David Mahon: Why NZ can't take sides in escalating US-China trade war

David Mahon argues that NZ cannot afford to take sides as the trade war intensifies. Photo/Getty Images

The trade tension between China and the United States is unprecedented. Even if the Democrats win next year, US attempts to contain China will shift only in style, not objective. The US will block Chinese technical innovation wherever possible, stem its rise, and coerce partners and allies to do the same.

This situation presents ongoing crises for Western nations such as New Zealand, for it is not simply a choice between Beijing and Washington – both are vital relationships. Politicians and diplomats are tempted to appease as many interests as possible, but they often end up losing the trust and respect of all. This is now Australia's status in Asia, and is swiftly becoming Canada's. The New Zealand Government has a good track record of acting according to its own principles and those of international law, even when its actions may evoke the ire of its strategic partners. It needs to draw on that legacy now.

New Zealand can resist the overly dramatic US characterisation of its trade conflict with China as a 'cold war'. It is not a cold war, it is trade war. The US's cold war with the Soviet Union was founded on a competition to export political and economic systems and gain maximum commercial influence, yet neither was dependent economically on the other. China and the US are inextricably linked economically, and their own as well as the balance of global trade depends on their ultimate co-operation.

Over the last three years, the US has tried to dissuade its friends from joining the Asia Infrastructure Investment Bank (AIIB), a much-needed funder of infrastructure projects in Asia. The AIIB nevertheless has 86 members, the largest borrower India with USD4.4 billion, even though India is the neighbour with which China is most frequently in dispute. The Belt and Road Initiative (BRI), is another focus of Washington's chagrin, characterised as an instrument of Chinese coercion.

A simple trade strategy with an opaque name

The BRI is a strategy to export excess industrial capacity to China's trading partners, with most of whom China has substantial trade deficits, and secure ports for its vast merchant fleet to ensure the smooth flow of vital resources and products. The willingness or not of countries to engage in the BRI has also become a means for Beijing to assess their commitment to economic partnership.

US President Donald Trump has taken many protectionist steps against China. Photo/Getty Images

In defiance of Washington, this year New Zealand signed a largely symbolic, but important, memorandum regarding the BRI, the first Five Eyes member to do so. New Zealand may now adapt the BRI to meet its own commercial needs, for the BRI can accommodate projects in fields as diverse as forestry, food safety and film.

With the AIIB now well established, the US has made BRI and Huawei's market position its key trade battlegrounds. In banning Huawei, Five Eyes partners Canada and Australia have chosen to obey Washington, while Britain and New Zealand are undecided. Malaysia has welcomed Huawei and Germany has indicated that it may. Any decisions must be based on incontrovertible evidence, not vague acknowledgements of the concerns of security services, or fears of trade retaliation.

Repair or empty respite

The visits to China of the New Zealand Prime Minister in April and David Parker in May helped to correct the perception that the NZ government had blocked Huawei from participating in building 5G. Some Chinese officials suggested that Jacinda Ardern had tacitly approved the use of part of Huawei's 5G technology. Others were left baffled at the prospect of a prime minister possibly leaving a major foreign trade and policy issue to be decided by the country's security services. For New Zealand to cast China as a security threat to itself or the region would be to give in to baseless fears and groundless conspiracies and be seen globally as a sop to Washington.

China is not, and is far from becoming, a global or economic superpower. It is a significant economic power, but with the obligations of a developed country while lacking institutional development and suffering the insecurities of a developing country. It is ranked 80th in global per capita GDP, has few strategic allies and many economic adversaries and competitors. The US runs the global financial system upon which China depends, and China lacks the means through its currency, or domestic financial institutions, to marginalise this role. If US economic power is diminished further it will be due not to the rise of China, but to its own actions.

New Zealand cannot take sides in a trade or cultural war between the West and China. It shares critical institutions of law and democracy with Europe and the United States, but is also an Asia-Pacific economy possessing its own principles of fairness, multiculturalism and independence. The relatively smooth years of navigating between Washington and Beijing may be over, but if Wellington avoids assuming that there is no problem, or downplaying the ramifications of its choices, it can proceed successfully. Whatever New Zealand manages to do, it will need to remain vigilant, accepting that the wider confrontation between China and the US will disrupt and jar for a generation.

- David Mahon is the executive chair of Mahon China Investment Management