The threat of United States financial sanctions against China has brought New Zealand a step closer to having to choose which of the competing global superpowers it will continue to do business with.
Two years ago Rabobank global strategist Michael Every warned of the possibility of financial sanctions should China back the Russian war machine in Ukraine.
Every said the US had been incensed by China’s refusal to condemn the invasion and was readying sanctions should Beijing step up its support for its Russian ally.
In December, US President Joe Biden took the next step when he gave the US Treasury the power to bar any banks, from any country, from the US financial system should they be found to have played a role in the Russian war effort.
Returning from Beijing last week, Biden’s Treasury Secretary Janet Yellen singled out Chinese banks specifically.
“Anything that involves aiding Russia’s military in their brutal war against Ukraine is unacceptable to us and we have the ability to sanction it,” she said.
NZ exporters have some recent experience of the chilling effect financial sanctions can have on trade with countries that find themselves in the crosshairs of the US Treasury.
The meat industry’s attempts in 2018 to resurrect trade with Iran were blocked by the reluctance of the Australian-owned banks to repatriate export receipts because of the threat of US sanctions.
They feared enormous fines or losing their ability to tap money markets in New York if they were found to have transferred funds from entities or individuals either blacklisted by the US Treasury or linked to somebody that was.
Given their reliance on offshore money to fund their mortgage books in NZ, facilitating the meat trade with Iran was simply too big a risk for the Aussie banks and they refused to transfer funds for their meat exporting clients.(Financial middlemen from the Gulf states have handled receipts from the dairy trade with Iran but the service isn’t cheap and is likely to come under more scrutiny from the US as a sanctions loophole.)
And while it played up the moral dimensions of its decision, at least one top-flight lawyer with sanctions experience believed Western sanctions were at the forefront of Fonterra’s thinking when it dumped its Russian customers in the weeks following the Ukraine invasion.
The small amount of trade with Iran and Russia meant the economic damage was inconsequential for NZ exporters when those markets were closed off to them.
The same cannot be said for China, NZ’s single largest export market.
Just what would be the reaction of the Australian-owned banks if Chinese counterparties through whom export receipts were repatriated to NZ were found by the US Treasury also to have banked Chinese companies that supplied materials to the Russian war machine and were suddenly blacklisted?
How easy would it be to find a Chinese bank untainted by links to blacklisted individuals or entities? How much would that cost and would trade still be economically viable for exporters?
Reassuringly for NZ exporters, the Economist magazine recently noted it would be a major step for the US to fully enforce its Russia sanctions when countries representing 80% of the globe’s population, and 40% of its GDP, continue to trade freely with Russia and ignore the threat hanging over them from the US.
To force compliance would risk driving countries to abandon the US-led financial system, the magazine wrote.
Still, even if the US doesn’t follow through on its threats there is mounting evidence of a growing rift in world trade, where countries are increasingly trading more with those whose geopolitical and strategic interests align.
The World Trade Organisation recently analysed the trading patterns of countries according to their votes at the United Nations since the Ukraine invasion.
It found trade between countries that voted the same way has grown 4% faster than trade between countries that voted against each other.
Some trade observers fret that by strengthening ties with the US through new defence arrangements such as AUKUS, the National-led government risks a backlash from China that could harm our export industries.
But could the jockeying between the global superpowers have a pay-off for NZ exporters? Certainly Australia, as one of AUKUS’s foundation members, has seen its relationship with China thaw significantly in recent months with tariffs on barley and wine exports finally dropped.
What trade concessions might China offer NZ to back its bid to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership trade agreement?
Could Washington’s eagerness to draw NZ further into its orbit give NZ the leverage it needs to push for a long-awaited free trade deal with the US?
