China virus offers NZ trade opportunities

The National Business Review
23 February, 2020

New Zealand isn’t the only country pondering if, in today’s world, the most dangerous thing of all is that almost everything is made in China.

From low-cost manufactured goods and novel coronaviruses, to university budgets and a fair chunk of New Zealand’s gross domestic product, China is responsible for an outsized slice of the Kiwi pie.

But globalisation was supposed to spread supply chains, drop the cost of commerce and leverage each country’s unique skills. Instead, most manufacturing was simply pushed offshore to China. As the orders rushed in, Beijing made a fortune and kept its surplus (mostly male) population at work and out of trouble. China’s economy has ballooned phenomenally, creating one of the largest middle-class cohorts in the world.

This China-centric version of globalisation was fantastic for New Zealand. After a painful economic divorce from the UK in 1973 when that country joined the European Economic Community, New Zealand searched for a replacement market, while guarding against repeating overdependence on a single market. China was the obvious choice and the Clark-led Labour government put the building blocks together for a robust free-trade deal with China, which was signed in 2008.

Since then, two-way trade between New Zealand and China has trebled from about $8 billion a year, to more than $28b. Twenty years ago, New Zealand exported only about 5% of its goods to China. Today China is New Zealand’s largest export destination (about 26%) – overtaking Australia in 2016 – while 13% of Kiwi services exports head in that direction too.

FTA upgrade

In November, the Coalition government agreed to upgrade the FTA with China. This new deal lowered compliance costs, removed even more tariffs on Kiwi exports to the Middle Kingdom, added environmental considerations and smoothed the visa application process.

Yet it’s becoming clear the new coronavirus spreading from mainland China, Covid-19, will dampen that country’s productivity and consumption levels, which could hurt New Zealand’s GDP in the short and medium terms. It’s hard to know the exact impact but it isn’t likely to be nil.

If it is any consolation, New Zealand wouldn’t be alone in its struggle. Australia’s latest trade report showed 40% of its exports go to China (it was just 20% a decade ago); Taiwan sends China 30%; Angola, 58% and Mongolia, 93%. China is also now a key consumer of hydrocarbons, minerals and timber globally, meaning even a small slowdown could hurt many other nations.

Beijing has quarantined about 700 million people (or 10% of the world’s population). More than 20 provinces and other regions have told businesses not to resume work in February and reserved the right to extend that moratorium if the virus can’t be contained. In 2019, those parts of China accounted for more than 80% of the country’s national GDP and 90% of exports, according to China-based research institute Wind Information.

The virus isn’t happening in a vacuum. China is also in the middle of a structural slowdown as the fruit of low-hanging economic development has been plucked. In the early 2000s, China’s GDP growth during the Sars virus outbreak, by comparison, was above 10%. Today, Beijing is running up enormous debts just to keep it at 6%. The unresolved trade war with the US also isn’t helping.

In other words, as China turned into the world’s factory, countries such as New Zealand made a lot of money and kept the price of consumer goods low. But supply chains are now highly dependent on China in much of the developed world so even small economic shocks are everyone’s problem.

Manufacturing rethink

Of course, there is no reason to backpedal on globalisation but the coronavirus does offer the New Zealand government another chance to push its trade strategy on Kiwi businesses.

New Zealand’s trade negotiation team may be the most competent in the world, given the quantity and quality of its FTAs (free trade agreements). The whole point of creating this basket of deals is to protect New Zealand against shock. Yet the attractiveness of China’s market has captured the eye of Kiwi businesses and the government has struggled to encourage them to diversify to places such as Indonesia or Japan (trade with these is slowly rising but is nowhere near the levels of trade with China).

Again, New Zealand isn’t alone. Many other countries saw dollar signs in China.

But about a dozen countries along the equator – including Ethiopia, Vietnam, the Philippines – are now capable of manufacturing complex goods such as microchips and cellphones, and consuming those products too. With this country’s basket of FTAs, New Zealand businesses are perhaps the best positioned among their global peers to spread their connections – but it is up to them to make that decision.

This virus is also a good opportunity to question the received wisdom that globalisation means “manufacturing is dead and isn’t coming back.” If that were true, China would never have been able to grow to its enormous size today. In reality, there are precious few reasons to think New Zealand is doomed to become a service economy and shouldn’t get machine grease on its hands again.

New Zealand has a great trading relationship with China. No one is suggesting giant manufacturing cities spring up in Waikato but perhaps Kiwi businesses would be even better insulated from strange Chinese virus shocks if they took a leaf out of the government’s book and brought some manufacturing closer to home.

There is a broader point to make as well. New Zealand is bemoaning its lack of productivity and it’s hard not to notice that the dearth of genuinely new inventions (as opposed to innovations) may be connected with offshoring manufacturing jobs to China. New ideas and inventions come from tinkering with existing machines. People won’t earn the necessary experience to invent a new tool if they never get to work with tools in the first place.

It’s worth considering, anyway. Service economies are great for employment but only if other countries are building the computers or cars with which those services are delivered. And all it took to notice this vulnerability was the temporary shuttering of 20 Chinese provinces due to a virus.

Nathan Smith is chief editor of the NZ Initiative.

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