December 12, 2023

The importance of diversification in trade

In both the countries we trade with, and the goods we trade in

New Zealand’s new coalition government has set a priority to target free and fair trade agreements in the recently signed coalition agreement.

Specifically, “As an export dependent nation, (the Parties will) prioritise free and fair trade agreements, including with India.”  

Accessing a global powerhouse market 

New Zealand and India share a significant and warm relationship, with shared interest in ensuring prosperity and regional stability. Some form of a free trade agreement (FTA) with India has long been an objective of New Zealand governments (both National-and Labour-led). Negotiations for a bilateral agreement were launched in 2010, but the last formal round of negotiations occurred in 2015. Undeniably, securing a trade agreement with India, one of the world’s fastest growing economies and home to over 1.4 billion people, would deliver significant benefits to New Zealand. Improved access to the fast-growing middle class in India would be a particularly valuable opportunity for New Zealand exporters. 

To date our trade with India has been relatively limited given the scale of the market. In the September 2023 quarter, India was New Zealand’s 14th largest trading partner in terms of total two-way trade, totalling $667 million. 
The Indian market is a globally recognised opportunity; Australia recently signed an agreement with India, and the United Kingdom (UK) is currently working on one too. But achieving a comprehensive trade deal between New Zealand and India remains a work in progress.

Trade negotiations are far from a straight-forward 

There are often challenges that need to be overcome in trade negotiations, such as managing the intricacies of each country’s economic interests. In the case of trade between New Zealand and India the inclusion of dairy products is a significant barrier. Dairy is one of India’s largest industries, and New Zealand’s largest export. Both countries rightly want to protect their interests and defend their dairy industry. Concessions may need to be made if we are to progress. India’s firm stance on the industry led to an early-stage agreement with Australia last year, deliberately excluding dairy from the deal. 

It wouldn’t be the first time we have had to make compromises in our trade negotiations. For example, our FTA with the European Union (EU) requires New Zealand producers to not use terms like sherry, port, and feta

New Zealand will always be vulnerable to changes in the global market

Diversification in trade and trade partners is crucial for promoting economic stability, growth, and resilience. Expanding the range of goods and services we produce and export, as well as broadening our trade partners, mitigates the risks associated with economic shocks, geopolitical tensions, fluctuations in demand, or supply chain issues. More trade diversification will also enable New Zealand to adapt better to global market conditions and drive sustainable economic growth.

The drive to expand and create new trade opportunities for New Zealand has gained traction in recent years. Multilateral agreements that have come into force include the NZ-UK FTA, the Regional Comprehensive Economic Partnership (RCEP), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and Pacific Agreement on Closer Economic Relations (PACER). Plus the NZ-EU FTA is expected to enter into force in 2024. 

Concerns about our export dependence, mostly with selected goods in a few markets, are still debated. Such concerns with our reliance on China were echoed throughout the COVID-19 pandemic, with the implications of the recent slowdown in the China economy evident in StatsNZ’s recent release of international trade data for the September 2023 quarter. Total goods and services exports to China in the September 2023 quarter decreased by $893 million, compared to the year previous, down to $4.19 billion. This comes as no surprise, with prices and demand for many key exported goods (dairy, forestry products, and meat) steadily falling since peaking around the September 2022 quarter.  

China is also continuing to invest in building their national food supply system over the next ten years, as highlighted in the agricultural outlook for 2023-2030. Although imports of dairy and meat are expected to grow over this projection period, China is focusing on diversifying import sources and strengthening trade with South East Asia, South America, and the Black Sea region.  

Diversification in trade builds resilience 

In recent times, there has been a notable rise in inward-facing policies and the practice of ‘friendshoring’ worldwide, potentially posing a risk to New Zealand’s exporters. This further emphasises the importance of trade diversification, not only in the countries we trade with, but also in the goods we trade in. Embracing diverse trade opportunities will not only ensure stability but also foster long-term resilience in the face of evolving global trade dynamics.