New Zealand Plans to be the Asian Trade Hub to South American
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A report on the value of placing New Zealand in the middle of passenger and freight routes between Asia, the Pacific and South America out today says the opportunity would be worth at least $1.87 billion within a decade, once Covid is under control.
Economic consultancy NZIER’s Southern Link: the potential to develop a global value chain report, done for the New Zealand China Council, envisages New Zealand as an e-commerce hub, shipping or airfreighting parcels and other goods from Asia to New Zealand and then out again to South America, Australia and the Pacific, using our relatively uncongested airports, our deepwater ports, and new facilities including Microsoft’s Auckland data centre and the new Amazon Web Services facility to become a more central part of the global value chain.
The report is presented two years after a high-powered confab between the New Zealand government and business determined there was soon to be the need for such a hub in Oceania; participants were keen to see New Zealand established itself as the preferred candidate over Australia.
Southern Link says the benefit of putting New Zealand in the middle of an ASEAN-South America global value chain (GVC) would also help boost tourism, education exports, business services and general trade, generating opportunities by putting New Zealand in the middle of a chain it is usually at the end of. But there are challenges as well, including the post-Covid recovery and the return of aviation able to handle the volume of freight, the speed at which regulatory change can be made, and, to a lesser extent, the deteriorating US-China relationship that forms a complex geopolitical backdrop.
The report has been presented to the government and there are indications that departments such as Customs are interested in learning more about what needs doing at a regulatory level to bring the Southern Link to life. Report author and NZIER principal economist Chris Nixon said Covid was the first big obstacle.
But once Covid was less of immediate concern, the possibilities to service global e-commerce from New Zealand were exciting, he added.
“It’s not as if, in typical New Zealand style, we say ‘we’ve got the planes, we just need the demand’; we actually have the demand and it is taking off, because Covid has pushed us into the digital world, particularly South American countries.”
Cross-border trade the way it was currently being experienced did not really exist five years ago he said: “What we have now though is a sustained need for cross-border e-commerce and that’s what’s driving it, and what’s making it so successful.”
Nixon believes business has to coalesce around making Southern Link work as soon as possible. But New Zealand China Council executive director Rachel Maidment said the ideas laid out in the Southern Link report required a champion within government, followed by regulatory changes to make the establishment of e-commerce hubs faster and smoother, and then changing New Zealand’s cumbersome transit visa application process.
“Then [it would be about] having an ‘NZ Inc.’ approach, so the government can really work with other countries to talk about the link and get a bit of engagement on it,” she said.
“We do have a real opportunity here because we’ve seen through Covid the complexities the federal structure brings – in New Zealand we have the ability for the government and industry to act really nimbly together and seize opportunities such as this.”
Although the idea for a Southern Link with New Zealand in its middle is not a new one – it dates back three decades by some counts – the idea really took shape in 2019 off the back of China’s Belt and Road initiative, a global infrastructure development strategy first unfurled in 2013.
The Southern Link was seen as a way that New Zealand’s private and public sector interests could participate in this global spend-up, by attracting the attention of Chinese commerce on its way to South America.
The first concrete step towards it was the preparation of today’s report, which was delayed because of Covid. But at the same time, Covid actually brought the Southern Link to life, when Aerolineas Argentinas and Chile’s LATAM flew through Auckland to China to get PPE supplies – with New Zealand authorities working quickly to get those flights approved.
The experience suggested to participating airlines that the speed and price per kilo of freight transported along the route was competitive with alternate routes, the Southern Link report said.
In addition, international e-commerce and mail carrier Asendia has been trialling the Southern Link route. Oceania managing director Dene Green says the route offers clear time advantages, with less congestion and smoother logistics.
“There’s been huge growth in demand from cross border e-commerce between China and South America in the past couple of years. Moving goods through New Zealand has allowed us to exceed our KPIs and ensure faster and easier shipping to our customers,” Green said.
“The Southern Link places New Zealand in the middle of a global value chain for the first time, bringing businesses closer to market and unlocking opportunities.”
Meanwhile, Chile has announced plans to develop a trans-oceanic cable to Auckland, Australia and Asia, with Argentina and Brazil also signed up to participate. It is thought this cable will be able to underpin the services component of the Southern Link.
