NZDB 225 INTERNATIONAL THE BALANCE OF PAYMENTS

TRADE AND FINANCE

Lecture Two An open economy interacts with

Other economics in two ways:
1: buying and selling goods and
The Balance of Payment services in world product markets .
Significant Current New Zealand 2: buying and selling capital assets in
Trade Agreements world financial markets

THE BALANCE OF PAYMENTS THE BALANCE OF PAYMENTS

Last class we have learnt the basic definitions, terminology, Two forms of foreign investment
and theories in the product markets. This class we mainly 1. foreign direct investment
focus on the balance of payments.
for example: a Chinese corporation opens up a company in New Zealand

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.
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

Foreign Direct Investment THE BALANCE OF PAYMENTS

• Foreign direct investment What is the balance of payments?

– 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 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 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
Please read the text book P353 to grab
the direct impression of the balance of
payment.
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
Why are we hearing more about them now?
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
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
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
Significant Current New Zealand
Agreements
The significance of FTAs in today’s trading
environment is that they are important to
ensure the ongoing competitiveness for
exporters in key markets
Significant Current New Zealand
Agreements
FTA components
• 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
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.