Feeding the Dragon: Lessons of the New Zealand-China FTA

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Feeding the Dragon: Lessons of the New Zealand-China FTA

The FTA has been a boon for New Zealand trade, but is not without its growing pains.

Feeding the Dragon: Lessons of the New Zealand-China FTA
Credit: REUTERS/Nigel Marple

Historically, when Western nations traded with China it was on unequal terms. In the nineteenth century, Britain’s coercive opium trade, the Western power’s concession ports and the unequal treaties cemented a disparate relationship between the West and the Eastern colossus. Perhaps the irony today is that this unequal relation has been reversed. Western nations now come to China more often than not on China’s terms. This has certainly been the case with the New Zealand-China Free Trade Agreement (FTA) signed in Beijing in 2008.

For New Zealand, this agreement held the promise of securing a greater share of the rapidly expanding Chinese market as well as the potential for deeper bilateral relations. From an economic perspective, the free trade agreement has been a remarkable success for New Zealand, increasing exports to China from NZD2.2 billion ($1.8 billion) in 2008 to NZD8.6 billion in 2012 (the most recent statistics). As tariffs on 95 per cent of the products New Zealand exports to China are incrementally phased out (the FTA comes fully into force in 2019), trade is only set to increase. As it stands, China has already overtaken Australia as New Zealand’s largest export market, changing the status quo of New Zealand’s economic focus, even at the risk of putting all of its eggs in one basket.

New Zealand’s dairy industry has been the primary beneficiary of the FTA (accounting for NZD2.8 billion of the export total in 2012), followed by the wood (NZD1.2 billion) and meat industries (NZD412 million).

In many ways, the FTA has underscored the fact that primary industry will continue to be New Zealand’s future source of economic riches, handing the sector a lucrative marketplace in the form of the rising middle class in China’s eastern provinces and cities. This segment of Chinese society is set to grow: the number of Chinese earning 100,000 to 200,000 RMB ($16,500 to $33,000) will increase to 28 percent by 2015 (compared to 6 percent in 2010) and those earning more than 200k RMB will double to 4 percent in the same year, as New Zealand Government’s report “Opening Doors to China” notes. With more disposable income, these consumers are increasingly quality conscious and have tastes for Western products. Consequently, “NZ Inc.,” the brand that attempts to market New Zealand’s export product, with its on a clean, green image mixed with a degree of entrepreneurial spirit, holds real currency in China.

While this is a remarkable accomplishment, the past five years since the first set of tariffs began to fall have been somewhat difficult for some New Zealand exporters. A number of crises, particularly in the dairy sector, have damaged the NZ Inc. brand in the eyes of Chinese authorities and consumers. As such, New Zealand’s China strategy has at times appeared to have plodded along, constantly trouble-shooting issues, while failing to fully capitalize on the FTA.

Indeed, “rebuilding trust” became the mantra for 2013. The failure for New Zealand government officials to understand the new Chinese customs certification documents resulted in 30,000 tons of meat (up to NZD100 million’s worth) being detained in the northern port of Dalian in June 2013 – this followed a similar incident that had occurred in January over milk products. In what became a particularly embarrassing saga over a minor administrative matter, officials from the recently merged Ministry of Primary Industries scrambled to organize a solution under the glare of media attention. Admitting that it was a sloppy, even arrogant look, the New Zealand Government duly noted that they would have to “rebuild trust.”

Unfortunately, this need to rebuild trust also extended into the sensitive realm of food safety. In January, there was DCD contamination in milk made by Fonterra, New Zealand’s hegemonic milk producer. Then in July, there was the botulism scare in Fonterra-produced infant formula. While the DCD contamination caused alarm, the botulism scare seriously dented the NZ Inc. brand, resulting in Chinese retailers taking New Zealand dairy products off the shelf as consumers sought “safer” products from other overseas exporters.

