New Zealand needs to focus its exporting efforts on close neighbours such as Australia and the Pacific Islands as they have proven to be of more value than countries such as China.
Recently, the EU Trade Ambassador responded to the question of a possible NZ/EU Free Trade Agreement (FTA) by bluntly stating “but what do we get out of it?” This pretty much sums up NZ’s problems with world trade, and in particular exports. Since 1984, when NZ became officially nuclear-free, this factor has over-shadowed our dealings with the US (including trade). Such are the problems of being a small, remote, but peaceful country - we are largely insignificant on the world stage when it comes to the real nitty-gritty issues of global trade and geo-politics.
New Zealand’s economic meltdown in the late 1980s resulted in open market reforms that saw a wholesale sell-off of the country’s SOEs at bargain-basement prices. While not denying that some of these were necessary to improve efficiencies, we radically went far further than the rest of the world - and now we have few bargaining chips left when negotiating trade deals.
For a start, we are a nation high in debt. According to Statistics NZ, last year, on average, Kiwis had committed nearly two-thirds of their weekly income to paying off mortgages, leaving little else for productive investment.
VOLATILE CURRENCY
NZ exporters have also found it difficult to operate under the volatile and often high NZ dollar. This is unlike China, which has maintained an artificially low currency to help its exporters while its so-called basket of currencies seemed permanently joined at the hip with the US dollar.
As exports of “services” are not so easy to identify, and analyse, my observations will have to focus on “merchandise” exports (the area I am familiar with). While looking at NZ’s exports, we must not lose sight of the other side of the trade ledger, imports.
For example, we are told that exports to China have grown phenomenally since the FTA - but have we looked at the imports side? Overall, we have a trade deficit of $2.33 billion with China for the year ended January 2010, which is 13 times our deficit with the whole world, of $178 million.
FOCUS ON MARKETS WITH HIGH YIELDS
Here are some possible answers to how we can improve our exports, without fuelling imports.
First, we must seek to arrive at a lower and more stable NZ dollar that is shielded from speculation by Japanese housewives and Belgian dentists. The speculative interest in our currency results in an exchange rate that bares no relationship with our true economic situation. Some people have suggested a rate of between US55c and US60c to the US dollar would be appropriate. In 2001, the NZ dollar was sitting at US41.98c, but by 2007, it had gone up to US71.71c. Fortunately, the NZ dollar has stayed far steadier against the Australian dollar, and helped our exports across the ditch. In 2009, we had our largest trade surplus, of $1.64 billion, with Australia.
This brings me to the next point – focusing on the markets that are of real value to us. Our current obsession with exporting to developing economies (especially Asia) has seen milk powder, unprocessed logs and wool, raw hides, wood pulp, coal, and plastic and metal waste exports soar. Our exports of value-added goods to China in machinery equipment was only $82 million last year, just 2.3% of our total exports to China. During the same period, we sent $1.4 billion worth of machinery and equipment (including optical, medical and furniture) to Australia; $571 million to the US; and $68 million to Fiji. I am not suggesting we should desert the China market - but let us refocus on where the real “value-added” markets are.
We should therefore make it a priority to nurture the Australian and Pacific Island markets, which provide us with a combined trade surplus of $2.9 billion, of which $1.13 billion is with the Pacific Islands alone. Let’s not take our closest neighbours for granted. The US, Canada and some selected EU countries should also be high in the priority for “value-added” exports - as well as Japan. But first, let’s look after our own backyard.
Rather than pursuing flashy trade missions and bilateral trade pacts, we should also keep under the radar, and focus offshore resources on one-on-one relationship building, and in-market support. My preference is to see a Doha-style free trade agreement with the whole world - which keeps the playing field far more level.
New Zealand’s shrinking manufacturing/exporter base is a result of, among other things, our export competitors providing extensive government support to their export economy while erecting non-tariff barriers to protect domestic businesses.
Our export capability is also being threatened by the loss of skills to Australia as well as New Zealand increasingly becoming merely a branch office for transnational corporations with head offices in Europe, North America or Asia. This undoubtedly will affect our export capability.