Don’t Panic, Miss Muffet

Originally published in The Spinoff, June 2019.

Taking a longer term view of developments in the China market would help everyone’s stress levels.

These are tense time for trade.  The ongoing US/China trade war makes everyone (even me) nervous.  And so it was that markets reacted swiftly to news that the Chinese Government wishes to see 60 percent of the infant formula market controlled by Chinese companies:  shares of A2 Milk Corporation dropped sharply. Nervous analysts, worried about the future Chinese market for kiwi milk, should take a deep breath and relax – there remains plenty of room to grow New Zealand exports of high quality, sustainably produced  dairy products including infant formula to China. “They’ll be drinking our milk there” for some time to come.

This is not the first time (and will likely not be the last) that the Chinese have moved to tighten control over the domestic market for infant formula.  Assuring the food supply is a key concern of the Chinese Government, which has long held fast to the concept of domestic “food security” whereby a certain volume of essential foodstuffs needs to be produced at home.  (New Zealand on the other hand contends that food security is assured by open and stable global trade).  Eleven years ago the melamine scandal led in January 2018 to limits being placed over the number and types of formula that can be sold in China – this led to a significant shrinking of the number of New Zealand suppliers doing business there.  Other New Zealand exporters including A2 and Fonterra have continued to trade and Chinese consumers have responded very well with New Zealand products holding small, but growing market shares.  Other international competitors like Nestlé and Danone hold larger shares and all are competing against Chinese companies which, while eager to expand their business, still have trouble convincing consumers, and particularly those Chinese “tiger Mums”, about the quality of their products. 

Whenever I visit supermarkets in China, the managers invariably tell me they would like to sell more New Zealand milk products.  For New Zealand to hold a commanding share in any product category such a large and complex market as China is no simple task (although Fonterra manages it with mozzarella toppings on pizza).  Nor do we necessarily need to do so to continue to grow our exports.  We can develop highly profitable market niches by concentrating at the upper end of the market and building on our reputation for clean, safe and sustainable products.

Some may ask how the Chinese Government under our free trade agreement can make these sorts of changes.   The FTA means China cannot arbitrarily stop the flow of exports and nor did they do so in 2018.  But when it comes to the rules applied to the trade ,it’s not so straightforward.  China (and New Zealand for that matter) have considerable scope , for example, to apply rules for public health reasons – this is common to all the FTAs New Zealand has signed and is one of the ways which the right to regulate in the national interest is maintained (despite what those nay-sers said about TPP).  The rules China applied earlier  to control the infant formula market could be justified under these provisions.  The current policy moves are different – they are focused more on growing the domestic industry and for the time being are largely aspirational even if the intent is pretty clear.  New Zealand officials will be watching this space closely, but any devil is likely to be in the detail.

What else does this intended action on the part of the Chinese Government tell us?  It tells us loudly and clearly that we cannot take this important market for granted. Not only do we need to be alert to what is on the mind of Chinese regulators and policy makers, we also need to invest in deeper understanding of the Chinese system.  That’s why in recent years government agencies like MFAT and MPI have increased staff numbers at the Beijing Embassy. This investment is a hedge against rapid policy change that might impact our interests.  We also need the right political relationship with China, as was clearly demonstrated by Prime Minister Jacinda Ardern’s recent visit to Beijing.  The Prime Minister was not there simply to promote trade interests, although inevitably that was a major focus.  She was there to advance the relationship across the board.  The Chinese have told us for some time that the traffic cannot all be one way – in exchange for the considerable economic opportunities they are offering us, they are looking for partnership in a range of areas, including, for example, climate change co-operation, innovation, science and technology and – as I keep saying (but is anyone listening?) – Belt and Road.  It’s not rocket science – if we want China to listen to us, we need to listen to them too.  The challenge for New Zealand, with its different political system, is to manage all this in a way which meets not just our economic interests, but also our values.  This means that there are likely to be disagreements from time to time, but as the Prime Minister has said, we need to work to make sure they do not define the relationship.

The Chinese are also looking for one more thing – a level playing field for their business interests in New Zealand.  While this can now be interpreted as codeword for Huawei’s continuing involvement in our market, it is ironically exactly what New Zealand wants for its business interests in China.  Both China and New Zealand have legitimate “security” interests to protect and both of us need to do so in the spirit of partnership and within the framework of the FTA rules we have agreed between us.  

So away from the headlines it’s business as usual for New Zealand infant formula exports to China, where the market continues to grow. Chinese consumers want to buy what we have to sell:  if we keep meeting their needs, Miss Muffet can continue sitting calmly.