NZDB 225 INTERNATIONAL TRADE AND FINANCE Lecture Two The Balance of Payment Significant Current New Zealand Trade Agreements
THE BALANCE OF PAYMENTS Last class we have learnt the basic definitions, terminology, and theories in the product markets. This class we mainly focus on the balance of payments. What are the main differences between flow of goods and flow of capital? An example is a US resident with $ 20,000 could use that money to buy a car from Toyota, but he could instead use that money to buy stock in the Toyota corporation. The first transaction would represent a flow of goods, whereas the second would represent a flow of capital.
Foreign Direct Investment • Foreign direct investment – Purchase of physical assets or in another country to gain a measure of management control.
• Portfolio investment – Investment that does not involve obtaining a degree of control in a company.
THE BALANCE OF PAYMENTS An open economy interacts with Other economics in two ways: 1: buying and selling goods and services in world product markets . 2: buying and selling capital assets in world financial markets
THE BALANCE OF PAYMENTS Two forms of foreign investment 1. foreign direct investment for example: a Chinese corporation opens up a company in New Zealand 2, foreign portfolio investment foreign example: a Chinese corporation buys stock in a New Zealand corporation. both increase China net foreign investment. Net foreign investment: The purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners
THE BALANCE OF PAYMENTS What is the balance of payments? • The balance of payments is a statistical statement that records the transactions of one country with the rest of the world. • The balance of payments has three accounts: the current account, the capital account and the financial account • We only focus the current account and the capital account
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THE BALANCE OF PAYMENTS • The current account is the sum of net income from trade in goods and services, net factor income (such as interest payments from abroad), and net unilateral transfers from abroad.
THE BALANCE OF PAYMENTS Please read the text book P353 to grab the direct impression of the balance of payment.
• The capital account is one of two primary components of the balance of payments. It tracks the movement of funds for investments and loans into and out of a country
THE BALANCE OF PAYMENTS investment income received: domestic residents receive investment income on their holdings of foreign assets, and foreign residents receive investment income on their holding of domestic assets Net transfers received: countries give and receive foreign aid
THE BALANCE OF PAYMENTS The current account and the capital account are mirror images of each other. A current account deficit is financed by net capital flows from the rest of the world. Thus by a capital account surplus. Similarly, a current account surplus corresponds to a capital account deficit.
THE BALANCE OF PAYMENTS • The capital account is the net result of public and private international investment flowing in and out of a country. This includes foreign direct investment, plus changes in holdings of stocks, bonds, loans, bank accounts, and currencies. • The capital account only keeps track of the money being transferred (i.e., the worth of stocks is not taken into account as money when calculating figures for the capital account). Hence, a surplus in the capital account amounts to debtor status
Significant Current New Zealand Agreements • Free Trade Agreements (FTAs) are also known as Closer Economic Partnerships (CEPs) or Strategic Economic Partnership (SEPs) • They are negotiated directly with countries, or groups of countries to improve access for New Zealand exporters to overseas markets and reduce barriers impeding trade • Can make greater gains and in less time than World Trade Organization negotiations which involve 150 countries.
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Significant Current New Zealand Agreements
Significant Current New Zealand Agreements
Why are we hearing more about them now? The significance of FTAs in today’s trading environment is that they are important to ensure the ongoing competitiveness for exporters in key markets
Due to the slow progress seen in the World Trade Organisation (WTO) negotiations. New Zealand’s first and most successful free trade agreement was signed in 1983 with Australia
Significant Current New Zealand Agreements
Significant Current New Zealand Agreements FTA components
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How does the FTA process work? In the earlier rounds, participants will look to build confidence in each other. In later rounds, the process evolves to discussion on specific text, and on respective requests and offers for market access commitments in the areas under negotiation. After negotiations are concluded, and the text is legally verified, the agreement will be signed, a National Interest Analysis prepared When the agreement enters into force, the benefits of the agreement begin to flow.
Significant Current New Zealand Agreements
• For goods, New Zealand aims to bring trade as close as possible to duty-free. Elimination of tariffs may be phased in over a period of time. An FTA should also tackle any existing quotas or import licence requirements • For services, the objective is to ensure New Zealand service exporters have greater access to the markets of other partner countries, and greater certainty around the conditions that exist for doing business in that market • For investment, an FTA aims to remove or limit restrictions to investments in foreign markets to ensure an improved environment for New Zealand investors • An FTA will also address rules of origin, trade remedies, consultation and dispute settlement cooperation and legal and institutional issues.
Significant Current New Zealand Agreements
How does an FTA work? • This depends on the area. For example, in goods, some tariff lines may be reduced to zero immediately • On other products, the tariff will phase out over a period of time, not necessarily in a straight line. For instance, New Zealand’s negotiators consult closely with local industry to ensure that if a tariff is going to be removed in an area of sensitivity, industry has time to adjust to this. • In services and investment, some benefits will flow immediately with up-front commitments to remove or limit various restrictions. Other benefits may come in time, either through unilateral reform in the partner country or as it negotiates with other countrie
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New Zealand’s FTA agenda 1983 Australia New Zealand Closer Economic Relations Agreement (CER) 2001 New Zealand and Singapore Closer Economic Partnership 2005 New Zealand and Thailand Closer Economic Partnership 2005 Trans-Pacific Strategic Economic Partnership (Trans-Pacific SEP) Brunei
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Significant Current New Zealand Agreements FTAs under negotiation • New Zealand and China Free Trade Agreement • New Zealand and Malaysia Free Trade Agreement • New Zealand-Australia and ASEAN Free Trade Agreement • New Zealand and Hong Kong Closer Economic Partnership. Negotiations on this agreement are currently suspended pending further developments on outstanding issues and progress in the New Zealand and China FTA negotiations.
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