The extent of this damage to the New Zealand brand is still hard to determine, but what is clear is that “NZ milk has lost its aura of perfection” in the eyes of Chinese customers, as one New Zealand business owner noted. It will take time to rebuild New Zealand’s dairy safety standard, especially because the one child policy makes Chinese parents hypersensitive when it comes to food safety. This is frustrating for New Zealand dairy producers, particularly those smaller dairy companies, as milk products are a lucrative market in China. Given the appalling record of Chinese dairy after the 2008 scandal in which 13 infants died as a result of melamine being in the infant formula, dairy from overseas fast became white gold in Chinese supermarkets. While New Zealand has benefited from this, it did not help when embarrassing questions over Fonterra’s overall complicity in the deaths of the infants were raised in 2008. Fonterra had a 43 per cent stake in Sanlu Group, one of the Chinese dairy producers guilty of putting melamine into their milk. Guilty by association and perhaps also for being too much of a silent shareholder was sufficient even then for some Chinese consumers to put a question mark over New Zealand diary.

With all that is at stake, the dairy sector cannot afford any more scandals, lest the entire NZ Inc. brand be ruined in China. This much is all too well known amongst business circles; as BNZ Bank economist Michael Barnett observed, the botulism scare was a “wakeup call” for New Zealand business and government to “come to grips” with the FTA. Perhaps the starkest warning came from Zhang Fan, the Chinese Commercial Counsellor at the Wellington Embassy, when he explained on New Zealand television what Chinese consumers were thinking, noting severely: “Mistakes should not be repeated again and again. Three times and you are out.”

By that count, New Zealand really ought to be out. This warning is significant given that in the next few years New Zealand will lose its competitive edge. As other OCED nations seek their own free trade agreements with the Asian powerhouse, New Zealand will shortly find itself competing with other, stronger export nations. In December 2013, David Cameron visited Beijing calling for an EU-China FTA, while South Korea have been negotiating a FTA since 2012. Of particular significance, New Zealand’s primary sector exports may soon face greater competition as early as the end of this year if Australia’s FTA with China is completed on schedule. With New Zealand’s persistently strong dollar, exporters are not likely to have an easy time, at least for the short term.

The fact that other nations are pursuing an FTA with China comes as no surprise. In a global economy, opportunities for exporting nations are constantly being sought and China is a natural destination. In that sense, New Zealand has received a head start in terms of learning how to sell to the Chinese consumer and how to do business in China. And by the looks of it, this start has evidently been needed, especially for primary industry exporters.

In spite of the scandal and setbacks, New Zealand has learnt some valuable lessons and has begun acting on them. This was demonstrated even during the botulism scare itself. Fonterra’s slick PR response went some way to allaying fears and demonstrated that the company was serious about China. Even the New Zealand Government showed an uncanny ability to say the right things to Chinese authorities. Devoid of any governmental doublespeak, the Ministry of Primary Industries report over the holdup of meat exports at Dalian also demonstrated a frank ability to resolve the issues at hand in order to move forward. Hailing the report’s honesty, the President of Federated Farmers, Bruce Wills emphasized that “Government departments, exporters, and educators” have to move from their “Eurocentric” mind-set and listen to their export market.

In other words, New Zealand must recognize that its future is in the Asian region and needs to understand China and other Asian nations in order to succeed in these markets.

Ultimately, New Zealand has learnt the most important lesson of all: China is a difficult market. An unforgiving, bureaucratic process, an authoritarian government that still has its hands on many of the levers of the Chinese economy (compared to New Zealand’s almost unregulated free market), and a quality and safety conscious Chinese consumer all means that businesses to do their homework if they are to do business with the Chinese. As Fran O’Sullivan, the managing director of New Zealand Inc., wrote in the New Zealand Herald “there is now a new hardball era in China” and there are no free rides for foreigners game enough to do business there. This sentiment was further echoed in the ANZ Bank’s report on China “Feeding the Dragon,” which stressed the importance of having “an intimate knowledge of a targeted market segment” as well as understanding Chinese “cultural understanding of tastes and business practices.” Above all else, it noted that entrepreneurship in China requires patience. Business relationships take time and establishing yourself in China is inevitably a long-term commitment.

In that sense, the first five years of the FTA have been an important prelude in what is set to be a long term-trade relationship. With the growing pains of the past five years, New Zealand is slowly beginning to learn how to feed the dragon without getting burnt. So long as it maintains its brand integrity, the FTA will prove to be a gift to New Zealand business that keeps on giving.

Christopher Ernest Barber is a doctoral candidate at the University of Auckland, specializing on the history of  international arbitration and the development of globalization, commerce, and trade.