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Middle Earth and the Middle Kingdom

Fall / Winter 2015 In Situ

Middle Earth and the Middle Kingdom

Middle Earth and the Middle KingdomOr on the dynamic between very small and very large states, and how New Zealand is managing its Asia pivot

The liberal, rules-based international system is weakening, with a more fragmented system emerging in which larger countries and groupings can exert more power and influence. These developments are particularly challenging for small countries, which are disproportionately reliant on international institutions and the rule of law to ensure open markets and a stable security environment.

A small country at the end of the world provides a useful perspective on some of these emerging issues. New Zealand has been insulated from previous episodes of great power politics because of its physical isolation – “a strategic dagger pointed at the heart of Antarctica,” as it were. But as the centre of global economic and political gravity moves toward Asia, New Zealand is grappling with a new strategic context. The country is adjusting to this relatively well (see my Nez à Nez debate with Hugh White in the Fall 2012 issue of GB), but ongoing adaptation to this disruptive change will be required.

Like Australia, New Zealand has long been seen as a Western outpost in Asia. It is physically on the periphery of Asia, but is now acutely aware that its economic and strategic future is increasingly tied to the region. Indeed, New Zealand has profited substantially from the explosive economic rise of China; this relationship was one of the key factors that moderated the effect of the global financial crisis on New Zealand.

The share of New Zealand’s merchandise trade exports to China rose from four percent in 2001 to 22 percent in 2013. China is now New Zealand’s largest goods export market, and tourism, migration, and investment flows are also growing rapidly. The Chinese economic relationship is expected to continue to grow strongly. Prime Minister John Key recently committed to an official target for two-way trade with China to increase by another 50 percent to NZ$30 billion by 2020 from about NZ$20 billion today. This growth is supported by investments to increase New Zealand’s official representation in China – now New Zealand’s largest offshore physical presence. The September re-election of the government for a third term will see a continuation of this policy direction.

Just as the New Zealand-China relationship has generated significant economic dividends (in the general), it has also created significant economic exposure. A Chinese economic slowdown would now have a significant effect on the New Zealand economy. Of course, New Zealand has previous experience with such economic exposure. One of the searing moments in New Zealand’s history happened in 1973 when the UK joined the European Economic Community, ending preferential market access for New Zealand exports to the UK (which accounted for about half of New Zealand’s exports in the 1960s). This generated substantial economic costs.

Indeed, one general lesson from and for small states is that economic diversification is valuable: you do not want to have all of your eggs in one basket. Partly for this reason, New Zealand is actively involved in negotiating free-trade agreements with a broad range of partners (including with the Trans-Pacific Partnership), and has developed strategies for building engagement with regions such as ASEAN and the Gulf Cooperation Council.

Still, in addition to the direct consequences of the country’s economic concentration, there is a sense that this economic exposure may create a broader vulnerability in which China is able to exert strategic pressure on New Zealand. For example, it may be able to use New Zealand’s economic reliance on China to encourage New Zealand to act in a particular way, or to punish or reward the country for particular behaviour. This may restrict Wellington’s freedom of choice, or make certain choices more costly.

This vulnerability is due to a manifestly asymmetrical power relationship. China clearly has more direct influence and hard power than New Zealand. And New Zealand’s economic reliance on Chinese demand is greater than China’s reliance on New Zealand (there are alternative suppliers of milk and other commodities to which China could shift).

New Zealand’s rapidly growing commercial relationship with China has to date been predicated on a strong bilateral political relationship, developed through sustained investment by successive governments over four decades. For example, New Zealand was the first country to recognize China as a ‘market economy’ for the purpose of WTO accession in 2004. This led to the world-first free-trade agreement with China (and now free-trade agreements with Hong Kong and Taiwan), as well as a recent agreement on renminbi convertibility. New Zealand has thus been careful to position itself as relatively independent, and has not disagreed with China on major issues. Indeed, China refers to New Zealand as a model for the ‘bilateral relations between China and other developed countries.’

The flipside is that the ongoing health of the economic relationship is contingent on the state of the political relationship. And as the bilateral relationship becomes larger and more complex, New Zealand will inevitably be confronted by a series of challenging questions and choices in respect of China. It is likely that Wellington will do or say something that will put the country at odds with Beijing on an issue about which the latter cares. This need not be the consequence of New Zealand’s political mismanagement as much as of the basic realities of the interaction between large and small powers (as a Chinese official recently warned an ASEAN meeting: “we are large, you are small”). And China is becoming a much more assertive regional power in respect of its neighbours, such as Vietnam and the Philippines, not to mention Japan.

The differences in approach to China between New Zealand and Australia partly reflect these realities. Canberra has adopted a more assertive stance on regional issues in Asia, has the US alliance as a central part of its foreign policy, and is deepening its relationship with Tokyo. But this is based on a more balanced economic power relationship between Australia and China: Australia has even greater economic exposure to China, but has the great advantage of Chinese reliance on its supply of high-quality iron ore.

To provide a sense of how China is prepared to act to advance its interests, it is useful to consider recent country experiences. In 2010, the Nobel Peace Prize was awarded to the Chinese dissident Liu Xiaobo by the Norwegian Prize Committee. Exports of Norwegian salmon to China were subsequently restricted (for new veterinary reasons), resulting in significant losses in global market share. The Norwegian government, in turn, recently announced that it would not meet with the Dalai Lama, with a view to restoring the Chinese relationship.

The UK government had similar problems after Prime Minister Cameron met with the Dalai Lama in 2012. Cameron was refused a state visit to Beijing, and the relationship is still quite cool compared to that enjoyed by European competitors Germany and France. The UK’s quiet stance on recent protests in Hong Kong is seen to be at least partly based on a desire not to upset China. And in Southeast Asia, China uses its economic importance to influence the behaviour of ASEAN member states – for example, to make it more difficult to reach unanimity in ASEAN on South China Sea issues.

To be sure, China is not the only large country that uses its economic power over smaller countries. New Zealand has memories of French behaviour in the 1980s after the Rainbow Warrior bombing; and New Zealand has not been at the front of the queue for a free-trade agreement with the US, in part because of its stance on the 2003 Iraq war and its anti-nuclear stance in the 1980s (which resulted in banning US naval vessels from New Zealand ports). In other words, political power has always mattered, even if it seems likely that economics and politics will be more tightly linked in respect of China than for other relationships.

The possible pinch points could be several, from New Zealand’s stance on regional issues to policy on Chinese investment in New Zealand. But the ability of small countries to act fully independently is more constricted when large countries have significant economic power, and when the multilateral system is not functioning well.

The intersection of international economics and politics – and the growing need to balance economic and political interests – will, as in centuries past, be a real challenge for many countries in this early new century. In the region, apart from New Zealand, countries like Australia and Singapore face many similar issues. History shows clearly that large countries tend to act like large countries. And so small countries in Asia – and elsewhere – will need to continue to be very thoughtful in order to survive and prosper in the shadow of their larger neighbours.


David Skilling is the Director of Landfall Strategy Group, a Singapore-based research and advisory firm.

(Photograph: The Canadian Press / AP / New Zealand Herald / Mark Mitchell)

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