What has New Zealand gained from The FTA with China?: Two counterfactual analyses†
| Author | Murat Üngör,Samuel Verevis |
| DOI | http://doi.org/10.1111/sjpe.12260 |
| Published date | 01 February 2021 |
| Date | 01 February 2021 |
20
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wileyonlinelibrary.com/journal/sjpe Scott J Polit Econ. 2021;68:20–50.
© 2020 Scottis h Economic Societ y
1 | INTRODUCTION
New Zealand (NZ) w as the first develop ed country to sign a free t rade agreement (F TA) with China. The NZ–China
FTA took effect in O ctober 2008, resul ting in a large increase in tra de between the two count ries. We study this
event from the per spective of a policy eval uation problem and invest igate the effects of t he 2008 NZ–China FTA
on trade flows (ex ports fro m NZ to China) and income (r eal GDP per cap ita in NZ) using t he synthetic co ntrol
method (SCM) to estimate the counterfactuals. We generate several counterfactual scenarios without the FTA to
evaluate the per formance of our outcome v ariables, namely, NZ's ex ports to China and re al GDP per capita. Sin ce
Accepted: 18 June 2 020
DOI: 10 .1111/sjpe.1 2260
ORIGINAL ARTICLE
What has New Zealand gained from The FTA with
China?: Two counterfactual analyses†
Samuel Verevis1 | Murat Üngör2
*Some part s of this articl e are based on the f irst author 's master thesis ( Verevis, 2018), wh ich was super vised by the secon d author. The view s
expressed h erein are those o f the authors an d not necessar ily those of the in stitutes they a re affiliated t o. We thank an anony mous referee for h is/
her valuabl e comments, wh ich greatly hel ped in improvin g the paper. The pos ter of this paper w as presented an d won the People's Ch oice Poster
Prize at the 59th Ne w Zealand Asso ciation of Econom ists Annual Co nference in Jun e 2018. An earlie r version appea red as the Univer sity of Otago
Economics Di scussion Pape r No. 1906.
1Research and A nalysis Unit, Min istry of
Foreign Affa irs & Trade, Wellington , New
Zealand
2Departm ent of Economics, Uni versity of
Otago, Dune din, New Zealand
Correspondence
Murat Üngör, Depa rtment of Economic s,
Universit y of Otago, PO Box 56, Du nedin
9054, New Zeal and.
Email: murat.ungor@otago.ac.nz
Abstract
We investigate the effec ts of the 2008 New Zealand (NZ)–
China free trade ag reement (FTA) on expor ts from NZ to
China, and real GDP p er capita in NZ using t he synthetic
control method to es timate the counterfactua ls. NZ exports
to China were more than 20 0% higher in 2014 than what
they would have had the FTA never bee n signed. NZ's food
and live animals expor ts to China were mor e than 180%
higher in 2014 than the counter factual. Our counterf actuals
indicate a small but neg ative effect of the FTA on NZ's real
GDP per capita b etween 2009 and 2012.
KEYWORDS
trade agreem ents, New Zealand, Chin a, synthetic control met hod
JEL CLASSIFI CATION
F13; F14; F43; O56
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VEREVIS and Ü nGÖR
we have no post-2008 obser vations on NZ where the FTA with Ch ina was not signed, we create a control g roup
by synthesizing t he performance of countries si milar to NZ. We use a combin ation of other OECD cou ntries to
construct a “sy nthetic” control NZ, whi ch resembles relevant e conomic character istics of the NZ economy bef ore
signing the FTA with Ch ina. The subsequent econ omic progress of this “counter factual” NZ withou t the FTA with
China is compare d to the actual experien ce of the NZ economy.
