Fran O'Sullivan: Exploiting the China edge

The challenge facing New Zealand Inc is to apply some creativity so its first-mover advantage on free-trade negotiations with China is not squandered.

New Zealand heads a long queue of nations talking free trade with China. But if it is to distinguish itself from the other 22 nations wanting greater access to the Asian growth market, we need to adopt a NZ Inc approach that goes well beyond the usual negotiating diet of mutual tariff reductions and behind-the-border reforms.

Any first-mover advantage negotiators get may only be for a matter of months, if not weeks, given the new competitive environment, particularly as Australia inches towards the negotiating table.

What is needed is a dynamic approach to lever the trade talks and capitalise on opportunities for New Zealand to become a "hub" between China and Latin America - and look at where the overall Asia-Pacific strategic game might be in 10 to 20 years.

New Zealand was first cab off the rank when Prime Minister Helen Clark said last April her Government would recognise China as a market economy, a precursor for any FTA with the Middle Kingdom.

But business is concerned that the China deal will be skewed to agriculture sector tariff reductions. They fear officials will be pressured to put services liberalisation on the back burner so politicians get kudos for New Zealand becoming the first Western developed nation to score a China free trade deal.

Business has reasons to be worried.

The Thai deal, which ring-fenced talks on services so that nothing would get under way for three years, is clearly unsatisfactory. A former Ministry of Foreign Affairs & Trade high-flyer suggests that Australian pressure and the Thai Prime Minister's unwillingness to expose his economy to competition in areas where his own business interests predominate played a part.

Thailand is not a major trading partner for this country. China is. Services also make up 68 per cent of NZ's GDP, a factor which means this particular FTA cannot be allowed to become a mere Fonterra play.

MFAT officials have consulted widely with business on opportunities for the bilateral FTA. But those discussions are usually held in isolation. There is little evidence of a more strategic approach involving the big brains of NZ business to see how the country could get a long-term advantage from its growing association with China.

The drivers for adopting a more investment-focused approach fall naturally out of China's growing global footprint as it hoovers up manufacturing jobs, resources and power to fuel an economy which still rockets along at 9.5 per cent growth, despite rising capacity constraints.

Over time, India may muscle in on China as it becomes a technology competitor and perhaps the world's next sweatshop. This will impact on New Zealand investors looking to outsource manufacturing in low-cost countries.

They also need to consider how long China's workers will be content to be wage serfs for global manufacturers.

As a visiting Chinese vice-foreign minister told me, the US gets cheap goods, China gets the sweatshops. This will not endure as Chinese workers are more exposed to the global environment.

But China's buying power parity is still larger than the rest of East Asia combined. It is on track to be the major player in the Asia-Pacific region, to the detriment of the US, in particular.

Already it is the major destination of foreign direct investment. Its economy is largely driven by domestic demand as rural people migrate to the city.

The four critical factors that play into the need for a more strategic focus are these:

* China's significance in world commodity markets.

* China's critical link in global production networks.

* China's role as it expands beyond being a growing integrator of East Asian supply chains (in which New Zealand is increasingly lumped) to also involve Latin America.

* China's role as a price-setter.

It is important here not to focus on China through a purely NZ lens but to take a more global look at where this country sits in relation to those critical factors.

After the 1997 East Asian crisis wrecked nearby markets, Singapore switched from a purely "Asia First" focus. But it also invested in a raft of energy and chemical plants to increase its power as a regional hub.

Since Chinese President Hu Jintao's visit to implement the first steps in China's strategy to gain market economy status, he has swept through Latin America, Africa and the Middle East doing a raft of long-term resource deals.

Chinese investors have been quick to see New Zealand's potential in China's global supply lines. There are talks at Government department level on investments in oil and gas exploration and ironsand prospecting.

But there is also a chance for New Zealand to nail its place in the Asia-Pacific supply lines by forming a regional transport and tourism hub - particularly between Latin America and Beijing. Why leave it to Sydney when this country is closer (it also a destination of choice for Chinese politicians who do not want to swing through the US on their way to Latin America) to Santiago?

Chinese airline operators like Hainan Airlines' Chen Feng have expressed interest in the NZ hub potential, as has Air NZ. But little substantive action has occurred.

Promoting a trilateral FTA between New Zealand, China and Chile would also prove more useful to us longer term than the Pacific Three negotiations with Chile and Singapore, particularly if a China P3 focuses on strategic investment areas and services such as aviation, tourism and transport.

Underlining the potential is the growing Asianisation of New Zealand.

With a third of New Zealanders expected to be of Asian ethnicity within 30 years, it makes sense to embrace the equation now by bringing in guest workers from China to fill our lower-skilled vacancies in the construction industry and to increase our mutual connectivity.

This is not radical stuff - but it is the sort of thinking that should be taking place now - so that Helen Clark can promote a real bilateral opportunity when she visits Beijing later this year.

* Fran O'Sullivan presented on China Hub: The Opportunity for New Zealand at last week's Inside the New China summit.