In the critical aviation services space, however, connectivity between New Zealand and Latin America has largely been severed as a result of Covid, Maidment explained.
“Before Covid we did have routes running into South America, so the pre-Covid landscape had a good funnel of activity from Asia into Auckland and Christchurch and then a couple flying on from Auckland to South America, but when Covid came, those flights to South America stopped.”
Airlines like LATAM started deploying their planes domestically because of the pandemic but it is hoped they’ll be back to international routes in early 2022, by which time established players and new startups are seeking to convert all empty space on flights into freight transportation, which has taken off.
One of the factors driving demand for an e-commerce hub has been the explosion in e-commerce over Covid. In South America, particularly in countries like Brazil, Covid support payments have fuelled online retailing, bringing people who had not been involved in the formal banking system onboard.
Asian platforms had started establishing themselves on the continent to respond to demand, putting pressure on freight servicing the Pacific.
The Southern Link report says e-commerce requires the development of hubbing/fulfilment centres that are able to rapidly respond to customer needs – ie, a customer buys three pairs of jeans, tries them on and sends two pairs back free of charge. The opportunity lies in being able to send the product 24/48 hours after purchase and then being able to respond in an efficient way to return goods.
It’s about the hubs themselves but also the transportation routes. The report outlines how New Zealand has, at present, a potential competitive advantage over Australia in terms of developing the Southern Link; its time zone is more suitable; its ports being ready and waiting for use (Australia’s eastern seaboard ports are in the middle of redevelopment), its airports are less congested, and wages and other input costs are lower this side of the Tasman than in Australia.
Maidment said size did not matter when servicing an e-commerce hub.
“Some of these key e-commerce companies don’t pick the biggest airport to go through; there are advantages to being smaller and more nimble, and what they are really looking for is capability, which our airports have,” she said.
By establishing an efficient hub, the report says New Zealand will be in a much stronger position to remain part of the GVC even when technology allows it to be bypassed, such as when planes can regularly fly direct from Asia to South America.
Tourism, education, arbitration
There are some other, less immediately lucrative but also promising side effects of a well-functioning Southern Link, with tourism and education exports, as well as business services, all expected to receive a boost from the idea.
Tourism to and from South America from New Zealand is not currently large, while the next frontier for tourism out of Asia is South America, said Maidment.
Transit visas for travellers from some Asian countries, including China, are currently required, but the system is currently cumbersome and the 12-page, English-only, paper-based application form and accompanying US$200 fee is not popular.
“We need that to be a streamlined, online application – that would make a huge difference,” says Maidment, noting that throughout Europe, Chinese tourists for example do not need transit visas at all.
Another possible new market that could be developed, as posited by the report, is that of disputes resolution. Arbitration, a form of disputes resolution used in commercial contracts, is traditionally held in places like Singapore, Hong Kong, New York, London, and Paris. These services tend to deal with large company business disputes and violations of investor protection provisions, but can be beyond the affordability and accessibility of small to medium enterprises (SMEs).
The report says New Zealand could pitch itself as a low-cost arbitration centre offering useful time zones, shorter delivery times for verdicts, and strong institutions that make us a “trusted partner”.
The report acknowledges challenges involved in developing the Southern Link – some that New Zealand can control, and others that the country has no control of whatsoever.
The country can adapt its regulatory settings and work with Air NZ and partners on onward connections, slot times, and transit times that could potentially be developed.
But as the report says, how other airlines will respond is unclear.
“Most are still focused on surviving day-to-day in the Covid-19 era. What might come to pass in two years’ time may not be at the top of their priority list. The current situation is dire for all airlines except for those companies operating freighters such as DHL and Fed Ex …the most enthusiasm for the Southern Link is being expressed by the logistics companies who are close to the e-commerce platforms.”
Two other major challenges present themselves in the form of Covid-19, and the deteriorating China-US trade relationship, although report author Nixon says it won’t have a major impact – “the elephants in the room are squaring off, and they will have to decide how they compete and what statements they make, but this link does not have much to do with big power politics.
“The focus here is on the lack of congestion through this route. The alternative is through Europe – through Paris, Heathrow and Madrid, we are looking for a small part of that trade. So I am not sure the big power politics will have too much to with this.”
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Post available in: English