Technology: China FTA more sweet than sour for tech firms

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Technology: China FTA more sweet than sour for tech firms

21 February 2005

By REUBEN SCHWARZ

Despite concerns over piracy, IT firms are licking their lips over free trade with China.

A free trade agreement with China could be a boon for New Zealand IT companies, if it’s done properly.

When the trade tariffs finally fall - probably after years of intensive negotiation - New Zealand companies will gain unrivalled access to the most coveted market in the world. The companies, though, will have to be prepared.

"It’s a very large market, so I think it’s important to think about what kind of market they want to address," says free trade agreement (FTA) lead negotiator David Walker. "It’s important to do your homework up front."

The agreement should end up in New Zealand’s favour because China’s tariffs are higher overall than New Zealand’s, he says.

Any agreement will also tackle non-tariff barriers to trade, such as standards, certifications, and intellectual property rights.

China’s attitude toward intellectual property rights, in particular, worries Information Technology Association head Jim O’Neill.

"Their track record hasn’t been great. Right the way through Asia, piracy has been a significant problem."

After China’s entry into the World Trade Organisation - granted in 2001 after 14 years of negotiations - the country has started cracking down on software piracy, passing tough new laws and organising large-scale campaigns against it.

But piracy still remains rife throughout the region. Some pundits estimate that 96 per cent of all software in China was pirated in 2003, US$568 million worth.

Mr Walker thinks an FTA could spur more effective enforcement.

In the short term, though, it gives a good push to any Kiwi companies that are lax about solid legal protection for their products.

As the first Western country to sign an FTA with China, New Zealand would be in a unique position to act as a gateway between Chinese and European and US firms.

"Any agreement with China should make New Zealand a more attractive place for investment for companies looking to access the Chinese market," Mr Walker says.

Mr O’Neill says overseas companies are already looking into this.

"India sees China as a major opportunity market, but for many reasons, many of them historic, some Indian companies find it difficult to do business with China and vice versa," he says.

As middlemen, New Zealand companies could do quite well cooperating with Chinese firms.

"They’ll come in a small way, and therefore the opportunity to partner is very high because they’ll use New Zealand as a staging point to get into other countries," says Garth Hamilton, acting chief executive of Wellington IT services firm Synergy. "And by being the first country to have an FTA, there’s a lot of opportunities for New Zealand firms to do deals with other countries which want to get into China."

Synergy currently uses its office in Singapore to penetrate the Asian market, including China. It has a mobile Internet product that Mr Hamilton is keen to get into the Chinese market.

Chinese firms may also invest directly in New Zealand intellectual property, with a view to exporting it to the entire Asian market.

Mr O’Neill thinks that’s something New Zealand companies need anyway, since they lack the money and know-how to bring their product to large markets.

New Zealand exporters stick to the tried and true - Britain, Australia and the US. Asia is dismissed as "too hard".

"The FTA could spur New Zealand companies to start thinking globally. I think there’ll be a knock-on effect and New Zealand companies will start looking to Asia."

China’s ambition to be the next India, at least in terms of outsourcing, shouldn’t worry IT workers in New Zealand. Mr O’Neill says the market here is too small for Chinese companies to pose a huge threat.

Companies such as banks and insurance firms will be cautious about outsourcing to China anyway, because of the nation’s "almost non-existent" privacy protection.

China views New Zealand’s FTA as very much an experiment - a test of free trade possibilities in a small, benign environment.

China is New Zealand’s fourth largest overseas market; New Zealand is China’s 31st.

Kiwi exports to China total NZ$1.74 billion - mostly dairy and other agricultural products - a sizable chunk of our export market. Chinese exports to New Zealand amount to NZ$3.38 billion, barely a trickle of the estimated NZ$9.1 trillion gdp of China.

Mr Walker says the trade flows are complementary - China exports mass-produced, labour-intensive goods, while New Zealand exports specialised niche products.

Electronics companies could be under threat from the cheap labour of Chinese competitors. But most of the changes, says Mr O’Neill, will be Chinese imports replacing those from other countries.

Prices for IT hardware may drop with the tariffs, but "the jury’s still out on that".

Under the agreement, both governments will try to stimulate cross-border e-commerce though it’ll be up to individual companies to forge the bonds.

But access to China’s mega-market could be a boon to New Zealand’s software firms.

"It will be of real interest to New Zealand software companies to make software that can be exploited in the Chinese and the other Asian markets," says Mr O’Neill. "It’s potentially a very big market."

New Zealand’s IT services specialities - utilities management or earthquake monitoring, for example - are particularly good candidates for export because China is lagging behind the West in service.

"China has very little experience with service systems. It’s never been a service society but it’s having to become one."

Mr O’Neill sees barriers to IT services as a particular problem in China at the moment - both tariffs and red tape. The FTA, he says, should make "recognised free access of service companies" a priority.

"The last thing we want is open access to New Zealand and less than open access to China."

The FTA should also make it easier to move people into China, to hire employees there, and to repatriate money. He says these are difficult now, and companies struggle to open and maintain Chinese offices.

"The majority of companies will have real problems in being able to establish proper business in China, hire people, send people over there, and do business on an even footing."

Mr O’Neill sees the FTA as a good chance for New Zealand to push its exports to the next level.

"We’re already sending skins over there full of meat and heaps of stuff like that, but that gives us a wonderful opportunity to move to higher level products. It’s the very epitome of a smart society."

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