How US-China trade war could affect NZ

COMMENT: With a trade war brewing between two of the world's biggest economies, China is more likely to be prepared to agree to more favourable terms in the upgrade of its Free Trade Agreement with New Zealand.

At the end of May, the Government announced the next round of talks on the upgrade of the FTA would take place this month.

Regardless of missing the June target, the timing for these talks is particularly interesting given that China and the US are mired in an escalating trade dispute.

On June 15, the Trump Administration announced it would impose a 25 per cent tariff on up to US$50 billion ($73.8b) of Chinese goods to protect American intellectual property (IP) and technology. China responded by imposing trade levies on US$34b of US goods, including agricultural products.

Short-term there is potentially some upside for New Zealand if producers here can replace some of the American products in China.

This is where our FTA talks can help, to position these short-term opportunities as long-term realities. And the Chinese may be appreciative if we show good faith, which we have done in the past.

New Zealand was the first country to support China's accession to the World Trade Organisation (WTO), and the first developed country to recognise China as a market economy under the WTO.

This helped New Zealand become the first developed country to start negotiating, and sign, an FTA with China.

Since the signing of the FTA in 2008, our exports to China have increased and China is now our largest export market.

Trade Minister David Parker says if the FTA upgrade goes to plan, it will be a modern, inclusive agreement with a strong focus on the environment, competition, e-commerce and the expansion of the services trade.

Parker acknowledged the proposed e-commerce chapter in the upgraded FTA is of particular importance to New Zealand.

It's a difficult issue as the Government is moving to reform our GST rules on online shopping, which is likely to act as a barrier to expanded e-commerce.

Imagine what headaches it could bring to Kiwi exporters if China introduces a similar rule and New Zealand exporters are required to register for VAT in China?

On another note, it is interesting the Americans are citing restrictions on US investments in China as one of the causes of the current tariff impositions.

This refers to a Chinese policy that requires any foreign company investing in China to form a joint venture with a Chinese company.

The accusation is that these joint ventures allow Chinese companies to potentially steal trade secrets.

However, what is often omitted is that China no longer needs these joint-venture rules in many industries, with several sectors already competitive with their counterparts in the US.

Closer to home, New Zealand will soon introduce restrictions on foreign ownership of residential properties.

When China introduced their restrictions on foreign investments, they knew their problem was not foreign investments, but the lack of competitiveness of their key industries.

For New Zealand it's simply about looking to curb demand for an asset class given our inability to grow supply.

The simple fact is the number of homes we are building is lower now than in the mid-1970s, although we are building more in terms of total floor area.

To put this into context, in the year ended August 1974, 38,000 new homes were consented, representing a total floor area of 4.2 million square metres.

In the year ended August 2016, 30,000 new homes were consented representing a total floor area of 5.4 million square metres. So 40 years on, even by total floor area, construction of new houses has only increased by 29 per cent, while the total number of new homes has decreased.

While restrictions like those that are proposed are sometimes necessary to allow space and time for parties to deal with their issues, they are simply the means to help resolve any problems.

Looking at it through another lens, while Minister Phil Twyford's decision to ask overseas companies to express their interest in setting up, or expanding, off-site manufacturing factories to make KiwiBuild homes is welcome, encouraging the development of new technologies in the property and construction industries should not be limited to KiwiBuild.

Larger construction projects can also benefit from new and better methods and materials.

Perhaps any overseas investment restrictions from New Zealand should also have a strategic focus on encouraging the development of construction technologies here.

China has addressed many of the problems they hoped to resolve through joint ventures, and can now go on without restrictions. Can New Zealand do the same? Perhaps there are other good things that we also want from foreigners, not just their money.

- Jenny Liu is a Deloitte New Zealand tax partner and leader of Deloitte's China Services Group.