Liam Dann 's Opinion

Business editor of the NZ Herald

Liam Dann: Why our China challenge is too big for petty politics

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PM John Key and President Xi Jinping announced in Beijing that the target from our previous objective of $20 billion worth of bilateral trade by 2015 was updated to $30 billion by 2020. Photo / APN
PM John Key and President Xi Jinping announced in Beijing that the target from our previous objective of $20 billion worth of bilateral trade by 2015 was updated to $30 billion by 2020. Photo / APN

It is unfortunate that some Government sloppiness about business relationships has clouded the coverage of John Key's trip to China, because it has been historic.

It has cemented New Zealand's special relationship with the fast-growing economic giant.

It is crucial that we digest the implications of that relationship and prepare for them.

If we don't, we'll have less control over the economic and cultural changes that are coming our way.

We are fortunate to have a favoured status with the Chinese Government but we will need to be actively engaged as a nation to ensure we achieve the best results for New Zealand.

The currency convertibility deal was an important symbolic move. More significant for us was the agreement to target $30 billion worth of bilateral trade by 2020.

That target announced by John Key and President Xi Jinping in Beijing updates our previous objective of $20 billion by 2015. There is no reason to assume we won't get there.

The Chinese don't like to miss targets.

You could also argue that all they have done is get a pencil out and extend the growth curve along its existing path.

But growth has been spectacular since the free trade deal was signed in 2008. Another six years of equivalent growth will have an even bigger impact on New Zealand life.

In 2007 two-way trade with China was worth $7.5 billion. Last year it was worth $18.2 billion.

Most of that growth has been in dairy exports, which accounted for $10 billion of last year's total.

It is doubtful we can continue to expand our dairy production to develop the volume of exports to that extent.

The issue now is the quality of that trade relationship, and that issue is key for both countries.

I have written before about the risks of the relationship with China. The risk of having our eggs in one basket if China experiences a market bubble and financial crash is ever present.

More theoretical, but no less serious, is the foreign policy issues New Zealand will face if relations between China and the US (still our closest superpower ally in a cultural sense) were to go downhill.

But let's imagine it all goes to plan. Because if we don't have a clear sense of what the best possible outcome of this relationship is, then we will struggle to achieve it.

There is a win-win scenario here because both New Zealand and China are trying to achieve similar goals around export growth.

We have both had huge growth in the past decade at the low end of the value chain. Where we've been relying on agricultural commodities, China has relied on cheap labour to export mass-produced consumer goods.

Now we want to sell more infant formula, wine and gourmet food. China wants to sell more of its own premium consumer products instead of just making them for the likes of Apple and Nike.

New Zealand won't be a big market for China but will likely be a good test market.

The Japanese made the shift in the 1980s. Its products went rapidly from a running joke in the West to become the benchmark for high quality cars and electronics. The Koreans - led by Hyundai and Samsung - have achieved the same kind of shift in the past decade.

China is planning on making such a transition. New Zealanders should expect to see Chinese companies like telco Huawei and car maker Great Wall pour enormous sums into marketing and branding in the next decade.

Locally we can see the benefits of this shift at F&P Appliances, now owned by Chinese whiteware giant Haier.

Haier is using New Zealand skills to push up the value chain.

The Chinese firm is investing $2.5 million expanding its Dunedin R&D plant and has hired 80 new engineers. It is going to spend a further $5.5 million building a new R&D hub in Auckland and hopes to have F&P Appliances generating $4 billion of revenue in the next decade - up from $1 billion.

This is really good news for New Zealand but the cynics will have noticed the downside in the story.

We'll almost certainly see Haier reducing its commitment to basic manufacturing over the next decade.

That's an inevitable part of this economic story for New Zealand. It was already happening when F&P Appliances was locally owned. NZX-listed F&P Healthcare is following the same path.

We need to get ready for an acceleration of this shift. We can't compete with low-wage economies such as Vietnam and the Philippines and we shouldn't try.

The Green Party might call it a crisis but if we want to maintain a high standard of living and lift the median wage then we need to start viewing this as an opportunity.

It is an opportunity where our relationship with China can give us a powerful leg up.

But New Zealand's biggest challenge will be to produce more kids with qualifications in design, engineering, software development, marketing and all the skills that go with high-end manufacturing.

We have to stop viewing these as elite qualifications and start viewing them as a bottom line. There's no doubt that this will be a huge challenge but we owe it to the next generation to take on that challenge because the world - including China - isn't going to wait for us.

We are lucky to have a special trade relationship with the world's emerging economic superpower - but if we just sit back and watch the bulk milk powder sales tick over, many of us won't be any better off in 2020.

- NZ Herald

Liam Dann

Business editor of the NZ Herald

Liam Dann is the Business editor of the New Zealand Herald, overseeing all our business content in print and online. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy.

Read more by Liam Dann

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