Story by Katie Foley

Illustration by Rebecca Walthall

IT’S true the worlds of trade and politics foster an innate, burning desire to create acronyms.  The ‘group of eight’ major world economies, made up of France, Germany, Italy, Japan, the United Kingdom, United States, Canada and Russia are the ‘G8’.

In 2001, commentators would say ‘BRIC’ was better than using ‘emerging economies’ because after all the reform, after seeing the skylines of showcase cities like Sao Paulo, Moscow, Mumbai and Shanghai – bastions of light, energy and freshly-minted money  – it seemed a bit condescending to still refer to them as ‘emerging’.

The next 11 coming up, the supposed inheritors of the BRIC mantle, are the ‘N11’: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam.

The acronym BRIC was designed to give an exciting glimpse of where fortunes would be won, lost and built over coming decades. It was originally coined by Goldman Sachs economist Jim O’Neill as a way of grouping high-growth countries together. Early this year the heads of state invited South Africa to join them, turning BRIC into BRICS.

Where New Zealand fits into this crowd of acronyms is around our current trade positioning, and around our need to move from an internal-consumption model of growth towards an export-led one.

One country makes a notable presence across both the G8 and the BRICS: Russia. It is also the country looking set to soon be our second BRIC free trade partner.

For the BRICS countries, who have largely  lifted themselves up in the last decades through export, there is now a need to move to a model where economic growth is fuelled by internal consumption – growing a middle class with purchasing power and disposable income.

The crossover would seem to be the very definition of trade, like an economist’s dream market: we need to sell and they need to buy, but instead we have an impasse on a grand scale.

The World Trade Organisation’s Doha Development Round, kicked off in 2001 to negotiate increased worldwide trade liberalisation, has been limping on, in circles, for a decade.

Senior lecturer in political science and international relations at Victoria University Marc Lanteigne says many of the BRICS countries have been trying, unsuccessfully, to act as intermediaries between the European Union, the US and the lesser developed countries to reach a consensus in the talks.

“You have China, to a lesser degree India, to a degree Brazil, trying to act as mediators back and forth, all of these countries are trying to put themselves as the go-betweens and in the end we haven’t seen much in the way of solid progress,” he says.

Because of the start of electoral cycles, particularly in the US, experts have called for December 2011 to be a deadline for the final make or break of the Doha gridlock. Not many hold out hope of any success.

In the absence of success in WTO trade liberalisation, what many countries will fall back on is the agreements they’ve already negotiated.

“New Zealand is aware of this,” Lanteigne says. “New Zealand is certainly aware of the value of creating as many bilateral and multi-lateral [agreements] as possible.”

New Zealand’s regional, bilateral and multi-lateral trade agreements in force include with Australia, Hong Kong, Malaysia, Thailand and Singapore. Agreements currently being negotiated include with Korea and the Gulf Co-operation Council (Bahrain, Oman, Kuwait, Saudi Arabia, the UAE and Qatar).

In terms of agreements with the high-growth, high-potential BRICS’ countries, the last four years has seen fast movement.

The New Zealand-China free trade agreement (FTA) was signed in 2008. Many credit the huge resultant increase in trade with getting us through the recession.

In May 2011, Indian Minister of Commerce and Industry Anand Sharma said he hoped the New Zealand-India FTA would be in place by the first quarter of 2012.

Negotiations for the Russia-New Zealand FTA were announced in 2010 and are due to be completed late this year.

Lanteigne puts our popularity as a free trade partner down to our experience and the fact that our number of sectors open to preferential trade is small enough that the negotiation process is much shorter compared to European states.

We also have a history of jumping at opportunities to declare things first. In 1997, New Zealand was the first Western country to conclude a bilateral agreement with China on its accession to the WTO and, in 2004, the first developed country to recognise China as a market economy.

“Those other countries wanting a stronger economic role in that region will very likely see New Zealand as a very good way of getting started; it’s almost like training wheels,” Lanteigne says.

Illustration by Rebecca Walthall

THE BRICS have a common story: inflation is a short-term risk across the board, and all of them have a certain amount of political risk, but the long-term fundamentals are there: increasing population, burgeoning consumer consumption, low debt relative to GDP, increasing household saving and increasing spend on infrastructure.

China and India are seen as the stronger two for manufacturing. Russia and Brazil have advantages in the supply of natural resources.

