quantitative restrictions or licensing. During the period under review, all statutory marketing boards have been "disestablished" and their participation in commercial aspects such as marketing and export rights has been deregulated. "Industry good" activities previously undertaken by these boards are now managed as appropriate through producer-levy-funded industry organizations, established under the provisions of the Commodity Levy Act 1990. However, one state-trading enterprise remains in place and has almost exclusive statutory rights for kiwifruit exports. Fonterra controls 94% of the market, thus giving rise to competition concerns. Changes were also made to the Fisheries Act in 2004, which now allows commercial fishing of any non-quota species not on a specified list and includes other measures to better protect fish stocks and quota rights. 3. In the electricity sector, there is considerable state involvement, with approximately 60% of the electricity sold being generated by state-owned companies. The sole transmission company is government owned, while the distribution companies have a variety of forms of ownership ranging from publicly listed companies to local community owned trusts. Electricity is traded in a liberalized market system, with no regulation of wholesale or retail prices. Some electricity transmission and distribution services are subject to price control (Chapter III and Chapter (IV)(3)(i)). During the period under review, regulation was also enacted in the gas sector and a regulator was established. As a measure to reduce emissions New Zealand introduced an emissions trading scheme in September 2008. 4. The share of manufacturing in GDP changed marginally to 14.7% in 2004/05, while the share of employment in the sector fell from 14.4% in 2003/04 to 12.7% in 2007/08. The share of manufactures in total merchandise exports declined from 31.5% in 2003 to 27.7% in 2007. The Government is committed to developing New Zealand into a high value, high wage and export-led economy. With a view to pursuing these objectives, the Government has taken various measures, such as increased budgetary funding for skills development, market development and international marketing. The average applied MFN tariff for manufacturing has continued to decline during the review period. However, the low average of 3.65% masks tariff peaks of as much as 11.2% in textiles, clothing, and leather industries. 5. Services' contribution to GDP declined slightly from 70.7% between 2003/04 to 70.4% in 2004/05, while its share of employment increased from 69.4% in 2003/04 to 70.8% in 2007/08. With low barriers to entry and limited restrictions on foreign investment, the services sector in WT/TPR/S/216/Rev.1 Trade Policy Review Page 74 New Zealand is relatively liberal and thus competitive. However, there is state involvement in certain sectors, including aviation, where the Government has a majority stake in the largest airline. Deregulation has continued in the telecommunications sector with the unbundling of the local loop. With regard to coastal shipping, the legal constraint on the use of overseas registered "demise chartered" ships (section (5)(iv)(b)) has been eliminated. The reform of the financial sector has continued with the implementation of the Basel II capital adequacy framework in 2008, and the planned prudential regulation and supervision of the insurance sector expected in 2011. New Zealand has commitments in 90 of the 155 sectors under GATS. (2) AGRICULTURE, LIVESTOCK, AND FISHERIES (i) Overview 6. Agriculture's contribution to GDP (including forestry and fishing) declined from 6.4% in 2002/03 to 6.2% in 2006/071, while its share of total employment declined from 8.5% to 7.1% (Table I.2) implying that labour productivity in the sector is improving, although it is still lower than the level in the rest of the economy. Agriculture's share in New Zealand's merchandise exports remained steady at nearly 60% between 2003 and 2007 (Table AI.1). New Zealand's main agriculture exports are dairy and meat products, which accounted for over 17% and 10.2% of all merchandise exports in 2007. It is a net-exporter of dairy products, meat products, fruits and vegetables. It is a net-importer of food staples, such as wheat, rice, and sugar products. 7. Economic reforms in the 1980s and 1990s have increased efficiency in the agriculture sector. Recent research by the Ministry of Agriculture and Forestry shows that, compared with other sectors, productivity gains have been the highest for agriculture over the past decade.2 8. Recent policy developments in agriculture are concerned with sustainable development and resource management. In this regard, in November 2004 bio-security functions in different ministries were merged into Ministry of Agriculture and Forestry (MAF) Biosecurity New Zealand. The Sustainable Water Programme of Action was initiated in 2003 so as to maintain the quality of water and meet the increasing demand for water (including for irrigation). The Sustainable Farming Fund3, which has been in operation since 2000, has provided grants of NZ$85 million to more than 600 producer led projects (as of 2008). The agriculture sector is subject to the Commerce Act and the Fair Trading Act, both of which are administered by the Commerce Commission. The Commerce Act promotes long-term benefits for consumers and authorizes the Commission to take action against anti-competitive behaviour. The Fair Trading Act prohibits misleading and deceptive conduct and unfair trading practices. (ii) Border protection (a) Import measures 9. New Zealand's tariffs on agricultural products have continued to decline since its previous Review in 2003. The average applied MFN tariff under the WTO definition of agriculture was 1.8% in 2008/09, compared with 2.1% in 2002. This is lower than New Zealand's overall simple applied 1 Figures provided by the authorities. 2 Since 1998, multifactor productivity growth in the agriculture sector has been 1.8% per year compared with 0.9% for the economy as a whole (Ministry of Agriculture and Forestry, 2008). 3 The fund focuses on short-term (1-3 years) projects and provides funding for projects that enable access to information, technology or tools that bring together communities to address their problems and to improve their economic base. New Zealand WT/TPR/S/216/Rev.1 Page 75 MFN tariff, which was 2.5% in 2008/09. The New Zealand Schedule of Commitments allows for tariff-rate quotas for apples, pears, and hop cones, but New Zealand does not apply these quotas because the applied MFN tariff on these products is zero. New Zealand's exports of several key agricultural products, however, are subject to tariff-rate quotas imposed by some trading partners (section below). 10. There has been no change to the Commodity Levies Act 1990. The Act permits products, including those imported, to be subject to compulsory levies for industrial research purposes. Additionally, the Act permits the farming and horticultural sector to fund "industry good" activities, such as research, information dissemination, and product promotion. (b) Export measures 11. State involvement is limited to the Government allocating export licences (Chapter III) for certain dairy and meat products destined for certain markets. 12. The Zespri Group Limited (Chapter III), which is owned by kiwifruit growers, has been authorized by the New Zealand Kiwifruit Board, to have the automatic, but not sole, right to export New Zealand grown kiwifruits to all markets (except Australia).4 All other exporters of kiwifruit must seek approval from the Board to be able to export kiwifruit in collaboration with Zespri, which effectively means that Zespri has a near monopoly on exports (for markets other than Australia). Exports to Australia are governed by the New Zealand Horticulture Export Authority Act 1987 (the HEA Act). The HEA Act imposes qualitative restrictions through industry-developed export marketing strategies. Restricting the volume of exports or number of exporters to a particular market is not permitted under the HEA Act. 13. Fonterra Co-operative Group (section (iii) below and Chapter III), created in 2001, is the main exporter of dairy products. Although Fonterra has no monopoly rights on dairy exports and, in principle, competes with other cooperatives and dairy processing companies, it has exclusive licences, up to 2010, to export dairy products to designated restricted markets, as listed in the Dairy Industry Restructuring Act. Under an amendment to the Act in December 2007, the Ministry of Agriculture and Forestry will allocate export licences, based on eligibility criteria5, once Fonterra's initial rights end.6 Also under the amendment, the New Zealand Food Safety Authority will be responsible for compliance, certification, and enforcement.