New Zealand’s economic relations with a global giant
On 7 April 2008, New Zealand became the first developed country to sign a free trade agreement (FTA) with China. The agreement came into force on 1 October that same year, signaling the beginning of a blossoming economic relationship between the two countries. But why has New Zealand so fervently pursued an economic relationship with China? What’s in it for us? And what interest does China have in an island nation, with a population of only four million people, at the bottom of the South Pacific?
The deal
The substance of the FTA was negotiated over a three-year period. Kefeng Chu, Director of Operations–China from New Zealand Trade and Enterprise (NZTE), says that the final product of the negotiations, the FTA that is now in place, “liberalises and facilitates the trade of goods and services, improves the business environment and promotes cooperation between the two countries in a broad range of economic areas”.
In addition to this, Chu says the FTA ensures “that any services and investment provisions that are extended by China to third countries in future trade agreements will automatically be applied to New Zealand”.
For most of us, this just sounds like economic gobbledigook. So what does the signing of the FTA mean in a sentence? The Ministry of Foreign Affairs and Trade (MFAT) summarises the FTA as this: “New Zealand and China have entered into an agreement that allows for mutually beneficial concessions in the area of trade of goods, services and investment.”
There are several specified “key outcomes” of the FTA. The most important of these is the removal, over time, of tariffs on 96 per cent of New Zealand exports to China. The FTA outlines rules to determine which products qualify for tariff cuts, along with rules to “counter unfair trade or unexpected surges in imported products from the other country”. The FTA is, in some respects, a more formalised means of building upon and expanding our already cooperative economic relationship with China.
For a number of reasons, it makes sense for a small nation like New Zealand to pursue an FTA with China. Despite the recession, China’s economy has continued to grow, even if at a slightly lower rate. China has become an important player economically and politically on a global level, and its importance is unlikely to diminish in the foreseeable future. Some political commentators have predicted a shift in the global ‘balance of power’ from the United States to China and East Asia.
In the two years since the FTA was signed, China has gone from New Zealand’s fourth to second largest trading partner. Agricultural products, including dairy, wool, oils and fats, are New Zealand’s main exports to China. Beyond the agricultural sector, forestry, seafood, machinery, aluminium and high technology products are among New Zealand’s other export products to China. Trade with China is crucial to New Zealand, and yet because of our size and relative economic unimportance, we are but a blip on China’s economic radar.
A long-standing relationship
New Zealand’s relations with China date back to the late 19th century, when Chinese migrants arrived in New Zealand seeking jobs and other opportunities. Professor Xiaoming Huang, who heads the Contemporary China Research Centre at Victoria University, says three stages are evident in New Zealand’s relationship with China. The arrival of this first generation of Chinese in New Zealand, many of whom found jobs as gold miners, marks the first stage in relations between the two countries.
The second stage, Huang explains, spans the 1930s and the Second World War period, when a few New Zealanders ended up in China. He says they developed “very good relations with the then-exiled Communist groups in different parts of China”. The Chinese Communist Party (CCP) eventually took power in the Communist revolution of 1949. As a result, the relations that New Zealanders had developed with members of the Communist party became very useful.
New Zealand established formal diplomatic relations with China in 1972, recognising the People’s Republic of China led by the CCP. In the years since, the relationship with China has become, according to MFAT, “one of New Zealand’s most valuable and important”. Visits by high-level officials and politicians have been exchanged between the two countries, particularly since the mid-1990s. Prime Minister John Key has twice visited China, the most recent visit being just a month ago, while the Chinese Vice-President touched down in New Zealand in June.
What has paved the way for greater economic cooperation between New Zealand and China is the opening up of the Chinese market, a process started by Deng Xiaoping in 1978. His sweeping economic reforms ended the stranglehold that the CCP and the state held over the Chinese economy. China’s economic liberalisation and entry into the global marketplace has seen China’s wealth grow considerably, with business and private enterprise opportunities opening up for both the Chinese population and foreign investors hoping to tap into the Chinese market.
Huang says that particularly over the last ten years, and especially with the FTA, New Zealand and China have built a relationship with “more substance”—marking the third stage in bilateral relations between the two divergent countries.
“China and New Zealand, they are different sizes, [come from] different political ideological camps, different historical backgrounds, but somehow they have found common interest to nurture their relations.”
Huang adds, “What China wants here and what we want from China may not always be the same, so you do have [those] different views about the relations. New Zealand is doing quite uniquely with China.”
What are we set to gain?
The economic benefits to be gained from an FTA with China have been a major talking point in media coverage of the New Zealand-China relationship. Charles Finny, Chief Executive of the Wellington Chamber of Commerce, says that since the signing of the FTA, New Zealand has been doing even better than expected.
