VZCZCXYZ0000
RR RUEHWEB

DE RUEHWL #0366/01 1310506
ZNY CCCCC ZZH
R 110506Z MAY 06
FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC 2773
INFO RUEHBJ/AMEMBASSY BEIJING 0308
RUEHBY/AMEMBASSY CANBERRA 4397
RUCPDOC/USDOC WASHDC 0047

C O N F I D E N T I A L WELLINGTON 000366 
 
SIPDIS 
 
NOFORN 
SIPDIS 
 
STATE PASS USTR-BWEISEL 
STATE FOR EAP/ANP-DRICCI, EAP/CM AND EB/TPP/MTA-MBGOODMAN 
 
E.O. 12958: DECL: 05/10/2016 
TAGS: ETRD ECON PGOV PREL NZ
SUBJECT: NEW ZEALAND FACES LONG MARCH TO CHINA FTA 
 
REF: A. CANBERRA 531 
     ¶B. 2004 WELLINGTON 217 
 
(U) Classified by Ambassador William McCormick.  Reasons: 1.4 
(b) and (d). 
 
¶1. (C) Summary: Negotiations on a China-New Zealand 
free-trade agreement have been slow going since their start 
16 months ago, and the road ahead looks long and difficult, 
with China firmly in the driver's seat.  Beijing has pitted 
New Zealand against Australia, trying to hold New Zealand 
hostage to whatever advantage China extracts from Australia 
in separate free-trade negotiations.  Also, Beijing has 
warned New Zealand that if it does not accept China's terms 
for an agreement, bigger and more important countries could 
jump the queue, leaving New Zealand behind.  Beijing has 
taken a tough line in the talks, which it sees both as 
"practice" and precedent for future dealings with larger OECD 
members.  New Zealand, the first OECD country to start talks 
on a free-trade deal with China, is left with little room to 
maneuver and unable to turn back now that it is so publicly 
committed to the negotiations.  End summary. 
 
The premier's visit 
------------------- 
¶2. (SBU) New Zealand's eagerness for a free-trade agreement 
(FTA) with China has never been in doubt, a fact that 
initially sped its entry into the negotiations but that now 
might pose a problem.  New Zealand was the first developed 
country to sign an agreement on China's admission to the 
World Trade Organization (WTO), the first to recognize China 
as a market economy and the first to start negotiations on a 
free-trade deal (ref B).  Chinese Premier Wen Jiabao said 
during a visit to New Zealand that he hoped for a fourth 
"first":  that New Zealand would be the first Western 
developed country to sign an FTA with China. 
 
¶3. (C/NF) Discussions on the FTA were the centerpiece of 
Wen's stopover in Wellington from April 5 to 7.  He and New 
Zealand Prime Minister Clark announced that they would seek 
to conclude a deal within one to two years and, to accelerate 
the process, they agreed to ramp up responsibility for the 
talks to the level of their vice ministers.  In words chosen 
by Wen, according to New Zealand's lead negotiator David 
Walker, the two leaders said the result would be a 
"comprehensive, high quality and balanced agreement."  Walker 
told post on May 2 that his government previously had 
resisted Chinese pressure to speed up the talks, believing 
that could compromise New Zealand's ability to obtain a 
quality agreement.  But, mollified by Wen's public commitment 
to a "comprehensive" deal, New Zealand dropped its refusal to 
set a time frame for the negotiations. 
 
¶4. (SBU) New Zealand views an FTA as part of an effort to 
form a comprehensive relationship with China.  An agreement 
also is intended as insurance against failure of the Doha 
Round and a means of getting Washington's attention in the 
absence of free-trade talks with the United States, according 
to a former New Zealand diplomat and industry representative. 
 The Kiwis posit that for China, an agreement would be an 
image-builder, a chance to demonstrate to the WTO that it can 
forge an economic partnership with an OECD country. 
 
The negotiations 
---------------- 
¶5. (C/NF) The 16 months of talks have gone little beyond 
exchanging views and identifying topics for discussion.  In 
the first five negotiating rounds, starting in December 2004, 
the two sides discussed process and procedure and exchanged 
information, according to a New Zealand trade official.  Only 
in the fourth session did both sides discuss a framework of 
rules for an agreement, such as rules of origin, quarantine 
regulations and technical barriers to trade.  In the sixth 
round, in March in Beijing, New Zealand outlined the issues 
that it wants to include in a "comprehensive" deal.  Walker 
said detailed discussions have been held only on trade in 
goods, with New Zealand wanting all tariffs on goods to go to 
zero, although it is willing to reach that goal over time. 
Both sides have identified their "sensitive" sectors:  for 
China, dairy and meat products and services, and for New 
Zealand, textiles, clothing and footwear.  A New Zealand 
Treasury official said his government has accepted the idea 
that negotiations on some sensitive issues will have to be 
deferred. 
 
¶6. (C/NF) Walker said detailed discussions have yet to start 
on other issues that New Zealand wants addressed, including 
services, intellectual property, investment, government 
procurement and dispute settlement.  He noted that New 
Zealand knows it would not get everything it wants from China 
on investment, and it accepts that an agreement with China 
would exclude labor or environmental issues, which will be 
dealt with in "parallel" discussions outside the FTA talks. 
China has said it wants to include "Mode 4" liberalization -- 
the temporary movement of Chinese people to New Zealand -- 
and New Zealand is awaiting specifics of that request, Walker 
said.  The seventh round is scheduled for the week of May 15 
in New Zealand. 
 
