In recent weeks I have been exploring some of the challenges in finding new markets that will allow New Zealand to stem its increasing reliance on China.
My focus in the last three articles was first on northeast Asia then the Asean countries of southeast Asia then south Asia and Iran. This week I look further west to Europe and the Americas before completing the circle.
First, to recap a little.
The emergence of China as the most important trading partner of NZ has been a function of natural alignment between what NZ produces and what China wants, complemented by NZ also wanting what China has been producing at lower cost than anyone else. The other factor has been very fast growth in the Chinese economy creating space for new and expanding supply chains.
In contrast, elsewhere in north Asia the times of easy growth were gone by the end of the 20th century. The growth of what were the north Asian tiger economies of Japan, South Korea and Taiwan had plateaued. Low economic growth rates combined with low birth rates mean new market development requires elbowing out existing products. This is much more challenging than responding to new market demand.
Turning to the Asean countries further south, some of them, such as Vietnam and Indonesia, continued to show strong economic growth till covid-19 arrived but that was off a low base.
Taking Vietnam as an example, its per-capita GDP when measured on the basis of buying power parity is about US$8000, depending somewhat on who does the calculations. That is about 20% of NZ’s per capita GDP when calculated the same way.
However, imports have to be paid for at market exchange rates rather than internal buying power parity and on that basis Vietnam’s GDP per capita is only about US$2600 or less than 7% that of NZ. In practical terms that means imported products are very expensive for Vietnamese people relying on their local salaries, even if they are part of the rapidly growing middle class.
Travelling west into south Asia, per-capital incomes are even lower than in the Asean countries. India is by far the biggest of the south Asian markets but it maintains strong barriers to pastoral products. That is unlikely to change.
A little further west, Iran is one place of great potential but America, through its control of the international finance world, has bullied almost everyone else into not trading with Iran. The extent of future trade between NZ and Iran will be determined by neither NZ nor Iran but by American politics.
Travelling further west through the Middle East the future opportunities depend almost totally on the price of oil and regional politics. For many years NZ has done good business with Saudi Arabia while choosing to avoid introspection as to whether it is a country with which it wants to do business.
Heading further west most of Europe is now in the European Union and can be considered as one mega market. NZ does have aspirations for a free-trade agreement with the EU but the signs are not good. The EU does not want our dairy, beef or lamb. However, it will and does take products such as kiwifruit, which do not threaten its traditional agricultural industries.
Indeed, kiwifruit is a wonderful product for NZ. The good old Chinese gooseberry, now greatly improved through Kiwi breeding, has become a wonderful, differentiated product on the world market, protected for the medium term by plant variety rights.
In a temperature-controlled environment free of ethylene, kiwifruit can be stored for more than six months. Unless the technology changes there will always be a northern hemisphere seasonal window for NZ production with few competitors. Kiwifruit has been a great success story and there is a good chance that can continue across the globe.
With Brexit, there are also hopes for a free-trade agreement with Britain. This, too, will bring its challenges given Britain, unlike 50 years ago, has no need to import pastoral products from NZ. It has internal voting constituencies that would get very upset if there were major pastoral imports from NZ.
As for the Americans, they want a free-trade agreement only if it is in their own self-interest. That means having free access to NZ for all of their service industries including finance, insurance and education but keeping dairy products out.
NZ already has excellent US access for beef, lamb, wine and kiwifruit so there is not much else going to be on offer. Most of those products are now struggling in the US because of covidf-19, given they are predominantly food-service rather than home-consumption products.
That leaves only Africa. NZ has almost no trade with Africa and it is hard to see that changing. Distance, logistics and income all mitigate against it. The projections are that Africa’s population will double over the next 30 years to 2.5 billion unless some catastrophic event casts those projections aside. It is hard to foresee good outcomes for Africa.
In travelling around the globe I left Australia out of the story. Perhaps that was a mistake, particularly given that Australia is NZ’s second-largest trading partner after China. Australia is by far the most important export market for NZ’s manufactured goods. Maybe those markets can be further developed?
Unfortunately, the trend for NZ manufacturing, apart from food products, has been long-term decline. For non-food products NZ has no competitive advantage in Australia compared to Asian products. Indeed, NZ seems to lack competitiveness for manufacturing even in NZ markets and its manufacturing industries continue to be hollowed out.
All the above leads to uncomfortable issues for NZ to face. With a population that continues to increase rapidly it becomes puzzling where and how NZ is going to find export markets that underpin current per-capita living standards.
The blunt reality is that if market forces are allowed to play out unhindered the likelihood is NZ’s trade dependence on China is going to further increase. The reason for this is the same natural alignment that has led in recent years to China becoming the most important trading partner for NZ.
Coming to terms with that hard reality requires a conversation that goes well beyond issues of trade.
That discussion has to include issues such as immigration policy. It also has to include a discussion about where NZ sits in global geopolitics. And it is no good simply stating the things NZ should not do. It has to be specific about what NZ should do.
