Seeking new markets in the West

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.

About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
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7 Responses to Seeking new markets in the West

  1. David Porter says:

    Thanks for your thoughts Keith. I’d agree with almost all but I do see hope for a decent UK deal. The UK government is under serious pressure to get some of the promised “Brexit dividend” in terms of trade agreements and, because agriculture is such a small constituency in terms of votes, letting in cheaper food produced in a first world country with some decent animal welfare and no GMOs would be acceptable to them in terms of votes I think. The UK Gevernment has very quickly backed away from the “no chlorine washed chicken” etc. stance when under pressure from the US so are not averse to food imports if there is a bit of quid pro quo to be had from something they can export to New Zealand, most likely in the form of financial services.
    The British public consistently say they want local food with good animal welfare and environmental standards but then consistently buy the cheapest option when presented with a choice. They want the bucolic countryside but aren’t prepared to pay for it.
    They are major net importers of fruit and vegetables (≈$20b) and import quite a bit of meat, dairy, eggs & fish (≈$15b) so there is a lot to play for. New Zealand has a decent image in the UK and, being Southern Hemisphere produces, in the opposite season to the UK so can fill in the seasonal hole in supply. It does seem a good fit and even of the volumes are massive, there is potential to move up the value chain.

  2. granthod says:

    Keith, I really like how you are once again telling sober home truths about our long term prospects for developing export markets for our primary produce, and the big issue of our dependence on China. How can we grow in the directions that we know we want to go? How do we foster more innovations like the kiwi fruit varietal research you mention, that have stabilised that product as an export winner? Or like turning butter into frozen, oven-ready croissant for export to France? What incentives and product research/development processes work best? I can’t see us becoming world-beaters in any other technology but food technology, not because we don’t have tech and engineering talent, but because food production is our biggest resource base and existing context for growth.

  3. Glennis Moriarty says:

    Thank you for a most interesting post.
    Is it possible that there is an elephant in the room – the effects of climate change? If we accept that these effects are starting to be felt in our country as they are globally (droughts, floods, extreme weather events, the pandemic – leading to huge changes in immigration patterns, transportation, farming practices and so on) and are now unlikely to be reversed, shouldn’t they be taken into account with regard to the continued viability of all export markets?
    As you say at the start, “…It’s all about self interest.” Looking at this admittedly bleak future, how can ‘business as usual’ be changed to something that looks further ahead?
    What will be needed is food and water safety, shelter, health care and the necessities of life for our own growing population. The absolute basics.

  4. Tom Walker says:

    Listening to people like John Mearsiemer (Chicago university),the U.S has gone from a policy of engagement to containment in regards to China and will force countries like Australia and NZ to chose sides in the coming battle for regional hegemon in East Asia.

    The choice will be stark for the ANZAC countries..prosperity versus security.

    • Keith Woodford says:

      Tom,
      I agree that NZ has not yet given sufficient thought to the implications of he US moving from China engagement to China containment.
      My own leaning is towards NZ finding its own way through these complexities rather than seeing things in terms of black and white.
      Keith W

  5. Keith, what of Canada, Mexico and Peru? As co-signatories of the CPTPP (TPP-11) there is surely some potential in those countries if we are prepared to do the ground work.

    (OK, Canada not so much perhaps. I recently suggested to a Canadian economist that their farmers deserved as much subsidy as their shoe manufacturers (i.e., none) but was met with blank refusal to accept the well-known-to-economists harmful effects of subsidies in that case.)

    I think that pushing along the CPTPP, intensifying co-operation among its members, is an alternative future to dependence on one superpower or another. An alternative not as rich in material possessions perhaps, but richer in self-respect.

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