Context for the Review
In April 2000 the Government took the decision to freeze tariffs at their July 1999 levels until at least 1 July 2005. This decision constituted a significant departure from the previous Government's policy of unilaterally removing all tariffs by 2006 - most by July 2001.
New Zealand's tariff levels are now low by world standards with a simple average MFN tariff rate across all goods of 3.7 per cent.1 In 2002 duty levied on all imports totalled $288 million - 0.7 per cent of government revenue. Approximately 95 per cent of imports (by value) enter New Zealand free of duty and most dutiable imports face low tariffs of 5-7 per cent. New Zealand's highest tariffs are, with few exceptions, confined to carpet, clothing and footwear which attract rates of up to 19 per cent. Some textile products have rates of up to 12.5 per cent and automotive components have rates as high as 11.5 per cent.
Given the large proportion of imports that are either duty free by way of tariff concessions2 or subject to tariff preferences, the mean tariff rate across all manufactured goods is barely 1 per cent.3 Consequently, the potential gains to be had from further tariff reduction will be smaller than the benefits which have accrued as a result of previous tariff reduction programmes. Equally the costs associated with retaining remaining tariffs have also diminished.
Economies need to exploit both comparative advantages and seek to establish new competitive advantages. The Government's Growth and Innovation Framework is aimed at increasing New Zealand's international competitiveness and adding higher value to New Zealand products and services. As part of this, it is important that manufacturers continue to strive to be internationally competitive, especially at the innovative, higher value end of the market. The post-2005 tariff regime must support improved innovation by encouraging resources to flow to high value activity both across sectors and within industries, and encourage firms to develop new global markets.
The Terms of Reference for the Review were broad and required careful weighing of a number of different issues.
The textiles, clothing, footwear and carpet (TCFC) industries are in the process of consolidating a transformation and growth strategy. Tariff policy should support the industries' transition to becoming globally competitive by providing clear incentives to adjust, while ensuring also that adjustment pressures do not undermine the implementation of the industries' growth strategy.
Internationally, tariffs have been steadily reducing since the late 1940s. At present, the WTO Doha Round is reaching its critical phase. It is scheduled to finish by 1 January 2005. New Zealand sees the current round of multilateral trade negotiations as the best prospect for substantive across-the-board reductions in international tariffs. New Zealand is seeking an ambitious outcome for the round and has proposed the elimination and binding at zero of all tariffs on non-agricultural products as one arm of its negotiating strategy. However, at this time it is not certain to what extent the Doha Round will successfully deliver further multilateral bound tariff reductions. The Review therefore has taken place against a background of a high degree of international uncertainty.
New Zealand alongside other Asia-Pacific economies has adopted the APEC Bogor Goals. Given that implementation under the APEC framework requires unilateral commitment to tariff removal it is unlikely that these goals will be met across APEC economies, particularly as the focus on tariff liberalisation has shifted to the multilateral forum of the WTO. New Zealand continues to give the highest priority to achieving reciprocal tariff concessions from its key trading partners in the multilateral process and under bilateral initiatives.
Consultation with industry associations and firms reflected some mixed messages. There was strong support on the one hand for retaining tariff protection in light of other countries' positions. On the other, there was recognition that tariffs would eventually go. Firms recognised their survival depended on their ability to adjust and operate in an unsupported environment. All strongly supported a certain and gradual adjustment path if tariffs were to be reduced. Many firms anticipated removal of tariffs by 2010 given the APEC Bogor Goals.
The major productivity gains from tariff reduction have in large measure been achieved. There are, however, further productivity gains to be had. In some industries they will be more difficult to achieve as the gains will be a function less of cost reduction and more of the development of new markets and innovative processes and products. Tariff policy, therefore, while still a key economic instrument for supporting productivity gains is not in itself sufficient. Tariffs are a relatively blunt instrument and tariff policy needs to be complemented by other appropriate economic development initiatives. Other government initiatives are, and can be, better targeted than tariffs.
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