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Non-tariff barriers that New Zealand companies experience when exporting to China

Strategy

By Helen van Asch, Massey University Masters student

A research report written to fulfil the requirements of a Master’s of Management Studies at Massey University identifies specific Chinese non-tariff barriers (NTBs) affecting New Zealand exporters and provides possible solutions to overcome them. Masters student, Helen van Asch, conducted 14 interviews with New Zealand managers and business consultants directly involved in trade with China from industries ranging from dairy, wood, machinery, steel, and fruit, farming technology, premiere food and amphibious vehicles as part of her research and along with a review of current management theories, has recommended practical strategies for New Zealand exporters to manage these NTBs and experience successful trade with China.

Introduction

Business relations between New Zealand and China has been considered a topic of importance as China is fast becoming New Zealand’s major trading partner, second to Australia. China is also currently the world’s largest potential market with an emerging middle class and increasing incomes attracting exporters. Statistics have shown that business activity between New Zealand and China has accelerated with the achievement of the New Zealand China Free Trade Agreement (NZCFTA) that came into force in 2008. The year the NZCFTA came into effect, New Zealand exports rose from $2.2 billion to $3.5 billion. However, this accomplishment has only addressed the barriers caused by tariffs, not NTBs. NTBs facing New Zealand exporters range from vast cultural differences, complex distribution channels, and differential value added taxes (VAT), corruption and counterfeiting. The results produced from this research have been provided to the interviewees and interested parties and may encourage other New Zealand companies to engage in exporting to China but to avoid the same trading difficulties as previously experienced. Thus, this research topic aims to educate small-to-medium businesses (SME’s) in New Zealand about Chinese NTBs pertaining to New Zealand exporters whilst providing practical strategies to overcome them.

NTBs

A non-tariff barrier (NTB) is defined as any measure other than a tariff that distorts trade. NTBs identified through both theoretical and preliminary empirical research that concern New Zealand exports to China included a deficiency in cultural understanding including Guanxi or personal relationships, intricate distribution channels, lack of key government contacts and networks, corruption, customs, counterfeiting, differential VAT values, antiquated transportation systems, complex certification and documentation requirements and inconsistent governmental and corporate rules and regulations impacting New Zealand trade with China. The NTBs were firstly defined and coded from the results produced in the preceding literature review before the interviews took place and were used as a reference guide throughout the interviews.

Interview Results vs. Literature Review

A total of 14 interviews were conducted, 12 interviews with New Zealand business managers and 2 interviews with New Zealand business consultants. The majority of the interviewees represented agricultural industries which included wine, wood, honey, dairy and fruit as well as premium products such as chocolate and electronic and industrial products such as steel, electronic bikes, amphibious vehicles, electric fencing, electronic fire detection systems and health information systems. The literature review evaluated works from academic sources such as journal articles and books and also covered material from print and online media with seminal authors being Blankert, Mahon, Zigmantaviien & Snieška, Haley and Haley, Haley, & Tan.

Contrasting views existed between interviewee participants when discussing NTBs of transportation, counterfeiting and corruption whilst a consensus was present when considering NTBs of distribution channels, cultural differences, the importance of Guanxi and contradictory government and corporate regulations. When comparing the results of the interview data with the literature review, there were disagreements about the different facets of cultural differences as an NTB. For example, David Mahon stated that understanding the Chinese language and culture was essential to negotiating trade in China in his publications whilst, interviewees David Catty and Nick Howarth contended in the interviews that the use of a good translator can not only overcome language barriers but non-verbal language barriers as well. Other aspects of cultural differences were emphasised as more challenging NTBs than language and included a lack of understanding or appreciation towards vital Chinese cultural components such as Mianzi or saving face and Guanxi or personal relationships, as well as standard Chinese business etiquette including the acceptance of business cards, gift giving, respect to elders or those in senior positions and engagement in the drinking culture.

