The level of milk power imported to China has quadrupled since 2008. Consumers there lost confidence in local milk when it was discovered that the industrial chemical melamine was added to give the appearance of higher protein content.
The tainted milk scandal saw at least six babies die and 300,000 made ill by dairy products.
The Chinese authorities have responded by raising the tariffs for New Zealand dairy exporters.
However, the New Zealand Government has not taken any action to protect the local industry against surges in Chinese imports.
Overseas Trade Minister Tim Groser told Morning Report the Government has not thought this necessary and said dairy exports to China have surged in spite of the sanctions.
"Our exports have gone from under half a billion to over two billion in four years - that is astonishing.
"The imbalance of trade in China's favour has gone massively down towards New Zealand's favour. We've done extremely well from this FTA."
Groser says China is playing within the rules of the free trade agreement with New Zealand.
Dairy Companies Association executive director Simon Tucker says the trade deal allows China to use sanctions to safeguard its industry.
However, he says the surge in exports has meant the tariffs have had a bigger effect than anticipated when the deal was signed.
Lincoln University's professor of agribusiness Keith Woodford estimates that half of dairy exports have been affected. -- Source: RadioNZ