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Professor Roger Bowden

China, NZ and the Free Trade Agreement: Remind me again, which is the LDC?

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Visiting China is a disconcerting experience these days. The main or central campus of Xiamen University , which is where I’ve just been, has nearly 30,000 students, every single one of them postgraduate. It’s a startling experience to deliver an official lecture and to have so many students ask perceptive and knowledgeable questions — in very good English!

Likewise, the quality of staff is in some cases outstanding. Special chairs are paid US salaries and are expected to publish in top of the line academic journals. Gone are the days of the old liturgical institutionalists, recycling the approved Maoist political line. This is now a competitive structure in which each institution is acutely aware of its own official ranking, for there is such; and has figured out that the best way to achieve this is to feed off the major US and European universities for staff, ideas and standards.

The contrast with our own decaying tertiary system here in NZ could not be more complete. I sounded off at length about the state of our own micro-managed universities in my recent book The Economic State of the Nation, and I won’t whinge about that any more – well, much more – right now.

The numbers show it. In 1996 China had 315,000 engineering graduates. In 2006, just ten years later, it had 1,341,000, which is roughly a four fold expansion. To be sure, there are some issues concerning just what you describe as engineering, and the Americans have been on the defensive on that one. But any way you measure it, one thing stands out, that this is an amazing and unprecedented build up of human capital. For much the same story is repeated in other numerate and scientific disciplines.

Which brings me on to the theme of the China-NZ Free Trade Agreement and what it signals. With the failure of the last Doha round of WTO talks, more emphasis than ever is now being placed on securing bilateral FTA’s. The agreement China signed with us in April is their fifth, but the first with an OECD country.

As it happens, I think the Chinese did very well in this. I’m a little less certain about us. Tariffs on our major export, Dairy, will not be fully phased out until 2019, and even then China has the right to say us nay if they think it’s damaging their own industry (which, by the way, is now the world’s third largest, after India and the US). Agriculture is an overdue sector for reform in China and there is now a big push under way to do just that. They have to, with food prices going through the roof.

The FTA gives China the right to import into NZ an appreciable number of skilled workers and supporting ‘working holidayers’, which I would guess is not going to mean quite the same thing as the Big OE of our own young people, having a good time in Kensington tenements and pubs. The construction industry is in fact singled out in the Agreement along with one or two others like tourism and financial services.

So now you see the connection. We are going to need a lot of infrastructure repair and development in the years ahead. The Chinese have become particularly good at this. They have concentrated IFS development around their special economic zones, which makes a lot of sense. They build motorways in their sleep, and this year the 32 km Hangzhou Bay Seabridge came in on time and under budget. Not to mention the Shanghai — Beijing high speed railway and intercontinental oil and gas pipelines.

When you get a build up of engineering experience and numbers on this scale, there has to be supply pressure for expansion into exports. So that is where we come in, and shortly also the Australians, who are also going to need a lot of infrastructure. Something else also stands out, namely that the trade and development model that China wants for itself is being signalled.

As we all know, China ’s success has hitherto been built up on manufactures; labour intensive exports. But as their own wage rates rise, they are well aware of the cost advantage switching to countries like Thailand or Indonesia .

The Chinese still have a window of time to follow the old manufacturing model. Not last because they have no intention of signing up to Kyoto on carbon emissions. Indeed, they argue vigorously that they deserve the opportunity to catch up with the West, who have had a free ride in cumulative carbon emissions ever since the industrial revolution of the early 19th century. They’ll do their best on carbon intensity per unit of economic growth, they say, but by about 2020, China will be easily the world’s largest carbon and GHG emitter and everyone knows it. The only thing the UN Clean Development Mechanism can do about that is to employ their planned Carbon Fund to encourage the Chinese and the Indians to develop clean industry and sell carbon sinks to the West.

However, the Chinese have also watched the Japan model and know that human capital will be the key to their future. This is not the old textbook model of a lesser developed country exporting labour intensive manufactures. It is human capital services that they will be exporting.

I wish I could say the same for us. But with the education our own universities are churning out, it’s hard to see in many cases that any sort of capital is being produced, or if it is, in the right sort of disciplines and numbers. To be sure, we will technically still do quite well on exporting education via foreign students, even it is drying up a bit, but the real story on that is that we are importing residence rights, not exporting education services .

So I would guess that it’s we who will be importing human capital as part of our trade deals. But look on the bright side. All that future brainpower in China is going to need a lot of milk powder, and hopefully they’ll even get round to eating our beef and lamb. In the fullness of time, we may discover lots of oil and natural gas (yes, really), so we can send that off as well, using infrastructure that the Chinese have built for us. All financed with the massive savings that Chinese workers have accumulated in the meantime, directed via their burgeoning financial services industry (human capital again), also mentioned in the FTA.

But in the end which party, one wonders, can be called the lesser developed country in all this? We need to do something effective about our own universities, where the Tertiary Education Commission has become part of a problem it should be trying to fix, for they are being micro-managed into intellectual extinction. We need to power up our spending on scientific research, rethink the way that the money is allocated, and where it goes. I wrote about some of these things in ESN. This last visit to China has made it look even more urgent.