Neither Europe nor the USA are going to do us any trading favours says Keith Woodford. For both of them, it is all about self-interest

Neither Europe nor the USA are going to do us any trading favours says Keith Woodford. For both of them, it is all about self-interest

In recent weeks I have been exploring and writing about some of the challenges in finding new markets that would allow New Zealand to stem its increasing reliance on China. My focus in the last three articles has been first on North East Asia, then the ASEAN countries of South East Asia, then South Asia and Iran. This week I look further west to Europe and the Americas before completing the circle.

First to recap a little.

The emergence of China as the most important trading partner of New Zealand has been a function of natural alignment between what New Zealand produces and what China wanted, complemented by New Zealand also wanting what China has been producing at lower cost than anyone else.  The other factor has been very fast growth in the Chinese economy, with this creating the space for new and expanding supply chains.

In contrast, elsewhere in North Asia the times of easy growth had gone by the end of the 20th Century. The growth of what had been the North Asian tiger economies of Japan, South Korea and Taiwan had plateaued. Low economic growth rates combined with low birth rates means that new market development requires elbowing out existing products. This is much more challenging than responding to new market demand.

Turning to the ASEAN countries further south, some of these such as Vietnam and Indonesia continued to show strong economic growth until COVID-19 arrived, but this was coming off a low base. Taking Vietnam as an example, its per capita GDP when measured on the basis of purchasing power parity is about US$8000, depending somewhat on who does the calculations. This is about 20 percent of New Zealand’s per capita GDP when calculated the same way. However, imports have to be paid for at market exchange rates rather than internal purchasing power parity, and on that basis Vietnam’s GDP per capita is only around US$2600, or less that 7 percent that of New Zealand.  In practical terms, this means that imported products are very expensive for Vietnamese people relying on their local salaries, even if they are part of the rapidly growing middle class.

Travelling west into South Asia, per capital incomes are even lower than in the ASEAN countries. India is by far the biggest of the South Asian markets, but India maintains strong barriers to pastoral products. That is unlikely to change. 

A little further west, Iran is one place of great potential, but America, through its control of the international finance world, has bullied almost everyone else into not trading with Iran. The extent of future trade between New Zealand and Iran will be determined by neither New Zealand nor Iran, but by American politics.

Travelling further west through the Middle East, the future opportunities depend almost totally on the price of oil together with regional politics. For many years, New Zealand has done good business with Saudi Arabia, while choosing to avoid introspection as to whether this is a country with which it wants to conduct business.

Heading further west to Europe, most of Europe is now within the European Union and can be considered as one mega market. New Zealand does have aspirations for a free trade agreement with the EU, but right now the signs are not good. The EU does not want our dairy, beef or lamb. However, they will and do take products such as kiwifruit which do not threaten their traditional agricultural industries.

Indeed, Kiwifruit is a wonderful product for New Zealand. The good old ‘Chinese gooseberry’, now greatly improved through Kiwi breeding, has become a wonderful differentiated product on the world market, protected for the medium term by plant variety rights.

In a temperature-controlled environment free of ethylene, kiwifruit can be stored for something more than six months but not twelve months.  Unless the technology changes, there will always be a Northern Hemisphere seasonal window for New Zealand based production, with few other competitors.  Kiwifruit has been a great success story and there is a good chance this can continue across the globe.

With Brexit, there are also hopes for a free trade agreement with the United Kingdom. This too will bring its challenges given that the UK, unlike fifty years ago, has no need to import pastoral products from New Zealand. The UK has internal voting constituencies that would get very upset if there were major pastoral imports from New Zealand.

As for the Americans, they too only want a free trade agreement if it is in their own self-interest. That means having free access to New Zealand for all of their service industries including finance, insurance and education, but keeping dairy products out.

New Zealand already has excellent access for beef, lamb, wine and kiwifruit to the USA, and so there is not much further that is going to be on offer. Right now, most of those products are struggling in the USA because of COVID-19, given that in the USA these products are predominantly food-service rather than home-consumption products.

In terms of continents, that only leaves Africa.  Currently, New Zealand has almost no trade with Africa and it is hard to see that changing. Distance, logistics and income levels all mitigate against this.   The projections are that Africa’s population will approximately double over the next 30 years to 2.5 billion unless some catastrophic event casts those projections aside.  It is hard to foresee good outcomes for Africa.

