Monday, February 26, 2024

Risk, reward and dead rats

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NZ has to reconsider its place in the world and what it wants to achieve, says Ben Anderson.
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In this series, the lads consider New Zealand’s place in the world.

Shortly after re-entering the farming game, someone asked me what I did beforehand. I told him that for the most part I used to help companies manage risk. That person then rather unkindly pointed out that I must have been a bit rubbish at it if I decided it was a good idea to buy a farm. I was stung, but I bravely washed my pride down with a second pint.

For a little bit of context, I used to help companies work out how they could operate in high-risk environments, such as the Democratic Republic of Congo and the Danakil Depression in Ethiopia. Both of these places can present massive financial and operational risks for those who choose to operate there. Conversely, the rewards can also be massive. 

The Danakil Depression has one of the worlds largest remaining deposits of potash sitting under its desert floor. The Congo is incredibly rich in high-value minerals such as lithium, diamonds and gold. The equation for working in these countries is that the benefits must tangibly outweigh the risk. To put it another way, the juice must be worth the squeeze, and then some.

The risk-reward equation is equally relevant to us farmers and the international trading relationships we so heavily depend on. Our industry leaders and government representatives strive to build relationships with countries we can create stable and mutually beneficial trade agreements with. 

These countries would ideally not be economically protectionist, nor resort to economic coercion any time New Zealand wants to clear its throat on human rights or protest about nuclear testing in its back yard. 

Unfortunately, idealism has a habit of giving way to reality at some point, and we will always end up having to swallow the odd dead rat to get a deal worth having. We just have to be confident that there is enough juice in the deal to wash the taste away. 

To give you an idea of why this is not always the case, lets look at our current free trade agreement with China. Since we signed this agreement in 2008, our trading relationship has grown to the extent that our exports to China are now worth approximately $21.45 billion, the large majority of that comprised of commodities such as dairy, meat and wood.  

This all sounds fantastic, but the reality is not as rosy. Our increased focus on the export of raw commodities such as raw logs and milk powder to China has seen a reduction in the number of value-added products leaving our shores. 

This has resulted in Harvard University recently ranking the complexity of New Zealand’s economy alongside that of Greece, Brazil and Russia. No big deal, you might say, but because the complexity of a country’s economy directly correlates with how wealthy it is, it seems we are also becoming progressively poorer. Which is a big deal.

Right now, the global trade landscape is in a state of flux. China and the United States are locked in a major trade war, the World Trade Organisation has lost its teeth, the Russian invasion of Ukraine shows no sign of abating, and the Israeli/Gaza conflict is spilling over into neighbouring countries.

Overlaying all this drama is an increasing shift away from globalisation and towards trade relationships driven by geostrategic interests, the two big players in this game being the US and China. 

We would like to think that this trend will reverse, and that NZ will be able to continue being the Switzerland of the South Pacific, aligning with no one and enjoying the benefits of trade with everyone. An appealing scenario but increasingly hard to pull off. 

There is a very clear trend in motion, with Australia’s strengthening trade and defence relationships with the US a recent case in point. Having to “pick a side” is a very real possibility.

Perhaps more at any other time, NZ has to reconsider its place in the world and what it wants to achieve. We would be silly to sabotage those trade relationships that are currently keeping us afloat, but we must begin to actively pursue trade relationships that allow us to create and sell value added products without penalty. Signing FTAs that incentivise the production and sale of raw commodities has done this, but will never be our pathway to economic prosperity. 

If globalisation as we know it is reaching for its final breaths, then we are entering a new era of risk. Like those companies operating in the world’s highest-risk environments, we’ll need to get the fundamentals right or risk disaster. Can we really trust our partners? Are we diversified enough to weather adverse events. Are we stuck in extraction when we should be innovating? How many dead rats is too many? 

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