The lure of Asia

This week’s signing of a free-trade agreement with Malaysiahas pushed our economy a little further down the path of being an "Asian nation",to borrow the description that Jim Bolger infamously applied to New Zealandback in 1993.   And the path to "Asiafication" has a lot of miles left in ityet.   A multilateral free-trade agreement (FTA) with the ASEAN nations is stillwaiting to be ratified, there has been preliminary work done towards bilateral agreementswith South Korea and India, and our government has also been in dialogue withits Japanese counterpart to strengthen the two countries’ trade relationship.

Obtaining Malaysia’s signature means that New Zealand now has FTAs with four of the ten countries in the ASEAN grouping, with agreements alsoin place with Australia, China, and Chile.   Our table shows that the importanceof China and Australia dwarf any of the other countries we’ve signed anagreement with.

New Zealand’s focus on largely bilateral trade agreementsover the last decade has come as progress in World Trade Organization (WTO)negotiations has been almost non-existent over the last decade.   Bilateralagreements are a second-best solution, with the scope for freeing up trade muchlower than the global reach of the WTO.   But the international recession of thelast two years has highlighted that protectionist tendencies remain common inthe US and Europe, the biggest global players, when economic conditions getdifficult.

Signing an FTA is, of course, no guarantee of exportsuccess.   Chile is a prime example – the value of our exports to that countryhas actually shrunk since the FTA came into force in 2006.   That said, New Zealand has little to lose by entering into FTAs with other countries given that ourimport tariffs are already low by world standards.   New Zealand’s unilateralreduction of tariff protection over the last 20 years has sent clear signals tobusinesses about what sort of products are economic to produce domestically.  The changes have been detrimental to our manufacturing sector, but haveultimately enhanced the living standards of New Zealanders by improving our accessto a wider range of goods from overseas.   At the same time, our productivecapabilities have been focused on goods that we actually have some comparativeadvantage in creating.

In other words, despite the time and effort required to naildown bilateral trade agreements, they are worthwhile.   FTAs have the potentialto improve export incomes, as overseas consumers pay a lower retail price forour products while returns to our exporters actually increase as the overseasgovernment no longer takes a share of the pie along the way.   If New Zealand products attract lower import tariffs overseas, export volumes can also beboosted as our products gain market share.

There are still some good-sized fish left to catch in the East Asia pond.   India and Japan made the third and fourth biggest contributions to worldgrowth over the last decade, South Korea was ninth, and Indonesia 17th.   Medium-term growth prospects across Asia remain strong given that muchof the continent is still firmly in "development" mode, and China’s advancement shapes as being a powerful driver of the region’s progress over thenext 20 years.

Events over the last two years have been a significant steptowards China becoming the pre-eminent world economy.   Just as the UK was usurped by the US last century, in terms of both economic and political power, China looks set to dominate the global landscape in 30 or 50 years’ time.   So the greaterthe number of trade strands leading into China, either directly or indirectly,that New Zealand can tap into, the better placed that New Zealand firms will beto ride along in the Chinese economy’s slipstream over the medium-term.

More trade will also boost social and cultural interactionwith Asian countries.   This interaction represents a change from ourtraditional cultural ties with Europe, and should be enriching for NewZealanders above and beyond the wealth gains achieved from increased trade.  Although negotiating bilateral trade agreements can be resource-intensive andslow, this limited pace of change may actually mean that our integration with Asia is more ordered and less prone to xenophobic backlash.

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