China’s trade dance with NZ
21 February 2005
China is the world’s fastest-growing economy and wants to open its doors to our exports. Sue Allen finds out how a free trade deal with the most populous country on the planet could transform New Zealand.
In the coming months, diplomats from New Zealand and China will take the first steps in a potentially long and complex dance that could lead to free trade between one of the world’s smallest countries and one of its biggest.
Last year, China’s economy grew 9.5 per cent - the previous year it grew 9.1 per cent - the strongest growth since 1996.
New Zealand’s growth was 4.6 per cent in the year to September 2004 but could nudge 5 per cent by year end.
According to research by Deutsche Bank, China and India will be the world’s second- and third-biggest economies by 2020, pushing Japan into fourth place.
The United States will remain the biggest economy.
Alongside an economic revolution, China is also full of confidence and looking to re-engage with the world as a cultural, political and trading force.
But the question on everybody’s lips is, why would a super-nation such as China single out New Zealand for trade talks when other countries are lining up?
At least one reason is New Zealand’s long-running political relationship with China.
New Zealand was the first World Trade Organisation member to finalise the bilateral negotiation associated with China’s joining the WTO in 2001.
Trade Negotiations Minister Jim Sutton says New Zealand is also safe ground for China’s first foray into talks.
Given New Zealand’s smallness, China "clearly wants to gain experience in bilateral agreements and we are a risk-free option".
"Even if they make something they may regard as a mistake, we are not going to swamp any markets of theirs."
Mr Sutton says New Zealand and China are also natural trading partners, with demand for New Zealand commodities, such as milk and meat products, rising rapidly in a country short of arable land.
According to economic modelling by the Foreign Affairs and Trade Ministry, total free trade could lift New Zealand exports of goods and services by between $250 million and $400 million a year during the next 20 years.
For China, the expected gain would be between $55 million and $100 million.
And if there are likely winners and losers, even in the short term, those walking away with a gold medal will surely include companies like Fonterra.
The dairy giant is already New Zealand’s single biggest exporter to China, making up most of the US$153 million of milk and cream exported in 2003.
China is now a key part of the company’s strategy. Fonterra already has a repackaging plant there and has entered joint venture talks with local diary company San Lu to try to increase direct sales to consumers.
Fonterra also hopes to cash in on China’s policy to increase per capita milk consumption from 18 kilograms in 2010 to 41kg by 2030.
Though trade strategy manager Fiona Cooper says it is impossible to talk about earnings potential from China, it is now in its top three or four for value and volume of exports.
And the free trade agreement, she says, comes just at the right time.
The agreement could do away with tariffs now at 10 to 12 per cent on dairy products - which will make Fonterra’s products more competitively priced in China.
It could also get rid of non-tariff barriers like product standards, customs procedures and testing and labelling requirements.
"The FTA could also help improve the investment climate within China and if investment protection could be included in the agreement, that would certainly encourage companies like Fonterra to take that leap into investing there."
Another potential winner could be forestry companies supplying wood to the booming Chinese construction industry.
Charles Finny, former director of New Zealand’s China FTA Taskforce, now chief executive at the Wellington Regional Chamber of Commerce, says one of the biggest threats to New Zealand would be not getting involved in talks and ending up with tariffs on our products when they have been removed from those of competitors such as Australia, the US or Chile.
And that has happened before. "Big hunks" of New Zealand’s dairy market disappeared almost overnight when Mexico joined the North American Free Trade Agreement, or Nafta.
"Almost overnight people were no longer interested in buying from us, so we just have to be in this game or we just won’t be able to compete."
At a simple level, what we gain from being first in the queue is the possibility of having a competitive advantage for a while and setting the FTA framework, rather than following bigger players and having to do a deal on their terms.
But for all those potential gold medal holders benefiting from China’s growth, there will be those going home with a wooden spoon.
And that could include all of us on one level or another.
China’s massive economy and huge increase in production is already thought to be drawing in more of the world’s resources, pushing up the price of oil, coal and steel.
Closer to home, the fear is that New Zealand’s manufacturing industry will suffer as China increases production and looks to export more. This month, Wellington-based specialist lock maker Interlock brought forward a decision to close its manufacturing plant and move most of its production to China with the loss of 200 jobs.
At the time, the company said the move was because of the strong Kiwi dollar but also to counter low-cost imports and the arrival of competing Chinese-sourced copies of Interlock products.
Last year, Tauranga-based Invensys moved production to China and more recently Wellington-based clothing maker Icebreaker announced it was doing the same thing.
The Government and pro-traders’ argument to the manufacturing threat is twofold.
First, they say New Zealand cannot hope to compete against countries such as China in the low-cost, high-volume arena and should concentrate on high-quality niche manufacturing.
Second, as the competition already exists, an FTA is likely to do more good than harm - particularly in areas such as taking action against copyright infringement, action that at the moment is fairly non-existent.
Taking a different stance is Green Party co-leader Rod Donald who opposes the China FTA, saying it will bring New Zealand manufacturing "to its knees".
Rather than enter a "race to the bottom", New Zealand should refuse to engage in talks with a country that has low wages and poor working conditions for many workers, he says.
And he has little time for the Government’s claim that New Zealand should move to niche, high-end manufacturing when those are just the kinds of businesses closing or retrenching.
"So where are the jobs being created to replace those being sacrificed?"
The outline of a deal is still probably years away but the Foreign Affairs and Trade Ministry’s initial report covers areas like tariffs, customs facilitation, inward investment, e-commerce, intellectual property, population mobility and trade in services such as tourism, education and financial and professional services.
Despite potential difficulties in some areas, Mr Sutton says New Zealand has done the hard yards in liberalising its own economy and is "well placed" to negotiate an ambitious outcome in the China FTA.
But it is also by no means a done deal.
"We have embarked with bilateral free trade agreements in the past and got to the point where we couldn’t reach agreement on terms beneficial to New Zealand and we didn’t proceed and that could happen in any bilateral FTA and we wouldn’t hesitate if the risks were too great or costs outweighed benefits."