HSBC New Zealand Head of Wealth Glen Tonks says he sees the BRICS countries’ massive investment in infrastructure as particularly exciting for business, typified by construction to host world sporting events.

The BRICS together will spend in the region of US$8 trillion over the next 10 years on infrastructure, which is around about 80 per cent of the world’s infrastructure spend over that period, he says.

“That is a story we are seeing with developing nations hosting the world’s major sporting events – the Beijing Olympics, the Indian Commonwealths and the Russian winter games – it’s really interesting to see how the relative success of those events – what message that sends to the world.”

China is leading the BRICS with respect to moving rapidly from an export-invest model, to an internal-consumption model, with last year 70 per cent of China’s GDP growth coming from consumer consumption.

“Really these four nations that have 40 per cent of the world’s population are the future growth engines,” Tonks says.

“[It] is a shift from West to East, and we see that accelerating out of the financial crisis. Particularly because of the hangover of debt in the developed world, so really it is game on the BRIC nations, really led by China.”

New Zealand’s long-term BRICS strategy has been accelerating in recent years. More than anything, our free trade agreement negotiations with China, India and Russia represent a fundamental shift towards a more long-term, strategic view of our place in the world and our friends in high-growth places.

Deputy chief executive of New Zealand Institute of Economic Research (NZIER) John Ballingall says the developments show a movement away from focusing on tariff reduction alone towards building long term political and economic relationships, as well as freeing up the way for enhanced services and investment trade, or put simply:

“We curry them some favour and as a consequence we hopefully get to be alongside them when they really start to grow rapidly.”

Because of the focus on high-quality agreements, New Zealand now finds itself well-placed to act as a go-between country with others who want to trade with our free trade partners.

“We’ve got these great links to China and Russia and soon India and South-East Asia and lots of other countries,” he says.

“[International companies can] invest in us and use us as a base from which to export or invest into these countries so it’s about getting this first-mover advantage really.”

In terms of the agreement we have most recently started to negotiate, Russia occupies a strategically important geographic position as a bridge between Europe and Asia, he says.

“[Russia has] got the extremely fast-growing Asia Pacific region on one side and a much more muted growth profile of mainland Europe on the other side and therefore potentially Russia could play a really important role of acting as a link between the two.

“If we’re then tapped into that supply chain as well, then that allows us to try and benefit from the growth that might happen in that supply chain as well.”

FOR grouping and vernacular purposes the BRICS are lumped together under one acronym – but they are also closely watching the success of each other’s state-guided economics, which has profound impacts for foreign businesses working under complex political, bureaucratic, financial and regulatory environments.

Perceptions of the Chinese model of state-guided economics, also called the ‘Beijing consensus’, have gone from abstract concept to “they may have something here” among other BRIC countries, Lanteigne says.

“Russia has definitely adapted that [Chinese] model, the state is now hyper present in so many parts of the country’s economy, especially in the energy sector.

“You’ve got the same thing in Brazil, you’ve got the same thing in South Africa, India; they’ve been oscillating back and forth a bit towards greater free market, but there’s still a huge amount of state dominance in several sectors and still a lot of bureaucracy involved in setting up any kind of business in the country.”

Lessons learnt from doing business within China’s state-guided economic sphere could help us do business in Russia, Lanteigne says, but the Sanlu scandal with Fonterra in 2008 will continue to be a cautionary tale.

A common communist government history in both China and Russia, countries where private property laws have traditionally been weak, will also have some relevance, as we’ve seen with New Zealand company Pacific Hovercraft NZ’s continuing fight over intellectual property with Chinese company Lianyungang Supreme Hovercraft.

“I think New Zealand’s experiences with China will help [in Russia] quite a bit, but there’s still a lot of caution that’s needed. When you’re in a country where the state has such a strong advisory role in so many sectors, including raw materials and agriculture and so forth, keeping that in mind is very important.”

With increased trade liberalisation brokered by the World Trade Organisation looking increasingly like a pipe dream, a ‘hub and spoke’ model of free trade agreements with BRICS countries in particular looks set to be what takes New Zealand through.

And if there happens to be some progress in the Doha talks, New Zealand will be in a much stronger position, and much better informed, to play an active role in the negotiations.

“Because a lot of it is also about information,” Lanteigne says. “In order to successfully complete a deal you really have to understand the concerns of the state, what the other states wants out of various deals, their economic situation.

“Setting up bilateral [agreements] is in some cases not a perfect method, but it does create a lot of windows into what your potential trade partners are thinking.”