The trouble with the EU/NZ trade deal
Quality French cheese makers may become winners from the NZ/EU free trade deal. Credit: Peachyeung316
Usually, free trade agreements are good news for dairy industries, or, at worst, one sector feels it has lost out compared to its competitors affected by a deal. But after the European Union (EU) and New Zealand signed a free trade agreement (FTA) last July 2023, after four years of negotiation, both the European and NZ dairy sectors – important global players – were underwhelmed by its terms.
This is despite significant hopes having been pinned on the agreement being able to liberalise and facilitate investment as well as trade: “Bilateral trade is expected to grow by up to 30 per cent within a decade,” said a European Commission note, adding that “EU investment into New Zealand has a potential to grow by up to 80 per cent” over current levels (1).
The New Zealand ministry of foreign affairs and trade has also tried to accentuate the positive, pointing out that all New Zealand exports would increase by up to NZ$1.8 billion (€1 billion) annually once the trade deal is fully implemented, with benefits to a range of sectors, including dairy. “New Zealand’s dairy sector will gain meaningful new opportunities for products such as butter and cheese, which will allow trade to flow more freely for the first time in many years,” a spokesperson said.
What the difference is
However, both the EU and the NZ government will struggle to persuade their respective dairy sectors that this deal will make a big positive difference.
Kimberly Crewther, executive director of the Dairy Companies Association of New Zealand (DCANZ), warned, “We need to be pragmatic about the amount of opportunity that this FTA offers for the New Zealand dairy industry.” Her organisation argues that the EU dairy market will overall remain largely closed to New Zealand exports of cheese, butter and milk powder, even after the agreement comes into force, expected in the first half of 2024 (2).
Under its tariff liberalisation terms, after seven years, additional limited tariff quotas for EU milk powder sales will grow by just 1.3 per cent; for milkfat (butter and anhydrous milk fats), just 1.7 per cent; and for cheese, a paltry 0.3 per cent, DCANZ has concluded. Crewther views the FTA as “a missed opportunity for Europe and New Zealand” as tariff liberalisation has been identified as one of the key actions to achieve UN Sustainable Development Goal 2: “Creating a world free of hunger by 2030” (3).
European Dairy Association (EDA) director trade and economics Laurens van Delft challenged this narrative, however, saying this was an “extremely favourable deal for the small island country…[which] will increase pressure on the European dairy sector.”
Small but strong
For sure, New Zealand joins this agreement in a strong position. In 2022, NZ dairy industry exports globally valued at around NZ$20 billion (€11.1 billion) according to Stats NZ, New Zealand’s official data agency. The country’s dairy exports to the EU were worth NZ$4.5 billion (€2.5 billion) in 2022, while the EU only exported dairy goods valued around NZ$33 million (€18.3 million) to New Zealand.
And while NZ has agreed to scrap a range of import tariffs on EU dairy exports, they will not compensate its “unilateral advantage” and “very generous market access”, due to the limited New Zealand home market (5.1 million people, compared to the EU’s 448 million), said van Delft. He argued import tariffs on EU dairy exports to New Zealand were “currently bearable,” and banning them should not incentivise significant exports, although, “there might be some opportunities under the geographical indication (GI) agreement for specialist cheese.”
EU dairy trade association Eucolait secretary general Jukka Likitalo agreed there were “opportunities for speciality cheeses as well as other high value products and whey derivatives.” He said, “The EU exports a lot of lactose to New Zealand, used for protein standardisation.”
But, agreeing with the EDA line, he noted, “The agreement will not offer much additional advantage as most duties are already at zero. However, remaining tariffs (eg, five per cent on lactose and whey powder) will be abolished.”
EU dairy sales to New Zealand would not increase significantly following the agreement, he predicted, “as NZ tariffs are either at zero or a maximum five per cent.”
Indeed, EU cheese exports to NZ have already been “very strong this year (6,000 tonnes in January to August), around double the usual amount (taking the average of last year’s).”
