Fran O'Sullivan: Dairy connection to free-trade deal

Despite last week's political hype caused by Prime Minister Helen Clark's talks with China's top leadership - much of it fuelled by Clark - there is a big gap between the two sides on free-trade talks.

As the flurry over the PM's visit subsides, a different picture is starting to emerge from Clark's relentless positivism.

A high-level meeting between Trade Negotiations Minister Jim Sutton and Chinese Commerce Minister Bo Xilai in Beijing on Monday pointed up significant differences in strategic ambition.

Bo is side-stepping any detail on differences at semantic and concrete level. But it is clear there are some tough talks ahead before common understanding is reached.

New Zealand is pushing for a comprehensive and high-quality free-trade deal - that is trade code for a move to zero tariffs for our agricultural exports and key goods over time.

But while the Chinese side (Bo) is also now talking about a high-quality deal, there are substantial differences within the Beijing bureaucracy over just what a comprehensive deal should entail or if the words should be used at all.

China's Commerce Ministry, now waging war against US protectionism on textile issues, is freemarket-oriented.

But the powerful Agriculture Ministry - which also took part in Monday's Joint Ministerial Commission in Beijing - is a different beast. It is facing a potential backlash from its dairy industry and will want to ensure sectoral liberalisation that proceeds at a faster pace than China's existing World Trade Organisation commitments does not expose smaller Chinese dairy farmers to heavier competition at a delicate development stage.

China's leaders - President Hu Jintao and Premier Wen Jiabao - last week expressed a desire to pick up the negotiating pace. But it was impossible to pose questions to either of the leaders after their respective discussions - that is not the way things are done here.

It was left to Clark to talk up the talks, and she did, saying the Premier had expressed a view that the deal should be a win-win agreement and that with leadership from the top we could get a good result.

After the Wen talks, Clark said it was significant the premier was also prepared to use terms like high quality and ambition, leading to optimism. She cautioned that the negotiations would still be complicated but the tone was upbeat.

Trouble is that while New Zealand is pushing for zero tariffs with phase-downs on either side for sensitive sectors, there is no sign China is yet ready to take a major step.

The official statement on the Hu-Clark talks did not mention the trade agreement. The closest it got was that the leaders of the two countries always treat and promote the development of bilateral ties from a strategic point of view and firmly uphold the direction of development.

China and New Zealand have strong economic complementariness. The Chinese government looks at and develops the relations with New Zealand from a strategic height and expects to:

* Build up mutual political trust.

* Actively and steadily push forward the negotiations on the bilateral free-trade agreement.

* Strengthen co-operation in fields such as agriculture and husbandry, forestry, energy and resource exploitation and development.

* Expand exchanges in the fields of culture and education.

* Reinforce consultations and co-ordination on major regional and international issues.

* Promote the constant progress of China-New Zealand relations on the basis of mutual respect, equality and mutual benefit.

China would enhance political trust and positively and prudently push forward the FTA talks, as would New Zealand, in line with mutual respect, equality and mutual benefits. But again the statement was silent on the New Zealand ambition for a comprehensive and zero-tariff result.

It was left to Foreign Ministry spokesman Kong Quan to introduce some bottom-line realism in response to a question from me after the Clark machine rolled on to Japan. Kong said that founding a free-trade area was a complicated issue.

"We have been carrying on our negotiation with a positive attitude. We hope that our two sides can overcome difficulties and make steady progress through negotiation and friendly consultation, so as to reach an agreement at an early date and rapidly develop our trade and economic relations on a new basis."

Neither Kong nor Bo Xilai, in my brief interview with him on Monday, would be pressed on areas of sensitivity or give an indication of China's negotiating deadlines.

But the fever over the textile dispute means China wishes to play down publicly any prospective result that might cause internal dislocations in a highly sensitive sector on implementation.

New Zealand's image in Beijing is one of a fair dealer on trade issues and China is endeavouring to enlist our support in WTO discussions on sensitive issues.

Difficulty is that this country also needs to project a strong approach, particularly on agricultural liberalisation, where any deal with China that smacks of being sub-optimal could spill over and jeopardise an outstanding result in the bigger WTO round.

Sutton has been supportive of China's predicament on textiles: "We can understand this is a time of cataclysmic change in the sector and countries want to manage that in a way that gives people a chance to adjust. That's fair enough.

"But they're all petrified of China not because they're paying workers less but because China is an absolute machine for producing textiles to specification on time."

He said China was already paying a stiff price for conditions agreed to on its accession to the WTO.

Sutton said he interpreted from Bo's impassioned comments at a post-Apec trade ministers' press conference in Korea last week that the Chinese deeply resented the US move. Bo's objective was to make it perfectly clear to everyone there that China was deeply concerned about these moves, which it sees as breaching the agreements reached before China's accession to the WTO which they paid dearly over a long negotiation period.

But yesterday, Sutton stopped short of saying New Zealand would formally support China on this issue.

Textile liberalisation is one of the key issues in New Zealand's own FTA talks. The phase-down period for the removal of the remaining tariffs on clothing, footwear and textiles is deemed an area of sensitivity.

"We are defensive," said Sutton. "We want to manage the phasing down of textile tariffs. But nevertheless it is an area where we have done the hard yard adjustments and our industry has repositioned itself and has in recent years been adding employment because we have moved into areas where we are not particularly vulnerable to Chinese imports such as niche areas and value-added products."

A joint feasibility study on the FTA showed China accounted for more than half of New Zealand's total textiles and apparel imports in 2003 with two-way trade for this sector reaching US$210 million.

The textiles and apparel sector is protected by New Zealand's highest tariffs. But, in recent years, New Zealand manufacturers have chosen to shift focus to fashion - instead of mass production, where they cannot compete with China.

But the big bilateral issue is dairy.

Sutton is heading a dairy mission to Inner Mongolia today to show New Zealand can add value to Chinese dairy producers and defuse fears over the impact of the upcoming FTA. New Zealand's dairy strength was an issue in the early stages of negotiations on the Thai bilateral deal and last week's P4 deal with Chile, Singapore and Brunei.

The local dairy industry went into spasms about the barbarians waiting at the gate for them to incautiously unlock the door "when we'll come in and take over their whole market," said Sutton. "It can get to levels of the absurd."

The success of the mission will not be judged by the ability of NZ companies to fill order books alone.

As Chinese negotiators develop their bottom-lines, demonstrating how NZ's dairy industry can add value to China's developing dairy industry is crucial to a good outcome for New Zealand.