China signed a free trade agreement with New Zealand on April 7. Ou Zhikui of the Nanfang Daily looks at the implications for Chinese dairy producers.

Recent price rises for dairy products in China will be eased now China has concluded negotiations for a Free Trade Agreement (FTA) with New Zealand. Under the terms of the deal, import tariffs on New Zealand dairy products will decrease one percentage point a year over the coming ten years until it reaches zero in 2019. China is now in talks for an FTA with Australia.

New Zealand currently accounts for 80% of China’s dairy product imports [TCP has not verified this figure]. Chinese importers that depend heavily on New Zealand will largely benefit from the FTA and the reduction in import tariffs will ease the burden of ballooning dairy product prices in the Chinese market.

China imports 130,000 to 140,000 tons of milk powder every year, 70% of which comes from New Zealand and is subject to a 10% import tax. According to the FTA, China will abolish tariffs on 97.2% of its imports from New Zealand January 1, 2019, with the first 24.3% abolished the day following the signing as the FTA took effect. It will be ten years before Kiwi dairy products enjoy zero tariffs.

Yu Dan, president of New Zealand Colostrum (Guangzhou) Dairy Industry Co, told the Nanfang Daily that companies that import significant quantities of New Zealand milk powder stand to save huge amounts on a reduced tax bill.

New Zealand is a major dairy exporter, snatching a 31% share of the international market. However, industry experts have raised concerns that New Zealand’s milk resources are highly vulnerable to fluctuations in international milk prices, meaning any savings due to the tariff cuts could be offset if prices for New Zealand’s milk resources increase faster than the pace at which import tariffs are removed.

Reduced import tariffs are expected to have only limited impact on foreign milk powder suppliers. An official with Mead Johnson said the company sourced milk resources from Australia, the EU and the US in addition to New Zealand. “One percentage point a year makes little sense to us given our amount of imports from New Zealand,” the official said. “We have a complex assessment system for milk resource suppliers and one percentage point a year will not change the makeup of our suppliers.”

Wyeth China echoed the remarks.

It has been widely argued that the possible influx of New Zealand and Australian dairy products into China could jeopardize the domestic dairy industry, but most industry experts do not share the concerns.

Wang Dingmian, chairman of the China Dairy Industry Association, said the ten-year buffer period would be long enough for domestic dairy firms and the industry as a whole to enhance their competitiveness and strengths in order to play in the international arena.

Guo Xueyan, general manager of New Zealand Fonterra Co-operative Group Greater China, said China produces 2.5 times more milk than New Zealand does and the market is expected to grow 15% a year, compared to New Zealand’s 3%.

Chen Yu, an industry analyst, added that New Zealand’s milk production could not expand infinitely as its pastures, unlike China’s, were natural and hence subject to natural factors.

Industry observers said domestic dairy products will be 50% cheaper than New Zealand’s even if the tariffs are zero; Domestic producers also have advantages in raw material and transportation costs.

Full details of the New Zealand-China free trade agreement are available on the New Zealand government’s website – TCP.

This article originally appeared in Chinese in the Nanfang Daily on April 10, 2008. The China Perspective takes no responsibility for the accuracy of the original article.