In traveling around the globe, I left Australia out of the story. Perhaps that was a mistake, particularly given that Australia is New Zealand’s second largest trading partner after China. Also, Australia is by far the most important export market for New Zealand’s manufactured goods. Maybe those markets can be further developed?

Unfortunately, the trend for New Zealand manufacturing apart from food products has been long-term decline. For non-food products, New Zealand has no competitive advantage in Australia compared to Asian sourcing of products. Indeed, New Zealand seems to lack competitiveness for manufacturing even within New Zealand markets, and its manufacturing industries continue to be hollowed out.

All of the above leads to uncomfortable issues for New Zealand to face. With a population that continues to increase rapidly, it becomes puzzling as to where and how New Zealand is going to find the export markets that underpin current per capita living standards in New Zealand.

The blunt reality is that if market forces are allowed to play out unhindered, then the likelihood is that New Zealand’s trade dependence on China is going to further increase. The reason for this is the same natural alignment that has led in recent years to China becoming the most important trading partner for New Zealand.

Coming to terms with that hard reality requires a conversation that goes well beyond issues of trade. That discussion has to include issues such as immigration policy. It also has to include a discussion as to where New Zealand sits within global geopolitics. And it is no good simply stating the things that New Zealand should not do. It has to be specific about what New Zealand should do. 


*Keith Woodford was Professor of Farm Management and Agribusiness at Lincoln University for 15 years through to 2015. He is now Principal Consultant at AgriFood Systems Ltd. . He can be contacted at kbwoodford@gmail.com.

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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51 Comments

Prof. Keith Woodford presents facts not muddled with ideology non-sense shouted by many here.

Having an increasingly better and deeper relationship with China is the ONLY way out of the COVID19 swamp for NZ.

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That's not what he said.

Then, what does he imply?

He certainly seems very pro- China. But he says in his last paragraph that we should think about trade in the context of geopolitics. Potentially we may choose to lose some trade in the name of geopolitics.

China will be buggered if the 3 gorges dam blows.... Why are the CCP trying to shhh this up?

True. But as a strategic interest it's pretty well protected..

xingmowang,

Not that we should unthinkingly tie ourselves ever tighter to China, but look really hard at our immigration settings.

We have a deep-seated problem-our poor productivity per capita. We need companies to invest more in plant, machinery and employee training. If we could get anywhere near Australia, we would be hugely better of as a country

Have to fix housing for this to happen. As long as our housing markets (well mainly Auckland really) remain fundamentally broken then higher risk adjusted returns will always be found in housing. The result is low investment in plant and machinery per capita and thus low productivity.

Out of the frying pan and into the fire. Great recommendation, Xi.

Well I would like to know what revenue we are getting from the USA and how we can build on this as they are buying our base products. Also what can we expect from the UK, we have traditionally sold our base products to them, admittingly that was some time ago but they don't have any attachment to the ECC anymore.
Looks like China's Ugly Attitude towards Australia and India might unwind them internationally. Covid is the base attitude. Watch this space........

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I guess a key question, Keith, is at what threshold does a free, democratic and humanitarian focused country such as NZ decide it has to pull back markedly from China, given it's human rights record and territorial naughtiness?
That's been a big part of China's cunning over the last 10 years. They have been moving in dodgy directions, but have pulled back from the precipice of intolerable actions. They have gone over the precipice in terms of IP with the USA, and hence there has been a backlash.
In all likelihood they will keep poking at HK and Taiwan, but not go over the precipice.
Are their actions on the Ugyars sufficiently bad to warrant trade action?

That is exactly the sort of ideology non-sense NZ should avoid.

First, most of reports on these issues you read are from the US media which is at best biased and single sided, and most of time simply false.

Second, it would be purely an action of double-standard for NZ worrying strong about China's human right while muting on the USA's one.

I could not make it more clear for NZ -- avoid what the AUS has done.

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Please tell me more about the USA's systemically planned and actioned human rights abuses...(and no, some individual racist police officers does not equal systemic human rights abuse)

