3 Outlook for China's impact on New Zealand
3.1 China's continuing growth will have benefits for New Zealand
While China's growth is expected to slow, it will continue at a relatively high level as incomes continue to converge with more advanced economies. The ongoing growth is likely to continue to be investment-led in the near future as infrastructure and housing investment continue to expand, increasing demand for hard commodities. The growth is also expected to incorporate steadily growing consumption, providing support for soft commodity demand. Consumption will slowly take over from investment as the driver of growth, providing a better long-term outlook for soft commodities than for hard commodities.
The positive outlook for Chinese commodity demand will benefit New Zealand's merchandise exports to China and will give continuing indirect benefits through Australia, while higher incomes in China and Australia will boost demand for New Zealand's services exports.[38] The IMF has estimated the impact of a comprehensive rebalancing of the Chinese economy in the form of a 20% appreciation of the exchange rate, lower precautionary savings, higher non-tradable goods consumption and financial sector liberalisation. The rebalancing is expected to increase the level of GDP by 0.2% and improve the current account balance by 0.2 percentage points in New Zealand and Australia after three years (IMF, 2011a).
The growing exposure to China will be assisted by the free trade agreement (FTA) which came into force in 2008 and reduces tariffs on China's imports from New Zealand over time. Some of this benefit may be eroded over time as other countries sign agreements with China, although New Zealand will benefit from already having relationships and supply chains set up. Eventually 96% of the products New Zealand currently exports to China will have tariffs removed. This will save around $120 million in duties annually, based on current trade, and will make New Zealand exports more competitive in China.
Some duties will take a while to phase out, with milk powder taking 12 years to be tariff-free. A large portion of tariffs will be phased out over five to six years starting in 2008. An example of the FTA advantage is in beef and lamb where farmers are estimated to have saved $25 million in tariffs in 2010, with tariffs to be fully eliminated by 2016, saving another $21 million(Beef and Lamb NZ, 2011). New Zealand's imports from China will also benefit from tariffs being removed over time, giving more access to Chinese products and/or lower prices. Behind-the-border restraints are also likely to continue to break down as China becomes more familiar with doing business with New Zealand. China's development of trade links with other East Asian economies will also lead to an expansion of New Zealand's trade with the region as a whole.
Food exports, especially dairy products, will benefit from growing Chinese incomes, increasingly westernised diets and continuing quality concerns about Chinese food production. This sector has a strong long-term outlook as consumption begins to take more of a priority in China's economy and New Zealand is well placed to take advantage of this expansion in demand for food products. New Zealand has efficient production systems, well established supply chains to serve the Chinese market and is known for producing high quality products. As a result, New Zealand will be able to meet some of China's increased demand, although biological and environmental constraints may require some diversion from other markets to match this demand. The dairy industry will continue to benefit from high prices, which will in turn promote more resources being allocated to the industry and drive a volume increase.
Continuing strong growth in both residential and infrastructure investment should also maintain substantial demand for New Zealand logs. However, growth in demand for logs may not be as long-lasting as the increase in dairy demand, since the rate of growth in investment is expected to ease at some point in the future. In addition, the increase in demand from the rebuilding following the Sichuan earthquake in 2008 has passed. Continuing uncertainty about Russian export taxes will also benefit New Zealand forestry exports, although the removal of these taxes would erode New Zealand's advantage.
China's strong investment growth will keep demand for Australian commodities high in the short term, which will continue to provide indirect benefits to New Zealand. China is also taking on a larger role in Asian-wide supply chains, which will provide indirect benefits to New Zealand through the rest of Asia. There should also be opportunities for New Zealand to position itself within these supply chains as integration with China continues to grow. Growing Chinese incomes should also boost services exports to China as more households will be able to afford to come on holidays to New Zealand and to send their children to New Zealand for education.
China's domestic supply response to growing agricultural demand will be held back by a lack of agricultural land and water resources per capita, as well as limited rural labour as urbanisation continues. China's demand for agricultural imports will also be assisted by an appreciation of the exchange rate, making domestic production less competitive, and continuing concerns about the quality of domestic production.
The remainder of this section discusses the outlook for China's primary commodity demand (the basis for New Zealand food exports), and the two main sectors exposed to China, namely dairy and forestry. We have concentrated on these two sectors because, although exports of other products have also grown (including meat, wool and fish), their impact has been outweighed by dairy and forestry products. There are positive outlooks for other emerging sectors, for example seafood, wine and honey, but dairy and forestry are likely to dominate the outlook.[39] Following this is a discussion of services exports and potential risks to this outlook. We have not discussed other potential impacts of China's growth on the New Zealand economy, eg, the impact of increased imports from China or the impacts of China's growth on capital or labour markets.
