March 25, 2014 1:00pm by David Farrar

Dann on China

We are fortunate to have a favoured status with the Chinese Government but we will need to be actively engaged as a nation to ensure we achieve the best results for New Zealand.

The currency convertibility deal was an important symbolic move. More significant for us was the agreement to target $30 billion worth of bilateral trade by 2020.

That target announced by John Key and President Xi Jinping in Beijing updates our previous objective of $20 billion by 2015. There is no reason to assume we won’t get there.

The Chinese don’t like to miss targets.

Indeed.

You could also argue that all they have done is get a pencil out and extend the growth curve along its existing path.

But growth has been spectacular since the free trade deal was signed in 2008. Another six years of equivalent growth will have an even bigger impact on New Zealand life.

In 2007 two-way trade with China was worth $7.5 billion. Last year it was worth $18.2 billion.

So exports in 2020 may be $22 billion higher. Per household that is around $10,000 per household. And recall Greens and NZ First fought so hard to oppose the free trade deal with China.

We have both had huge growth in the past decade at the low end of the value chain. Where we’ve been relying on agricultural commodities, China has relied on cheap labour to export mass-produced consumer goods.

Now we want to sell more infant formula, wine and gourmet food. China wants to sell more of its own premium consumer products instead of just making them for the likes of Apple and Nike.

New Zealand won’t be a big market for China but will likely be a good test market.

The Japanese made the shift in the 1980s. Its products went rapidly from a running joke in the West to become the benchmark for high quality cars and electronics. The Koreans – led by Hyundai and Samsung – have achieved the same kind of shift in the past decade.

China is planning on making such a transition. New Zealanders should expect to see Chinese companies like telco Huawei and car maker Great Wall pour enormous sums into marketing and branding in the next decade.

Locally we can see the benefits of this shift at F&P Appliances, now owned by Chinese whiteware giant Haier.

Haier is using New Zealand skills to push up the value chain.

The Chinese firm is investing $2.5 million expanding its Dunedin R&D plant and has hired 80 new engineers. It is going to spend a further $5.5 million building a new R&D hub in Auckland and hopes to have F&P Appliances generating $4 billion of revenue in the next decade – up from $1 billion.

But I thought foreign investment was bad, according to Labour?

This is really good news for New Zealand but the cynics will have noticed the downside in the story.

We’ll almost certainly see Haier reducing its commitment to basic manufacturing over the next decade.

That’s an inevitable part of this economic story for New Zealand. It was already happening when F&P Appliances was locally owned. NZX-listed F&P Healthcare is following the same path.

We need to get ready for an acceleration of this shift. We can’t compete with low-wage economies such as Vietnam and the Philippines and we shouldn’t try.

The Green Party might call it a crisis but if we want to maintain a high standard of living and lift the median wage then we need to start viewing this as an opportunity.

It’s what the wine industry went through in the 1980s. They used to compete by being the cheapest wines you could buy as tariffs meant no foreign wines could be sold cheaply. Then the protection went and the result was the NZ wine industry focused on quality and exports boomed as many NZ wines become valued around the world.

Wine exports are over $1 billion a year and in the 1990s were under $100 million.