1. Background
1. Cabinet agreed on 10 April 2000 (CAB (00) M 12/4):
- to halt the unilateral tariff reduction process by freezing tariffs at their July 1999 levels until 1 July 2005; and
- that the Minister for Economic Development and the Minister of Commerce should, in conjunction with other relevant Ministers, "undertake appropriate work" on New Zealand's tariff policy post-1 July 2005 and report back to Cabinet by 31 December 2001.
This decision marked a significant departure from the previous Government's policy of removing all tariffs by 2006 - most by July 2001.
2. On 10 December 2001 Cabinet agreed to commence a Tariff Review on New Zealand's post-2005 tariff policy with recommendations to be made by the Minister of Commerce by 30 May 2003 (FIN Min (01) 30/4).4 The Terms of Reference for the Post-2005 Tariff Review as agreed by Cabinet are annexed in Appendix A.
1.1 Scope of the Review
3. The Post-2005 Tariff Review covered all dutiable goods listed in Part I of the Tariff which forms the First Schedule to the Tariff Act 1988. Part II (concessions) was only considered with respect to the policy on the removal of concessions.
4. The objective of the Review was to review and develop tariff policy options for New Zealand's post-2005 tariff regime. In formulating options the Review:
- examined the effects of previous tariff reduction on the economy at the macro, industry and firm levels;
- examined likely impacts of further tariff reduction at the firm, sector and broader economy levels;
- considered the effectiveness of tariffs in contributing to the Government's broader economic development objectives;
- assessed the implications of pursuing a policy of reciprocity; and
- examined the case for retaining or removing alternative specific tariffs as well as giving consideration to whether the current policy of non-withdrawal of tariff concessions should continue.
1.2 Sources of Information
5. The Review was informed by four main external sources:
- the Review of Import Tariffs beyond 2005 (Infometrics), a report commissioned by the Ministry;
- information gathered from consultation with interested stakeholders, including from their submissions;
- the Textile and Clothing Industry Preliminary Report by Burleigh Evatt and the New Zealand Institute of Economic Research; and
- the TCFC Industry and Government Partnership Strategy report.
Infometrics Report
6. The Ministry commissioned Infometrics to undertake work in the following four areas:
- an historical examination of the link between tariff changes and employment (by industry, region, ethnicity, gender, family type and family income);
- a postal survey of 400 companies in industries benefiting from tariff protection to establish the relative significance of tariffs to firms. As well as tariff-related questions, the survey canvassed other issues including business strategy, the exchange rate, the company tax rate, access to skills and R&D spending. The survey had a response rate of 74 per cent;
- case studies to gain a better understanding of the past microeconomic adjustments associated with tariff changes, and future adjustment issues. A total of 26 firms were interviewed; and
- general equilibrium modelling work to analyse the macroeconomic and industry effects of various tariff scenarios.
7. The Infometrics analysis concluded that the macroeconomic gains from further tariff reduction were likely to be smaller than previous reductions. There were, however, efficiency gains still to be had. Infometrics maintained that the weight of evidence suggested that few companies benefited significantly from tariff protection. Evidence suggested that for many companies the tariff regime had an adverse effect on profitability. Infometrics also suggested that those companies for whom tariffs were still important were by and large those with relatively poor productivity, low foreign exchange earnings and mediocre prospects in terms of their future viability.
8. Infometrics recommended that tariffs be reduced to zero with a reasonable adjustment period to minimise transition costs. It was noted that some communities might merit some assistance if tariffs were reduced quickly.
Consultation
9. In order to maximise public input the Ministry:
- released An Invitation to Participate which invited written submissions to the Review. Fifty-seven written submissions were received from organisations, companies and individuals (see Appendix B);
- consulted in early/mid 2002 with 17 key business associations, industry organisations/representatives and unions to hear their views on tariff policy and seek their assistance in encouraging participation in the Review;
- held meetings with businesses throughout New Zealand to seek their views - this included firm level case studies;
- engaged in the TCFC Industry Government Partnership to ensure that there was complementarity between the Partnership and the Review; and
- publicly released the Infometrics report and invited submissions on its findings. Thirty written submissions were received in relation to this report (included in Appendix B).
- The views of those who participated in the consultation process are outlined in Section 2.
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