The interviews provided an in-depth analysis into a range of NTBs pertaining to New Zealand businesses, in particular the importance of understanding how distribution channels works in China and the use and qualities to seek for a good Chinese distributor to overcome the bulk of NTBs such as transportation, customs and corruption which was not widely mentioned in existing literature. In addition, the interviews offered an insight into custom processes relative to New Zealand exports and its preferential treatment of dairy over fruit products. Whilst topics such as Guanxi, Corruption and Counterfeiting were extensively covered in previous research, solutions to overcome these NTBs were not made available and the interviewees were able to recommend practical strategies to manage these NTBs which includes registering the company’s IP protection with Chinese authorities and investing in technological advancements to combat counterfeiting, a polite refusal or utilising efficient Chinese distributors to manage corruption and effective follow up and regular contact to maintain Guanxi.

One point that was highlighted from the interviews which was not cited in the literature review was how New Zealand companies avoided ‘whistle blowing ‘or raising awareness to improper business behaviour in China for fear of destroying business relationships. The research results did however agree with the literature review that hiring local staff and establishing a physical presence in China is helpful in defeating NTBs. The research results did fall short of identifying NTBs for Chinese imports in New Zealand and has presented opportunities for future research areas whilst the literature review provided additional strategies to overcome NTBs in China. This included New Zealand government agencies continuing to persuade the Chinese government to develop laws and regulations that will help eliminate NTBs and for New Zealand companies to tailor marketing strategies to meet China’s market needs in the absence of local staff or distributors.

Discussion

When discussing strategies to overcome NTBs through the interviews, the following implication became clear. Many of the subjects confirmed the importance of having a quality product when entering the Chinese market, preferably one with proven success in other markets, in particular Australia. Having a quality product and strong branding in some situations can even attract Chinese distributors to the exporter instead of the exporter trying to enter the market as a sole competitor. However, as previously mentioned, selecting a quality distributor is crucial. A quality distributor is one that has an extensive network and experience in the market and is currently distributing more than one brand of the exported product. The consequences of selecting a bad distributor could mean that a product could sit in a warehouse for long periods of time due to poor infrastructure or planning and then sold years later at a discounted price which could destroy a quality brand as seen in the wine industry.

Building formal or informal business alliances can help a New Zealand company select quality distributors but to do this a company would have to spend time in the Chinese market and ideally establish a physical presence there for example a branch or office. All subjects were considered ‘hands- on’ managers who travelled frequently to China approximately 3-6 times per year and knew the basics of the Chinese language and business culture. Showing respect to the Chinese language and culture aids in the development and cultivation of Guanxi as well as committing to long term investments in China as seen with Fonterra with their provision of ambulances and academic scholarships for Chinese students as well as the establishment of rural community programs. Last but not least, exercising patience and good old common sense never hurts but it’s not only applicable to China as one subject shared ‘if you wouldn’t believe something that you hear in your own country, then why would you believe it in another country?’

Patience is also to be exercised, as the Chinese tend to have a more long-term strategic view on business arrangements and life situations as opposed to New Zealanders based on the history and culture. Where New Zealanders are used to completing business deals within a few meetings, it usually takes a bit longer in China as both parties continue to develop trust and commitment.

Conclusions

Conclusions from the study include utilising and raising the awareness of current government and non-profit agencies and mentoring programs available such as New Zealand Trade and Enterprise, New Zealand China Trade Association (NZCTA), Asia New Zealand Foundation and the Beachheads program that help managers deal with the differing uncertainties of emerging markets such as China, Brazil, Russia and India, otherwise known as the BRIC group. New Zealand organisations also need to be advised about the training programs established to help assist New Zealand organisations into the Chinese market or those currently struggling there such as the many workshops and seminars provided by the NZCTA. Results from the interviews confirmed a need for government organisations to help New Zealand organisations understand the NZCFTA more thoroughly, as tariff-free benefits only apply to products once certification and documentation requirements are met and many New Zealand managers are not taught or informed about this and may be still subject to paying full tariffs when exporting to China.