Fran O'Sullivan: How many eggs fit into a Chinese basket?

Supermarket shopping in Beijing. China looks likely to remain a valuable market for New Zealand for the foreseeable future. Photo / AP

OPINION:

China is not a market for the faint-hearted.

There have always been hidden barriers to operating freely in the Chinese economy.

But talking openly about political risk factors — perceived or otherwise — has not been seriously approached until recent years.

The Prime Minister and the Minister of Foreign Affairs have had their say.

Foreign Affairs Minister Nanaia Mahuta said it was "prudent not to put all eggs into a single basket" when it comes to trade with China.

But irrespective of this, the bilateral trade relationship has continued to grow, amounting to $37.7 billion of goods and services in 2021, up from $31.3b in 2020 and $33.41b in 2019.

The reality is that companies will continue to trade with markets that provide sustainable business.

The underlying issue behind the debate is whether New Zealand's trade reliance on China does influence our politicians to pull their punches when it comes to making diplomatic calls that anger Beijing.

Their critics will say yes. The politicians will say their principles are not for sale when it comes to vexed matters like taking a stance on human rights issues in Xinjiang. And that they do talk openly about their differences in face-to-face meetings. That's called diplomacy.

But there have been other warnings — which have been taken further behind closed doors — that there may come a time when New Zealand does take a much stronger stance on a major issue that upsets Beijing.

Quantifying the risk to New Zealand business if the Chinese Government applied trade retaliatory measures is not straightforward. But it is not the only market risk New Zealand could face with China.

A new report out this week, written by Sense Partners for the New Zealand China Council, does just that by running a series of indicative scenarios.

The report, In perspective: The New Zealand-China Trade and Business Relationship 2022 Update is an update by author John Ballingall on his original report, How many eggs, How many baskets.

Ballingall makes the point that trade disruptions come in many forms:

• Many events can disrupt global and bilateral trade patterns, including income slowdowns, fuel price shocks, pandemics, economic coercion, sanctions regimes and conflicts. As a small, open economy, New Zealand is highly exposed to these shocks.

• The Covid-19 pandemic has exposed the vulnerability of global trade to sudden shocks. The impact of that sudden shock is giving way to more gradual shocks in the form of constrained supply chains, global inflation and an uncertain global recovery.

• Other more gradual shocks include increased domestic production within China, an objective of its "dual circulation" strategy. The initial impact may be on strategic goods such as semiconductors, but it is possible that the range of goods considered strategic by China could potentially become broader in due course.

• Trade disruption between Australia and China, driven by foreign policy disagreements, has loomed large in the past 18 months. Recent research indicates that — in aggregate — the impacts of Chinese trade policy on the Australian economy have been relatively moderate to date, although specific sectors have felt the pain more keenly (such as timber and wine).

• In part this is because affected Australian exporters have redirected exports away from China towards alternative markets: the exports that were destined for China are not simply lost.

Ballingall's indicative scenario analysis suggests that if there was a complete disruption of New Zealand exports to China, there could be nearly $1.15b in lost annual revenue.

The model assumed a total disruption for one year, with 10 per cent of exports unable to be sent elsewhere and the remaining 90 per cent reallocated among other markets based on current trade flows.

Among the worst affected exports could be logs, infant formula and also the rock lobster industry, which would not readily find alternative markets in a globally competitive environment.

The flip and somewhat ironic side of this is that, as the report illustrates, China has played a major role in assisting New Zealand to get through the Covid-19 downturn, thus mitigating the disruption to the New Zealand economy.

It says the bilateral trade relationship totalled $37.7b of goods and services in 2021, up from $31.3b in 2020 (after a small dip from 2019).

The 2021 goods export growth rate of 19.8 per cent is similar to pre-Covid growth levels.

It says market disruption as a result of China's battle to contain Covid's Omicron variant can be expected in 2022, but prospects for another quick recovery remain strong.

The impacts are not trivial. But weighed again New Zealand's total goods exports to China of $20b and our aggregate exports to the world of $63b, they would not be sufficient to crush the economy.

Seven years ago, I started asking chief executives if New Zealand was placing too much reliance on China?

Their response to the 2015 Herald Mood of the Boardroom survey was mixed.

To the question, is New Zealand is placing too much reliance on the China market, 42 per cent agreed and 41 per cent disagreed.

Here's a response from Local Government Funding Agency chair Craig Stobo: "1.35 billion population out of 7 billion global population, the second largest economy in the world, the fastest growing economy in the world, their first FTA was with NZ ... we are not doing enough!!"

From then Deloitte CEO Thomas Pippos: "China understands the value its market has on the global economic scene and choreographs its actions accordingly looking to maximise its own national welfare — it's acting totally rationally and businesses need to enter that market with their eyes wide open."

This was at a time when the gloss had temporarily come off the China market following volatility on Chinese stock exchanges and major commodity slumps which saw New Zealand's dairy export returns dramatically slashed. Even so, it was clear that a major commercial opportunity still presented in that giant market.

It would have been irrational to think otherwise.

But behind scenes the conversation had started to change about whether companies were "too optimistic" about China, and as a result not preparing any "Plan Bs".

The question arose of managing the risk posed by over-reliance on that particular market.

And the question of whether, as one professional firm boss said, that translated to commercial leverage being applied to drive positions on foreign policy, immigration, capital flows, ownership of key assets and so on.

Others suggested New Zealand had a range of free trade agreements (FTAs) that had not been well exploited and business should be encouraged to have more diverse export strategies with those other markets.

It was strategy of "China and" rather than "China or".

Seven years on, New Zealand has notched up valuable FTAs with other markets: the recent agreement with the United Kingdom and the European FTA which is tipped to be signed when the Prime Minister goes to Europe, possibly next month, are two such examples.

They will spur more trade between New Zealand, Europe and the UK.

The Comprehensive and Progressive Trans Pacific Partnership (CPTPP), which was signed on Prime Minister Jacinda Ardern's watch, brought Japan into the mix and the Regional Comprehensive Economic Partnership also brings regional benefits.

But opening new markets is not a simple matter.

It seems reasonable to suggest that China will continue to be a valuable trade partner for some time to come.

But also that New Zealand could withstand a period of disruption.

Disclosure: Fran O'Sullivan is a member of the China Council.