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Caught between

Jul 03 2019

There is no reason New Zealand cannot continue to work with both the US and China, despite trade tensions between the two superpowers, says Charles Finny CFInstD.

The US-China trade war is becoming very risky for New Zealand, says former Kiwi trade negotiator Charles Finny CFInstD.

“What we are seeing now is an intensification of a trend which was very much apparent in the latter part of the Obama administration,” Finny says.

“Things have intensified under Donald Trump. He is certainly taking things further and more quickly than anyone was anticipating. And he has a unique negotiating style which is basically punch first and start negotiating later. I think the jury is still out on how effective that is going to be.”

As a primary producer, New Zealand should be concerned by the tit-fortat tariffs on agricultural products that have been introduced by the two superpowers. These have to date mainly impacted producers and consumers in the home nations, but the US$16b subsidy announced for US agriculture in May could see further US product displaced and impact global prices.

“That’s going to have flow-on effects to global stockpiles and global prices. China is about to retaliate against the latest increases in tariffs. That will make it more difficult for some US exports to get into China.”

In some product lines, there could be an opportunity - a hole that maybe New Zealand exporters could fill, he says.

“But then where is that US product that was going to go to China going to end up? It is either going to go back into the US and be sold at cheaper prices or it is going to go into other markets. These things tend to be negative and to have a range of direct and indirect effects.”

SYSTEM FAILURE

New Zealand relies on larger countries operating according to international trade rules in order to trade with certainty. But Finny warns the Trump government is no longer operating by World Trade Organization (WTO) rules and notes the US has vetoed the appointment of judges to the WTO Appellate Body.

With the US-China dispute already creating uncertainty in global markets, the June announcement – by Trump tweet – the US would impose tariffs on all goods from Mexico raised fears for global growth.

The automotive industry in particular is concerned at the gradually rising tariffs on goods from Mexico – the country is a hub of automotive production. Trump had previously delayed imposing tariffs on automotive imports to the US to give carmakers time to reduce their exports.

BREXIT

The current uncertainties around the WTO and global trade should give politicians in the UK pause for thought, Finny says.

“The UK is a member of the WTO and if Brexit were to occur then immediately the EU most favoured tariff rate as bound in the WTO would be the rate applying to the UK.

“That’s the same rate that applies to New Zealand at present. There are some in the UK who are saying that if New Zealand and Australia and the US are able to trade so well into the EU then what is the problem with the UK operating on the same basis? But they miss the point that they have actually got a better position now than we have. We are trying hard to get a free trade agreement with the EU to improve our market access.

“I think they are talking about falling back onto WTO commitments [in the event of a hard Brexit]. I would be recommending that they negotiate a free trade agreement with the EU as quickly as possible. Of course they are not able to do that right now because they have not Brexited.”

“He is talking about voluntary export restraints, which are not legal in terms of the WTO,” says Finny.

“It doesn’t look like the Japanese or the EU are particularly happy about what he is proposing. If he was in six months to impose major tariffs on automobiles as he has on steel and China then expect a major retaliation by the EU and perhaps some others.

“If this keeps going the way it is going. It could have an impact on global growth. It could get bad.”

NEW PARTNERSHIPS

For New Zealand, bilateral and multilateral free trade agreements are likely to provide more certainty than the current WTO order in the near future.

Finny says the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP – formerly known as the TPP) is an example of how we can encourage stability of rules for our exporters and importers. Neither the US or China is currently a member of the CPTPP.

“It’s early days but we do have new access opportunities that are exporters are taking advantage of into Japan, into Canada and into Mexico. That is a very good thing.

“Longer term I expect the CPTPP to expand and as part of that expansion you will get a bigger benefit not just in terms of market access but through the certainty that a large number of our trading partners are acting according to the same rules. With the WTO system under real pressure, under threat, from another set of Trump’s actions it is good that we have so much of our trade covered under the CPTPP.”

“There is a wider concern, and I think we see this most obviously in the technology space, that the US is trying to decouple the Chinese economy from the global supply chain and potentially create a parallel China-focused supply chain.”

STRATEGY

Boards need to be vigilant and monitor geopolitical activities on trade very closely at this time, Finny says.

“Get your management teams to do that and, where necessary, buy in external advice. If you are looking at a particular market I would look very closely at risks the current environment might pose. You wouldn’t want to enter a market if there was enormous risk – or you should try to mitigate that risk.”

He also suggests companies seek to diversify their markets to reduce the risk of a trade shock.

“New Zealand relies on larger countries operating according to international trade rules in order to trade with certainty. But Finny warns the Trump government is no longer operating by World Trade Organization (WTO) rules…”

“Many of us can recall what happened when New Zealand was too dependent on a particular market [the UK] in the 1960s and early 1970s and how long it took us to get out of that situation. At companies, that type of discussion needs to be held. I hope it doesn’t mean that companies are less willing to engage in international activity, export activity or investment activity. But this has to be very well considered and they shouldn’t rush into anything.”

SUPPLY CHAINS

Board should consider how an increasing global focus on eliminating slavery could impact their supply chains and there are local companies setting good examples of how to manage this risk, Finny says.

“There is a team of people at The Warehouse, for example, who focus just on that issue and make sure that there is real integrity around the products they are importing. I think other New Zealand companies should be investing in a similar way.”

Importers may be able to take advantage of the US-China dispute if they keep are quick, he says.

“It may well be that some of the displaced product is product we would like to buy, and it may be available at cheaper prices. Companies need to be vigilant and seize those opportunities when they emerge.”

But such short-term gains are less important to a trade strategy than the long-term risks and uncertainties arising across supply chains from the flow-on effects of ongoing US-China tensions.

“There is a wider concern, and I think we see this most obviously in the technology space, that the US is trying to decouple the Chinese economy from the global supply chain and potentially create a parallel China-focused supply chain.

“I think that will have major implications for all economies. Particularly New Zealand, which is an FTA (free trade agreement) partner with China. Companies need to get their heads around what this might mean for them and how they should react. I am not sure we are there yet, but there is a risk there that companies should be monitoring.

“If you are a company with an international focus, whether that be import or export, you really need to have a rigorous risk process running as a board.”

CAUGHT BETWEEN TWO POWERS

New Zealand seems to have got its relationship with China back on track after a bumpy patch earlier in 2019, Finny says. And at official levels the relationship between the New Zealand and US remains strong. So he does not see a conflict between our US and China relationships.

“I don’t see why New Zealand can’t keep walking that tightrope,” he says.

“In both cases it is very important to try to not just have a good trading relationship but to have a relationship as close as possible. Which is a bit challenging right now given the nature of the current US administration. I hope New Zealand officials are working as closely as possible to maintain the relationship, and it seems they are.”

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