If New Zealand wants to diversify its trade away from China, then the ten ASEAN countries will be important markets. However, the commercial realities, particularly for value-add products, will be challenging.
In recent years, New Zealand has become increasingly dependent on China as its most important market. The key reason, which I wrote about last month, has been the natural alignment of trading interests. New Zealand had what China wanted and vice versa. However, the extent of dependence is now causing unease.
There is irony in that New Zealand’s trade alignment with China was influenced by a perceived need to diversify away from traditional markets. Few people foresaw that the solution might become a new problem.
Now, in once again seeking more diversity, where should the new path lead?
The notion that the new path, like the old path, must still lead to Asia should not be controversial. Europe and the Americas do not need most New Zealand products. Africa to a large extent cannot afford them. So yes, the main focus has to be Asia.
I have previously written about North-East Asia as a logical place to start that search. Japan, South Korea and Taiwan together comprise approximately 200 million people. They have higher incomes than most parts of Asia. Apart from China, they have been the economic powerhouses of Asia over the last forty years. Also New Zealand already has long-established relationships with these countries.
A big problem with Japan, South Korea and Taiwan is that even before COVID-19 they had plateaued in low-growth mode. Also, they are either already experiencing population decline (Japan) or are about to do so (South Korea and Taiwan). Accordingly, finding new markets in these already urbanised societies will be challenging.
Closer to New Zealand, there are ten countries within ASEAN. Travelling roughly from north to south, these countries are the Philippines, Vietnam, Laos, Cambodia, Thailand, Myanmar, Malaysia, Singapore, Indonesia and Brunei. Their combined population is more than 750 million, about half that of China.
The ASEAN countries have their own internal free trade agreement. More importantly, since 2010, New Zealand has had a collective albeit imperfect free-trade agreement with ASEAN.
According to the New Zealand Department of Statistics (https://statisticsnz.shinyapps.io/trade_dashboard/), New Zealand’s exports to ASEAN countries were $NZ7.6 billion in 2019, up from $NZ6 billion in 2014. The dominant item was dairy at $NZ3 billion followed by ‘travel services’ at 1.2 billion. The other major physical products were fruit and nuts at $NZ322 million and meat at $NZ220 million.
At various times, I have had work assignments in seven of those ASEAN countries. They are indeed very different countries with different histories and different cultures. But they do all lie within the tropics. Consequently, these are countries that will always struggle to produce dairy products, beef and sheep meats. Also, they are not good places to grow kiwifruit, apples, pears and grapes.
Here I focus on the four biggest countries in terms of population. They are Indonesia (273 million people), the Philippines (109 million), Vietnam (97 million) and Thailand (70 million).
All of these countries were experiencing rapid increases in GDP prior to COVID-19, typically between four percent and seven percent each year, with Thailand the lowest and Vietnam the highest. However, all four remain as relatively low-income countries with a combined GDP at official exchange rates of around $US2 trillion, with about half of this being generated by Indonesia. On the same exchange-rate basis, New Zealand has a GDP of about $US200 billion while China has a GDP of around $US12 trillion.
The first key message lying within these numbers is that these four ASEAN countries have a combined economy ten times larger than the New Zealand economy. The second comparison is that their combined economy is about one sixth that of China.
The early-stage of economic development in these countries becomes more apparent when GDP is expressed on a per-capita basis. The Philippines and Vietnam each have a per-capita GDP of less than $US3000, with Indonesia at around $US3600, and Thailand at around $US6500. In comparison, New Zealand sits around $US40,000 and China is around $US8500 of GDP per capita.
These numbers illustrate that the spending power of ASEAN citizens to buy New Zealand products, particularly any that have a value-add component, is very limited. Also, with the exception of Thailand, these countries are a generation behind China in terms of citizen spending power.
In making these comparisons I have purposefully used official exchange rates rather than purchasing power parity. This is because exports have to be paid for in $US at the official exchange rate. If I had been attempting to compare overall living standards, I would have used purchasing power parity, which would have made these developing countries appear somewhat more prosperous.
The other consideration is population growth. That story is of spectacular changes, with perhaps Vietnam the most striking.
Back in 1950 when Vietnam was fighting to evict the French, the population of Vietnam was around 25 million. By the end of what the Vietnamese call the American war in 1975, it had risen to 49 million, with 15% of the population less than five years of age. By 1990 it had risen to 68 million but soon thereafter restrictions were put in place, with the socially correct behaviour being to have a maximum of two children. One of my Vietnamese colleagues on a project was demoted from his position of responsibility for having a third child, but he thought it worthwhile, and did so with purpose.
For a while, Vietnamese birth rates dropped below two children per woman and so the population pyramid is now inverting. However, birth rates are now back to a level close to 2.1. According to United Nations projections, Vietnam’s population should top out at around 110 million by 2050, about 13% more than now.
In contrast, the Philippines has been slower to reduce the birth rate, with this being linked to a population that is predominantly Catholic Christian. I recall working on a project there in the late 1990s when the population was 70 million. However, the women were still having around four children. I figured it was inevitable that even if this rate were rapidly reduced to about 2.1 children, that it was already ‘baked in’ that the population would increase to around 140 million. Currently, it is 109 million. With births per woman still around 2.6, the population will inevitably overshoot that 140 million by 2050.
Indonesia has brought its birth rate down more quickly than the Philippines, but their population is still destined to increase another 20 percent by 2050. In contrast, Thailand has had low birth rates for more than 30 years and it will have a stable but aging population over the next 20 years.
Bringing all of these attributes together, it is apparent that the major ASEAN countries are open to New Zealand for business. Some, like Vietnam, are particularly keen to strengthen their alliances with the West as a counter measure to the long Chinese shadow. However, the stage of economic development in all major ASEAN countries does not compare to China. Hence the opportunities for selling value-add products to wealthy consumers are much more limited.
The corollary to that conclusion is that the last decade has been remarkable in terms of the opportunities that opened up in China. The search for a comparable opportunity in the next decade outside China must still go on. We have not yet found that opportunity.