Neither Europe nor the USA are going to do us any trading favours. It is all about self-interest
In recent weeks I have been exploring and writing about some of the challenges in finding new markets that would allow New Zealand to stem its increasing reliance on China. My focus in the last three trade articles has been first on North East Asia, then the ASEAN countries of South East 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 New Zealand has been a function of natural alignment between what New Zealand produces and what China wanted, complemented by New Zealand 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, with this creating the space for new and expanding supply chains.
In contrast, elsewhere in North Asia the times of easy growth had gone by the end of the 20th Century. The growth of what had been the North Asian tiger economies of Japan, South Korea and Taiwan had plateaued. Low economic growth rates combined with low birth rates means that 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 these such as Vietnam and Indonesia continued to show strong economic growth until COVID-19 arrived, but this was coming off a low base. Taking Vietnam as an example, its per capita GDP when measured on the basis of purchasing power parity is about US$8000, depending somewhat on who does the calculations. This is about 20 percent of New Zealand’s per capita GDP when calculated the same way. However, imports have to be paid for at market exchange rates rather than internal purchasing power parity, and on that basis Vietnam’s GDP per capita is only around US$2600, or less that 7 percent that of New Zealand. In practical terms, this means that 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 India 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 New Zealand and Iran will be determined by neither New Zealand nor Iran, but by American politics.
Travelling further west through the Middle East, the future opportunities depend almost totally on the price of oil together with regional politics. For many years, New Zealand has done good business with Saudi Arabia, while choosing to avoid introspection as to whether this is a country with which it wants to conduct business.
Heading further west to Europe, most of Europe is now within the European Union and can be considered as one mega market. New Zealand does have aspirations for a free trade agreement with the EU, but right now the signs are not good. The EU does not want our dairy, beef or lamb. However, they will and do take products such as kiwifruit which do not threaten their traditional agricultural industries.
Indeed, Kiwifruit is a wonderful product for New Zealand. 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 something more than six months but not twelve months. Unless the technology changes, there will always be a Northern Hemisphere seasonal window for New Zealand based production, with few other competitors. Kiwifruit has been a great success story and there is a good chance this can continue across the globe.
With Brexit, there are also hopes for a free trade agreement with the United Kingdom. This too will bring its challenges given that the UK, unlike fifty years ago, has no need to import pastoral products from New Zealand. The UK has internal voting constituencies that would get very upset if there were major pastoral imports from New Zealand.
As for the Americans, they too only want a free trade agreement if it is in their own self-interest. That means having free access to New Zealand for all of their service industries including finance, insurance and education, but keeping dairy products out.
New Zealand already has excellent access for beef, lamb, wine and kiwifruit to the USA, and so there is not much further that is going to be on offer. Right now, most of those products are struggling in the USA because of COVID-19, given that in the USA these products are predominantly food-service rather than home-consumption products.
In terms of continents, that only leaves Africa. Currently, New Zealand has almost no trade with Africa and it is hard to see that changing. Distance, logistics and income levels all mitigate against this. The projections are that Africa’s population will approximately 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 traveling around the globe, I left Australia out of the story. Perhaps that was a mistake, particularly given that Australia is New Zealand’s second largest trading partner after China. Also, Australia is by far the most important export market for New Zealand’s manufactured goods. Maybe those markets can be further developed?
Unfortunately, the trend for New Zealand manufacturing apart from food products has been long-term decline. For non-food products, New Zealand has no competitive advantage in Australia compared to Asian sourcing of products. Indeed, New Zealand seems to lack competitiveness for manufacturing even within New Zealand markets, and its manufacturing industries continue to be hollowed out.
All of the above leads to uncomfortable issues for New Zealand to face. With a population that continues to increase rapidly, it becomes puzzling as to where and how New Zealand is going to find the export markets that underpin current per capita living standards in New Zealand.
The blunt reality is that if market forces are allowed to play out unhindered, then the likelihood is that New Zealand’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 New Zealand.
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 as to where New Zealand sits within global geopolitics. And it is no good simply stating the things that New Zealand should not do. It has to be specific about what New Zealand should do.