Economics • International Trade

Free Trade Agreement Explorer

    before after the agreement

    Free Trade Agreement Explorer — Explanation

    A free trade agreement (FTA) is a treaty in which countries remove or cut their tariffs and other barriers on each other's goods and services. New Zealand has FTAs with China, the UK, the countries of the CPTPP, and others; MFAT lists them all.

    The chain, step by step (the numbers are illustrative):

    1. In the partner's market. The tariff made New Zealand's product dearer there (P0 + tariff). Without it, buyers pay the trade price Pt: it is cheaper, so they import more (M0 → M1).
    2. In New Zealand (the two-country model). New Zealand's exporters now receive Pt instead of P0: a higher price. They supply more, New Zealanders buy less of the good at the higher price, and exports rise (X0 → X1). Export receipts (price × quantity) rise, improving the balance on goods in the current account.
    3. Two-way. If New Zealand also removes a tariff on an import, the price-taker model applies: the price falls to the world price, imports rise, import-competing firms make less, and import payments rise.
    4. The NZ$. Overseas buyers need NZ$ to pay for the exports: demand for NZ$ shifts right and the NZ$ appreciates. In a two-way agreement, the extra imports increase the supply of NZ$ too, so the net effect depends on which is bigger.
    5. Groups. Exporters and their workers gain; New Zealand buyers of the export good pay more; other exporters lose competitiveness if the NZ$ appreciates, while importers and consumers of imports gain; the government collects more tax but, in a two-way agreement, loses tariff revenue; import-competing firms lose.

    How to use it. Choose an export and a partner in the title bar, and one-way or two-way. Step through with Next. The Explain the chain panel writes the explanation as you go, in the order an NCEA answer needs: the change, the model, the effect, and its impact on groups.

    Common exam mistakes

    The agreements' details are from MFAT (mfat.govt.nz); the prices, quantities and exchange rates are illustrative, and the exchange rate is measured in US$ per NZ$ for simplicity.

    Objective: NCEA Level 2 Economics 91223 — explain in detail, using the two-country model, the price-taker model and the market for the NZ$, how a free trade agreement changes New Zealand's exports, imports, the current account and the exchange rate, and compare its impacts on different groups in New Zealand society.

    Where this fits

    • NCEA Level 2 Economics: 91223 Analyse international trade using economic concepts and models; 91227 Analyse how government policies and contemporary economic issues interact
    • NCEA Level 3 Economics: 91403 Demonstrate understanding of macro-economic influences on the New Zealand economy

    Free Trade Agreement Explorer — Key Terms

    Key concepts in English, with te reo Māori, Chinese (Simplified) and Korean.

    EnglishTe reo Māori中文（简体）한국어What it means on this page
    Free Trade Agreement (FTA)no attested term自由贸易协定 (zìyóu màoyì xiédìng)자유무역협정 (jayu muyeok hyeopjeong)A treaty between countries to remove or reduce tariffs, quotas and other barriers on each other's goods and services, such as the NZ–China FTA or the CPTPP.
    Tariff (Import Duty)tākehoko tāwāhi关税 (guānshuì)관세 (gwanse)A tax imposed by a government on imported goods to make foreign products more expensive relative to domestic goods.
    Trading Partnerno attested term贸易伙伴 (màoyì huǒbàn)교역 상대국 (gyoyeok sangdaeguk)A country that New Zealand exports to or imports from.
    Two-Country Trade Modelno attested term两国贸易模型 (liǎngguó màoyì móxíng)양국 무역 모형 (yangguk muyeok mohyeong)An international trade model demonstrating how two countries settle on a single trade equilibrium price.
    Trade Price (P_trade)no attested term贸易均衡价格 (màoyì jūnhéng jiàgé)무역 균형 가격 (muyeok gyunhyeong gagyeok)The one price New Zealand's exporters get and the partner's buyers pay once the tariff is removed (Pt).
    Exporting Countryno attested term出口国 (chūkǒu guó)수출국 (suchulguk)The nation with a lower domestic local equilibrium price that produces an excess supply for export to international markets.
    Importing Countryno attested term进口国 (jìnkǒu guó)수입국 (suipguk)The nation with a higher domestic local equilibrium price that experiences excess demand and imports goods from foreign suppliers.
    Price Takerno attested term价格接受者 (jiàgé jiēshòuzhě)가격 수용자 (gagyeok suyongja)A country (or firm) too small to change the world price: it can buy or sell as much as it likes at that price, so it faces a horizontal world supply or demand line.
    Export Receiptsno attested term出口收入 (chūkǒu shōurù)수출 대금 (suchul daegeum)The money earned from selling exports overseas: export price × quantity exported. A credit in the current account.
    Import Paymentsno attested term进口支出 (jìnkǒu zhīchū)수입 대금 (suip daegeum)The money paid to overseas sellers for imports: import price × quantity imported. A debit in the current account.
    Demand for $NZno attested term货币需求 ($NZ 需求)통화 수요 ($NZ 수요)Purchases of $NZ by overseas buyers to pay for New Zealand exports, tourism, or local investments.
    Supply of $NZno attested term货币供给 ($NZ 供给)통화 공급 ($NZ 공급)Sales of $NZ by domestic residents to purchase foreign imports, overseas travel, or offshore investments.
    Appreciationpikinga wāriu升值 (shēngzhí)절상 (jeolsang)An increase in the value of a currency relative to another currency under a floating exchange rate system.
    Depreciationhekenga wāriu贬值 (biǎnzhí)절하 (jeolha)A decrease in the value of a currency relative to another currency under a floating exchange rate system.
    Current Accountno attested term经常账户 (jīngcháng zhànghù)경상수지 (gyeongsangsuji)The part of the balance of payments for trade in goods and services, primary income and secondary income.

    On the te reo Māori column. Terms marked as gaps have no attested equivalent in the sources checked — Karaitiana Taiuru's Dictionary of Māori Computer and Social Media Terms, Paekupu, the Reserve Bank's te reo financial glossary, NZQA and Te Aka. No coinage is printed as though it were established; where a class needs one, commission it from Te Taura Whiri i te Reo Māori and credit the translator. Te reo Māori is not italicised and takes no plural "s".