Trade myths and realities in the Covid era

Diversifying the New Zealand export economy is a worthy goal but requires a dose of commercial reality.

A 2018 study of 183 economies’ dependence on China, undertaken by the Australian Department of Foreign Affairs and Trade, showed that New Zealand ranked 93^rd.  So, do we have a problem or not ?

Too many eggs in one trade basket?

The DFAT study is quoted in a new report published by the Australia China Relations Institute (ACRI) at the University of Technology in Sydney under the intriguing title “Covid-19 and the Australia-China relationship’s zombie economic idea”.  You’ve got to hand it to our Aussie mates for their plain speaking!

Australia’s ranking in the  DFAT study was 46^th, with our other great trade competitor, Chile, not far behind at 49^th.  Australia and Chile both send around 35 percent of their goods exports to China, whereas New Zealand’s concentration is at just under 25 percent (adding receipts from tourism and international education will push that figure higher).  

For some sectors the concentration is even higher: for dairy its 35 percent, for meat around 50 percent, and for our $320 million crayfish trade, it’s a whopping 90 percent.  

How did this trade concentration come about?

The growing affluence of China’s middle class has made them eager to buy the goods we have to sell, especially our safe, sustainable and nutritious food products and a range of other high quality goods and services.  And since 2008 New Zealand and China have enjoyed a free trade agreement that has enhanced the trading environment between us.

The fact of the matter is that diversifying our business away from China whether for crayfish, dairy or other products, is not a straightforward matter.

Other markets may not be readily available, or they are highly protected by tariffs and non-tariff barriers, or – as in the case of those crayfish – they are not prepared to pay the premium China pays.

To make the case for diversification is to ask exporters to accept lower prices in other markets while good opportunities are passed to our competitors: this is a difficult proposition at the best of times but all the more so right now, when the Chinese market is saving our economy’s bacon.

Haven’t we been negotiating with partners other than China ?

While the ground-breaking FTA with China has certainly led the way in terms of export growth, we have negotiated FTAs with a range of partners – including Singapore in 2001, ASEAN in 2008 and the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) in 2018, to mention just a few.

Our long-standing quests for FTAs with the United States or India have not been able to be realised – not for want of trying, but because, unlike China, those particular economies, for their own protectionist reasons, do not want to do the deal with us, at least not on terms we would be willing to accept.

New Zealand is currently negotiating a new FTA with the European Union and hopes to start one shortly with the UK.  With luck, both these FTAs will yield new commercial possibilities, but they will not any time soon reduce the attractiveness of the Chinese market.  That’s because neither the EU nor UK FTAs are likely – short of a miracle – to deliver new access for anything like the volume or value of products currently traded with China.  

New vs traditional sectors

Our export trade with China and other markets is dominated by traditional sectors especially food, fibre and forestry. Sectors like IT, creative and film, along with high tech or specialised manufacturing, are all ones on which we should be increasingly focusing our attention to identify barriers to their further development, whether in relation to infrastructure, research or investment.   That work was important before the crisis, now it is vital.

There are therefore some very good reasons why New Zealand  has been able to expand its exports to China so strongly and equally why further diversification remains as challenging as ever.   

What we really need is both continuing strength in the trade relationship with our biggest partner and continuing efforts to open up new markets where these exist; both continuing growth in traditional exports, and more urgent work to develop promising new sectors.

Zombie ideas aside, the more realistic we are about the task before us, the more likely we are to succeed.

This post was prepared by Stephen Jacobi, Executive Director of the NZ International Business Forum.  This post is an abridged version of an op ed published on The Spinoff. For the full article see here.