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May 30, 2022 View:

China becomes major export market for New Zealand wine exports less risky

The latest business confidence survey shows that business confidence in New Zealand has returned to levels seen before the outbreak. Investment and development plans are beginning to resume in almost all sectors, except for tourism-related industries.

Image from: New Zealand Chinese Herald

Another positive sign was last week"s second straight increase in dairy auction prices, showing that global dairy demand remains firm. Despite the seasonal peak in New Zealand dairy production in October, prices were not dragged down by supply, providing a side note to the outlook for the dairy industry.

Demand from Asia has been rebounding due to the success of China and some Southeast Asian economies in containing the new crown virus, and is in stark contrast to the fragile recovery in Europe and the US. This is the underpinning of the resilience of New Zealand's agricultural exports.

The fact that New Zealand's exports exceeded expectations in an epidemic environment is largely down to the fact that New Zealand's main agricultural export market remains China, with up to 60% of New Zealand food exports going to this region. But the question that arises is: Is New Zealand overly dependent on China?

China has a huge market and high profitability. New Zealand exporters have benefited greatly since the signing of the Free Trade Agreement (FTA) between China and New Zealand in 2008. Today China is unquestionably New Zealand's largest export destination, easily taking the top spot in almost all exports.

But deepening into the Chinese market also poses risks, the biggest problem being that New Zealand is losing export diversity. It is not that the high volume of New Zealand exports to China poses a problem, but whether that export is strategic to China. If New Zealand's products and services are substitutable for China, China has the option of pressuring New Zealand through trade relations. This also means that there is greater exposure to certain sectors compared to others.

These risks include, but are not limited to: China restricting market access in some cases; inexplicable customs clearance delays and qualification lapses; sometimes China influencing country-specific product transactions through social or official media; and sometimes even intellectual property disputes.

The export sectors most at risk are tourism, study and education and seafood. They have high exposure to China because there are no large New Zealand companies in these sectors and China can easily find alternative markets outside of New Zealand.

The most risky of the agricultural products is the kiwi fruit, as China can turn to import other fruits such as bananas and pineapples, the latter two having a much larger market than the kiwi. In addition, it has been reported that Sungold kiwi, a premium variety of Japonic, is being grown illegally in China in large quantities and civil lawsuits are underway.

In comparison, dairy products are the safest. China relies heavily on New Zealand dairy products, with about half of its annual imports coming from New Zealand. Dairy products are also a strategic food in their own right, and there is a lack of suitable alternatives. China's healthy eating guidelines recommend that the country's population consume 300 grams of milk per day, well above the current per capita consumption level, so there is plenty of room for upside.

Wine is also less of a risk to China. In fact, exporters are eager to step up their exports to China to get on the express train of the rising Chinese middle class.

It is important to be clear that the size of New Zealand-China trade reflects the relative strengths of the economies. New Zealand and China are highly complementary, with China producing manufactured goods much more cheaply than New Zealand, while New Zealand's comparative advantage lies in agriculture, forestry and livestock. It is this trade complementarity that dictates that New Zealand's export exposure is less than the overall size would suggest. Chinese consumers need New Zealand's food because China cannot produce enough of it efficiently; by the same token, New Zealand needs to source large quantities of manufactured goods from China because it is the most competitive manufacturer in the world.

New Zealand will hold a general election this week. The most likely outcome of the current polls is a Labor victory, with the Greens as co-ruling partners; another possibility is that Labor will govern alone with nearly 50% of the vote; a third possibility is that a center-right coalition formed by the National Party and the Action Party will win.

Since there are not many policy surprises for either Labor or the National Party, financial markets are unlikely to have a big reaction on election day. Markets will only move once cabinet formation talks are completed, a new government is formed and major policies are announced. This process could last several weeks.