China: golden prospects

It’s almost a year since New Zealand and China signed aground-breaking free trade agreement. While world trade has contracted byaround a third over the last year as a result of financial market turmoil andsubsequent economic slump, New Zealand’s trade with China has continued togrow.

The value of New Zealand’s merchandise exports to Chinaover the year ended June 2009 increased by a whopping 61%, and in factaccounted for half the increase in the value of total exports in that year.Over the same period New Zealand’s imports from China increased by a moresubdued 14%, although again that accounted for half the growth in New Zealand’smerchandise imports last year.

On the face of it the free trade agreement has been aresounding success from New Zealand’s point of view. The timing and choice ofcountries could hardly have been more fortunate. China has largely sidesteppedthe financial meltdown and the massive fiscal and monetary stimulus it gave itseconomy last year, in the face of wilting world demand, has helped it maintaingrowth of 7%pa plus.

But let’s not get carried away yet. Based on the latestannual data China accounts for just 8% of all New Zealand’s merchandiseexports; up from around 5% over the previous six years (see graph).Interestingly that makes it our third most important export market just behindthe US but a long way short of Australia at over 20%.

Commodities and raw materials account for the vastmajority of New Zealand’s exports to China and given that country’s state ofdevelopment and pace of growth these products will remain at the heart of ourexport trade for some time yet. However, these traditional exports are by nomeans the only opportunity the trade relationship with China offers.

New Zealand can’t expect to compete head on in the generalmanufacturing area, but as the deal between China’s Haier and our own Fisher& Paykel suggests there are opportunities even for traditionalmanufacturers. As China moves to develop its own global brands it will belooking for clever technology and sharp designs (particularly ones tailored fordeveloped western markets) that it can incorporate into products that it willproduce on a scale we can only dream of. For New Zealand entrepreneurs theopportunity to leverage their talents by teaming up with rapidly maturingChinese businesses focused on the global market is substantial. Consummatingsuch arrangements may be easier said than done because of the immature state ofthe institutional and business infrastructure that is essential to securingreliable contracts.

One area that New Zealand Inc could focus on to strengthenthe trading relationship between the two countries, as well as being apotentially very valuable commercial opportunity, is food safety and biosecurityservices. New Zealand has a long and trusted track record of certifying foodfor picky export markets in Europe, US, Australia and Japan. The knowledge andskills built up over many years in this important area would surely be of realvalue to the Chinese authorities given the relatively underdeveloped state oftheir food industry standards and safety.

The infant milk formula scandal of 2008 was much morewidespread than the San Lu/Fonterra headlines we got in New Zealand and by someaccounts we gained kudos by blowing the whistle directly with the Chinesecentral government so that they could be seen to be taking the initiative to"uncover" and fix the problem. By now the New Zealand government should havefollowed up with an offer to help develop and implement a robust food safetyregime. Any involvement by New Zealand officials and consultants in developingthe institutions and regulations required to provide Chinese consumers with theassurances they are demanding on food safety could have valuable spinoffs forour food exporters. 

Tourism and education will be two other important areas oftrade growth with China. These industries already have footholds; the challengewill be to expand them on a sustainable basis. In the case of education thatmay involve investing in schools and universities in China rather than simplybringing more students to New Zealand.

The free trade agreement is in its infancy but thecontinued rapid pace of economic growth in China promises huge opportunitiesfor a small economy like New Zealand. The question is whether the New Zealandgovernment and local businesses can develop the commercial and culturalknowledge, skills and strategic nous to take full advantage of the potentialthat’s on offer. Simply saying this is what we produce, take it or leave it,will result in New Zealand squandering a golden opportunity.

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