Fiscal policy will push New Zealand back to China - Matthew Hooton

At the Nato Summit in Washington DC Prime Minister Christopher Luxon (left) with Korean President Yoon Suk Yeol, Nato Secretary General Jens Stoltenberg, US President Joe Biden, Japan Prime Minister Fumio Kishida and Australia's deputy PM Richard Marles. Photo / supplied.

Over 20 years, under three Prime Ministers, Foreign Minister Winston Peters has successfully rebuilt New Zealand’s security relationship with the United States. Whether that endures depends on New Zealand taxpayers funding the associated costs. At over $5 billion extra a year, that seems improbable. Like other economically struggling Pacific states, fiscal policy alone risks forcing us into full dependence on China.

Old-time diplomats say relations with Washington reached their nadir in the weeks after the 2003 US invasion of Iraq. The US accepted Prime Minister Helen Clark’s decision not to participate, which was consistent with most of its Nato allies. What enraged George W Bush’s Administration was Clark suggesting just days after the invasion began that it wasn’t going to plan.

After Peters became Foreign Minister in 2005, he did a superb job rebuilding relations with Bush’s Secretary of State, Condoleezza Rice, leading two years later to Bush, Vice-President Dick Cheney and Rice receiving Clark in the Oval Office, the highest-level line-up to meet a New Zealand leader since the nuclear ships dispute.

Whatever her private thoughts, Clark was a consummate professional, returning Bush’s high praise of both New Zealand and herself while maintaining fidelity to her own values. Building on the Bolger-Shipley Government’s work, Clark’s Government also signed our free-trade agreement with China while finally drawing the US into talks on the New Zealand-led Trans-Pacific Partnership.

Sir John Key’s extraordinary people skills, backed by his foreign-policy advisers Ben King and Taha Macpherson – now respectively chief executive of the Department of Prime Minister and Cabinet and deputy chief executive for policy at the Ministry of Foreign Affairs and Trade – saw him balance our relationships with the US and China better than any leader anywhere.

His Foreign Minister, Murray McCully, negotiated a new “Wellington Declaration” with Barack Obama’s Secretary of State, Hillary Clinton, committing us to a close security partnership for at least 25 years, while two-way trade with China tripled to $26b.

After his return as Foreign Minister in 2017 for Prime Minister Dame Jacinda Ardern, Peters accelerated his previous work.

His 2018 “Pacific Partnerships” speech at Washington’s Georgetown University recalled the US, Australia and New Zealand fighting together to liberate the Pacific from Japan, as well as in Korea, Vietnam, Iraq and Afghanistan.

Citing North Korea and “more external actors competing for influence” – code for China – Peters called for greater US involvement in the South Pacific “to uphold values that we share and want to promote … like democracy, good governance, greater women’s participation, and above all the rules-based systems on which the region relies”.

Peters’ tilt to the US was shared by Ardern, an Americanophile despite her left-wing persona.

Even after Peters left Parliament in 2020 and Labour was governing alone, Ardern and her Defence Minister, Andrew Little, were sufficiently persuaded by the intelligence evidence about China to move New Zealand closer again to the US and Nato.

By 2022, we were one of Nato’s Indo-Pacific Four (IP4) along with Japan, South Korea and Australia, making us something like de facto Nato members. Ardern became the first New Zealand Prime Minister to attend a Nato Summit, at which she urged the democratic nations to stand firm against China’s challenges to international norms.

Chris Hipkins and Christopher Luxon followed her to Nato summits in 2023 and 2024, indicating a bipartisan shift by New Zealand.

Hipkins has gone a little wobbly as Leader of the Opposition, ruling out New Zealand joining Aukus, but he’s been privy to the same intelligence about China and its intentions as Luxon and Ardern. Labour confirmed last month it rejects non-alignment, and shares the liberal values and interests of the other western democracies. It is committed to the Five Eyes intelligence alliance with the US, UK, Australia and Canada, and the IP4-Nato partnership.

Critics of Ardern’s, Hipkins’ and Luxon’s realignment – including Clark and Key – worry about the impact on our relationship with China, arguing we should try to continue the delicate balancing act they managed. Others doubt that is realistic as China continues to de-liberalise domestically and build closer relationships with Russia, Iran and North Korea.

Yet, if we’re not careful, the decision may be taken out of our hands, with us risking upsetting China only to be chucked out of the IP4-Nato club anyway.

In 2014, Nato agreed each of its members should spend at least 2% of their GDP on defence by 2024. In his first term as US President, Donald Trump linked that commitment to maintaining the US security guarantee. More coarsely, candidate Trump said last February that Russia could do “whatever the hell they want” to Nato members not honouring the spending commitment.

Nato is itself now considering raising the guideline to 3% of GDP. Trump reportedly plans to demand 5%, more than the US’s own spending of 3.4%, interpreted as pressure to lock in 3%.

Nato’s and Trump’s demands will inevitably extend to the IP4. Of the 36 Nato and IP4 countries, New Zealand’s defence spending is by far the lowest, at a little over 1% of GDP.

In contrast, South Korea is already well above 2%, which Australia reached last year and Japan will pass by 2028. The worst Nato country is Spain, on 1.3% and under strong pressure to comply with the 2% rule.

Just to maintain our current 1% of GDP, Finance Minister Nicola Willis needs to increase defence spending by around $800m a year by 2027/28.

Hitting 2% would cost over $5b a year more. A new Nato-Trump 3% rule would cost Willis $10b a year, four times what she had put aside in her annual spending allowances for everything, including health, education and law and order.

Even matching Spain’s unacceptably low 1.3% by 2027/28 demands Willis find nearly $1.5b a year more, or $6b over four years.

We can’t plead poverty. The guideline is a percentage of GDP so already takes into account us being poorer than other Nato-IP4 countries. The real difference is that while those countries are allocating more of their GDP to defence, we prefer to spend it on Working for Families, universal superannuation and the recent tax cuts.

There is no way we can expect to remain in the Nato-IP4 club, regardless of Trump, unless we are prepared either to forego billions of dollars of other government spending, pay higher taxes or add billions more to our debt.

If we’re not prepared to do any of them, then Peters’ work over 20 years and the bold Ardern-Hipkins-Luxon tilt to Nato risks costing us our economic relationship with China while doing nothing to improve our security.

We’d end up with little choice but to follow the example of other failing Pacific states of waving our begging bowl outside the Chinese embassy.