1 Introduction

1.1 Historical background and economic linkages

Since Deng Xiaoping initiated the programme of economic liberalisation in China more than 30 years ago, its economy has averaged annual growth rates of around 10%, doubling real GDP every seven and a half years.[1] In 2010 China became the second largest economy in the world in terms of nominal GDP converted at market exchange rates, overtaking Japan, and is projected to surpass the United States (US) by the mid-2020s; however, per capita GDP in 2012 was only 12% of US levels, showing the scope for further growth. Even by the mid-2020s, China's per capita GDP is expected to be only around 25% of US levels at market rates.[2]

New Zealand was well positioned to benefit from China's rapid expansion. New Zealand established diplomatic and trade relations with China in 1972 and was the first OECD-member to conclude a free trade agreement with China in 2008. China joined the World Trade Organisation (WTO) in 2001, supporting an increase in its share of world merchandise exports, which grew from 5.9% in 2003 to 10.6% in 2010, and an increase in its share of merchandise imports, which increased from 5.4% to 9.3% over the same period.[3]

China has become much more important to New Zealand recently as its demand for dairy, meat and forestry products has increased rapidly and other economic linkages have expanded.  A surge in merchandise exports between 2008 and 2012 lifted China to New Zealand's second largest market after Australia (accounting for 15% of merchandise exports, just over two-thirds of Australia's 21% share).  China overtook the US in 2009 as an export market and its share of merchandise exports was up from 2% in the early 1990s (Figure 1.1 below).[4]

China has also become a major source of imports, increasing from a 1% share of goods imports in 1990 to a 6% share in 2000 (fourth ranked) and a 16% share in 2012, the largest import source and just ahead of Australia (Figure 1.2 below). Since 1990 the balance of trade has been in China's favour, with New Zealand's imports exceeding exports. The trade deficit peaked in 2008 at NZ$3.9 billion (150% of the value of exports) and despite the large increase in New Zealand's merchandise exports to China since then, the balance of trade remained in China's favour in 2012 with the value of imports exceeding exports by NZ$850 million (12% of the value of exports).

Figure 1 - New Zealand's increasing trade with China

Source: Statistics New Zealand

Figures 1.1 and 1.2 also show the increasing share of New Zealand's trade with countries in Asia apart from China and Japan; the other Asian economies have accounted for 15-20% of goods exports for the past 20 years, but their share of goods imports has increased from 10% to 24% over that period, similar to China's increasing share of imports.[5] Meanwhile, the share of New Zealand's merchandise trade with the US, EU and Japan has steadily declined over the past decade.

New Zealand's trade with China is heavily concentrated in a small number of product areas. Given China's importance overall in New Zealand's external trade, New Zealand is heavily dependent on China as a market or source for those products. The top five export products to China accounted for nearly three-quarters of all goods exports to China in 2012 and in four of those product areas China was the major market (Table 1). Similarly for imports, the top five product groups accounted for more than two-thirds of New Zealand goods imports from China in 2012 and China was the main source for all of them, particularly textiles for which it accounted for nearly three-quarters of imports.

Source: Statistics New Zealand

China is also an important market for services trade. Services exports to China increased 42% from $744 million in the year to June 2006 to $1,054 million in the year to June 2012, accounting for 7.6% of services exports in that year. Short-term visitor arrivals (including students) increased 35% in 2012 from the previous year to 197,000, accounting for 7.7% of visitor arrivals and ranked second after Australia and ahead of the UK and US, and up from 33,500 in 2000 (2% share and ranked ninth). China is still a relatively small services import market, with New Zealand's services imports from China increasing 55% from $235 million in the year to June 2006 to $364 million in the year to June 2012, but accounting for only 2.5% of services imports. New Zealand short-term departures to China numbered 66,000 in 2012, 3% of all short-term departures and the sixth largest destination.

There are other channels apart from goods and services trade by which China's recent rapid growth has had an impact on New Zealand, including China as a destination for and source of investment and China as a source of migrants to New Zealand. In addition, there is the impact of these linkages on other dimensions of the New Zealand economy, for example the impact of increased imports on inflation in New Zealand. This paper and the accompanying one[6] concentrate on New Zealand goods exports and GDP.

China has become even more important to Australia than to New Zealand. China is Australia's major export market, accounting for 30% of merchandise exports in 2012, dominated by mineral resources.[7] Australia's merchandise exports to China were equivalent to 4.9% of Australia's nominal GDP in 2012. Australia in turn remains New Zealand's largest single export market (Figure 1.1) and so it is expected that there would be some flow-on benefit to New Zealand from Australia's trade with China.[8]

There have been previous periods of strong economic growth in China and demand for raw materials in the past thirty years. New Zealand exports increased throughout the 1980s with wool the major product and China reached nearly a 5% share of total goods exports;[9] in the recent period dairy, forestry and meat products have been the major export categories and have contributed most of the growth. The surge in demand for New Zealand products has occurred since the global financial crisis (GFC) escalated in late 2008, whereas Australia experienced a large increase in demand for minerals prior to the GFC as investment in China increased. After a pause during the crisis, demand for minerals surged again as the monetary and fiscal stimulus in response to the economic downturn boosted investment spending, particularly investment in infrastructure and property; China's annual growth in investment exceeded 20% in 2008 and 2009 in nominal terms.[10]