Trump declared a total war on Russia and China that has thus far involved: propaganda and psychological warfare, sanctions, threats, assassinations, mass arrests of Russian and Chinese citizens, sabotage, theft of diplomatic property, bombing Russia’s allies, commandeering of commercial assets and wealth, tariffs, support for coloured revolutions, McCarthyite witch hunts, an offensive against the Russian Orthodox Church and its allies, abrogation of all important international treaties regulating the deployment and monitoring of nuclear weapons, moving nuclear-capable missile bases close to Russian border, using India, Japan, Vietnam et al. as tools against China, weaponizing fascist fiefdoms in Eastern Europe and giving the Ukrainian zhidobandera (Judaeo-banderite) regime hundreds of millions of pounds of military aid, provoking China and Russia with large-scale military exercises and all kinds of military brinkmanship, trade war, weaponizing Hindu nationalism against China, approving extra funding for anti-Russian activities, expanding NATO, boosting Israel’s right-wing regime, strangling Venezuela, Bolivia and Cuba and almost provoking a war with Iran. Oh, fresh off the press—moving 10000 soldiers and dozens of aircraft from Germany to Poland. Did I miss anything? Link

Interesting perspective on Soros. It's a little rabid for my liking but worth further thought.

The point of interest is US indifference to our (supposed allies) dependencies and many others' needs.

Agree. The dismantling of turn based system is destabilising for NZ. I'm out for the count on Soros.

Please enlighten me as to what those camps are for.

For the moment at least, NZ is still a place where different ideologies can have a conversation. I'm glad our conversations don't have to conform to state-sanctioned ideologies.

I would like an answer on what the Ugyar camps are for, and what they do, when you have a moment.
Because, according to you, it's American propaganda that they are systematically trying to eliminate the Ugyar cultural identity...
So when you have a moment, please inform.me/us...

"Avoid what the Aussie has done". aha - finally you agreeing that CCP is a bully. CCP trying to bully Australia by telling mainlanders not to visit or study there. bully tactics!

Great article on real politic. My response is if we cannot stomach China's expansionism then now is the time to heavily invest in non-primary industry sectors, particularly in education, creative and tech/ IT. We simply do not have the requisite resources for high end manufacturing without being reliant on imports (steel and alumina).

Interesting to note that Oceania, South America and Russia didn't get a mention.

You are right, Russia is not mentioned, crazy, its a huge under developed market, NZ is missing out, thanks to the EU bully, who obviously has no real intention of giving NZ a FTA.

We were about to sign an FTA with Russia when Crimea erupted. The NZ PTB decided to scurry home without a deal.

Yep. Russia's track record with Ukraine and Georgia less than exemplary. Almost like it was trying to establish old school buffer states or something..

"As for the Americans, they too only want a free trade agreement if it is in their own self-interest."

Let's be clear that all countries sign TAs for their own self interest. There are no exceptions to this rule.

The question of reliance and furthering trade with China is actually about further empowering the CCP. This isn't in NZs interest.

I dont buy the arguement we need to produce every more dairy product, beef and logs as a recipe for economic success.

I rather prefer the idea of building NZ manufacturing for domestic consumption rather than continuing the unsustainable march toward buying absolutely every manufactured product from China.

Our current path is slowly but steadily eroding our political sovereignty and gradually killing any remaining manufacturing.

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Glitzy
I am interested to try and understand how you would build New Zealand manufacturing. To take a current example, I read last week that the NZ-made Treasures brand of disposable nappies is closing down because they are not cost competitive, with the loss of 26 jobs. What explicit policies would you recommend so that companies like this can survive? Cadbury's is another example of a company that closed down its Dunedin factory. It would not matter so much if there were lots of new manufacturing companies being set up, but I do not see that happening.
KeithW

Pretty well why I advocate knowledge economies here.

Keith,

The issue with FTAs with low cost countries is that jobs migrate to the lower cost centre. Production shifts wholesale from the developed world to the developing world.

The world is slowly waking up to the reality that globalism doesn't actually work.

So what politics and policies are likely to succeed in the next 20 years for NZ ?

~ Tariffs and removal of FTAs with countries with significantly lower cost of labour or political systems
~ Tax incentives for local investment
~ Tax incentives for local employment
~ Genuinely closing the loopholes used by global corporations for tax avoidance (I.e. transfer pricing and payments for intellectual property)
~ Reduced immigration
~ More limited ownership of NZ land by foreign corporations
~ Investment visa linked only to employment generation / business investment
etc etc

None of this is rocket science, it just requires a change in the mindset that more of the existing policy is going to help.

As it is we are f~cked squared with our reliance on China. Sooner we wean ourselves off that teet the better.

Keith it's blindingly obvious why it's so hard for NZ to compete in the global economy and that's because the cost of living in NZ has sky rocketed in the last decade (Especially in our main cities) this has hampered business growth in Tech and manufacturing. There's been far to much selling out NZ to so called overseas investors, too much focus and dependency on relying on Real Estate sales for GDP growth that has hollowed out our cities and forced young Kiwis to move out of NZ.

