The impact of the Euro on New Zealand's bilateral trade with the European Union

Abstract

Since 1990, the European Union (EU) is New Zealand's second biggest trading partner after Australia. New Zealand's exports to the EU are mainly in agricultural products, such as sheep-meat, butter, venison, kiwifruit, apples, wools, hides and skins. Furthermore, New Zealand imports high-technological products from the EU, such as cars, aircraft, telephone equipments, etc. This research focuses on two major issues: the introduction of the euro and the enlargement in the EU membership. It examines the impact of the euro on New Zealand's bilateral trade with the EU.

In January 1999, the Europe's single currency, the euro, was officially launched into the financial markets and the withdrawal of the twelve member-states' national notes and coins in the Euro-zone was completed by the end of February 2002. Because of the close trade relations between New Zealand and the EU, the introduction of the euro could significantly impact business (or trading) behaviours between New Zealand and the EU.

This research examines whether the introduction of the euro resulted in structural changes on New Zealand's import and export relations with the EU-15 member states. The research uses the Augmented Dickey-Fuller (ADF) unit root test to test the order of integration of the variables (imports, exports, Countries' GDP, relative prices of imports and export) , and whether all variables are integrated in the same level, I(1). In addition, Vector Autoregression (VAR) models are formulated and then the Johansen maximum likelihood procedure is used to determine the cointegrating relations among the series in the import and export models. Following weak exogeneity tests, single equation models are developed by following the LSE-Hendry 'general to specific' modelling strategy. Finally, the CUSUMSQ test, Chow stability test and recursive least square estimates of the coefficients are used to examine coefficient stability and structural changes. It is intuitively obvious that instability is found in imports more than in exports, but the instability or structural changes are more likely explained by the impact of Asian Crisis than by the impact of the euro's introduction.

Furthermore, the 2004 EU membership enlargement brings both benefits and costs to New Zealand. The bigger EU market offers more business opportunities to New Zealand, but the enlarged EU becomes a strong agricultural supplier in global trade which at the same time threatens New Zealand's export market. And, the impact is more likely to be seen in the long run, but not in the short run.