Knocking down trade walls. Australia and New Zealand have signed a ground-breaking trade agreement that wipes away most barriers between them. Some hope the pact will expand into a larger Pacific trading bloc.

Australia and New Zealand yesterday clinched a historic free-trade agreement that is even prompting some speculation of a political union. The unprecedented Closer Economic Relations (CER) agreement knocks down nearly all barriers to trade in farm and industrial goods and services between the two nations by July 1990.

``We have achieved an agreement on trade in services which is probably the most advanced in the world,'' Prime Minister Bob Hawke said yesterday. Indeed, Canadian officials have described CER as a model for its trade ties with the United States.

In creating a trans-Tasman Sea market, CER will eliminate tariffs, abolish antidumping laws, harmonize quarantine and customs practices, and provide equal opportunity for bidding on government contracts.

However, a few major stumbling blocks remain. Laws on foreign investment are not yet compatible but are expected to be smoothed out by mid-1989. Both countries still have restrictions on entry into broadcasting, telecommunications, postal services, and airline services. Both nations have inordinately high shipping expenses, mostly due to port handling costs. ``It can be cheaper to ship goods to England than it is to New Zealand,'' says a Sydney-based manufacturer.

But both governments are resolutely committed to resolving these remaining obstacles to freer trade. In response to Australian concerns about subsidized New Zealand dairy competition, Prime Minister David Lange said that ``New Zealand will not engage in crooked commercial practices to rub out its opponents.''

Mr. Lange is in Canberra until today for CER talks and to sign protocols that expand the original 1983 pact and accelerate the process by five years.

The pending interchangeability of business laws and production standards is provoking speculation that New Zealand could become Australia's eighth state. Both populations regularly hop the Tasman Sea on holidays and business. Both share a common heritage. Defense links, via joint arms and equipment purchases, are growing.

Still, both Mr. Hawke and Lange have quashed the idea of a political marriage. ``There's nothing in it for Australia or New Zealand,'' says Lange flatly, in an Australian magazine interview. Polls show little public support for such a union.

But public support for CER is high. Lower tariffs mean a greater variety of goods and services at potentially lower prices. Business leaders are mostly pleased with the agreement. Many advocate even quicker reforms and bringing other nations into the CER fold.

``We should start to develop closer ties with countries in the Pacific Rim, particularly Korea, Thailand, Hong Kong, Singapore, and China,'' says Rick Farley, director of the National Federation of Farmers. ``Australia's major trading partners in the past were Britain, then the United States, then Japan, and the next shift should be toward the rapidly expanding economies of Asia.''

Mr. Farley notes other trading blocs developing worldwide: the European Community (EC), Canada and the US. Japan has raised the possibility of a Northeast Asian trading bloc. ``If Australia and New Zealand don't start quickly, they'll be shut out.''

Until this month, Australia's Minister for Trade Negotiations Michael Duffy (now acting Minister of Foreign Affairs and Trade), has held firmly that protectionism worldwide should be reduced through multilateral trade negotiations. Australia has been a key player in trying to get the EC and US to agree on a reduction in farm trade barriers.

But the combination of the US drought and election year politics will make it difficult for farm subsidies to be cut. In a recent speech, Mr. Duffy hinted that Australia may join a Pacific trading bloc if the next GATT meeting in December fails to result lower agricultural trade barriers. (GATT is the organization that governs a large part of international trade.)

``Pressure has got to be exerted on the US and EC to wake up,'' Duffy insisted. ``By March or April next year, if there isn't any movement, ... stronger bilateral action has to be taken.''