China is taking a higher proportion of prime beef cuts from NZ.
Comment:
A trade relationship that leads with principle rather than product — that is something exporters to China may like to consider.
In the turbulent market of today, there have been headlines showing good opportunities happening and some things turning to custard.
Analysis of what is driving market trends shows a cluster of forces at work. From our side, we began years ago by defining what each country values. We reasoned that as the first country to conclude a trade agreement with China, this would create more sympathetic outcomes to work together. China values supply chain security for key resources, products like logs, meat, dairy and horticulture. New Zealand values China as a market for these products because we can produce them in excess of our own consumption requirements. What has emerged is a relationship where we provide the resource and China does the processing.
But recently, the environment has changed. China has moved into the ranks of middle-income countries. The extreme poverty rate dropped from 26 per cent in 2008 when New Zealand signed its Free Trade Agreement (FTA) to 7 per cent in 2012 and then to just 4.1 per cent in 2014.
This change is a reflection of China's focused leadership and of the positive gains that can be made through symbiotic trade relationships. It is a change that has also produced a stronger demand for high-quality, sustainable products and it has also resulted in a more watchful bureaucracy to ensure the trade standards are met.
For New Zealand, that has long- and short-term implications. Take beef for example. A few years ago, the first question a meat trader would ask each day was: What have US beef prices done overnight? Today the question is: What is China bidding?
China officially became the largest importer of beef globally last August. A few years ago, NZ exported 60 per cent of its beef to the United States each year. Recent reports show that in the last four months NZ exported 34 per cent of its beef to China and 29 per cent to the US, and this trend is unlikely to change.
Further, China is starting to demand greater levels of value, taking a higher proportion of prime cuts from NZ rather than grinding meat. Against this positive long-term backdrop, however, are short-term frustrations, for example recently an acceleration in demand for hides and pelts was unwound by a subsequent crackdown as the trade is not viewed as sustainable. Similarly, China has recently stopped importing New Zealand's (and other countries) waste products – paper, plastics and textiles – and closed recycling plants that weren't abiding to its pollution standards.
Both these examples are a reflection of the role principles play in a trade relationship. Since signing our FTA, China has changed, its people have changed, and so has its administration and politics.
There are political forces at work, as you would expect in any trade relationship. However, these should not be confused with China's strict compliance which means that trade can be at risk if compliance falls short of the mark, no matter how small the non-compliance may be.
China is wanting a more sustainable and reliable trading relationship, one based on the assurance of quality and supply, especially in food and lifestyle products on which China's new urbanized population demands and depends. Politics is supporting this. For New Zealand, that means the mantra - "we provide the resource and China does the processing" - needs revising.
As well as the meat industry, that credo applies in timber, dairy, horticultural and even the technical products world. In dairying, China has invested in NZ-based companies establishing milk powder, infant formula and UHT production lines – creating quality products in New Zealand that go direct to China's urban consumers. China invests in the primary production in New Zealand and markets the Kiwi-made brand in China. It has, hopefully, secured a long-term win-win.
In the timber industry we have a long way to go. Today New Zealand exports very little value-added wood products, however NZ has the opportunity to promote sustainable urbanization in China (and elsewhere) and in so doing transform the demand for our radiata pine into a product suitable for high value applications.
It's the small-medium business (SME) sector where there are also big opportunities.
With China now a middle-income country and NZ dominated by innovative, creative, and technically-astute SMEs there is a huge potential to do more business together.
In the first 20 years of the Closer Economic Trade Agreement (CER) with Australia signed in 1984, the Government invested heavily in firstly encouraging aspiring SMEs to include a trans-Tasman initiative in their business plans, and secondly, supporting them with targeted assistance including market research, setting up meetings and identifying partners.
The strategy worked, securing Australia's position as New Zealand's biggest trade partner and building a sizeable repeat order market for New Zealand businesses, many who began small but have grown into mid-sized companies with scale operations across Australasia.
The first eleven years of the NZ-China FTA have been extraordinarily successful in growing New Zealand Forex earnings from our bulk, long-established product (primary) exports. The FTA has been a good start, but we now need to invest to widen and deepen the agreement. With opportunities for exporters in China now virtually limitless, and poised to expand into the services sector, e-commerce and other areas of the digital economy, there is an opportunity to encourage aspiring SMEs to jump on board in a big way.
Change is never easy and often results in frustrations and set-backs. However, the success this generation of leaders achieves in positioning NZ appropriately throughout this change will contribute to determining the outcomes for future generations. Our mission must be to see past the short-term frustrations that change inevitably brings.
New Zealand and China must articulate a vision of the future that aligns our shared principles and ensures the collective benefit of both countries.
● Michael Barnett is the chief executive of the Auckland Business Chamber
Dairy export revenue has lifted 16% to a record $27 billion.