New Zealand dairy company Fonterra Cooperative Group was a staunch advocate of the free trade agreement (FTA) between China and New Zealand signed in Beijing in April. Both countries should theoretically benefit from the agreement: China is good at pumping out finished goods, but it needs the wool, food products and other natural resources that New Zealand exports.
Yet, Fonterra’s head of China operations, Bob Major, says the FTA will contribute little to his firm’s bottom line in the near term.
“As far as straight-up commercial benefits, it’s going to be a long period of time before we’re going to get significant benefits,” he said.
The agreement – China’s first with a developed nation – isn’t simply a matter of money. The deal with New Zealand, one of China’s smaller trading partners, gives Beijing a chance to test a host of issues likely to arise in more complex FTA negotiations with larger trading partners.
“This agreement is a safe haven to experiment with how some of these more sophisticated FTA commitments will impact China’s trade policy interests,” said Eugene Lim, who leads a trade planning group at law firm Baker & McKenzie.
Indeed, immediate rewards for companies involved in China-New Zealand trade are scant.
At Shandong Haima Carpet Group, a Chinese company that imports wool from New Zealand to make carpets that are exported across the globe, the FTA won’t have a significant impact on business. A general manager of imports and exports at the company, who gave only his surname, Han, said this was because of New Zealand’s small export market and the already-low tariffs on wool products from the country. The company would have to wring out oblique benefits from the trade deal.
“We’re considering exporting carpets to New Zealand first and then relocating them to Australia if this can help us avoid tariffs,” Han said.
Representatives at several Chinese firms who do business with New Zealand expressed similar sentiments.
Experts argue that New Zealand stands more to gain from the agreement in the short term, as China is the country’s fourth-largest export destination. The agreement will see New Zealand phase out all tariffs on imports from China by 2016, while China will remove tariffs on 96% of its imports from New Zealand by 2019. This should lift New Zealand exports to China by US$180-280 million annually, according to the New Zealand government.
New Zealand’s Trade Minister Phil Goff estimates that the FTA would be worth US$319 million to his country each year.
The money from the FTA is nice, but hardly show-stopping. The two countries’ trade volume last year was US$3.7 billion, according to China’s Ministry of Commerce. That compares to China’s overall trade volume of around US$2.2 trillion, with US$302.1 billion of it going to the US. Australia, New Zealand’s largest trading partner, did business worth US$43.9 billion with China last year.
But Shan Wenhua, an international economic law professor at Xi’an Jiaotong University, noted that the New Zealand agreement will set a crucial precedent.
“Each country has its own trade priorities,” he said. “But having one signed FTA in hand at least gives an indication of where the Chinese baseline lies.”
Promising not to dump
Future trade deals will likely focus on articles 62 and 63 of the New Zealand FTA, which stipulate that neither party will take anti-dumping actions in “an arbitrary or protectionist manner” nor “introduce or maintain any form of export subsidy on any goods destined for the territory of the other party.”
These provisions, in which New Zealand essentially agreed not to initiate anti-dumping or countervailing measures against Chinese exports, were likely non-negotiable for the Chinese, said Baker & McKenzie’s Lim. He noted that it would be a “tricky hurdle” for other countries to grant China the same exemptions.
According to Zhang Haibin, of the Shanghai Institute for International Studies, political considerations will complicate any attempts to replicate the FTA on a larger scale.
“If China wants to sign FTAs with big powers like the EU, Australia and the US, it requires much more time for bilateral negotiations, because these countries have a much more complicated economic and political environments,” she said.
China and New Zealand’s friendly political relationship was key to inking the agreement. Premier Wen Jiabao, for example, praised New Zealand for achieving “four firsts” in its economic ties with China.
“New Zealand has been a country among the [Organisation for Economic Co-operation and Development] states that has been consistently friendly to China,” Xi’an Jiaotong’s Shan said. “And an FTA with New Zealand is a good way to reward such a friendly state.”
There are some sticking points between the two countries. For example, the New Zealand public is generally positive about the FTA, according to Niven Winchester, a senior lecturer of economics at New Zealand’s Otago University, but there have been some reservations – from the country’s foreign minister, for example – about job losses. Noises have also been made about a provision that will allow up to 1,800 Chinese to work in New Zealand annually. New Zealand’s population is 4.2 million.
Still, some see the labor provision as a sign of growing savvy on the part of Chinese negotiators.
“It signals a move toward a more sophisticated agreement … extending to the realm of the moving of natural persons,” Baker and McKenzie’s Lim said. “It really signals that China has come of age.”