“The modeling done before the negotiations started suggested that a high quality FTA would deliver benefits worth hundreds of millions to the New Zealand economy. The performance of our goods and services exporters since the FTA was signed suggests that the growth in our exports has probably exceeded these expectations.
“During the first year of operation, New Zealand exports to China grew by 60 per cent. This was in the face of a global recession, which saw the biggest contraction in international trade since the 1930s. Over the last year, exports to China have continued to grow strongly at around 25 per cent.”
Finny adds that New Zealand consumers have also benefited from “lower prices resulting from tariff liberalisation at the New Zealand border”.
Chu says that as a result of the FTA, New Zealand products enjoy 15 per cent lower tariffs, compared with countries that don’t have an FTA with China.
The FTA has “helped to increase the overall awareness of the potential of the China market for New Zealand businesses, and there is an increasing number of New Zealand companies who are interested in the China market or have entered the market,” Chu says.
“The FTA has also resulted in an increased awareness of New Zealand, at least in some business sectors and amongst some senior government officials in China.”
Given New Zealand’s size, exports are crucial to the economy. “In the longer term, the FTA with China will increase our exports to China,” Chu says.
“The FTA also leads to greater cooperation in the areas of customs, sanitary and phytosanitary measures and intellectual property, which will improve the operating environment for New Zealand companies and their services/products in the China market.
“There are also other areas of cooperation, such as agriculture and food safety, that have strengthened as a result of the FTA.”
In the end this will help increase New Zealand’s presence in China, no doubt having flow on economic effects for us back home.
Bumps along the road
It hasn’t all been smooth sailing in New Zealand’s relations with China. Prior to the signing of the FTA, Finny says New Zealand faced a range of barriers to goods and services exports into the Chinese markets.
“These ranged from quotas, to high tariffs to heavy regulation. Our companies also had poor protection for their IP [intellectual property]. The FTA has liberalised these barriers and increased protections for New Zealand companies.
“Our key competitors—Australia, [the] EU, US, Canada—do not enjoy the good access conditions New Zealand now enjoys.”
China does not present as much of a concern to New Zealand, strategically and politically, as it does to bigger countries like the United States and Australia. This could be a reason why New Zealand has been able to develop cooperative relations with China, but others have found it a more complex prospect.
“If you look across different countries, certainly New Zealand feels less [political problems] or otherwise in dealing with China,” Huang says.
“I suppose because we don’t have much of a strategic concern that some other countries might have—the United States, or even Australia I think—[their concerns are] bigger than just economic interests I suppose.”
However, debate does occur in New Zealand about the nature and shape of our relationship with China. And this debate goes beyond the issue of economics. Huang says that different interests and views regarding relations with China do exist within New Zealand society.
“It’s not like there’s no questions or debate about what we do with China… Particularly more recently in terms of how do we deal with incoming Chinese capital to buy land, to buy companies? How do we deal with labour issues, politics in China, values, human rights issues—all these issues. You do have different groups and interests in New Zealand.”
Interestingly, Huang doesn’t think these competing interests pose much of a barrier to New Zealand’s relationship with China—thus far the two countries have successfully made agreements based on what common ground they do share.
“They’re just a part of the policy process and general public interest,” he says.
The future?
China is going to play an important role in New Zealand’s economic future, Finny believes.
“The international financial crisis has increased China’s relative economic position globally, and reinforced the importance of China’s foreign exchange reserves and the strengths of its banking system,” he says.
“China has become more important to New Zealand, not just as a trading partner… but as a source of capital and investment funds. As a country that is a net importer of capital, we need China if we are to maintain our standard of living and improve upon this. We need a more sophisticated debate on foreign investment. If we don’t access capital from abroad, where is it going to come from?”
Finny touches on a good point, one that came to prominence when a Chinese-backed company proposed buying the Crafar farms earlier this year. There appeared to be considerable opposition to the proposal, and foreign investment in New Zealand farms appeared to hit a bum note among New Zealanders. Huang says that the issue of land purchases touches at the very “foundation of New Zealand society [and] economy in a sense, this is the way we built our system”.
John Key made it clear in an interview on Q+A that he was concerned about New Zealand farms being sold offshore in large numbers because he believes it’s “not a good thing for New Zealand”. But as Finny says, if the capital can’t come from within New Zealand, where else are we to turn?
New Zealand’s budding relationship with China is not going to be without its challenges. As ties with China grow stronger, no doubt it will have some impact on policy debate in New Zealand and how we see ourselves as a country. But New Zealand has set itself on a path that it might find difficult to turn off.
“Movement of Chinese capital around the world is a phenomena you can’t stop,” Huang says.
“[The] question is how international society can build relations so it can be useful for us. It’s a challenge.”