Who will buy what NZ has to sell?
Certain words wax and wane in public discourse. One you hear a lot these days is ‘‘diversity’’. In the New Zealand business context, this tends to describe the desire to see New Zealand diversify its exports. It’s an old adage: don’t put your eggs in one basket.
The basket in question is, of course China, New Zealand’s top trading partner. China was the biggest source of New Zealand’s export growth last year, driven largely by dairy, meat and forestry exports. New Zealand’s reliance on China has increased to be more than 30% of our total exports.
I’m old enough to remember New Zealand’s experience in the 1970s, when the UK joined the European Economic Community and we lost most access to our largest market. The egg basket broke.
A very real challenge around diversity of markets is that while the Government negotiates the rules and frameworks that allow our exporters access, ultimately, governments don’t trade, businesses do.
Moreover, companies are usually legally required to maximise the returns to their shareholders. That said, there is also a responsibility to manage risk, which includes those attached to having all your eggs in one basket.
So, how to diversify export markets? Economics 101 makes clear it’s a function of two factors: what you can sell (supply) and who will buy (demand).
Let’s start with supply. New Zealand’s top five exports in the year ended December 2021 were dairy, meat, wood, travel and fruit and nuts. The top five export destinations were the People’s Republic of China, Australia, the United States, Japan and South Korea.
Of course, border settings have impacted our services exports. Our two largest pre-pandemic services, tourism and international education, fell by a combined 51% in 2021. Increased product to China has insulated us from some of the impacts.
Over the years, New Zealand has talked about the desire to change its export picture – fewer commodity exports, more valueadd. And we’ve seen progress in areas like wine, health products, boutique foods and services like Xero.
But the fact is, these newer export products still make up relatively small amounts of the overall picture. Realistically, we can expect dairy, meat and logs to remain the backbone of exports.
Then there is demand – what markets want to buy. Our dairy and meat exports are essentially protein: safe, high-quality protein.
Protein is in demand when people reach a certain wealth threshold. Safe protein from other countries is demanded when you don’t trust your own systems, and when safety is a very high priority (for instance, baby formula).
So, who wants protein? Let’s take a cursory look around the globe.
Europe and the United States remain pretty closed when it comes to protein exports from New Zealand. As Singapore’s Prime Minister Lee Hsien-Loong and our Prime Minister Jacinda Ardern noted during her visit to Singapore, domestic politics in the US mean a meaningful FTA is a low possibility.
While New Zealand’s new FTA with the UK is a bright light for our dairy and meat in the coming years, it is still unclear what an FTA with the EU might offer. Europe is wealthy and demands safety, but it also produces its own food – and much of that is subsidised.
Latin America has great potential, but New Zealand also has strong competitors in the protein stakes in that region.
Africa’s 54 countries have huge potential, but have a way to go to reach the middle-class numbers required to demand or afford New Zealand exports. But it’s a potential bright spot for future decades.
Which leaves Asia. A report from the OECD and the FAO (Food and Agriculture Organisation of the UN) last year noted pressure on agricultural land in Asia would intensify as populations grew.
Urbanisation was growing rapidly and would contribute to consumption of higher value and processed foods. Average incomes were continuing to grow in China, India, Vietnam, Thailand and Indonesia, and consumption of dairy and meat protein would grow.
Various international economic growth projections have Indonesia, with its 273 million people, on track to overtake major economies like Germany, Russia and the UK in the years ahead. Vietnam and the Philippines are other economies projected to grow rapidly.
Unsurprisingly, then, it looks like Asia – with its growing populations and wealth, and limitations around protein supply – will offer real potential for New Zealand to diversify its exports.
And despite the preconception of many, Asia is not just China. China will remain a very important source of demand for our products, but there is much potential in the many other countries of Asia. My hope is that ministers and the officials continue their work on visiting Asia, increasing access and reducing barriers and opening doors for New Zealand businesses.
For businesses themselves, it reinforces the need to grow knowledge of this diverse region, because growing a customer base takes time, effort and experience, and good relationships.
New Zealand has limited time, resource and effort to put into finding new markets that want what we provide. The numbers indicate a pretty strong case that the effort should be put into Asia. Or, as that great New Zealander Ernest Rutherford once said: ‘‘We haven’t got the money, so we’ll have to think.’’