China is poised to upgrade its ground-breaking free trade agreement with New Zealand but scoring a major move in favour of NZ's dairy exporters will be problematic.
Chinese Vice-Commerce Minister Wang Shouwen maintains that the China-New Zealand free trade agreement is already at a very high level.
Wang told the Herald that the FTA upgrade would result in progress in the services sector.
But he indicated NZ's key merchandise export to China - dairy - was more problematic.
"New Zealand has become the largest dairy exporter to China."
His view on the critical issue of dairy safeguards - which kick in at relatively low volumes of NZ exports - was that they were "not big ... and it will be less in the future".
This is a critical issue as far as NZ is concerned because Australia - which is in the process of finalising its own free trade deal with China - is poised to ramp up production, particularly of infant formula, as a result of concessions in its deal which its own dairy industry believes give them the opportunity to catch up with their NZ competitors.
The 2008 bilateral China-NZ FTA progressively reduces tariffs on dairy products to zero.
The tariff on milk powders will be phased out by 2019 and on all other products such as cheese and liquid milk and cream by 2017.
But the agreement also includes safeguards to protect China's domestic dairy industry which are triggered at relatively low volumes, particularly on milk powder which is by far the largest component of NZ's dairy exports to China.
For instance, in 2015 the safeguards were to be triggered once China has imported 135,675 tonnes of skim and whole milk powders from New Zealand.
The upshot is that once the NZ safeguard is triggered, NZ reverts to paying a most favoured nation rate.
These safeguards will continue to be applied until 2024.
The FTA upgrade was canvassed by Chinese Vice-Premier Wang Yang and Economic Development Minister Steven Joyce in a meeting in Beijing on Tuesday and in a subsequent meeting between Wang Shouwen and Associate Trade Minister Todd McClay.
China is focused on the growth and consolidation of its own domestic dairy industry which lost momentum (along with the confidence of Chinese consumers) after the melamine contamination scandal.
Joyce said the safeguards were having quite an impact on the price of dairy in China - a point he made to the Vice-Premier. "They want to see their agriculture industry continue to expand," Joyce said.
"We both recognise that the investment by Chinese companies in New Zealand and by Fonterra up here is a good way for both China and NZ to work together to meet that consumer demand," he said.
"There is a strong sense that dairy is going to continue to grow and that demand won't be met by NZ farmers or Chinese farmers on their own.
"Their assessment is the demand for dairy will grow in the years ahead," Joyce added.
"Their assessment is China has some way to go in how much dairy will be consumed in the next five years."