US China trade war food for thought for New Zealand

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.

By Jenny Liu

At the end of May, the Government announced that 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 imminent talks is particularly interesting given that China and the US are mired in an escalating trade dispute.

Specifically, on the 15th of June, the Trump administration announced that it would impose a 25% tariff on up to US$50b Chinese goods in an effort to protect American intellectual property (IP) and technology. China quickly responded by imposing trade levies on US$34b of US goods, including agricultural products like beef, fresh and dried fruits, and seafood.

Short-term there is potentially some initial upside for New Zealand, if producers here can replace some of the American products in China, in particular agricultural products. But long-term any benefits could be partly offset as US products are redirected into other markets and compete with Kiwi exports elsewhere. And no doubt there will also be suppliers in other countries looking to take advantage of the available opportunities opened up by the current trade dispute.

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

New Zealand was the first country to support China’s accession to the World Trade Organisation (WTO), and we were the first developed country to recognize 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. To date, the FTA has significantly helped our economy. Since the signing of the FTA in 2008, our exports to China have increased dramatically 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. Minister Parker acknowledged the proposed e-commerce chapter in the upgraded FTA is of particular importance to New Zealand. 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 that 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 first form a joint venture with a Chinese company. The accusation is that these joint ventures allow Chinese companies to potentially steal trade secrets to grow Chinese industries. However, what is often omitted is that China no longer needs these joint-venture rules in many industries, with several sectors and companies already competitive with their counterparts in the United States.

Closer to home New Zealand will soon introduce restrictions on foreign ownership of residential properties. Both cases seek to restrict foreign investments but for quite different reasons.

When China introduced their restrictions on foreign investments, they knew that their fundamental problem was not foreign investments, but the lack of competitiveness of their key industries. They introduced the restrictions, but at the same time tried to use them to help their key industries to grow.

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 that 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 percent, while the total number of new homes has actually decreased.

Accepting that restrictions like what are proposed are sometimes necessary to allow both space and time for parties to resolve their issues, they are simply the means to help resolve any problems, rather than the solutions to the problems themselves.

Looking at it through another lens, while Minister 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.

Taking a leaf out of China’s book, 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.

This article first appeared in the New Zealand Herald on 5 July 2018.

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