GI concessions
Here, the GI concessions made by New Zealand may make a difference. Indeed, they have not been welcomed by NZ dairy producers. New Zealand cheese makers wanted to retain the right to continue using the terms Feta and Gorgonzola for NZ cheeses, reflecting these styles. After strong lobbying from Greece and Italy, the trade deal will prevent NZ cheese makers using these terms for products sold to the EU, within New Zealand and exported elsewhere after a transition period of nine years. According to DCANZ, this will impact New Zealand cheese manufacturers’ business in both New Zealand and overseas, “while providing an open
door for European producers to further monopolise naming rights at the expense of large and small New Zealand cheese makers.” Lighter restrictions (4) will apply for Parmesan and Gruyère, allowing previous NZ users of these terms “to continue that use, provided if they used these terms in good faith for at least five years before the FTA comes into force.
Nonetheless, Crewther said these restrictions may limit future innovation in cheese making for large and small New Zealand cheese producers, she fears. “After decades of investment to grow markets for these cheeses, this has been a very disappointing outcome for New Zealand producers,” Crewther concluded.
In Europe, dairy experts and the European Commission welcomed New Zealand’s granting of GI protection for some 1,967 EU GIs, including Asiago, Comté, Feta and Queso Manchego cheeses, which could boost sales. “There might be some potential here, but the market of five million New Zealanders is rather limited,” van Delft argued.
Likitalo, whose association promotes dairy imports as well as exports, said, “Almost all dairy products were considered sensitive by the EU in these negotiations thus limiting liberalisation.” Full EU liberalisation, or zero tariffs, was only given to milk protein concentrates, casein, caseinates and certain other protein ingredients, but for all these products EU tariffs are already low. “All other dairy products will be subject to tariff rate quotas (TRQs) and the most sensitive product groups (milk powders and butter) even have an in-quota tariff,” he added.
Under the deal, most expanded EU TRQs (cheese, butter, milk powders) will be phased in over a seven-year period, with quota volumes gradually increasing. They will be subject to an import licensing regime, with licences issued on a first come, first served basis. A certificate of eligibility from the exporting party will also be required, Likitalo said.
He doubted Europe’s dairy prices would reduce through this FTA, although “at times, when the New Zealand product is considerably cheaper, there might be some downward pressure from imports.”
Fonterra speaks
Simon Tucker, director global sustainability, stakeholder affairs and trade at Auckland-based Fonterra, the major global dairy co-operative owned by 9,000 farmers, called the outcomes for the sector “very disappointing.” He said this reflects the protectionism that continues to afflict the dairy trade worldwide and particularly the EU dairy industry. “The agreement provides some small pockets of access for certain products over time, but overall commercial opportunities for products such as butter, cheese, milk powder and key proteins are constrained relative to the size of the EU market by a combination of small permanent quotas, in-quota tariff rates, and quota administration requirements.” He also commented on the issue of the GIs, which mean that Fonterra, alongside other New Zealand cheese producers, will no longer be able to use the term, Feta, after a transition period of nine years. Fonterra, however, was happy it has been able to retain the ability to use the terms Parmesan and Gruyère. (5)
According to Crewther, it is difficult to predict how the market will respond to the outcome of the FTA. Given the limited TRQ volumes, it is unlikely that a significant shift in New Zealand dairy exports to the EU will emerge, she said. “The government will promote opportunities for implementation of the FTA, but we do not expect any particular incentives to encourage uptake.”
She said the agreement largely maintains a status quo for New Zealand while placing significant additional costs on dairy trading and denying New Zealand exporters the ability to offer what they say are high-quality and lower carbon dairy products to European consumers. Fonterra stresses that NZ cows are 96 per cent grass-fed, with high standards of animal health and welfare, and with NZ soils having low nitrous oxide emissions.
For Ksenija Simović, senior policy advisor for trade, international advocacy and external communication at EU food producers’ association Copa-Cogeca, “the agreement is in its
infancy, so the real evolution will only come when we see how the flows are changing and how the sector is impacted.”
But she indicated that significant changes in EU/NZ dairy trade were unlikely. Today, around 90 per cent of the EU’s milk production is consumed domestically, while New Zealand exports around 90 per cent of its production, said Simović.
1 – https://ec.europa.eu/commission/presscorner/detail/en/ip_23_3715
2 – https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-concluded-but-not-in-force/new-zealand-european-union-free-trade-agreement/nz-eu-fta-overview; https://www.mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-concluded-but-not-in-force/new-zealand-european-union-free-trade-agreement/resources/
6 – https://www.nzmp.com/global/en/about-nzmp/sustainability/low-carbon-dairying.html
