China now buys about a third of everything New Zealand exports. What happens if it decides to shop elsewhere?
In 2008, New Zealand became the first developed economy to sign a free trade agreement with China. This began a period of significant growth in worldwide goods exports for New Zealand.
Exports to China grew rapidly after the FTA was signed.
Demand from China's rapidly growing middle class more than offset slowing growth from traditional partners such as the UK , United States , Japan , and South Korea .
This demand has also been driven by China’s own challenges feeding itself.
It has 18 per cent of the world’s population and just 9 per cent of the world’s arable land .
For example, China also does not have enough dairy cows to supply its growing demand for milk.
cow per 1000 people
cows per 1000 people
As the population has become wealthier the country has bought more milk, more fish, more meat, more logs, and more fruit and vegetables, which has benefited New Zealand.
But New Zealand’s government is worried that the golden era could come to a sudden end. If China were to take offense when New Zealand speaks out about human rights abuses against Uyghurs in Xinjiang, China’s crackdown on democracy advocates in Hong Kong, or its treatment of neighbours in the South China Sea, the trading giant could choose to shop elsewhere.
It’s all happened before
New Zealand’s exports to the United Kingdom fell immediately after it joined the European Economic Community (EEC) in 1973.
Although the dollar value of products exported has grown over the years, new and increasing tariffs from the 1970s means the share of exports going there has continued to drop.
Back then, 31 per cent of our exports headed to the ‘Mother Country’. Now they make up just 2.5 per cent.
The proportion of our exports to the UK slumped. Farmers were forced to diversify what they produced and this adjustment period contributed to the broader downturn in New Zealand’s economic fortunes.
Exports to other traditional partners like the United States or Japan did not make up for it.
Now, New Zealand has found itself similarly reliant on a single trade partner. The difference: that partner is China
The fear that demand could drop off again is not unfounded—Canada and Australia have both felt the wrath of China in the past couple of years.
In late 2018, Canadian authorities arrested Meng Wanzhou, the daughter of Huawei’s founder and the telecommunication company’s chief financial officer, following an extradition request from the US.
She is wanted there on fraud charges.
In the following months, Beijing announced it was suspending licences for two Canadian canola companies to export seeds to China.
Other Canadian canola companies have seen exports drop between 50 and 70 per cent.
A similar pattern unfolded in Australia after relations deteriorated.
Australia’s foreign affairs minister, Marise Payne, called for a probe into the origins of the Covid-19 virus. In the following weeks, China started enacting a litany of official and unofficial trade sanctions.
Not all Australian exports have been hit in the trade war. Exports of iron ore—which China does not have an easy alternative to—are still growing.
Meanwhile, over the past decade, China has implemented a policy of agricultural trade diversification to shield its own consumers from disruptions at farms halfway around the world.
The policy is designed to prevent China becoming too reliant on one country and mitigate the risks from any political disagreements. That means if China were to fall out with New Zealand it has other markets where it can shop.
The challenge of diversification
As New Zealand’s exports to China have grown, what we farm, how we manufacture it and what we export has changed to suit our biggest partner.
Exports of primary and resource-based products such as milk powder, wood logs and meat carcasses are rising again.
But the increase in low, medium and high-tech exports as a proportion of what New Zealand sends offshore has decreased.
New Zealand’s manufacturing sector has suffered as raw unrefined logs have been shipped offshore to be used in construction and the manufacture of products like plywood. Sectors such as pulp and paper, once the lifeblood of the eastern Bay of Plenty, have largely disappeared.
New Zealand cuts down 36.6 million cubic metres of wood annually
Around 50 per cent goes to China.
China uses the wood for construction, packaging, furniture and finished timbers.
Wood is used to box up concrete and is later destroyed.
Some of the ply, MDF and wooden furniture is exported.
$89m of wooden products were exported back to New Zealand last year.
Data shows that the complexity of the products that New Zealand sells has continued to deteriorate.
According to The Atlas of Economic Complexity from Harvard University, the complexity of New Zealand’s trade portfolio is now comparable to Greece , Russia , or Brazil .
Australia also shows the worrying trend of an increasingly decomplexified economy.
Economic complexity clearly correlates with wealth—so the trend towards raw commodities is not good news for New Zealand.
But it’s not all bleak. There are opportunities outside of China for New Zealand exporters, according to a market analysis by the economics consultancy Infometrics.
For example, it shows that exports of plywood and MDF—higher value-added goods than wood logs—could be bolstered in markets such as the United States.
This additional potential could increase exports of these products to these markets by almost 75 per cent.
Infometrics also identifies European countries as possible markets for New Zealand wood products like newspaper, wood pulp, and paperboard.
Dairy products— yogurt, cheese, and butter—could also find huge growth in the untapped potential of European markets, areas from which New Zealand exporters are currently restricted.
The top five markets pinpointed by Infometrics alone could be worth over $2.5 billion.
The key for exporters is better access to larger markets. New Zealand has 12 free trade agreements but has no existing or planned agreements with almost 40 per cent of the world's economy and consumers.
New free trade partners would open new opportunities.
A trade pact with the United Kingdom could increase NZ exports there by 40 per cent after 15 years, while an FTA with the European Union could increase exports by between 10 and 22 per cent.
New Zealand is negotiating free trade agreements with the UK and EU now.
But until then, exporters have a hard decision to make. Reduce their exposure to China and maybe earn less in the short-term? Or sell to the highest bidder and hope New Zealand and China remain friends?
Easy growth drives NZ's risky reliance on China
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