And we shouldn't be looking to do basic factory manufacturing that's outdated thinking. We need to stick to innovation in the tech industry that can also improve manufacturing production. There's are plenty of other tech areas that NZ excels in, you only have to look at our film industry to see that.

As an example, there's a much bigger tech revenue generating area that gets hardly any support here even though we have lots of talent for it, and that's the games industry and the best country to partner with for that market is the UK. BBC UK gaming market worth record £5.7bn. https://www.bbc.com/news/newsbeat-47783558

In general the UK's tech sector growth has outstripped the US and China, so again it is one of the best countries to partner with for innovation. Article Tech Nation: UK tech sector beats both US and China to lead global growth in 2019. https://technation.io/news/2019-a-record-year-for-uk-tech/

And lastly, to be cost effective in such a globally market place for our companies to grow. We need to lower our corporate tax rate to at least match the other countries that we're working with otherwise we can't offer competitive production service rates in a digital economy.
Currently we have one of the highest business tax rates in the world which stifles growth.

I agree on business tax. It would be good if that came down a bit, compensated for by new or increased taxes elsewhere.

Yes it is a bit ridiculous to expect our business to grow and be competitive in the global market place when most business in the rest of the world have a much reduced tax burden. Though I would add, that any business related to property (Real Estate Agents, Landlords etc) should remain at the current tax rate (28%) due to having made the cost of living in NZ so high which has damaged "Real Economy" businesses.

Deloitte Corporate Tax Rates 2020: https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl...

By the way, if you look at China's tax rate for example. They actually have special rates that apply to small-scale enterprises (20%, 10%, or 5%). Rate is 15% for new/high-technology enterprises, advanced technology service enterprises that perform qualifying outsourcing services, and enterprises incorporated in certain regions and engaged in encouraged business activities. Special rates available for certain other encouraged business.

I am interested to try and understand how you would build New Zealand manufacturing.

Keith, you are talking FMCG here this is a particular interest of mine in how economies adapt. For ex, Japan, North America, and Europe have transitioned to low-cost consumer economies through store brands and discount retailers. Japan has been the stellar example where you can buy almost the equivalent of almost anything for 100 yen (approx USD1) for daily use. This of course has extended to clothing through the Uniqlo business model. After the GFC, America and Europe have also made the shift through store brands and discount retailers. What these economies have that NZ (and Australia) does not have is economies of scale, better supply chains, and greater manufacturing innovation capabilities.

I cannot see how NZ and Australia can really adapt to achieve what the other developed nations have been able to do. And this is what I also think is massively destructive of our property bubble, which has driven the wealth effect so that shoppers / consumers are less concerned about the cost of living. Now that the wealth effect is looking shakier by the day, you may see people clam up at the supermarket shelves. Also good to remember that NZ supermarket assortments are among the most extensive in the developed world with value-added processed products all competing for basket space. I expect that some of those high-cost, high-vaule FMCG products to lose share and revenue. Many will disappear. This will feed back into the economy.

Keith is on the money. Markets such as Vietnam are difficult to sell high value-added products such as Manuka honey, beef, etc. However, kiwifruit is quite interesting as fruit is one product that Vietnamese will spend on, particularly for occasions such as gift giving. Out of many foreign food brands, Zespri has done a lot right, even thought they could possibly do better through better channel segmentation.

Also, I recently watched a webinar about exports to Japan and Zespri shifted USD200 mio of kiwi in Q1. IMO, that's phenomenal, particularly considering Zespri is not the only fruit brand choice in the market.

Keith - what about North Africa, Ethiopia, Egypt, Morocco to name a few. They are traditional eaters of lamb and goat and I don't think they have any prohibitions against beef, and I also believe they are regular users of dairy products.

wee willy winkie,
Ethiopia is the only one of those countries for which I have direct in-country experience, and that was some time ago.
The per capita GDP at market exchanges rates for Ethiopia, as estimated by the IMF in 2019, was US$953, compared to NZ at a little over US$40,000.
Ethiopia is possibly the poorest country I have ever worked in. When I was there (23 years ago), there was considerable malnutrition.
Since then, Ethiopia has been making considerable strides but they cannot afford to purchase food products from NZ.
A significant middle class has yet to develop.
Egypt's per capita GDP at market exchange rates is around US$3000 and Morocco around US$3300. These are still very poor countries.
KeithW

Casual Observer,
Yes in 2017 Fonterra was claiming that its products made up 70% of New Zealand's trade with Africa.
I am all in favour of milk supplementation in poor countries where children suffer from protein deficiency, and also other nutrients, but alas it is really only a humanitarian band-aid. It is hard to make that trade work without aid agency funding. Algeria is the biggest importer of milk powder in Africa with much of that usually coming from Europe.
KeithW

Great article Keith, thanks. Clearly our society needs to educate itself more thoroughly with regards geopolitics, simply sticking with the status quo regards america , and the MSM anti-Chinese is not going to get nz, and Nz'ers very far.

