New Zealand’s engagement with China is clear-eyed

Then, on April 19, Ms Mahuta took things a step further, stating that New Zealand was “uncomfortable with expanding the remit of the Five Eyes relationship”, preferring instead to “look for multilateral opportunities to express our interests on a number of issues”.

To be sure, it has not all been one-way. Australia and New Zealand made a joint statement on Hong Kong on March 13. New Zealand also joined Australia on March 23 in welcoming sanctions against Chinese officials in Xinjiang province, citing ‘grave concerns’ of human rights abuses against Muslim minorities.

But there has been a distinct shift in strategy that has been predictably welcomed in Beijing and derided in the West.

Woke not war

The Global Times, with characteristic zeal, wrote in late April that “in sharp contrast with Australia, which tied itself to the US’ chariot, New Zealand has maintained a relatively independent approach on foreign policies, paving the way for the country to pursue policies that benefit its own economy and citizens”.

The most simplistic criticisms that have been made of the Ardern government focus on export dependency to China.

There is no shortage of irony here, as Jacinda Ardern is hardly a mercantilist. Instead, she is routinely criticised in political and technocratic circles for being “woke”.

There is an element of truth, as well.

China is the largest export market for both Australia and New Zealand, at roughly 40 per cent and 30 per cent respectively. Even if the export mix is very different (think iron ore, gas and coal, versus dairy, meat and wood), the dependency is very real.

Yet New Zealand’s near-term prospects do not depend on China.

The most important policy initiatives that have been rolled out by Wellington this year were on March 23, to cool the runaway housing market, and on April 6, with the announcement of the trans-Tasman travel bubble.

We think the latter has been significantly underestimated, in terms of its macro impact.

The early uptake, which is visible on a daily basis from New Zealand’s Customs Service, is encouraging versus a pre-pandemic baseline.

Moreover, we can see from various alt-data providers that hotel booking momentum is back to near pre-pandemic highs. This reflects both the significant rotation by Kiwis toward domestic tourism over the past year, along with a kicker from the bubble.

New Zealand also has form, with its (now celebrated) nuclear-free zone, that led the US to suspend its ANZUS obligations in 1987.

We also have New Zealand moving into a pronounced current account surplus over the coming year. This is distinct from the call we made a couple of years ago, that Australia would move into historic current account surplus.

In Australia, a key driver remains the superannuation funds, whose earnings have reduced the net income deficit on a structural basis. For New Zealand, it will be more about runaway prices for its principal exports.

Net, and despite the (unlikely) prospect of a technical recession between the fourth and first quarter, the RBNZ will be forced into a new round of (significant) upward revisions, for both GDP and inflation, from the second quarter onward.

Quid pro quo

As for the Five Eyes, the Ardern government has every right to create some daylight.

New Zealand also has form, with its (now celebrated) nuclear-free zone, that led the US to suspend its ANZUS obligations in 1987.

This is a different situation.

The Five Eyes is a quid pro quo arrangement, with New Zealand’s main contribution being the facility at Waihopai Station, which was extensively described in the second-round Snowden disclosures of 2015.

But there have long been concerns about the lack of democratic oversight over the Five Eyes. Bear in mind that it was founded as a secret treaty between the US and the UK in 1946, with Australia and New Zealand included via annexure thereafter.

These concerns have been accentuated by recent mission creep, in terms of foreign policy formation with respect to China. Even if and though the alliance is necessary, there is no remit to direct, dictate or co-opt the government of the day, including via joint statements.

Unsurprisingly, the Morrison government is not best pleased, but it is unlikely to go as far as endorsing Four Eyes, as has been mooted by some. It is more likely, in fact, that Japan joins the fold later this year.

In the meantime, Canberra would do well to reflect on its own management of the violent pivot between East and West that we flagged in this newspaper over a year ago when we said that “for Australia, our strategic balancing act between the US and China is set to be tested in real-time”.

In our view, the most significant policy mistake the Morrison government made was to spearhead the Wuhan inquiry. From a realist perspective, that decision was asymmetric to the downside.

For New Zealand, foreign policy hawks will undoubtedly continue to circle. But in time we may well be looking to our (best) friends across the Tasman, not as mercantilists, but as interlocutors.