Can NZ double its exports over the next decade?
On National’s campaign trail in 2023, Christopher Luxon set the ambitious goal of doubling exports over the next decade. At the forefront of its strategy to achieve this goal, National set out to conduct a record number of trade missions to open doors for New Zealand exports, including making India a priority for increased trade and investment.
In this article, we look at New Zealand’s previous export growth performance, before delving into our export growth prospects by looking at the trade relationships we have developed recently, our reliance on China as an export destination, and the feasibility of a Free Trade Agreement (FTA) with India.
Doubling exports in a decade: overly ambitious?
Looking back at New Zealand’s historical export performance, Chart 1 shows that we have never doubled the volume of exports within a decade, and we have only managed to double the value of exports in 10 years once since the late 1980s. Even that achievement, between 1991 and 2001, was from a low base, with the early 1990s hit by a global recession and a New Zealand economy in a period of transition following the economic reforms of the 1980s. Furthermore, the trend in export growth has been slowing over time, presenting an uphill battle to achieve this lofty goal.
What would need to happen for exports to double in 10 years?
Improving access to export markets is arguably the most obvious way to boost our exports, and we will examine specific markets shortly. But there are a few other ways to improve our export performance. Improving productivity through technological advancements in our key industries could boost production volumes and value-add. Diversification of our export product mix, reducing our reliance on agricultural products, could improve the resilience of our export earnings and open new growth opportunities. However, both these changes would take significant time and focus.
So how do growth prospects for our key export markets shape up? Our relationship with the United States has flourished, with bilateral trade between the US and NZ growing 16% in 2023. By March 2024, the US had even surpassed Australia as our second largest export market overall. The US is now our top export market for services, and our third top export market for goods.
We have improved our relationship with other large nations in recent years. In December 2018, New Zealand entered into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), an FTA with 10 other economies in the Asia-Pacific region. With some exceptions, tariffs are being removed or heavily reduced on New Zealand’s exports to CPTPP countries.
Have we become over-reliant on China?
New Zealand entered an FTA with China in 2008 and has since seen exports to China reach 32% of total merchandise exports in 2021, before easing back to 26% in the latest 12 months.
The signing of the FTA combined with rapid sustained economic growth in China has resulted in export growth that we will struggle to repeat in coming years if we simply continue to rely on growing demand from China. Expectations for China’s economic growth have eased dramatically over recent years, after averaging more than 9%pa between 1990 and 2020. Much slower growth of around 3-5%pa is expected in China over the next 10 years.
In the near term, softer growth expectations for China are being driven by weaker global demand, a struggling property market and declining construction activity. More fundamental and possibly longer-term problems faced by China include high youth unemployment and an aging and shrinking population. Youth unemployment rises have been triggered by a skills mismatch, with the number of university graduates hitting record highs at the same time as factory labour is in short supply. High youth unemployment combined with the aging population creates a strain on the workforce to support elderly dependents alongside youth beneficiaries.
At a government policy level, China also appears to be moderating its economic growth targets and taking other objectives into account. These objectives include becoming more self-sufficient in key areas (such as some food production), as well as taking more consideration of environmental outcomes. Any increase in emphasis on these types of objectives is likely to limit China’s demand relative to the almost solitary focus on economic growth that has prevailed throughout the last 30 years.
Chart 2 also demonstrates the risks associated with being overly reliant on one export market. The breakdown in diplomatic relations between China and Australia saw China’s share of Australian merchandise exports drop from 42% to 29% between mid-2021 and late 2022. The increasing fractures in the global community and the use of trade barriers to exert power mean New Zealand is equally at risk of experiencing a similar reversal in its exports to China in the future.
With less room for growth in China, have we maxed out our most important trade partnership? What other opportunities do we need to develop to grow our exports?
Is India the next superpower, can we reach a Free Trade Agreement?
Every country is scrambling to form an FTA with India and its growing population. India is now the world’s most populous country, with a dense middle-class and developing economic capacity. The Indian economy is expected to see growth of 5-7%pa over the next 10 years, outpacing growth in China.
The current New Zealand government has put an emphasis on doing everything possible to strike a trade deal with India, and during last year’s election campaign, Christopher Luxon targeted striking the deal within three years.
However, forming a trade agreement with India has been echoed by many previous governments, which have tried but failed to get a deal across the line. Australia managed to strike a deal with India which came into force at the end of 2022, but the dairy sector was one of the key exclusions.
In future trade negotiations with India, New Zealand would probably struggle to have our largest goods export included in any deal in the near term. India has protectionist policies in place for its dairy sector through high tariffs, as many farmers do not possess the economies of scale to produce dairy products at volume, with most farms having only one or two cows. The threat of New Zealand dairy exports flooding the Indian market would severely threaten the viability of small farms in India. As India’s population grows exponentially, there might be an instance in the future where major dairy exporting nations gain access to India to fulfil a shortfall, but for now it looks unlikely that any nation would be able to agree a deal including dairy.
Although not impossible, achieving any FTA with India within the next three years is a relatively tight timeframe. Trade deals generally take a long time to strike as a relationship between the nations needs to be built up and a deal needs to be mutually beneficial. However, as the Chinese experience from late 2008 onwards shows, once an FTA is in place, the effects on exports can be relatively quick to materialise.
A more comprehensive approach needed?
Looking at historical growth of New Zealand’s exports, it is hard to envisage a scenario where we double our exports in 10 years. We have long relied upon free trade agreements to boost our export growth, but if the Chinese experience is anything to go by, even unlocking access to dairy markets in the world’s most populous country would not be enough to double exports. Even with the Chinese FTA coming into force, New Zealand’s total export values only grew 39% over the decade to 2018.
Although the goal may be overly ambitious, it represents an opportunity to rethink our broader trade strategy – either by encouraging diversification of exports by strengthening less prominent export industries, or pursuing productivity improvements that will lead to higher value-add and revenue for exports going forward.
