THE VERY best thing about the free trade agreement with China is the overwhelmingly positive response from business leaders.
For the first time in more than a decade they are actually excited and ambitious about a big opportunity that will improve New Zealand's fortunes. If they follow through with bold strategies and excellent execution, they will start to solve our two biggest economic problems, one external and one internal.
The external one is our poor track record on exports and direct investment overseas. Both have grown more slowly than the OECD average. As a result, we are the only developed country to become relatively less engaged with the world economy since 1990, as the New Zealand Institute revealed in its excellent analysis "Dancing with the stars?" published in December 2005.
China isn't the answer to everything. But if businesses learn how to make the most of the FTA, they will take a huge leap in confidence and skills they can then apply elsewhere in the world.
The FTA offers them a lot. The government and its officials deserve the praise they have received from business. Our exports to China will benefit from a number of key elements of the deal. Some 35% (the ones with tariffs of less than 5%) will be tariff-free from this October; a further 31% (with tariffs now of 6-20%) will be tariff-free by 2013; and all but a 4% rump will be tariff-free by 2019.
New Zealand First leader Winston Peters says the cuts should be deeper and faster. But he is wrong on two accounts. First, this is a good deal because China is actually offering reductions on agricultural tariffs. Many of our main trading partners, particularly the US and the EU, or the World Trade Organisation's multi-lateral talks are not.
Second, a residual level of tariffs on dairy commodities is a very good thing, as Fonterra has found in the US. It has forced the company to invest in manufacturing in the country and to export more sophisticated products free from tariffs and quotas. Those are growing by some 25% a year whereas tariff-constrained commodities are flat.
Moreover, much of the fast growth in Chinese demand for dairy products is coming from those higher-value products such as liquid milk and chilled desserts. They can't be supplied from here so Fonterra is investing in-market to meet demand. A sharp reduction in tariffs on basic dairy commodities would give Fonterra a brief but short boost, but distract it from its real strategic challenge.
Exporters will also benefit from a series of "behind-the-border" elements of the deal. They will get faster, preferential clearance from Chinese customers; release of goods within 48 hours of arrival; a joint technical-barriers-to-trade committee; mutual recognition on the likes of standards, intellectual property and government procurement; greater commitments on trade in services than are available through WTO protocols; and access to dispute resolution remedies that should be faster than through the WTO.
The aim, the agreement says, is for a "predictable, consistent, transparent" system that facilitates trade. But there's one big caveat. Beijing government decrees are often ignored around the country. Exporters will inevitably still run into infuriating local bureaucracy. Nonetheless, Kiwis should overcome their usual reticence about complaining. They should push hard to make the new mechanisms work. China knows the world will be watching how well it makes its first FTA with a developed country work.
Of course, outbound trade and investment will grow significantly only if New Zealand businesses gear themselves up for the challenge. To that end, the government is offering some services through the likes of Trade & Enterprise. A good starting point to see what's on offer is the new website www.chinafta.govt.nz. It was encouraging to see some practical focus being applied from the start with Trade Minister Phil Goff taking a mission straight from the FTA signing in Beijing to Hangzhou in Zhejiang province. This area, part of the Yangtze delta, accounts for 10% of our trade with China.
Rightly, the government is cautious about the impact of the FTA. It estimates it will generate some $350m a year in trade benefits plus a further $115m in tariff savings. This, though, would be an easy target to beat if business got serious about using the FTA to help New Zealand overcome its weak external performance.
Similarly, the FTA could help overcome a serious internal weakness in our economy. As a tiny country far from our main markets, we are drastically short of the people, capital and plants we need to grow faster in more productive, less inflationary ways.
On people, the deal allows for 1000 Chinese a year to visit on working holiday visas and a total of 1800 skilled Chinese workers to be in the country temporarily at any one time. These are small numbers but they will help a bit while also developing relations between the countries.
The impact of inbound investment from China will be far greater. It already totalled $1.66b as of March 2006, and much more is expected. For example, the Chinese state electricity grid company is reported to be planning a joint bid with Cheung Kong Infrastructure, a Hong Kong company, for the Wellington electricity lines business being sold by Vector.
Some government and business leaders are also arguing that the FTA will encourage overseas companies to invest here so they can use us as a springboard into China. This seems far-fetched, though. We will always be a distant, tiny and very roundabout-way to get to China. That's less true for Australian companies, but they are likely to stick to home until they get their own FTA with China.
But the FTA will have a big impact on our internal economic constraints if New Zealand businesses grasp the opportunity of doing more with China in two ways. The first, is by investing there to get access to the country's abundant industrial resources. Once approved, New Zealand companies will be treated like domestic ones. So far only Fonterra, Nuplex, Skellerup, Glidepath and a handful of other companies have invested in China. Their commitment totalled $333m as of March 2006, the latest figures available. But the FTA will help open up China to many more businesses by giving them a bit more comfort and predictability.
The second way is to access plants, technology and other capabilities unavailable or in short supply here.
For example, Icebreaker, the Wellington-based clothing company, buys around one-third of the New Zealand merino clip. The wool is processed and made into garments 1.5m last year in a cluster of very large, high-technology plants in Shanghai, owned by overseas companies.
Moreover, the plants work by law to higher environmental standards than are required in New Zealand. Icebreaker is only one small customer of the Shanghai cluster. It could never come up with the capital, volume of business or number of staff needed to build and run a series of plants like that here.
But it is using the cluster to allow it to take its creativity, intellectual property and brand the real sources of its wealth out to global markets far faster and on a much large scale than it could do, if it did everything here.
That's a very challenging business model that eludes most New Zealand companies. But if more of them began to see such opportunities, they would be far less gloomy than they are currently about their prospects in this tightly constrained domestic market.
Such a very rare sense of optimism emanated from the 190 business people who travelled with Prime Minister Helen Clark to Beijing for the FTA signing. Travel always works wonders for changing perceptions. The trip might change business perceptions of the prime MInister. Many of the delegates would have seen her up close for the first time. They would have appreciated her deep knowledge of many NZ businesses, her keen interest in their ambitions and strategic issues and her excellent skills communicating and negotiating on their behalf with foreign leaders.
A senior European trade diplomat who saw her in action on a New Zealand trade mission to India in October 2004 once told this columnist that Helen Clark was the best politician he had seen play that role, with the exception of the-then finance minister of Ireland.
Our free trade agreement with China is testament to that.
- Sunday Star Times