National Business Review, New Zealand
2 July 2004
FTA with China: a cautious but necessary approach
Column: Foreign affairs by Stuart McMillan
Whatever the risks for New Zealand in a free-trade agreement with China, it would be hard to justify letting the opportunity to explore that possibility slip by.
Leaving aside, for the moment, the fact that the thought of China’s immense market has been the stuff of many a trader’s dream for centuries, there are a host of practical considerations which need to be weighed.
In the first place China is already New Zealand’s fourth-largest market for both exports and imports. It is not a market on spec but already hugely significant for New Zealand, being the most important export market for wool, concentrated or sweetened milk and services in education. It is New Zealand’s biggest source of clothing and footwear and an increasingly important source of investment and co-operation in science and technology.
Second, China appears to be on the lookout for free-trade agreements, including with some of New Zealand’s competitors. If competitors concluded free-trade agreements and New Zealand did not, New Zealand might lose markets it already has won.
Third, the opportunity to explore the possibilities of a free-trade agreement is there, agreed by the governments of China and New Zealand. Such an opportunity should not be ignored because it might not come again soon. If New Zealand does start negotiations, it is possible that it will be ahead of practically all other single countries in entering into negotiations. That should bring some advantages. Hong Kong and Macau have concluded Closer Economic Partnership arrangements with China. The Association of South-east Asian Nations has been in negotiation over a free- trade agreement with China for some time. New Zealand is further down the road than others, though Australia is also exploring the possibility.
Fourth, although by some methods of calculation China already has the second-largest economy in the world, it is not the precise ranking that matters. Even if one casts a sceptical eye on some of China’s statistics, the country undoubtedly has a rapidly growing economy now and will have for as far as any reasonable assumption can be made.
Negotiations for a free-trade agreement have not begun. Feasibility studies are being conducted by both New Zealand and China and a joint study is expected to be completed by the end of this year. If there are negotiations they will start early next year.
A special taskforce has been established, headed by Charles Finny, an experienced trade negotiator in the Ministry of Foreign Affairs and Trade. The task force is based at Mfat and is also made up of officials from the Ministry of Economic Development, the Ministry of Agriculture and Forestry and NZ Trade and Enterprise. Officials from other government agencies will be brought in if issues affecting those agencies arise.
The taskforce will be conducting a number of seminars throughout New Zealand and conferring widely with businesses.
The taskforce is acutely aware of the sensitivity within New Zealand of a free- trade agreement and is trying to make the process as open as possible, inviting comment from businesses and putting as much information as it can on the website at www.mfat.govt.nz. The website carries forms for making submissions and even prepared forms posing questions for businesses who do not want to make a formal submission. The end date for these is September 1. While many government agencies make a pretence of consultation, this effort looks more serious than most.
The main job of the taskforce is to identify all barriers to a free trade agreement with China, to determine the likely impacts of a free trade agreement, to develop a negotiating strategy and to work with industry to achieve these outcomes. A couple of economic modelling studies have been commissioned to work out the economic impacts of free-trade agreement with China.
The rise of China as an economic regional and world power is a matter on which much has been written. New Zealand is keeping traditional friends and trading partners informed of the state of its dealings with China.
Not surprisingly, considering the size of New Zealand’s market, politics rather than economics or trade, plays a significant part in China’s approach to a free trade agreement with New Zealand.
New Zealand does not represent any sort of a threat to China. Thus China may be seen as using New Zealand as something of a test case to work out how it should go about concluding free trade agreements with other bigger countries. New Zealand has several advantages, including a good historical relationship with China. It was the first country to conduct bilateral negotiations with China in the World Trade Organisation. It has also recognised China as having a "market economy," a point of concern to China because under WTO rules it is possible to discriminate against countries which do not have a market economy. Many countries do not recognise China as having a market economy.
The more direct economic advantage China sees in a free-trade agreement with New Zealand would be to help secure primary resources.
The trade with China might continue whether there is a free-trade agreement with China or not. There are, however, a number of trade barriers now existing. Although many of China’s tariffs seem low, its method of calculating them increases the cost.
In some cases China adds insurance and freight into the price of the export, calculates the tariff on top of that and then adds its value added tax.
Trade Negotiations Minister Jim Sutton believes that the advantages to New Zealand of a free trade agreement with China are to be measured in the hundreds, not tens, of millions of dollars.
The most obvious threat to New Zealand manufacturing from a free trade agreement with China lies in the further inroads into clothing and footwear, but information technology will need attention because of the way in which illegal copies of software have a way of proliferating in China.
The task force hopes that it can counter this by insisting on a sound legal framework over copyright.
Stuart McMillan is an adjunct senior fellow in the school of political science and communication at the University of Canterbury