Kinley Salmon: Cure on hand for Chinese headache

Latin America could prove to be a big market for New Zealand's agricultural technology and machinery.

Opinion

Long-neglected Latin America could be the answer to slowdown in Asian powerhouse, writes Kinley Salmon.

When China sneezes, New Zealand catches a cold - so the saying goes, and not without reason. New Zealand's economy is one of the most exposed in the world to a slowdown in China.

Fully 22 per cent of our goods exports went to China in 2014. A further 23 per cent went to Australia and China's immediate neighbours such as South Korea - countries which are themselves strongly affected by China.

And right now China has a bad case of the sniffles and a serious headache. Its policymakers are fumbling desperately in the drawer for a box of paracetamol, but a full-blown flu could be on the way. Growth last year was the slowest in a quarter of a century. Chinese imports have fallen for the past 14 months in a row. New Zealand's dairy exports to China fell from $6 billion in the year ending June 2014 to $2.3 billion in the year ending June 2015 - a whopping 60 per cent decline.

Make no mistake, we are poorly diversified in terms of our export markets and vulnerable to the vagaries of the Chinese economy and China's policymakers. Yes, China will remain an important export market for New Zealand producers, but by growing other export markets, a slowdown in China need not be such a big strategic risk to New Zealand's economy.

There is another continent, the same distance away as Asia, which could help reduce our reliance on China - South America.

Incredibly, just 1 per cent of New Zealand's goods exports went to the entire continent in 2014. Central America and Mexico represent just a further 1 per cent of our total goods exports.

Tourist visitors from Latin America are also thin on the ground. Last year there were more visitors to New Zealand from Sweden than Brazil. No other country in Latin America is even in the top 30 countries for visitors to New Zealand.

Yet Latin America is a massive economic bloc. It has a combined population of over 600 million with a middle class of 200 million and, in the north in particular, it is far less tied to China's economy. Mexico and Colombia, for example, trade heavily with the US. It is a significantly underused opportunity for New Zealand, and a potential hedge against a slowdown in Asia.

Why do we sell so little to Latin America? Language and cultural barriers may play some role, but we successfully export throughout Asia. If this is part of the problem, we can and should get past it.

In part it is trade barriers - New Zealand has been slow to pursue trade agreements in Latin America. This reflects a broader lack of strategy - we are only opening an embassy in Colombia (Latin America's third-largest economy) this year. But this only explains part of the problem.

Our limited exports to Latin America are also a result of our lack of product diversification. We produce similar goods - primary commodities and agricultural products - to many Latin American countries, which makes it harder to export there. Consumers tend to buy local and Latin American governments are also under pressure to protect these sectors.

New Zealand's lack of product diversity underpins our limited range of export markets and this in turn makes it harder to avoid the impacts of a slowdown in China.

A strategy for reducing our exposure to slowdowns in China should include a focus on Latin America and on products beyond primary commodities. Tourism, international students, agricultural technology and machinery are all important possibilities. Agritech, for example, was identified by a recent Coriolis research report as underperforming in size, but with potential upside for worldwide exports of five to 10 times the current export level of $1.2 billion.

Despite our limited overall exports to the region, there are signs that Latin American demand for non-traditional products from New Zealand could also be a real opportunity. For example, in 2014 machinery made up just 5 per cent of New Zealand's global goods exports, but in Argentina it was 31 per cent, in Colombia 26 per cent, and in Brazil 14 per cent of our goods exports. Much of this was agriculture-related machinery.

Our world-leading agriculture sector has proven vulnerable to volatile commodity prices, but it may have a dynamic new dimension as a platform for exports of agricultural technology and machinery to new markets that we have long neglected.

New Zealand need not be so closely tied to China's worsening headache. With the right support for business, Latin America could be the catalyst for much-needed diversification of New Zealand's export products and markets.

Kinley Salmon is an economist. He is a graduate of the Harvard Kennedy School and has worked for McKinsey and Company and the World Bank on questions of economic development and diversification. The views expressed here are his own.