Despite ministers sounding the call for Kiwi exporters to diversify, the proportion of our goods heading to China has hit a new annual record. Sam Sachdeva looks at why business is continuing to boom and where.
In a major speech on Aotearoa-China relations earlier this year, Foreign Affairs Minister Nanaia Mahuta warned against Kiwi exporters becoming overexposed to a single market.
“In thinking about long-term economic resilience, we also understand that there is value in diversity.
“Just as the [New Zealand China Council] has noted, it is prudent not to put all eggs into a single basket.”
But in a mid-September update for New Zealand businesses, the Ministry of Foreign Affairs and Trade noted the proportion of New Zealand’s goods exports heading to China had grown to 31 percent for the year to June 2021 – the highest on record for the country.
“China’s role as our largest goods trading partner has grown as its economy led the global post-Covid recovery in the first half of 2021.”
Siah Hwee Ang, the Chair in Business in Asia at Te Herenga Waka Victoria University of Wellington, told Newsroom the growth was little surprise, given many Kiwi businesses would have invested time and money into the Chinese market which may not have yet yielded results.
“If you start to break even and start making some money, it’s also quite difficult to say, ‘Look, guys, you're making some money, maybe it’s not a great idea to make even more money out of it’.”
“It won't be a conscious effort by any business to say, hey, let's diversify ... but of course, businesses will be open to opportunities, and these opportunities come sometimes in a sort of an opportunistic way, so diversification will naturally happen that way.” – Siah Hwee Ang, Te Herenga Waka
For premium New Zealand products like Mānuka honey, China still offered higher profit margins than emerging markets like Vietnam and Thailand while its large middle class offered an easier path to overnight success, he said.
While there had been consistent growth in China’s share of New Zealand exports which would continue for some time, Hwee Ang believed that would eventually “taper off” before crossing the 40 percent threshold as the country’s economic growth slowed and other markets became more appealing.
“It won't be a conscious effort by any business to say, hey, let's diversify ... but of course, businesses will be open to opportunities, and these opportunities come sometimes in a sort of an opportunistic way, so diversification will naturally happen that way.”
Infometrics principal economist Brad Olsen told Newsroom that the growth in China’s exports share was part of a longer-term story since the 2008 signing of a free trade agreement.
“It is a record, but it’s been a record almost every month since late 2016.”
New Zealand’s economic strength through the pandemic was in part due to the ability of Kiwi exporters to continue trading into the country at a time of volatility, Olsen said.
However, with regional tensions flowing into the trade space as seen with Australia and China, it made sense to both make greater use of underutilised markets like India and the Middle East, and to produce more value-added products for the likes of North America.
The Evergrande risk
Domestic instability within China could also have flow-on effects, Olsen said, noting the plight of Evergrande, the country’s heavily-indebted second-biggest property developer which some fear could default on its bonds and send the global market into a spiral.
“Current issues with Evergrande, with over US$300b in debts and real risks around default circling, reinforce how real an overexposure to Chinese trade could be,” he said.
Establishing new trade options was neither cheap nor quick, and would require “boots on the ground” from government officials to help businesses develop new connections.
While the Government was working on free trade deals with the United Kingdom and the European Union, those were both “old stomping grounds” where New Zealand businesses already had good links.
Hwee Ang said there was too much focus on the country’s top trade markets instead of developing new opportunities, leading to “a perpetual sort of investment” into the same countries.
But both he and Olsen agreed diversifying did not mean an ‘either/or’ dichotomy when it came to trading with China, and instead required exporters to develop new markets while continuing to offer goods to Chinese consumers.
New Zealand is far from alone in dealing with this issue: 36.7 percent of Australia’s exports went to China in 2020, a drop of 4.9 percentage points from the previous year but up 15.1 points compared to five years earlier.
In an economic survey of Australia released last week, the OECD said that while the country’s trade ties with China had benefited businesses and households, “the increased concentration of export flows makes Australia more vulnerable to a future shock in the Chinese economy or import restrictions being imposed on additional commodities, such as iron ore”, further warning that “a ratcheting up of diplomatic tensions” with China could weaken Australia’s trade activity.
Responding to questions from Newsroom, Mahuta said the trade figures reflected the difficulty for Kiwi businesses of expanding into new markets, given the restrictions forced on them by the pandemic.
“Exporters are operating under some very difficult conditions at the moment with Covid: disrupted supply chains, the inability to have open borders, to actually explore other potential markets, so many of our exporters are working with existing trading partners...
“Is that a reflection of where we need to be? I don't think so. Does my message change in terms of signalling to exporters, they need to diversify and build resilience into the business model? That message is still the same.”
