China deal a feather in Helen Clark's cap

By FRAN O'SULLIVAN

In Santiago, everyone wants face-to-face meetings with Chinese President Hu Jintao.

Hu's dance-card is full as he juggles approaches from Asia-Pacific political leaders attending the Apec summit who want to forge stronger ties with the region's fastest-growing economic powerhouse. The heady whiff of "competitive liberalisation" is in the air as leaders try to trump one another.

Prime Minister Helen Clark secured a favoured slot with Hu after Chinese officials pulled strings to ensure that her timetable needs were met.

Other leaders with more obvious clout were pushed aside so the pair could formally launch negotiations on a Sino-New Zealand deal during a meeting at Santiago's plush Marriott hotel.

Negotiations will begin "as soon as possible".

The whirlwind courtship - begun after Hu's three-day visit to New Zealand in October last year - has been reinforced by a joint feasibility study which concludes that China and New Zealand would benefit from a free-trade deal and stresses that both economies will expand, as will bilateral trade, "if immediate, comprehensive and reciprocal elimination of trade barriers is achieved".

A clearly delighted Clark now wants to go "all out" to ensure the deal is finalised and barriers quickly eliminated so business can make the most of New Zealand's "first-mover advantage" with China.

"New Zealand needs to be looking to where the high returns are so we can pitch our business effort," she says.

The feasibility study recommends that negotiations cover goods, services and investment.

Trade Negotiations Minister Jim Sutton said the free-trade deal could be done "within a year" if trade in goods was the only aspect on thetable.

But Sutton's preference, a more comprehensive deal also covering trade in services and investment, could take up to two years.

"Nothing's been left to chance. We're well ahead of everyone else."

Economic modelling underscores Clark and Sutton's optimism, predicting strong financial benefits for New Zealand from a deal.

The modelling by the NZ Institute of Economic Research and Canberra's Centre for International Economics forecasts that New Zealand exports of goods and services to China are expected to grow on average between $260 million and $400 million a year for the two decades after an agreement goes into effect.

This is 20 to 39 per cent above what would have been achieved if an agreement had not been negotiated.

In the year to September, New Zealand's exports to China, excluding services, grew from $1.43 billion to $1.62 billion.

For China - which pocketed the benefits from New Zealand's trade liberalisation revolution when our tariffs were slashed years ago - the numbers are less significant: an average growth surge between $55 million and $100 million a year (in percentage terms that is a 5 to 11 per cent higher gain than would otherwise be expected for the same 20 years.

Clark and Hu acknowledge concerns that the free-trade deal would have "adjustment implications" for some producers. They want "impacts to be taken into account in negotiations".

Prime Minister Helen Clark's Government opts for closer economic partnerships (CEPs) .

In Hu's case, CEPs are the deals that China reserves for its partners such as Hong Kong. FTAs are for deals with sovereign nations.

In Clark's case, CEP has been a handy word to spray about to defuse opposition from Labour-left and union opponents to free-trade deals.

Who won the debate on the China-NZ deal? Hu, of course - it will be a free-trade deal.

Officials isolate dairy and wool (China) and textiles and footwear (New Zealand) as potentially vulnerable sectors.

But they stress that that is the affected industries' advice rather than what the free-trade agreement modelling itself suggests.

For critical New Zealand export industries such as dairy, meat and forestry products, the potential gains from a free-trade deal are huge.

For instance, the prospects of zero tariffs over time would give Fonterra (and any other subsequent dairy-exporting competitor) a big advantage over American competitors, who would still face higher tariffs averaging 10 to 12 per cent.

The negotiations will also tackle a raft of non-tariff measures which affect New Zealand businesses' ability to satisfactorily compete in China.

Stronger investment ties would deepen and entrench the relationship. Uncertainty over issues such as profit repatriation, tax and foreign exchange rules and arbitrary decisions at provincial government level will inevitably need to be tackled at some point in the relationship.

The China-New Zealand announcement - coming just one day before the formal Apec leaders' meeting begins - is a major feather in Clark's cap.

Chilean President Ricardo Lagos did beat her to the starter's mark by announcing talks between Chile and China at a function for Hu at the Palacio de la Moneda the previous evening.

But Clark is still ahead with her desire to paint New Zealand into the history books as the first "Western developed" nation to stitch up a China deal.

Australia, which has yet to open negotiations with China despite starting discussions a year earlier, is now promoting itself as the "most developed" nation to be talking free trade with China.

The proliferation of preferential trade deals is one of the major items on the Apec leaders' agenda this year. Their business advisory group has warned that many agreements are substandard and work against the Bogor goals for free and open trade in the region.

Hu and Clark want their agreement to be a cut above the rest. They stress the importance of the China-New Zealand deal for advancing Apec goals, being consistent with World Trade Organisation rules and "reinforcing the two countries' commitment to sustainable development".

Their statement also stresses New Zealand's role as the "first developed country in the world to recognise China as a market economy" - a step which China has subsequently made use of in other negotiations and is worth much more to that country on the world stage than the additional monetary gain that New Zealand stands to make from the free-tradedeal.

Clark highlights Hu's visit ("I think we struck a rapport") and her concerns that Australia was "moving full steam ahead of us" as key factors in China deciding to devote political capital to investigating New Zealand's case.

"I had the opportunity to stress that the Australian and New Zealand markets were so closely integrated that it would be a good thing if we could endeavour to move more broadly in tandem."

Advisers say Clark stuck to Hu throughout his visit, ensuring that he took on board her message that New Zealand had skills and knowledge in areas such as animal husbandry which could aid China's rapid development.

Neither Hu nor Clark has said so outright, but New Zealand's decision to stand up to what China regards as "bullying" tactics by the Americans over Iraq was another plus for the Chinese Foreign Ministry when it came to getting New Zealand into its free-trade queue.

China's low production costs and huge market potential have made it increasingly the world's factory. Pressure is likely to emerge from New Zealand trade unions fearing that the textile and footwear industry will be for the chop if remaining tariffs are phased out swiftly.

Clark says: "That says we've lost the plot if we try and compete with China in the same price range and quality and sophistication range. We just have to be in the higher-value sectors."

The feasibility study suggests options to assist China to make further inroads into establishing environmental and labour protections.

Charles Finny, director of New Zealand's China free-trade taskforce, says a "whole of Government" taskforce is being pulled together to work out strategies to ensure New Zealand makes the most of the advantage of being first cab off the rank and to implement the subsequent free-trade agreement.

"I think we are seeing an early harvest already in that there are a whole lot more companies going upto trade for the first time because all this is happening and because there has been so much publi-city."

Ironically, New Zealand's success at getting to the negotiating table will persuade even more countries to try to follow suit. Officials point to signs that China may be getting close to saturation point with negotiations pending on several fronts.

Finny said potential deal-breakers - such as the tussle over China's ban on the imports of some New Zealand meat products and radiata pine for building materials - were cleared so that the talks could proceed unimpeded.

Other issues to be tackled in negotiations are capacity building, customs facilitation, e-commerce, intellectual property, sanitary and phyto-sanitary measures, co-operation on small and medium enterprises, technical regulations and standards, temporary entry and mobility of business people, trade and investment promotion, competition policy and Government procurement.

WHY THE DRAGON IS EMBRACING NEW ZEALAND

* First OECD country to assist China's accession to the World Trade Organisation.

* First OECD country to recognise China as a "market economy".

* First OECD country to begin negotiations on a China free-trade deal.

* First OECD country to forge a China free-trade deal? If we're quick.