Fran O'Sullivan: Seriously cultivating China

COMMENT

Should New Zealand move quickly to recognise China's status as a "market economy" to strike an advantaged relationship with the world's rising economic superpower?

That question is not top of the agenda for the Seriously Asia forum in Parliament this week - but it is one of the goals up for debate.

Access to Asia's growth motor, and the concessions that entails, will surface as Prime Minister Helen Clark endeavours to refocus business and bureaucratic attention on New Zealand's slipping performance in the region.

Even though China and New Zealand have yet to embark on discussions towards the trade and economic framework announced during President Hu Jintao's recent visit - let alone begin negotiations towards a resultant free-trade deal - China has said it wants "market economic status" recognition.

At issue is whether New Zealand should act pragmatically and utterly in its own self-interest by meeting China's request or hold China to its World Trade Organisation definition as an "economy in transition".

This is a tricky issue for New Zealand, whose overall interests lie in the successful completion of the Doha Development Round.

There are mixed views within the Government.

China has impressive economic goals for the first two decades of this century. It is already Asia's growth motor.

By 2020, it plans to have completed its industrialisation and put in place a "well-developed socialist market economic system".

Clark is typically cautious about China's request, wanting to analyse the ramifications of giving such a concession before making any firm commitment.

She points out that Australia, which recently signed its own trade and economic framework with China, has not met China's wish at this stage: "They simply recognised China's tremendous achievement towards establishing a market economy."

But she does concede Australia has let China off the hook on three specific WTO accession commitments for a two-year period while a feasibility study is undertaken into a bilateral free-trade deal.

Trade Negotiations Minister Jim Sutton, who will head the negotiations, is expected to take a pragmatic approach.

Sutton believes China - "under extreme pressure" - probably conceded too much to get entry to the WTO. He makes the point that New Zealand does not differentiate between market or non-market economies when it comes to considering issues such as anti-dumping measures.

"From my point of view it's not something we have ever withheld from them," said Sutton.

"There may be political ramifications that are beyond my ken as a humble trade minister but my view is we should take them as we find them and I believe they have paid a big price in terms of internal reforms to join the WTO."

Clark called for the Seriously Asia initiative after concerns that New Zealand could miss out on the burgeoning Asia market while it pursued more difficult targets like a free-trade deal with the US.

Both politicians acknowledge China presents a huge opportunity and one they are keen to pursue.

"We will never be at the top because of the small size of our market," says Sutton. "And they will never be able to supply an increasingly wealthy market of their size in those things that are our specialties."

Confidential talks between Australia and China began 18 months ago. Diplomatic sources confirm strict secrecy was imposed to stop opposition killing the move once it was obvious that China wanted relief from its strict WTO conditions. Much of the Australian framework is window-dressing. In essence it brings together strategic linkages, including agriculture, customs, quarantine and trade facilitation.

The real prize is market access under a subsequent free-trade deal.

Under strong US pressure, China agreed to maintain its non-market economy status as an economy in transition for 15 years after its accession to the WTO. But Hu is a politician in a hurry.

At the recent Apec summit, Hu reaffirmed China's goal to quadruple GDP (2000 levels) by 2020 topping US$4 trillion ($6.25 trillion) with average per capita GDP exceeding US$3000. In prosperous cities such as Guangzhou the growth targets are far more ambitious: per capita incomes of US$20,000.

It will rival Japan's GDP by 2015 and is expected to equal the US by 2040.

There are domestic political fishhooks for the Clark Government to consider.

The trade union movement is opposed to the final dismemberment of protection for the clothing, textile and footwear industry.

The Council of Trade Unions has yet to form a position on China but CTU economist Peter Conway foreshadows it will want assurances around Chinese labour and environment practices added to the negotiating mix.

Clark is suitably cautious: The Government would need to look at the overall picture, quantify the size of barriers to New Zealand's trade, the cost to exporters and "balance it up".

But the Australia deal does put a two-year freeze on China's WTO commitments in respect of clothing and textile exports.

It would be foolish to think that China's ambitions in relation to the New Zealand market will be focused primarily on exporting cheap clothing and textiles. China has embarked on building its own global brands.

The Haier Group is now the world's fifth-largest household appliances manufacturer, manufacturing and selling dishwashers and microwaves to big retailers like WalMart and Costco in the US.

China needs foreign trade to provide the growth locomotor for restraining unemployment.

The World Markets Research Centre says China is "unstoppable". As long as advanced economies increasingly buy Chinese goods with hard currency, China's strong growth performance over the past two decades will continue.

China's import growth is now booming at a 40 per cent annual rate. Its trade surplus is likely to fall sharply in the next year despite robust exports. There is also concern about unemployment because of layoffs from state-owned companies and a fragile banking system bedevilled with non-performing loans.

But the key point is that China is exerting a huge pull through Asia from Japan to Australia right down to New Zealand. This is underscored in a report by Australia's Department of Foreign Affairs and Trade, "China's Rise - East Asia's Challenge". China's continuing growth, falling Chinese trade barriers post-World Trade Organisation entry and declining Australian trade barriers in labour intensive manufactures will ensure growing synergies, says Foreign Affairs.

Like Australia, New Zealand is a direct competitor with China in relatively few markets, but there is a great deal of complementarity between the nations' economies, as Hu stressed during his visit.

During his discussions with 12 New Zealand business leaders Hu laid out four big growth opportunities: Expanding co-operation in traditional sectors; improving services trade in science, education and tourism; growth in investment, including encouraging well-established Chinese enterprises to invest in New Zealand; and improved co-operation to develop Chinese agriculture.

The Warehouse chief executive, Stephen Tindall, has proposed a New Zealand export-import hub within China and a new bilateral China-NZ Council to forge stronger linkages.

The major threat to this deepening relationship is a political one.

United Future leader Peter Dunne criticises the Government's "craven" attitude towards China and its fear of upsetting Taiwan. "It is time we changed our approach to work more closely with democratic Taiwan rather than continuing to sycophantically fall into line every time totalitarian China clicks its fingers."

New Zealand's expanding ties with China are not conditional on a devil's pact to sell out Taiwan. But if Taiwan pursues complete sovereignty we will be forced to choose.