Tim Groser: China trade not our only option

Butter for Britain in the 1970s, milk powder for China today. If the destination has changed, so have trade rules. Photo / NZ Herald

New Zealand's exports to China are increasing exponentially. In the three years prior to signing the Free Trade Agreement (FTA) in 2008 our exports increased on average by a little under 4 per cent. In the comparable three-year period after the FTA entered into force, that figure leapt to a bit over 30 per cent. Last year the growth rate accelerated to 45 per cent and our exports are now some $10 billion.

Simple arithmetic tells us anything close to this growth rate is unsustainable: within less than five years, growth at that rate would mean more than 100 per cent of New Zealand exports would be China-bound - a literal impossibility.

But on this much higher base of $10 billion, significant export growth at a less frenetic rate seems highly likely. The underlying drivers of demand and access to their consumers are there.

The rate of growth of two-way trade is inevitably a little slower, since imports from China are strictly limited by the tiny size of the New Zealand economy relative to China's. But even so, the Prime Minister and President Xi, justifiably confident that we will meet and surpass the original goal of doubling two-way trade to $20 billion by 2015, have raised the bar again - to $30 billion by 2020.

We have enormous momentum and we have every reason to believe we can attain this goal.

The much vaunted "slowing down" of the rate of growth of the Chinese economy is over-hyped. Every year, 7 per cent growth of a $10 trillion economy produces an annual increment of $700 billion - far larger than 10 per cent growth of an economy of $5 trillion, which was the case less than 10 years ago.

At some point it is highly likely China's growth rate will indeed slow down - almost every other fast-growing economy since World War II, starting with Germany and Japan (and Korea more recently) has seen its growth rate fall as it caught up with the most advanced economies. But the IMF calculates that in spite of China's enormous success in lifting hundreds of millions out of poverty since 1980, there are still some 90 countries with higher per capita incomes. China has a long way to go.

It is entirely reasonable that a number of New Zealanders are beginning to ask an obvious question: are we creating a dependency trap along the lines of the trap my generation of New Zealanders rudely discovered in 1973 when the UK (then taking 50 per cent of our exports, compared with China today at 21 per cent of our total exports) belatedly entered the then EEC (now the European Union)?

That began the slow process of deliberately grinding NZ out of the EU market through the so-called "degressivity" provisions of Protocol 18 - put simply, we were legally required to decrease our key exports to Europe year by year.

It got worse: as New Zealand tried to develop alternative markets in the 1970s and 1980s, the EEC pursued us with huge export subsidies. The world trading system was no use to us - agriculture was effectively outside the framework of international economic law.

Everywhere New Zealand turned we were blocked and we paid a heavy price for excessive dependency on one market. In simple terms, we had no Plan B in 1973.

Those dark days are now behind us.

We have, over the past 40 years, constructed an alternative and more diverse set of options for New Zealand.

Agriculture was brought into operationally effective WTO rules in 1994 with the conclusion of the Uruguay Round. We stabilised our trading relationship with the EU in that negotiation and put disciplines on export subsidies, allowing us to diversify into other markets.

The EU itself has made major reforms to the Common Agriculture Policy. Following successful discussions between the Prime Minister and the President of the EU, Herman Van Rompuy, a matter of weeks ago, we are even looking at the possibility of a comprehensive economic agreement between the EU and NZ.

In 1973, when the hammer came down on our heads, we had no alternatives. Since then we have negotiated a gold standard FTA with Australia (still actually our largest market for exports if you include services exports with merchandise exports to our CER partner), a variety of individual FTAs with South East Asian countries plus the extraordinary achievement of a comprehensive FTA with all 10 ASEAN countries.

Add to this the world's first comprehensive FTA with both Hong Kong and (since December 1 last year) Taiwan. We have a comprehensive FTA with Brunei, Singapore, Chile in what is called P4 (Pacific Four), which is the essential building block to the mother of all mega deals, the TPP, or Trans-Pacific Partnership.

Because New Zealand is the administrator of that building block, we are the administrator ("Depository") of the TPP. If concluded successfully, that will create huge new opportunities and by definition vastly spread our risks.

We are at an advanced stage of negotiations with Korea and we hope now to get an FTA with the Gulf States in place.

There are a range of other alternatives we are working on. The key point I am making is this: the analogy with the dependency of New Zealand 40 years ago on one market (the UK) is, at least in my view, vastly overdone. We have myriad opportunities in these other markets which have opened up to New Zealand through the combined process of their own successful economic development and a highly successful policy of negotiating access to their consumers through international trade agreements.

If China were to "catch a cold" (I am at the sceptical end of analysts on this favourite topic for seminars), we have diverse options.

We might, if forced to divert our exports to such markets, lose the price premium that China is prepared to pay for our wonderful suite of export goods and services, but by comparison with what happened to New Zealand when the world changed on us in 1973, that would be little more than a trading hiccough.

I think the right approach for us is obvious: celebrate every success in the China market and build on it - why wouldn't we take every advantage of this unique opportunity?

But the complementary strategy to this is equally obvious: continue doggedly with our strategic policy of developing an ever wider range of political and economic platforms to spread our risk.

• Tim Groser is the Minister of Trade