¶7. (C/NF) A fundamental difference between the two sides has 
been over the deal's scope.  Wen's reference to a 
"comprehensive" agreement notwithstanding, his government's 
expectations are much more limited than New Zealand's, the 
trade official said.  For instance, China's FTA with Chile, 
signed November 18, covers only goods.  Walker said he has 
reminded the Chinese that negotiating with an OECD country is 
different:  "We have told them that FTAs are WTO-plus." 
However, before departing Wellington in late 2005, then 
Chinese Ambassador Chen Mingming told a closed meeting of 
diplomats and academics: "Many people (in the Chinese 
government) do not see the need to make more concessions than 
were made when we acceded to the WTO."  Chen also warned that 
China's position on agriculture and services was 
"formidable," implying these sectors might be excluded from a 
deal. 
 
¶8. (U) China is New Zealand's fourth-largest export market, 
although it imposes significant tariffs on New Zealand's top 
exports, including dairy products, meat, kiwifruit and wool. 
China is seen as having particular interest in gaining 
greater access in New Zealand for its textiles and clothing, 
the last large product category on which New Zealand imposes 
tariffs.  A joint study on the feasibility of an FTA predicts 
that a trade deal could boost New Zealand's exports to China 
by 20 to 39 percent over 20 years, or US $180 million to US 
$280 million a year.  China's exports to New Zealand would 
rise by 5 to 11 percent, or US $40 million to US $70 million 
a year. 
 
The difficulties for New Zealand 
-------------------------------- 
¶9. (C/NF) Walker acknowledged that, in negotiating with a far 
larger country, New Zealand will have to be nimble and play 
its cards carefully.  Its basic problem is that it holds few 
cards, having already given China what it most wanted -- 
recognition by an OECD country that it is a market economy, 
the Treasury official said.  New Zealand thereby agreed not 
to use anti-dumping and safeguard rules against China, as 
allowed under Beijing's WTO accession agreement. 
 
¶10. (C) Although negotiating a free-trade deal would seem 
relatively easy since New Zealand poses little threat to 
China's immense economy, the Chinese have taken a hard line. 
They know that whatever they agree to with New Zealand will 
be considered precedent in future FTA negotiations, according 
to the trade official.  In addition, China aims to concede no 
more than New Zealand's other FTA partners already have. 
"The Chinese have in their back pockets copies of the New 
Zealand-Thailand FTA ... which limits our flexibility and 
negotiating leverage," the trade official said.  That 
agreement contains no commitments to liberalize trade in 
services, despite the fact that services compose more than 
two-thirds of New Zealand's GDP and 28 percent of its 
exports. 
 
¶11. (C) New Zealand's leverage also is lessened by its stated 
desire to be among the first of OECD countries to sign an FTA 
with China.  New Zealand fears that at some point China will 
move on to other, larger and more important economies.  The 
Chinese already have implied that threat by essentially 
saying that if New Zealand wants to be first, then it must 
accede to China's terms, the Treasury official said. 
 
¶12. (C) The nightmare for New Zealand is that, having watched 
enviously as Australia signed an FTA with the United States 
in 2004, its neighbor beats it again with China.  New Zealand 
officials had proposed to Canberra that they negotiate an 
agreement jointly with China, but were rebuffed, according to 
an Australian government official.  Now, New Zealand finds 
its negotiations affected by the ongoing China-Australia 
talks -- and Australia appears to be in no rush for a deal 
(ref A).  Former Chinese Ambassador Chen said: "It is easy to 
reach a deal with New Zealand because its capacity is not so 
great.  But our problem is Australia.  What we give to New 
Zealand, Australia will want."  With China and Australia in 
the figurative front seat, New Zealand may feel increasingly 
as if it is just along for the ride. 
 
¶13. (C) Among the more general difficulties that New Zealand 
officials have experienced dealing with their Chinese 
counterparts is contending with China's centralized 
decision-making process, the trade official said.  New 
Zealand often has had to ask for higher-level participants, 
even sending Prime Minister Clark to Beijing in May 2005 
largely to get the Chinese leadership to again publicly 
commit to the negotiations, according to the trade official. 
New Zealand also has had to negotiate separately with two 
Chinese ministries because of a philosophical split.  The 
Chinese Commerce Ministry wants to push ahead with 
liberalization, while the Agriculture Ministry is anxious to 
protect the country's small dairy farmers. 
 
Comment 
------- 
¶14. (C) For the Chinese, an FTA with New Zealand is less 
about substance and more about symbolism -- a sign that 
China, in the words of PM Clark, "can deal with open market 
economies."  But the New Zealand government is keenly aware 
that it needs a deal with substance if it is to avoid being 
criticized at home and abroad for giving in to Chinese 
demands.  Still unclear, amid the upbeat comments of the 
countries' leaders last month, is which side is better 
endowed with patience.  Predictions of a deal in "one to two 
years" appear very optimistic. 
 
McCormick