Making it in China

By Andrea Fox

Tuesday 1st June 2004

New Zealand will be the first developed country to do a free trade deal with China. How's it going to work? Andrea Fox seeks the answers to five big questions

As an appetiser for bargaining on a China-New Zealand free trade deal, the headline "Chinese mussels being passed off as New Zealand produce" had the potential to give Kiwis a bellyache. Chinese mussel producers are apparently trying to cash in on New Zealand's high-quality shellfish reputation by copying our exporters' boxes and passing their mussels off as Kiwi-grown.

But there's another way of looking at this blatant counterfeiting. They say imitation is the sincerest form of flattery, and in Sino-New Zealand relations at the moment, flattery seems to be the coin of business. China, the emerging economic juggernaut, is by all accounts deeply flattered at New Zealand's support in its struggle to have the world recognise its economic and market reforms. We were the first country to support China's entry to the World Trade Organisation (WTO). Then we were first to recognise our fourth biggest trading partner as a true "market economy", agreeing not to apply anti-dumping provisions in China's WTO accession protocol.

Our reward for all this trailblazing? New Zealand is the first developed country with which China will negotiate a free trade agreement (FTA) - an honour which has deeply flattered the Beehive. For the rest of us, all this mutual admiration takes a bit of swallowing. Don't Chinese products already dominate our daily diet as consumers? (50% of clothing imports last year were from China). And aren't we already one of the most open economies on the planet? Besides, what sort of negotiating clout can New Zealand have with the mandarins of Beijing? (One of the rare times we've felt sorry for Aussies was when their farmers got left out in the cold in that country's recent FTA with big brother US.) Kiwi unionists are alarmed, fearing the closure of more clothing, textile and footwear factories, which employ about 18,000 people.

But the doubters could be drowned out by the chorus that says an FTA with the world's sixth biggest and fastest growing economy - 10% a year for the past ten years - could be very, very good for New Zealand. Why? Because an FTA would offer more than a cut in tariffs. It's the opportunity to sell China more of the things we are very, very good at - like the technology and productivity smarts behind our mussels. An FTA with China is also our insurance against the collapse of the WTO, says the government. Trade Negotiations Minister Jim Sutton says there is simply no more important trade and economic relationship for New Zealand this century than with China.

1 The devil's going to be in the detail - so what's the detail? How does New Zealand ensure it gets a fair go?
We don't know. The Ministry of Foreign Affairs and Trade (MFAT) says the detail work has still to be finished. What the two governments have agreed on is a formal trade and economic cooperation framework, of which a key element is agreement to start negotiations next year. The framework, to be signed in June, covers an FTA study (including the impact on trade and the New Zealand economy), bargaining, and steps both will take to strengthen cooperation. Either party can back out at any time.

Australia is also chasing an FTA with China. Under CER, coordination with the Aussies in their push is a possibility.

Trade Liberalisation Network boss Suse Reynolds says China won't lord it over us because it is now a WTO member and has to abide by international trade rules. While we've yet to see what sort of bilateral trade precedent China wants to set, she's confident of a liberal deal on agriculture because there's an upside for China in accessing Kiwi agricultural technology and skills. Victoria University senior lecturer in marketing and international business Tim Beal is also confident of a fair deal because he says the economic aims of the two countries are complementary. Relationships are important to the Chinese, he says. Foreign minister Li Zhaoxing said in the China Daily the country "valued its good relations with New Zealand" and wanted stronger ties with Wellington "on the basis of mutual respect and benefit".

2 New Zealand is first to enter free trade talks with China. Could there be good reasons why no one else has wanted to be first?
Judging by Chinese newspapers, China really was impressed with New Zealand's initiative in declaring China a market economy. The China Daily called the announcement "a breakthrough statement which paves the way for the nation to earn the international trading status it deserves". Reynolds says we are first because we've always had a good relationship with China, which as an economy does not threaten us.

Our small size also gives China an opportunity to test FTA waters in a less complex negotiation than with a big trading partner.

3 What restrictions could be lifted under this deal? How free is our trade with China now?
New Zealand goods get hit with tariffs and restrictions on many fronts. Even when China has fully implemented its WTO commitments, the tariff on our milk powder could still be up to 10%. China is our biggest wool market, with exports last year of $150 million - but out-of-quota wool exports attract duties of up to 38%. Meat exports to China, worth about $130 million in 2003, attracted tariffs of about 15%. Kiwifruit exports can be whacked for up to 20%.

There are regulatory and other non-tariff measures in many other sectors. Dealing with these in an FTA could mean costs of doing business in China will fall, making Kiwi goods and services more competitive. What an FTA could shake loose for manufactured exports is less clear. Kiwi dishwashers face tariffs of 10-14%, fridge-freezers 9-30%, air conditioners up to 20% and carpets up to 14%.

At our end, we apply tariffs of up to 19.5% on certain lines of textiles, clothing, footwear, plastics, and automotive parts. These aren't aimed just at China - they apply to other countries too, except those with which we have FTAs.

4 Haven't the unions and environmentalists got a point? How can our manufacturers really compete in an unprotected trade regime with Chinese producers who pay their workers $US1 an hour and pour their waste into the nearest river?
We don't yet know what labour and environmental protections, if any, could be negotiated. Until MFAT's drilled deeper into the preparatory work, it's not saying. While the Greens tugged at the public's heartstrings in asserting Kiwi workers must not compete with Chinese sweatshops, and that China should prick our environmental conscience, the commercial response is that our manufacturers would not, and should not, be trying to compete with China. Victoria University's Beal says competition is not the aim. After recently visiting Beijing, he says China is aware it lags in environment management and is working on its problems. We can try to increase awareness of environmental responsibilities but can't expect to be a global policeman, he says.

Reynolds, an enthusiastic supporter of an FTA, says there will be "quite a bit of pressure" on our clothing and textile industries. But she says clothing has hardly any protection now and if manufacturers still turning out t-shirts and knickers haven't read the signs "they've missed their flip anyway".

5 Who will be the big winners and losers?
Biggest winners will be the dairy, fruit and vegetable, and processed food sectors selling to China's 100-million-strong middle class. The Chinese appetite for dairy products is growing strongly (up 53% in 2002). Fonterra's trade in China is worth $300 million a year, with exports growing 20% annually. Reynolds says there will be "huge opportunities" for all exporters, but manufacturers should be looking for Chinese products to help them in other markets, like cheaper components and new technology.

Losers could be a big chunk of the 18,000 people who work in the clothing and footwear industries, when the deal ends tariffs on imported goods

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