Published in Insights, The New Zealand Initiative’s newsletter, 28 March 2014

The Prime Minister visited Europe this week. After meetings with European Union leaders, John Key announced that – finally – a free trade deal between New Zealand and the EU was on the table. Even though he was careful not to sound too optimistic, the Prime Minister strongly signalled that such a deal may be signed sometime after 2015.

If it came to that, it would be excellent news for New Zealand. It would bring a huge market for our products within closer reach of exporters. However, we should not count our chickens before they are hatched. The mills of trade diplomacy grind slowly, especially in Europe.

There are at least three obstacles that are in the way of a free trade agreement with the Europeans. First, Europe has other priorities at the moment. Second, the EU remains an organisation with protectionist instincts. And third, we may have more to gain from a deal with the EU than vice versa.

The first reason is easy to understand. Europe is fighting two big battles at the moment. It is trying to get its own house in order because the euro crisis is far from over and the continent’s many economic, financial and monetary problems remain unsolved. To make matters worse, dealing with an increasingly aggressive Russia is a political challenge as well as a threat to Europe’s energy security. Little wonder, then, that hardly any European newspaper even mentioned John Key’s visit, let alone the proposed FTA with New Zealand. It may have been big news for us but not for the Europeans. They have other things to worry about.

The second reason why free trade is difficult to negotiate with Europe is the nature of the European Union. It is an organisation that has facilitated free trade between its members, but at the same time, it has erected substantial tariff walls for its dealings with the outside world. The EU’s protectionism is particularly bad in the one area which concerns us most: agriculture. This will be the biggest obstacle in the negotiations.

Finally, the third problem is New Zealand’s small size. Although we would love to have better access to a market of half a billion consumers, for the Europeans the trade relationship with New Zealand is just a “nice to have”, not a “must have”. Consequently, they will rather focus on their efforts to establish a free-trade zone with North America, which to them promises a much greater return.

None of this is to diminish the Prime Minister’s efforts in bringing about an FTA with Europe. One can only wish him well on it. If it can be done, it would be a major political achievement.