We ask two questio ns in this paper. Question one asks: H ave NZ's exports1 to China incre ased significantly be-
cause of the 2008 FTA? We find that N Z exports to China w ere more than 200% h igher in 2013 and 2014 than what
they would have bee n if NZ had never signed the FTA with Ch ina. We also explore trade c reation and trade dive r-
sion effect s of the 2008 FTA for NZ expo rts. That is, as NZ exp erienced larger commo dity exports go ing to China,
it also experie nced declines i n exports to ot her major trading partner s, such as Australia and the Unite d States
(US). We find that total c ommodity export s from NZ to the world would have b een 22% less than what they we re
in 2014 had the FTA never occurr ed. At the sectoral level , we find that the “food an d live animal” sector's ex ports
to China would have be en 185% less in the counterfact ual outcome. The second que stion we ask is: How has the
FTA with China affected t he per capita income of NZ ? We find that NZ's real GDP p er capita was 4% lower, on aver-
age, during the 20 09–2017 period than what they would have be en if NZ had never signed the FTA with Ch ina.
Our main result s, presented i n Sections 4 and 5 , are based on a contr ol group that consis ts of 24 OECD
countries (see S ection 4.1). When eva luating our count erfactu al results, we re port two goo dness-of-fit criteria
to measure the simi larity of our con trol group to NZ in th e pre-treatment pe riod. Our anal yses yield goo d fits
(see Figure 3 and Fi gure 7), indicating that c ountries in our control gro up can be considered pee r countries of NZ.
However, there are still d ifferences betw een the countries in our c ontrol group and NZ that we do n ot account for
in our benchmar k counterfactua ls. For example, almos t half of the countries in our c ontrol group (10 of 24) belong
to the Eurozone monet ary union (see Section 6. 2). NZ is not a part of thi s union, therefo re, these 10 countr ies
are different f rom NZ in this aspect. We recognize thi s as a necessity of robustness , especially for the outcome
variable of real G DP per capita. We re-es timate our main specific ation excluding the Eurozon e countries from our
control group, an d find significant (alt hough smaller than o ur benchmark) eff ects of the 2008 F TA on NZ's exports
to China. This is not s urprising considering t he significant increase of NZ's export to China in th e post-FTA era. In
terms of real GDP pe r capita, the experiment w ithout the Eurozone countries is co nsistent with our benchmark
counterfactual for the 2009–2012 period. However, the experiment without the Eurozone countries suggests
gains in real GDP p er capita start ing with the year 2013. Thes e findings highlight how i mportant the choic e of the
control groups ar e in counterfactual e xercises and its consequ ential influence on result s.
Our paper, to the bes t of our knowledge, is one of the firs t (if not the first) study tha t provides a systematic
quantitative a nalysis of the 2008 NZ–China FTA on the eco nomic performance of NZ w ith several counterfa ctual
comparisons.2 This work is relate d to a small but growin g literature that t ries to unders tand the impact of past
trade agreem ents using the S CM. The two pap ers most close ly related to ours a re Hannan (2016) and Han nan
(2017). Hannan (2016) explo res the impact of past tr ade agreements using 10 4 country pairs that had e ngaged in
trade agreem ents between 1983 and 1995, and fin ds that substantial ga ins are generated, with aver age increases
in export s of 80%, and annual grow th of 3.8%. Hannan (2017) em ploys the SCM to determine t he impact of trade
agreements f or 64 Latin American count ry pairs in the 1989–1996 period. Her results sugges t that trade agree-
ments have marked ly boosted exp orts in Lat in America , on average by 76.4 percent age points over 10 year s.
Hosny (2012) and Aytuğ, Kütük, Odun cu, and Togan (2017) provide more specific exam ples of trade agree ments
between count ries. Hosny (2012) s tudies Algeri a's trade agreem ent with the Gre ater Arab Free Trade Are a
(GAFTA) and invest igates the counterfact ual of Algeria signing the FTA in 1998 instead of 2 005. Hosny's results
suggest that Algeri a's trade would have improved in comparison with the counter factual. Aytuğ et al. (2017) study
1All export a nd import fig ures in this pap er are expresse d in nominal US do llars, unless r eal terms are sp ecified.
2There are som e descriptive s tudies on Chin a's impact on the N Z economy. See, for ex ample, Bowma n and Conway, 2013a,b; Ke ndall, 2014. Osbo rn
and Vehbi (2013) pr ovide a quantit ative analysis of t he impact on NZ of e conomic growt h in China employ ing a vector auto regressive mo del.
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