Rabobank’s Singapore-based global analyst Michael Every says the scenario he was outlining threatened to pull the rug on the decades-old global free trade mode.
China’s role as the biggest buyer of New Zealand’s primary products is under threat as its struggle with the United States for global preeminence reaches a new level of intensity, a top analyst believes.
Rabobank’s Singapore-based global analyst Michael Every says the US is incensed by China’s failure to condemn Russia’s attack on Ukraine and is readying economic sanctions should it go further and provide military backing.
Trade-limiting sanctions have been likened to economic weapons of mass destruction, with the potential to far exceed the damage to both the US and Chinese economies that followed the tit-for-tat tariffs on billions of dollars of trade between the two countries initiated by former US President Donald Trump in 2018.
Many analysts believe the damage to both countries’ economies would be so severe that the US would be unlikely to pull the trigger on sanctions nor would China provoke it to do so.
Every, however, isn’t so sure China is ready to back down.
“They can afford to do it. And the historical likelihood is that they will at some point … if we carry on the dynamic we are in now it will be to a greater degree than anyone thought possible and sooner than anyone thought possible,” Every said.
The US, too, could not be counted on to back away from its threats, he said.
Russia’s stranglehold on European oil and gas had given the US pause for thought about its own reliance on imports from China.
While sourcing fewer of its consumer goods from China would push up the cost of living, for Americans it was a cost the US was increasingly looking like it could be willing to pay.
“The alternative is that if you do not do that you can never have control of those supply chains and from a national security perspective you are just waiting for another country like China to do something like Russia [has done] and you cannot do anything about it,” he said.
Every said the scenario he was outlining threatened to pull the rug on the decades-old global free trade model, where countries allocated their economy’s resources according to what they were most efficient at producing and imported the rest.
From now on countries would prioritise trade with allies, rather than where they could get the best deal.
The knock-on would be rising prices as less efficient producers accounted for a rising share of global production.
While that was positive for commodities it was also potentially massively disruptive for NZ farmers who remained reliant on China as their number one export market.
“If you put all your eggs in one basket and somebody decides to cut off the handle because they don’t like the basket, then you go down with that basket,” he said.
Neither was it a case of NZ trying to keep a foot in both camps.
“I would be very surprised if NZ, in a fracturing world between a Russia and China camp that invades countries like Ukraine and a Western world, that you decide because of the dairy industry that you are going to be siding with Russia and China,” he said.
Instead NZ needed a “massive rethink” on how to diversify its export markets.
The US and the European Union were the most obvious alternatives, but high tariffs and the absence of free trade deals made it difficult for NZ farmers to compete in those markets right now.
Every encouraged NZ to follow Australia’s example of building security links with trading partners to gain better access to their markets.
“If you had done that you would be in a better position than you are now,” he said.
NZ should also consider aligning with other major dairy exporters such as the EU and the US in the same way OPEC countries do to control the price of oil.
“The world is changing rapidly. NZ can stand to benefit from that, but there will be significant near-term disruption and one needs to plan for it rather than just presuming it won’t happen because all the signs are we risk repeating history,” he said.
