Coronavirus: Is New Zealand about to feel the downside of explosive growth in trade with China?

Exports to China have soared over the last 20 years, which could make New Zealand more vulnerable to the disruption caused by coronavirus. Photo / Mark Mitchell

COMMENT:

The impact of coronavirus on New Zealand's economy is still highly uncertain, but the warning signs are becoming ominous.

Only a few hours after the Herald reported the Port of Tauranga boss Mark Cairns saying there would "no doubt" by an impact for New Zealand's largest port, one of his smaller rivals suggested the impact was already here.

Andrew Gaddum, chief operating officer of Eastland Group, owners of Gisborne's Eastland Port, went so far as to squash rumours the port was poised to suspend operations.

"This is a challenging time, globally and locally, and the impacts are now being felt across New Zealand and here in Tairāwhiti," Gaddum said.

"Eastland Port is open and will continue to stay open. However, the flow of product is hugely reduced, as it is at ports around the country.

"We're continuing to monitor and respond to this rapidly evolving situation."

Exactly how widespread the disruption will become is uncertain, but every day it appears the likely disruption gets bigger.

A week ago many commentators seem confident that any impact will be short-lived, pointing to the experience of the Sars outbreak in 2003.

But back then China was a far smaller part of the global economy, the global economy was less integrated then than it is now, while social media ramps pressure on Governments to be seen to act swiftly to keep their countries safe. (When the impact on New Zealand's economy becomes clear we must remember that the National Party has virtually goaded the Government into hasty decision-making).

Already we have seen New Zealand respond by banning arrivals from mainland China, following similar moves from Australia and the United States.

This prompted a warning from China's consul general in Auckland, Ruan Ping, that the move "will certainly have a impact on the business between the two countries" calling the move "disappointing" because New Zealand was "joining efforts to isolate the Chinese economy".

A week ago Tourism New Zealand warned that up to 90 per cent of visitors from China could be impacted by Beijing's effective suspension of group travel.

Seafood prices have taken a hit and economists have predicted a swift impact on other perishable exports such as fruit and other premium food products.

The comments of the port companies suggest the impact could already be spreading to trade more generally.

It is easy to see why this may be the case. Much of the Chinese workforce is on an unscheduled holiday after authorities announced an extension of the current Lunar New Year holiday by more than a week.

Even if things return to normal, the episode is likely to cause a short, sharp bottleneck at the ports in China.

New Zealand could now feel the downside of the reliance we have built up over more than a decade to the Chinese economy.

Ratings agencies have been warning about this for some time.

Despite being overall positive about the outlook for our credit rating, New York-based Fitch warned in January of New Zealand's reliance on both commodities and Chinese consumers "which makes the country vulnerable to a sharp slowdown in China's economy".

Although the growth in business with China may not seem to be what it was a few years ago, this may simply be that earlier in the decade we were coming off a lower base.

Port of Tauranga boss Mark Cairns. Photo / File

Take beef exports for example. Exports to China more than doubled in 2019. Sales of beef to China are now close to the value of sales to beef to all other markets combined.

As a whole, exports to China were around $16.7b in 2019, a 21 per cent increase, led by increases in dairy products, beef, lamb, fish, and fruit, all products which would be vulnerable to a sharp decline. (These figures exclude exports to Hong Kong and Taiwan, which are both top-10 export markets).

This was in a year when exports to Australia dropped below $9b, the lowest in more than a decade.

Similarly, exports to the European Union and the United States were flat.

As well as the short term disruption to travel, there are concerns about what the coronavirus may do to demand within China, and this could have longer lasting impacts.

Within trade circles there are concerns that if China slows, it may end up reinvigorating the trade war.

As part of the trade deal Beijing signed with the US in January, China promised to buy an additional US$200 billion worth of products from the US over the next two years.

This was an ambitious pledge at the time, but if demand from China softens, it may be that it struggles to meet the target.

A hefty chunk of the pledge by China is a sharp increase in the amount of agricultural products it buys from the US, some of which are products which compete with our own.

Even before coronavirus emerged there were concerns among exporters that US products may be favoured over those from other countries to hit its new sales commitments.

Any slowdown in Chinese demand may made it even harder for authorities to meet its commitments to the US.

This could mean that Donald Trump uses the episode to reignite the US-China trade war.