Australia correspondent The New South Wales Government may breach the closer trade relations agreement with New Zealand in a bid to save jobs.

In defiance of international treaties, Treasurer Eric Roozendaal has announced moves that will provide local companies with a 20 per cent advantage over the bids of foreign rivals.

But under the 1997 transtasman government procurement agreement, New Zealand goods and suppliers must be treated as equals of local companies.

The move, which has angered the federal Government and drawn warnings of possible trade wars, has the potential to lock New Zealand bidders out of major contracts.

In yesterday's state Budget, Mr Roozendaal said NSW would spend A$18 billion ($22.7 billion) on infrastructure in the next 12 months as part of a total four-year, A$63 billion programme - the largest of its kind in the state's history.

The decision to effectively subsidise local suppliers will hit major trading partners other than New Zealand, and may add strains to Canberra's relations with China after a defence paper identifying Beijing as a potential long-term threat to regional stability.

Federal Trade Minister Simon Crean said yesterday that the Government had received "significant queries" from the US and the European Union, and was demanding further details from NSW.

Mr Roozendaal said after the Budget that more than 500,000 small and medium-sized businesses in the state would be given mandatory preferential treatment under a "local jobs first" policy.

Government agencies and state-owned corporations would have to provide local bidders with a price preference of 20 per cent compared with foreign tenders. "For instance, if an agency has a choice between purchasing an Australian-made product for A$10 and a foreign-made product for A$9, the Australian-made product will be discounted under the policy, making it in effect worth A$8 to the Government and making it the better-value product," Mr Roozendaal said.

An additional 5 per cent advantage could be given to industries based in rural NSW.

Mr Crean said the policy was misguided, fundamentally flawed, and would not protect local jobs.

The federal Government has the ability to overrule the states under the constitution's external affairs powers, allowing it to enforce compliance with international treaties.