Tariffs are a crucial component of international trade policy, affecting the cost of goods, market access, and business competitiveness. As New Zealand relies heavily on exports and global supply chains, the country’s approach to tariffs is shaped by its legal commitments under various free trade agreements and its membership in the World Trade Organisation (WTO).

This article examines tariffs - what they are, why they are used, and how they are implemented in New Zealand. It also explores the WTO’s role in regulating tariffs, New Zealand’s trade policy, and its approach to international trade agreements. We further highlight the practical implications of tariffs, using a key trade dispute between New Zealand and Canada as a case study. Finally, we provide insights into how tariffs may impact businesses and consumers and what they should prepare for in an evolving global trade landscape.

What is a tariff?

A tariff is a tax on goods or services traded between countries. Tariffs are usually charged as a percentage of the price a local, New Zealand, buyer pays to a foreign seller. Governments typically impose tariffs on imported physical goods, especially raw materials, manufactured products and consumer goods. 

The New Zealand Customs Service administers tariffs through the Working Tariff Document (WTD). This document is empowered by the Tariff Act 1988 and maintained by the Chief Executive of the New Zealand Customs Service and details tariff classifications, duty rates, and concessions. Importers must refer to the WTD to determine the applicable tariffs on their goods. 

As at the date of this article, most goods imported into New Zealand are not subject to tariffs. However, some products, including textiles, footwear, processed foods, machinery, steel, and plastic items, may face tariffs of 5% or 10%. Preferential duties offer reduced tariff rates for goods imported from countries which have trade agreements with New Zealand, offering lower rates than the standard tariff rates.

Why are tariffs used? 

Historically, tariffs have been utilised for either revenue raising, or protectionist purposes. In today’s global economy, imposing tariffs often has broader international relations implications, and are often used as policy instruments to aid in trade negotiations, protect domestic industries and gain increased tax revenue, or to achieve other foreign policy aims. Whilst the imposition of tariffs has a genuine place in the global economy, managing relationships with key trading partners is a balancing act that all states must partake, and will often operate circumspectly when setting global trade policy, particularly when imposing taxes which stifle the flow of global trade.  

New Zealand’s international trade policy recognises the importance of free and open trade, and accordingly has used tariffs sparingly and cautiously. Most imported goods are not subject to any tariffs, and those goods which are subject to tariffs often have preferential rates which are passed through to an array of key trading partners under trade agreements.

World Trade Organisation on tariff regulation

The WTO regulates tariffs primarily through its framework of agreements, which aim to promote free and fair trade by reducing trade barriers, including tariffs. New Zealand has been a WTO member since its inception in 1995, and was a founding member of the agreement which preceded its establishment, the General Agreement on Tariffs and Trade (GATT) from 1948 to 1994.

The WTO operates on key principles that promote fair, open, and predictable trade. The Most-Favoured-Nation (MFN) principle, outlined in Article I of GATT, ensures that countries do not discriminate between their trading partners, meaning that if a country grants a trade benefit to one WTO member, it must extend the same benefit to all members. This principle applies to trade in goods, services, and intellectual property, though there are several exceptions to the principle including allowing for free trade agreements and special provisions for developing countries.

In the interests of predictability and transparency, Article 10 of GATT requires countries to publicly disclose their trade policies and undergo periodic WTO reviews pursuant to the Trade Policy Review Mechanism.   

These principles (among others) set out to create a stable and equitable global trading environment.

WTO members commit to a maximum tariff level (called a bound tariff) for each product in their schedules of market access commitments (see Article II GATT). Once a tariff is bound, the WTO requires that a country cannot increase it beyond the agreed level without compensating affected trading partners. WTO encourages progressive tariff reductions through multilateral trade negotiations. These negotiations aim to lower tariff ceilings over time, promoting trade liberalisation. WTO members also can enter into regional trade agreements allowing lower tariffs between certain partners. 

If a WTO member violates its tariff commitments, affected countries can file a dispute with the WTO. The WTO Dispute Settlement Body can rule on tariff-related disputes and authorise retaliation if necessary.   WTO decisions are legally binding on WTO members. While this provides a mechanism for enforcement, the WTO lacks direct coercive power, relying instead on economic and diplomatic pressure to ensure compliance. As a result, while WTO rulings carry significant weight in international law, their effectiveness ultimately depends on voluntary adherence, the willingness of states to impose retaliatory measures, and the reputational costs of non-compliance.

