Are China (and NZ) Heading for a Hard Landing? Will the TPP and Australia’s China FTA Change the Competitive Environment?

Remarks to China Business Summit, Auckland, 9 November 2015, Stephen Jacobi, Executive director, NZIBF.

Thank you for the opportunity to join such a distinguished panel this morning.
In the course of the last twenty years New Zealand has actively and purposefully sought a closer economic relationship with China – building on the famous “four firsts” and the successful conclusion of our ground-breaking FTA in 2008.

NZ China FTA
The FTA has given rise to an extra-ordinary increase in two way trade due as much to what are called the ‘dynamic gains of trade’ as to the progressive elimination of tariffs and other trade barriers.

Those ‘dynamic gains of trade’ have to do with the increased commercial attention that an FTA tends to focus on the relationship as well as the framework that an FTA provides to improve the relationship over time.

New Zealand has experienced these same dynamic gains arising from the CER relationship with Australia over the last 30 years.
I fully expect to see these dynamic gains arising from the Trans Pacific Partnership (TPP) once it has entered into force.
In the case of China the two governments are about to embark on an upgrade of the FTA in an effort to continue to sustain the momentum of trade and investment growth in recent years.

The upgrade is of great interest to business because FTAs always need continuous improvement and because trade agreements are always lagging behind market realities.

Some of the elements of the China FTA urgently require updating – such as the safeguards applied to dairy exports, which no longer reflect the growth of the market in recent years, the arrangements around the issuing of certificates of non-manipulation, which are out of step with a forward looking trade and economic relationship and a range of non tariff barriers which impede the growth of trade in key areas.

There are likely to be a range of issues on both sides that will be brought to the table to ensure that the FTA remains a driving force in the economic and commercial relationship.

ChAFTA
This is all the more necessary now that our other good friend and competitor Australia has concluded its own ground-breaking FTA with China, its single largest trading partner.

Our analysis is that the ChAFTA is a very good one for Australia and will slowly change the competitive landscape over time as Australian exporters enjoy similar and, in a few areas, better access than New Zealand.

The ChAFTA offers substantial improvements in market access for Australian food and agriculture, other goods, services and (private) investment.

Tariffs will be eliminated on 95% of Australia exports to China, although with safeguards on beef and whole milk powder.

New Zealand retains an advantage because we started our FTA much earlier.

By 2016, New Zealand will enjoy duty-free access for all products covered by the FTA except dairy, whereas Australia’s cuts will only just have begun to be implemented and will not be completed for around 15 years.

In the case of dairy, Australia will face fewer safeguards than New Zealand – on one product rather than five – albeit on lower export volumes.

The safeguard is applied once exports reach a trigger level: in New Zealand’s case the trigger is set at a low level, thereby negating the advantage of the lower tariff under the FTA.

It won’t be until 2024 that we are treated largely the same for all dairy products.

On beef, Australia faces a safeguard while we do not, but the impact remains to be seen – current volumes are well under the trigger so it may have little practical effect.

On services, the outcome is similar to the New Zealand FTA (including on education) but goes further in some important sectors (such as financial services).

Some of the market access granted to Australia will also be offered to New Zealand in areas such as tourism, construction and computer services.

On investment, Australia has raised the screening threshold for private investment, although the pre-existing constraints remain on most of the areas of core interest for China (state investment, farm land and housing).

TPP

TPP adds a further dimension to this competitive landscape.

It has been very clear throughout the TPP process that China has followed the negotiations closely.

That’s not surprising because in addition to market access TPP aims to set up a more contemporary framework of rules for trade and investment that will lower costs, reduce the time of doing business, provide greater certainty and security for business and ensure that over time there is a more consistent approach to setting regulations and standards across the region.

Some of this is likely to be challenging but TPP will inevitably cause China to rethink its external economic strategy, if only because TPP now links Japan and the United States in an FTA which has competitive implications for China.

Now the text has been released China will be judge its ability either to join TPP at a later date or to join what might evolve in the wake of TPP as we move closer to the vision of the Free Trade Area of the Asia Pacific.

This was always the strategy behind the broader TPP enterprise, espoused originally by New Zealand – to build on each agreement incrementally to expand the vision of freer trade and investment across the whole region: in that sense TPP is not just about the twelve current partners but about all 21 members of APEC, eventually including China.

Conclusion
Trade Minister Groser often refers to the “direction of travel” when it comes to assessing impacts of FTAs.

Looking ahead at the future of the New Zealand-China relationship, what we see are some profound changes taking place in the external environment – the “direction of travel” is one where more economies including China will be aligning their trade policies as they seek to integrate more closely.

In the medium to long term we will face increasing competitive pressure from Australia which will manifest itself slowly but surely.
This may however be over-taken by a rethink of the broader framework as a result of TPP.

In any event, what is critical in my view is to initiate and complete as soon as possible the upgrade of our own FTA so we can ensure we remain ahead of the changing game, so that the FTA can deliver value and certainty for our business and the dynamic gains of trade can improve growth and living standards here at home.