Widening the silk road

by David W Young / 13 January, 2007
If it were easy, everybody would be trading with China.

When Kiwi expatriate Simon Pickering opened the doors to his employers' brand-new factory on the outskirts of Shanghai, he discovered that the builders had provided internet access but no power or telephone lines. "I think they do that because everyone asks if there's [internet access] but don't think to ask if there's going to be a phone line," he laughs.

Two years later, the Norwegian-owned factory is pumping out elegant motorboats. Pickering has adjusted to life in Shanghai, although his wife and children have retreated to the Philippines because of the cost of a decent education and the difficulty of living in a nation where so few locals speak English.

As Pickering puts it: "If living and doing business in China were easy, everybody would be doing it."

Doing business in China has become the thing everyone wants to do. A fast-growing middle class has exporters everywhere licking their lips. The Chinese aren't just making luxury motorboats; they're buying them, too.

Like Pickering, most Kiwis in China work for foreign-owned companies, but there are some New Zealand success stories, too. New Zealand Natural hawks ice cream on Shanghai's busiest shopping street. Christchurch-based AuCom Electronics' high-tech engineering products are helping power China's boom.

But for every company doing business in China, dozens more are daunted by the prospect. The bulk of New Zealand's exporting is done by a handful of companies.

This year will be crucial for New Zealand's free-trade agreement (FTA) with China, which could open opportunities for more exporters.

In 2004 we were the first developed nation to reach the negotiating table: a reward for being the first to recognise China as a market economy and support its membership of the World Trade Organisation. The government would like to round out the "firsts" and complete an FTA with China before Australia does.

Negotiations are at a delicate phase. There have been nine rounds of discussions; the tenth takes place in China in a few weeks. At a briefing for journalists last November, a Ministry of Foreign Affairs and Trade official likened the process to climbing a mountain. Now that we're nearing the top - getting to the agreement's details - we are "breathing more heavily".

Fonterra is our biggest exporter to China, selling $200 million of dairy ingredients last year, and could be one of the biggest FTA beneficiaries. But in a twist that some local manufacturers would view with wry bemusement, China is concerned about the effect the FTA could have on its poor, unproductive dairy industry. In Shanghai in November, Trade Minister Phil Goff argued that New Zealand's economy was too small to threaten China in any sector. On returning home, he indicated that dairy remained a prickly issue.

More heavy breathing will occur throughout 2007. In one sticky area of negotiations, we would like "Most Favoured Nation" status for services, investment and government procurement; China is reluctant to give that up.

Negotiations are expected to stretch into 2008. Things could become interesting back home if the discussions aren't concluded until after the next general election: both the Greens and New Zealand First oppose the FTA.

Exporters themselves are unsure of the deal. They are usually the biggest cheerleaders for free trade, but a DHL survey in May last year showed only half New Zealand's exporters believe the FTA will have a positive impact on their business.

But with multilateral trade talks dead and an FTA with the United States unlikely, the government has put considerable political capital into eking out the best deal it can with New Zealand's fourth-largest trading partner.

While the Chinese FTA is one of the top trade priorities for our government, New Zealand's puny size guarantees that we are far down China's to-do list. In any case, China has more to worry about in 2007.

Although foreigners salivate over China's billion potential consumers, the truth is that more than half the population are poor and rural, and have received relatively few benefits from rapid growth. China needs to maintain its extraordinary levels of growth to ensure benefits reach more of the population, while being careful not to overheat.

Then there's international pressure. Already this year, China has argued with the United States over the yuan. Washington believes Beijing deliberately undervalues its currency to boost exports to the West. China has ruled out making any correction. Trading partners constantly complain China doesn't pay enough attention to intellectual property rights.

China faces a difficult year. It's not easy being the world's fastest-growing economy.

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