New Zealand needs to tread carefully because many aspects of Australia’s Plan B with China will run into New Zealand’s Plan A. Professor Ang suggests how we can still benefit

New Zealand needs to tread carefully because many aspects of Australia’s Plan B with China will run into New Zealand’s Plan A. Professor Ang suggests how we can still benefit

By Siah Hwee Ang*

Like in the case of New Zealand, China is Australia’s largest trading partner.

But as opposed to New Zealand, the focus on trade between China and Australia has always been more on iron ore, coal and other minerals.

China accounts for one-third of Australia’s exports - making it a significant player in the health of Australia’s economy.

Australia’s iron ore and coal trade with China

For years, Australia has been able to rely on China’s interests in iron ore and coal. However, the landscape has changed recently.

China’s construction industry has slowed down in the last year or so, affecting the demand for these commodities.

Further, China has found cheaper sources for these commodities, for example Brazil.

Coupled with these, and a more pressing issue, is China’s problems with pollution.

In mid September, in an effort to continue to curb pollution, the Chinese government imposed restrictions on the type of coal it will import.

The new restriction means that a large percentage of the 40 odd million tons of coal that Australia exports to China will no longer qualify.

At the same time, the unemployment rate in the Australian mining industry has increased significantly. Some of the mining companies are diversifying as a result.

Australia’s Plan B with China

Amid the changes in the iron ore and coal landscape, as the Aussie dollar weakened, some industries have risen to take over the burden of sustaining the economy.

The list includes agriculture, education and tourism. Do these look familiar?

Yes, they are significant industries for New Zealand.

In fact, some of the diversification done by the mining companies in Australia, mentioned above, is actually directed towards agriculture.

At the same time, there have been incoming interests from Chinese companies into Australia’s agriculture industry. Recently, Chinese state-owned enterprise Beijing Agricultural Investment Fund has committed US$2.7 billion to Australia’s dairy, beef, lamb and aquaculture industries.

Chances are high for further collaboration if the free trade agreement between the countries goes through later this year.

For a start, a private Chinese company has just bought Elizabeth Downs cattle station (205,000 hectare of land and 9,000 head of cattle) for US$17 million in northern Australia.

Tourist arrivals from China into Australia are up 14 percent this year. A Hong Kong property developer has recently been approved to build a US$7.2 billion resort in Queensland with the anticipation of increasing Chinese visitors in Australia.

Implications for New Zealand’s Plan A with China

No economy lives in a vacuum. While it is common for New Zealand to compare itself with Australia on many aspects, we also want to believe we are different.

Iron ore and coal is not New Zealand’s cup of tea.

Agriculture, tourism and education were not really on the priority list for Australia’s trade with China until now.

These industries have been Australia’s Plan B with China, but now they are called into action.

And their actions mean a potential head-on clash with New Zealand’s Plan A with China.

As with Australia, there have been lots of interests in the agriculture industry in New Zealand by Chinese investors.

While we can be uptight about it based on what values New Zealand can derive from such purchases, the literature on foreign direct investment offers lots of empirical evidence on its benefits. The literature also provides a lot of ways to which such values can be extracted.

Now that Australia is into the game, it would be wise to rethink the plan here.

While New Zealand is trying to make itself a stand-alone holiday destination for (Chinese) travellers, it may also be useful to consider making sure that the offer to travellers with Australia as a packaged deal continues to be part of the strategy.

A dual strategy, as a stand-alone and a packaged destination, will ensure that we ride on the bandwagon effect of a tourism boom in Australia from China.

Whether we like it or not, as we are located near Australia, some of the capital flow coming this way can potentially be a zero-sum situation with Australia.

It is important to ensure that we observe closely what is happening between Australia and China to make sure we are not missing the boat.

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Professor Siah Hwee Ang holds the BNZ Chair in Business in Asia at Victoria University. He writes a regular column here focused on understanding the challenges and opportunities for New Zealand in our trade with China. You can contact him here

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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5 Comments

China thinks it made a mistake giving the Kiwi's the deal they have, and the only thing offsetting that is the desire to balance up competition and dilute Fonterra's power.
http://www.stuff.co.nz/business/farming/dairy/10629999/Dairy-giants-funding-fix
has this proposition come from Oz observers, or the deep thinking of our No.1 best buyer?
http://www.abc.net.au/news/2014-09-16/nrn-china-investment/5747108
and Sandy from earlier
http://www.abc.net.au/news/2014-05-21/5466728 - at about half way mark...
China at industry at the processor level considering a diversification away from New Zealand Milk Powder....

Political move.  Now that NZer's are getting concerned about too many sales to Chinese foreigners.

They hoping that by going to Aussi, either NZ will get desperate an dlet them buy mor, or the Aussi's will fall for it.   You don't think they just wanted to buy milk power/FTA do you??

Same old story from Chinese merchants.

Same as if you want manufacturing done there.

Tell 'em if they want cheaper, then corners have to be cut just like at home.
Tell 'em we have government that monitors or environment and employees to make sure we don't under cut the peoples' interests, and that the government officals charge us to monitor these things.
Tell 'em the Australians look like they'll fight on price and be easier to manipulate but they can't because they're all up against the wall because they're fighting each other...just like in China.
Tell 'em only Fonterra has the scope and the independance to source the best from every country in the world, and Fonterra are the only ones that can make the import reliability that the want, on solid contracts that don't compete with their own people.   We _aren't_ a big coutry that will try and take their business off them.  We are more happy to work with their people, politely and quietly and openly.

Remind them that we have been working well together for many years, and look after their interests, and that is open for them to come and see.  The bad news they hear, is because we're interesting in solving problems, and making sure everything is open and honest in our production - we don't hide problems because we want safety to improve and people to know if they haven't heard anything then it is because it is safe, not because someone is not telling them things.   They can sent people they trust to see for themselves that we aren't hiding things.

and then ffs, fonterra, sort your ssst

Danone, Mead Johnson tight-lipped over acquisition rumor
French dairy group Danone and US infant formula maker Mead Johnson Nutrition Company have been in talks on a merger or an acquisition deal since March, an industry insider recently told Shanghai's China Business News.
...
Danone has been grappling with falling earnings and some investors have questioned whether the company can thrive in its current form as it competes with larger rivals Nestle and Unilever.
http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20141021000140&cid=1206

Nestle opens dairy farming facility in China despite glut
 
The development has posed a stiff challenge for Nestle, which has begun considering whether it should proceed with the project in Heilongjiang.
However, the company has decided to stick to its original promise of promoting the sustainable development of China's dairy industry by going ahead with the project for building a dairy farming institute. This means it will not take current economic profitability into account, according to the report.
http://www.wantchinatimes.com/news-subclass-cnt.aspx?cid=1206&MainCatID=12&id=20141021000078
If farms in China are currently not profitable I wonder what this is doing to Fonterra's stratergy of building lots of farm hubs in China.
So 90% of China's dairy imports come from New Zealand and they are thinking about reducing this because they are worried about Fonterra's market dominance, among other concerns.
What can NZ do to keep our largest customer satisfied? If they don't like monopolies would we be better off if we broke up Fonterra?
When NZ supplied the majority of its dairy products to the UK did they have the same concerns about NZ dairy board market dominance or was that a different era where we were more concerned about building long term customer relationships?