Marketing to the World

Sidestepping your main theme consider this and see if you can see the problem
Do a web-search on Baby Formula NZ
When the SRP's search-results are available, click on images
Then trawl through the images
Add up how many have a bold NZ-Green-image
The dominant colour is blue
In the first 100 images I found just 1 of a green paddock with 3 cows on it
That's the very best our marketers can do? - freaking cows
Ask yourself - If you were a 23 yo Asian mother what would your reaction be

Now try similar image searches for
Baby Formula Malaysia
Baby Formula Hong Kong
Baby Formula Taiwan

Latest News from China has intermediaries buying bulk Fonterra WMP and packaging it up as NZ Baby Formula

Most of the NZ baby formula brands sold offshore, are foreign owned, so the marketers don't necessarily dance to the NZ Inc tune.

How much are we prepared to sacrifice our sovereignty?
Other countries to consider
India???
Canada
Scandinavia
There is a hell of a lot of money coming from oil in countries around Kazakhstan
I would be trading as much as I could with the middle eastern countries
The other SE Asian countries my be relatively poor now but there is and will be a lot of industry shifted out of China to them so we should be laying the ground work now.
The alternatives to China will require a lot of work.
The down side to our lazy acceptance of the Chinese proposition is the loss of our independence and economic sovereignty. Look at Australia with 37% of their exports going to China.
China has such a hold over Australia that they are dictating that even Australian dissenters are punished. There was a case where the Herald reported that a Queensland student was thrown out of University for organizing a protest against China

Because of the low oil price Middle Eastern countries are not so good at paying at present. I heard one NZ company - no it wasn't Fonterra - sent a load of goods to a well known Middle Eastern country and last I heard it was still waiting to be paid. We were asked if we would be happy for our horticultural crop to go to Middle East, when it is picked. My reply was 'Who is taking the risk of non payment, because as a grower I won't?'

Woodward is 100% on the money here .

We need to front - foot our problems and think outside the square ..............its in our own self -interest to look after ourselves .

Starting with more diversification of our economy , particularly in the Tech fields around R&D

Thanks, Keith. Another great article.

In my view, NZ's primary industries succeed where there is (1) a commercial industry structure which allows the industry to create, capture and protect value and (2) a product or service which has some uniqueness/advantage which buyers are willing to pay for e.g. kiwifruit, dairy, dairy goats, king salmon, lobster, Rockit apples. The red meat sector is unfortunately an example of an irrational industry structure which has processor/marketers competing with each other, destroying value despite producing great products and having some v. smart, committed people in the industry.

Note re kiwifruit, to supply 12 months, they only need to store for 10 months given that the picking window is about 2 months. For Gold, they could get pretty close to a 12 month supply ex NZ with the use of controlled atmosphere storage and optimising fruit characteristics, growing and storage -- it's still a new variety with lots to learn.

Keith talks about food primarily here. It’s true NZ needs to diversify. Worth analysis is the value of the supply chain NZ is occupying with product we sell. Example we sell ingredients these are further processed and marketed. This is the value add We have been talking about here in NZ for 30 plus years! So if we sell 1kg of milk powder and this becomes yogurt in China or Europe what is our share of the final consumer product price. My guess is less than 20% so integrating down stream could be a play!

The reality is not many people want our commodities at a price and volume which makes us enough income. The old haunts have faded for the reasons outlined.
We need to invest in IT and technology - look at F and P healthcare value - 1 company twice the value of Fonterra and ability to grow - no water, climate, animal issues there. I pick that in 10 years IT and tech will be NZs biggest export earner by far. Education Education Education - if you don't want to do this and keep growing stuff thats fine but be realistic about the future and the need to be niche if you want to make good profit. Its not going to get simpler or easier but opportunities will be there for those open to change and learn new tricks.

This should not be taken as a serious comment, but that graphic....'If you come to a fork in the road, take it' - usually attributed to Yogi Berra, but might be much older....