New Zealand’s trade relationships

Whilst WTO members are bound by the MFN principle, the WTO does allow preferential/free trade agreements under specific conditions. These provisions allow customs unions and free trade agreements, so long as they cover ‘substantially all trade’ and do not raise barriers against non-members (see Article XXIV GATT and Article V General Agreement on Trade in Services), allowing New Zealand to negotiate better terms with certain countries without having to extend the same benefits to all WTO members. In addition, the WTO has implemented the “Enabling Clause”, which allows countries to grant special preferences to developing countries without violating the MFN principle. New Zealand is party to a number of different bilateral and multilateral free trade agreements.  We set out a case study below which highlights the precariousness of these agreements where sovereign states refuse to comply.

New Zealand’s response to breaches of free trade agreements

Free trade agreements are not a panacea for global trade relations.  Despite being a party to multiple trade agreements, New Zealand has not been immune to trade disputes. A notable example is the ongoing 2022 dairy trade dispute saga with Canada, where New Zealand alleged that Canada’s administration of dairy tariff rate quotas unfairly favoured domestic firms, in violation of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

In late 2022, New Zealand formally requested the establishment of a dispute resolution panel under the CPTPP framework. The panel ultimately ruled in New Zealand’s favour, determining that Canada’s actions were inconsistent with its CPTPP obligations. Under the agreement, Canada was given a reasonable period to comply with the ruling, with the deadline set for 1 May 2024. However, Canada failed to implement the necessary corrective measures imposed by the panel within the required timeframe. In response, New Zealand initiated mandatory negotiations under the CPTPP, which remain ongoing.

This dispute highlights the inherent fragility of trade relations and raises fundamental questions about the enforceability of free trade agreements. While trade agreements like the CPTPP provide structured mechanisms for dispute resolution, their effectiveness ultimately depends on the willingness of sovereign states to comply with rulings. The Canadian government’s failure to remediate its breaches of the CPTPP within the timeframe specified by the panel underscores the challenges in enforcing international trade law, particularly when economic or political interests conflict with legal obligations. Unlike domestic law, where enforcement is backed by state power, international trade law lacks a centralised authority to compel compliance. Instead, enforcement relies on diplomatic pressure, retaliatory measures, or further negotiations—processes that can be slow and uncertain.

Potential impact of tariffs on New Zealand businesses

Readers will be well aware that global trade and the imposition of tariffs is highly topical, with trading partners around the world treading on shaky ground, grappling with trade threats and shocks. We explore below how New Zealand businesses may be impacted (either directly or indirectly) if tariffs are imposed.

If New Zealand imposes tariffs on its trading partners

Tariffs imposed by New Zealand may ostensibly offer protection to local business by increasing the cost of overseas goods in favour of cheaper domestic alternatives. However, New Zealand businesses are still likely to be negatively affected where they rely on imported materials, equipment and components to operate. Higher costs for imported goods could make such New Zealand businesses less competitive internationally, with costs being passed onto purchasers and ultimately consumers. 

If other countries impose tariffs on New Zealand

Given New Zealand’s reliance on exports, tariffs imposed on New Zealand imported goods and services could significantly impact the country’s economy. Higher tariffs on New Zealand exports would make them more expensive in foreign markets, reducing demand and profitability for exporters. Depending on where the tariffs are imposed, New Zealand businesses may have to renegotiate trade agreements, seek dispute resolution through the WTO, or explore alternative export markets to avoid the impact of any tariffs imposed.

In response, New Zealand might wish to renegotiate trade agreements or seek dispute resolution through the WTO. Alternatively, New Zealand businesses may consider renegotiating supply contracts to distribute tariff costs more equitably with their customers, and/or raise prices when entering into any new contracts, as required.

Impact on New Zealand business where taxes are imposed on key trading partners

Even if tariffs are not imposed on New Zealand directly, we may be indirectly affected by the imposition of tariffs by other states on New Zealand’s key trading partners. Tariffs may have a ripple effect by reducing trading volumes and investment appetite globally. If tariffs are imposed by our key trading partners on other global economic powers and markets, the heightened cost of importing goods into those states may create an economic slowdown, and drive inflation due to the increased cost of trade. This could ultimately result in sustained high interest rates in response to persistent global inflationary pressures.

As the global trade landscape continues to evolve, it is crucial for New Zealand businesses to understand how tariffs and trade barriers could impact their operations. If you are concerned about how tariffs may affect your business, our corporate and commercial and tax teams are on hand to assist and clarify the options your business has with respect to its contractual relationships and tax position, in response to shifting global trade trends.

This article was written by Gerard Dale, Partner, in our Corporate & Commercial team, Bruce Bernacchi, Partner, in our Tax team and Sophie McAllister, Solicitor, in our Corporate & Commercial team.