How does New Zealand match China's cheaper labour costs?

Friday 10th May 2002

China's accession to the World Trade Organisation has opened up great hopes for New Zealand's export markets, especially those from the primary sector such as timber and agricultural products.

As an efficient producer of food we should find some ready markets, although it is sometimes underestimated how much by way of edibles China produces for itself. Famine, so long a spectre over China's landscape, is unlikely to re-emerge.

Since the Maoist era was swept aside and de-collectivised peasants were allowed to grow crops for cash, huge strides have been made in food production. The Chinese economy is now about 60% peasant agriculture, 30% state-owned enterprises, and 10% modern private sector.

Economic liberalisation within China has principally benefited the peasant class over the urban entrepreneur.

The gains of the peasantry in at least areas near to urban markets are evident in the modern homes that have mushroomed in the countryside.

It remains to be seen whether New Zealand will be one of those countries hit hard by China's WTO membership in conjunction with its low wage levels.

New Zealand has had a pretty open economy since the Rogernomics era and despite criticisms over subsequent years of whether the right things were done, we are probably better positioned than most economies to cope with the storms to come as cheap Chinese goods flood world markets.

New Zealand may have been smarter than it knew in plugging into globalisation earlier than some thought necessary.

Many other countries have plenty to worry about and not just high-wage developed economies.

Developing economies will have their fair share of concerns as well. One example given this year by the Economist is Mexico, which should be cheerful about its Nafta affiliation and the burgeoning manufacturing economy it has set up along the southern border of the US.

Instead, Mexico is profoundly worried. Its average manufacturing wage of $US2 per hour undercuts American workers but is still nearly 10 times that of China's $US0.22.

The Chinese themselves are somewhat puzzled by the western clamour for free trade. In 2000, the New Zealand Herald's Greg Ansley reported from the World Economic Forum held in Melbourne that David Tang, chairman of Shanghai Tang, stated to the summit that, "I've never understood why you want to engage us. China is going to completely devastate your whole labour force [with] labour costs 15 times, 30 times, lower than America."

It is hard to see what has changed since Mr Tang made his comments. There is no reason to believe New Zealand would be immune from direct negative consequences of free trade with China right across the board.

New Zealand could suffer indirectly also as former customers for Kiwi goods in other countries suddenly find their industries shut down and people out of work.

China is not New Zealand's only trading partner and workers worldwide are surely our biggest collective export market.

Perhaps we have already eliminated most of our uncompetitive industries but our low average rate of economic growth suggests we are still not getting enough bang for the buck out of capital invested in production.

Political parties like Act New Zealand, Labour and National say New Zealand needs to steer policies toward higher productivity to climb the ranks of OECD countries.

Australia is often cited as our benchmark and competitor for capital investment but perhaps we should be looking more at how Asian countries are responding to the threat from China.

New Zealand may have more to learn from how Singapore, for example, will progressively cut personal and company taxes to compete with Hong Kong, than from Australia's tendency to put faith in its Lucky Country heritage.

Singapore, with its target of 20% for corporate and top personal tax rates within three years, may have more to tell us about where we should be headed than Australia.

Should we start to benchmark our tax and other state-imposed cost structures, not to mention commitments to airy-fairy agreements such as the Kyoto protocols, to the examples given by modern Asian economies of population size comparable to our own?

It should not be forgotten how countries like China have benefited also from low-cost IT in their development.

The west, particularly the US, has been strident in attacking China's software piracy problem and the Chinese government has periodically launched crackdowns in response.

But from a purely economic point of view, China is better off turning a blind eye to IT piracy than standing on principle over intellectual property rights in which it has little of its own capital at stake.

Such piracy has been an economic development subsidy to the country. The same applies to other Asian economies, even developed ones like Singapore.

Western capital and competitive advantage does not necessarily have to be transferred to the Orient by its recipients paying full retail ticket price.

WTO quarrels ahead may shape up around the west protecting not only its manufacturing base but also its intellectual capital dominance. In which case Mr Tang's warning will come back to haunt the globalists.

In the meantime, with an election coming on, it would be helpful to know from our supposedly far-sighted political masters what this country is going to do to meet the growing challenge emanating from China.

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