New Zealand-China intra-industry trade: current trends and future potential

Intra-industry trade (IIT) that involves exports and imports within the same industry has become more and more important in international trade in recent years. Developed countries (e.g. Germany, Japan and the United States) have experienced great benefits from such trade. However, there has been very little research on New Zealand’s IIT with its trading partners except for Bano’s (2002) study of analyzing IIT between New Zealand, Australia, and the selected Asia-Pacific countries; with no specific literature analyzing the New Zealand-China bilateral trade relationship in recent years, even though China has become New Zealand’s second-largest trading partner on both exports and imports in the year 2010 (New Zealand Ministry of Foreign Affairs & Trade, 2010d). Therefore, this research analyzes the emerging trends in New Zealand-China trade and further analyzes the current trends over the period 2000-2009 and future potential of IIT between these two countries. This research first analyzes the emerging trends in New Zealand-China bilateral trade. Results has shown that the two countries have strengthened bilateral trade over the observed period, with New Zealand importing more than exporting to China, thereby recording a merchandise trade deficit. New Zealand exports mainly agricultural products to and imports manufacturing products from China, indicating more inter-industry trade, involving exchange of different products. The research also discusses the importance of the New Zealand-China Free Trade Agreement (FTA) that is expected to liberalize and facilitate trade by removing trade barriers on goods, services and investment flows in the future. Second, both past theoretical and empirical literature on IIT have been reviewed with emphasis on those specifically involving analysis of IIT between New Zealand and China. The country specific determinants are summarized in detail. In this research, two measures (Grubel and Lloyd index and Rajan’s index) are employed to examine IIT between New Zealand and China. These indices are used to estimate both the level and degree of IIT and product classification level at two-digit Harmonised System (HS) is used, as the level of IIT is hypothesized to be low after analyzing the determinants. The research confirms that New Zealand currently has a very low level of IIT with China and the number of industries which have IIT with China are very few and primarily concentrated in the manufacturing sector. Results show that product categories HS 29 (organic chemicals) and HS 48 (paper products) seem to involve relatively higher levels of IIT than other product categories. Further, the research also confirms that potentially there are no product categories involving both higher level of IIT with increasing degree of IIT between these two countries. Another important finding is that trade imbalance problem has not influenced New Zealand-China IIT significantly. However, since the FTA was only signed in 2008, the impact of the FTA on IIT is yet not clear, therefore, future trends of New Zealand-China bilateral trade should be watched to evaluate the influence of the FTA on IIT in the near future