NZ-India Free Trade Deal Is Live — But Don't Expect a Rush of Cheaper Prices

HouGarden New Zealand, 30 October — The newly live NZ-India Free Trade Agreement has sparked debate about its real-world effect on household costs and export revenues. Two economists offer sharply different lenses through which to read the deal — and neither paints a simple picture.

Gareth Kiernan, chief forecaster at economic consultancy Infometrics, says the consumer price impact hinges largely on whether India is a significant enough importer of any given product to move the world price of that product.

When India does carry that weight, its trade barriers suppress global demand — making domestically produced goods relatively cheaper inside India — and that suppressed demand pushes world prices down. New Zealand consumers, who effectively pay world prices for goods the country exports, therefore end up paying less too. Removing a tariff reverses that dynamic: Indian demand rises, the world price lifts, and New Zealand consumers may pay more, not less.

"Reducing the amount of international product that its consumers are willing to buy, as domestic products are effectively relatively cheaper ... lowers the world price," Kiernan said. "Reversing that situation out, by removing a tariff, will lead to greater demand globally and a higher global price."

The flip side, he notes, is when India is a marginal player. If India scrapped its tariff on beef but virtually no beef was consumed domestically, the world price would stay flat, New Zealand exporters would see no volume gain, and local consumers would feel nothing either.

Kiernan took a quick survey of New Zealand's main export categories to India. Wool and apples are the two products where a shift in Indian demand could, in his view, be large enough on a global scale to move prices — though he adds that wool prices are already so depressed the effect may be limited in practice. For lamb and wine, Indian demand is currently so small in global terms that a tariff change is unlikely to ripple through to prices here.

University of Otago economist Murat Ungor frames the central question around two distinct economic concepts: trade creation and trade diversion.

"Trade creation occurs when cheaper imports from a partner replace higher-cost domestic production, so prices fall, consumers gain, and resources shift towards what the country does best," Ungor said. That is the outcome trade agreements are designed to produce.

Trade diversion is the less welcome alternative. It happens when the tariff preference makes a partner country appear cheaper than it actually is relative to the rest of the world, so imports switch away from a genuinely low-cost outside supplier towards the partner. "Prices may still fall, but by less than under a non-discriminatory tariff cut, and the country loses tariff revenue and ends up buying from a higher-cost source," Ungor said. The net gain shrinks, and can even turn negative.

Which outcome dominates depends on the specifics, Ungor says. Trade creation is more likely when the partner is a genuinely low-cost producer and the two economies make similar products at different costs, leaving domestic production to be displaced by cheaper imports. Strict rules-of-origin requirements can push the outcome towards diversion by forcing firms to source inputs from the partner even when suppliers outside the agreement are cheaper.

Even when a tariff cut does lower import costs, Ungor warns that how much of that saving reaches shoppers is a separate question entirely. "Where retail or distribution is concentrated, pass-through can be well below 100 percent," he said. His conclusion: "The overall effect on prices can therefore be modest, gradual and a one-off shift in the price level, not a change in ongoing inflation." In other words, any consumer benefit is likely to be a single adjustment rather than a lasting change in the rate at which prices rise.

Kiernan points to a different, arguably more compelling rationale for the deal: reducing New Zealand's exposure to the Chinese market. Trade ties with China have been valuable over the past 17 years, he says, but concentration in a single market carries geopolitical risk. He cites the example of China's decision several years ago to effectively block several categories of Australian exports — including wine — as a demonstration of how that risk can materialise. Importantly, New Zealand has not faced equivalent measures, but the episode illustrated the vulnerability that comes with over-reliance on one market.

There is also a structural growth argument. "There's a widespread expectation that Chinese economic growth will be slower going forward than it has been over the 1990-2020 period, meaning that there are fewer gains to be made for exporters in that market," Kiernan said.

India, by contrast, offers a different trajectory. Kiernan describes India's economic and population growth outlook as relatively strong, and highlights the rapid expansion of its middle class — a process he compares to what China experienced over the past three decades — as still largely ahead of it. "The growth potential for exporters is considerable given the confluence of those factors, and the FTA's removal of impediments to realising that growth is key," he said.

For New Zealand exporters of wool, apples, lamb and wine, the FTA opens a door. Whether enough Indian consumers walk through it — and whether that translates into higher returns for producers or lower prices at home — will take time to become clear.