New Zealand legislation sets standards for water quality. Nitrogen leaching from dairy effluent compromises these standards, with the consequent move being toward land‐based effluent disposal. The cost of this to the dairy sector was estimated and a Computable General Equilibrium (CGE) model (GTAP) was used to investigate the impact of additional production costs on NZ’s dairy export trade. Two scenarios were analysed: first, NZ acts unilaterally in imposing water quality regulations, second, the other principal dairy exporters act in a similar fashion. Changes in trade patterns vary from insignificant to large, depending on the scenario analysed.