Diversification of Our Economy and the China FTA

21 March 2016

By Dieter Adam, Chief Executive of the NZMEA

Diversification of the New Zealand economy is a topic that comes up frequently, both in political discourse and the media.  We also hear a lot about the importance of free trade and the key role Free-Trade Agreements (FTAs) play in opening up trade.

Let’s have a look at how our FTA with China has increased exports to that market, and what ramifications this has had for the diversification of our economy, compared to some other large export markets.

Overall, the increase in exports to China post-FTA has been spectacular, with total exports increasing by 240%.  By far the largest gains, both in aggregate and as a percentage, have been in the primary industry and food and beverage exports.  For example, live animals and animal products, which includes dairy, increased by 405% between 2008 and 2015. It was at $857m in 2008, peaked in 2013 at $6101m - the low dairy prices took it down to $4331m in 2015.

Vegetable product exports increased 712% in the same period, and prepared foodstuff, beverages, spirits and tobacco increased 102%.  These three categories alone make up 60% of all exports to China in 2015.  In total, primary product exports to China amount to 77% of the total if we include wood and wood products, but exclude processed foods and beverages.

Growth in exports to China of elaborately transformed manufacturered goods have far been less impressive in comparison.   For example, machinery and mechanical appliances; electrical equipment and parts, etc. increased by 5% between 2008 and 2015, moving from $73m to $82m – this represents 1% of exports to China in 2015.

Looking at the European Union (EU) exports of this same elaborate manufacturing sector (machinery and mechanical appliances; electrical equipment and parts etc.) were $255m in 2015, representing 5% of exports.  Into the U.S., exports of this sector was worth $491m, and made up over 8% of exports.

Manufactured exports are generally conducted on a business-to-business basis, where understanding your customers’ business culture and building and maintaining long-standing customer relationships is key.  While our business culture is different to that in Europe and North America, this difference is more pronounced in many Asian markets. This, and a longer history of trade and business connections, may help explain some of these differences between China and EU and the US.

While China will remain an important market and there are growing opportunities in other South-East Asian markets, it is vital that New Zealand manufacturers, and the government in particular, remember how important our more traditional markets are if we want to maintain and grow a diversified export trade that doesn’t rely on primary product exports alone.  The current situation with dairy also shows the issues of strategy over focus and reliance on single or related commodities.

That is not to say that we should not strive to develop new markets for elaborately transformed, high-value manufacturing exports.  We need to be diverse not only in the products we sell to the world, but also in where we sell them.  Such market diversification is how we can better insulate our economy from swings, economic downturns and business cycles in different markets.

The key point here, in particular for the Government, is not to equate political and strategic imperatives with commercial strategies for market development. While the two can’t be completely separated, business will look for sustainably profitable markets wherever they are, and government needs to be mindful of such commercial imperatives.

We will discuss some of the policies that can help move New Zealand towards a more diverse and high-value economy at a later date.