Brian Easton says New Zealand is again having to reconcile conflicting pressures from its military and its trade interests. Should we join Pillar Two of AUKUS and risk compromising our markets in China?

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

For a century after New Zealand was founded in 1840, its external security arrangements and external economics arrangements were aligned. Britain, then the international hegemon, provided the security and the main export market together with the capital which flowed into this country. New Zealand even twice fought on the other side of the world (three times if you include the South African War) as a part of the deal.

But Britain was weakening relative to rising Germany and the United States. The Fall of Singapore in 1942 demonstrated that Britain could no longer guarantee New Zealand’s security and in 1951 it joined the ANZUS Treaty with Australia and the United States without Britain. That was a factor which led to New Zealand accompanying them into Vietnam between 1963 and 1975. The treaty began to unravel when New Zealand declared it was nuclear-free and in September 1986 the United States suspended its ANZUS treaty obligations toward it.

Neither country completely abandoned the other militarily. Since 2021 New Zealand has been considering joining Pillar Two of AUKUS, a strategic defence partnership between Australia, the United Kingdom and the United States. Pillar Two is about sharing advanced technology, like artificial intelligence and quantum computing. The technology could also include drones or support systems for hypersonic weapons. It does not involve nuclear weapons, which comes under Pillar One. (Japan is in a similar position.)

The unravelling of our economic ties with the UK came later. In 1966 more than 60 percent of our exports still went to Britain. Many might see Britain joining the European Community in 1973 as the switch point but it would be only symbolic. New Zealand had been rapidly diversifying; less than 30 percent of exports went to Britain in that year.

In 2008 New Zealand signed a free trade agreement with China which became our biggest export market. Today’s dominance of China in New Zealand's trade is extraordinary. It is our biggest market for milk products, sheep meats (for beef it is only second), fish, apples, wine and honey (for kiwifruit it is third). Thirty years ago, China did not make New Zealand's top ten export destinations in any of these products.

New Zealand now sends almost a third of its exports to China. East and South-east Asia and Australia are deeply economically interconnected with China and this wider group takes nearer two-thirds of New Zealand's exports. (Britain now takes about 2 percent.)

China does not dominate our capital markets to the same extent. The big foreign investors in New Zealand are Australia, Britain, the US and Japan. During a financial crisis we would go first to the US (or the IMF which it dominates), as happened in 2008.

In principle, the mismatch between our security and economic alignments should not matter, but currently China and the US are at loggerheads. A simple explanation is that the US has been the world hegemon both militarily and economically for the 80 years since the Second World War. While the US military is still the largest by far, and its international reach is like that of no other power, China is challenging it in what it deems as its own region/neighbourhood (including Taiwan, which it regards as an integral part of China).

The economic story is different. The World Bank’s latest figures suggest that China’s GDP is more than a quarter larger than that of the US measured in comparable prices.* Of course with its bigger population, China is much poorer in per capita terms but the sheer magnitude gives it economic heft.

China wants to use its economic (and military) might to challenge – even overturn – the American version of world order. Detailing this, and its prospects, is a much longer article than can be fitted in here. Instead, the column focuses on New Zealand’s response in this uncertain world.

What is especially worrying is that neither the US nor China seems to be greatly committed to a world order based upon the rule of law, for each has undermined or ignored the rules when it has suited them. In a free-for-all world it is too easy for small nations to be bullied. Lee Kuan Yew commented that whether elephants make love or war, the grass gets trampled.

The danger is that as the two powers contest, we may be forced to take sides. The outcome could be unpleasant. Australia’s decision to side openly with the US led to China’s withdrawal of market access for some of Australia’s products to signal it was not happy.

This provides a context to the current dispute over whether New Zealand should join Pillar Two of AUKUS. No doubt there has been a vigorous debate within the Ministries of Foreign Affairs and Trade, and Defence. (There was one about sending troops to Vietnam.) The Coalition Government seems to be more pro-US than the previous one. On the other hand, exporters – the Auckland Business Community is prominent here – is nervous that moving towards the US will compromise the key export market.

That suggests that we should not get too close to the US militarily. Frankly, I am haunted by the experience of the Vietnam War when the US deliberately lied to us. It did the same to Britain to inveigle them into the Iraq War. The concern is whether a cumulative set of commitments will put New Zealand in a position of having to take sides if a shooting war over Taiwan or the South China Sea breaks out. Pillar Two probably would not make much difference but it is a shift towards that possibility.

That is not to side with China which, to be frank again, has some very unpleasant human rights (wrongs) policies. Even so, we should recognise China’s growing place in the world order, support its increasing involvement but insist that the evolving order should be one where the rule of law is strengthened rather than weakened.

Ideally irrespective of these strategic considerations, we should be diversifying away from the China economic complex. Easier said than done, for it largely depends on how entrepreneurial our exporters are.

Central government can support them by pursuing further trade liberalisation. About three-quarters of our goods exports are covered by free trade agreements. We are hoping for more with economies in the Middle East and Latin America (and we also seek further liberalisation in services). However, the two big outsiders are likely to elude us: the US and India.

While the US is enthusiastic for New Zealand joining in its military ventures, its five million farmers and those in agriculture-related jobs are far more politically important than five million New Zealanders living in a remote (unfashionable) corner of the world.

One might have thought that India would be keen to help us get out of the China-US quandary, since it does not want to be in it either. We will, no doubt, get a free trade deal with it in due course, but it will be limited, especially in dairy products. It has almost a billion households in rural areas, and while not all are farming, their numbers are sufficient to be politically significant. (Both countries have more dairy cows than we have: 300m odd in India, 9m in the US against 6m in New Zealand – there are 7m in China and growing.**)

In summary, most countries think we are too small and not strategically located enough to really matter. (Australia and some Pacific Island states would be the exception.)

Our quandary is not unique. It is even harder for the ten ASEAN nations. Vietnam was invaded by China in living memory and the Philippines and Vietnam are confronting China in the South China Sea. Yet their economies are even more integrated into China’s economic nexus. We should be paying much more attention to how they balance the pressures.

The ASEAN strategy has been described as ‘multi-alignment’, in which states form overlapping relationships with several major powers. Presumably that is what New Zealand means by its ‘independent foreign policy’. It can be tricky to apply. Singapore says it does not have a US naval base. Even so, there is usually a US navy capital ship tied up to a wharf, which a cynic might think was specially built for the purpose – just ‘visiting’.

Finding the balance to ease the quandary will not be easy. I had a friend who was on the Department of External Affairs Vietnam desk during the height of the conflict. Like me, he wished we had not sent the troops, but he understood the pressures. Years later, Tim commented that he thought Prime Minister Keith Holyoake, advised by the DEA, got the balance about right, doing the minimum necessary. One hopes for a similar wisdom from today’s leadership.

* World GDP shares in thee same prices are China 19.1%, US14.8%, EU 14.7%, India 7.9%, Russia 3.5%, Japan 3.4%, Brazil 2.4%, Indonesia 2.3%, Britain 2.2%.

** India produces 24% of the world’s milk (including buffalo milk), the US 12%, China 5%, New Zealand 2.5%.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.