We may not like it, but we need China's money now more than ever

Diversifying the export economy is a worthy goal – but let’s be realistic about what throwing away a critical relationship with China would mean for New Zealand, writes Stephen Jacobi of the NZ International Business Forum.

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

A similar debate about whether there are too many eggs in one trade basket is alive across the ditch. The 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 46th, with our other great trade competitor, Chile, not far behind at 49th. Australia and Chile both send around 35% of their goods exports to China, whereas New Zealand’s concentration is at just under 25% (adding receipts from tourism and international education will push that figure higher).

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

In New Zealand the charge is that this makes us too dependent on one partner, one which has quite different political values from us.

How has it come to this?

First, because 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 second, because since 2008 New Zealand and China have enjoyed a free trade agreement (FTA) 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, they may be highly protected by tariffs and non-tariff barriers, or – as in the case of those crayfish – they may not be prepared to pay the premium China pays.

Decisions about choice of markets are made quite rightly by exporters themselves. 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.

Nor it is fair to argue that New Zealand has pursued links with China at the expense of other partners. In some respects, seeking diversification has always been New Zealand’s strategy, ever since 1972 when the UK joined the European Community.

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 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.

Perhaps the issue has more to do with the products we sell. It’s hard to deny that we could do with a few more strings to our economic bow. Successive governments have been trying to facilitate this for generations – remember Helen Clark’s Knowledge Wave, which was followed by a significant growth in sectors like IT, creative and film?

This is a continuing story. These are all sectors, along with high tech or specialised manufacturing, on which we should be 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.

It’s true that China and New Zealand are quite different societies with different political cultures. As the prime minister has said, we are never going to agree on everything all the time.

In an increasingly complex geopolitical world, the relationship requires careful management, so that New Zealand can continue to trade and make its voice heard on global issues New Zealanders care deeply about, like human rights.

There are 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.