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New Zealand economy, trade and China in focus after Ardern triumph

Handed first majority in decades, PM faces challenge of 'delivering'

New Zealand Prime Minister Jacinda Ardern holds a meeting with her Labour Party's members of parliament on Oct. 20, after their landslide victory in the country's general elections.

SINGAPORE -- Prime Minister Jacinda Ardern's landslide victory in New Zealand's elections will enable her to form the country's first single-party majority government in decades, but early signs suggest she will continue to govern as a relative moderate rather than make the sharp leftward tilt Kiwi progressives had hoped for.

The results could also lead to some foreign policy adjustments as New Zealand threads the needle between China and the U.S., experts say, though any shift appears likely to be subtle. And the next term is shaping up to be a big one for trade, with Wellington pursuing both bilateral and regional agreements.

The exact composition of the next government will not be confirmed until late October or early November, but Ardern's Labour Party is set to claim 64 of 120 parliamentary seats, while the opposition center-right National Party will have just 35.

The left-leaning bloc in the House of Representatives, which includes the Green Party, will control over three-fifths of the seats. Meanwhile, the populist New Zealand First, which had been Ardern's other coalition partner, did not gain enough votes to return to parliament, removing a "hand brake" on Labour's left wing.

But the prime minister, who ran a campaign that was light on policy, has acknowledged that her majority is built off the support of moderate and center-right voters who have rewarded her management of the coronavirus pandemic. And while Labour is in discussions with the Greens over the shape of the next government, Ardern has indicated that the junior party may play a less prominent role than they had hoped.

"Jacinda and Grant [Robertson, the finance minister] are inherently centrist politicians," said Thomas Pryor, a former National staffer who is now associate director at government relations consultancy Sherson Willis. "I don't expect her to go far left."

Ardern's immediate challenges are clear -- the first being to resuscitate the coronavirus-hit economy.

Gross domestic product contracted by a record 12.2% in the second quarter of 2020, following one of the world's toughest lockdowns. Unemployment has only been kept down by the 58.5 billion New Zealand dollars ($39 billion) in fiscal measures the government is planning to deploy through the end of fiscal 2024.

Though the net debt-to-GDP ratio is at a recent high, it remains low by international standards, and Ardern will not jeopardize the recovery by ramping up taxes to quickly pay off debt. Indeed, the prime minister has explicitly ruled out implementing a capital gains tax and the wealth levy that was a signature issue of the Greens, though Kiwis making over NZ$180,000 will have to pay slightly more in income tax.

Ardern has more room to maneuver when it comes to climate change. A landmark 2019 law that committed the country to carbon neutrality by 2050 passed with cross-partisan support and her next term in office will likely see an acceleration of the decarbonization of the economy.

Priorities include investing in hydropower infrastructure and enshrining environmental protection clauses in international trade agreements. There is also talk of gradually phasing out vehicles that run on fossil fuels.

"She'll be able to do a lot on the climate with the Greens, and, I suspect, the tacit support of the Nationals," said Peter Dunne, a retired member of parliament who has served as a minister in both Labour and National governments. "It's fairly risk-free."

Ardern's inclination toward caution, however, could hamper her ability to tackle other structural problems.

New Zealand is suffering from an endemic shortage of housing and Labour's much-hyped target to build 100,000 homes in a decade, which has been scrapped, is widely seen as a failure.

While the pandemic has led to falling housing prices elsewhere, that is not true in New Zealand. Instead, the crisis has been exacerbated as falling interest rates encouraged repatriated Kiwis to snap up property, pushing up the Real Estate Institute's home pricing index by 11% in September over the year-earlier period.

"In some ways, there's more pressure than ever for Labour to be transformational given the rising inequality," said Janine Hayward, a politics professor at the University of Otago. "But they are aware that they now have large numbers of National voters who are less interested in these policies."

As for foreign policy, there are likely to be some tweaks stemming from the new balance of power.

While diplomatic relations were barely debated during the campaign, the defeat of New Zealand First means that Ardern will need a new foreign minister to replace Winston Peters, who had served in that role for a cumulative six years. Defense Minister Ron Mark, a former soldier turned New Zealand First MP, is also out.

New Zealand Foreign Minister Winston Peters meets his Chinese counterpart, Wang Yi, in Beijing in 2018. Peters, who drove Wellington's recent hardening toward Beijing, is out after his party failed to win enough votes to return to parliament.   © Reuters

Prime ministers are typically the arbiters of New Zealand's foreign policy. However, the more instinctively pro-American Peters played an assertive role over the past three years as Ardern's attention was preoccupied by domestic issues, said Nina Hall, a New Zealand expert at the Johns Hopkins School of Advanced International Studies in Bologna, Italy.

While New Zealand is a long-standing American ally, Ardern's personal relationship with U.S. President Donald Trump has been frosty. Instead, she has developed a greater rapport with young leaders like Emmanuel Macron of France and Canada's Justin Trudeau.

And it was Peters who drove the recent hardening of Kiwi foreign policy toward China, New Zealand's largest export market, by suspending the Pacific nation's extradition treaty with Hong Kong.

"She wouldn't want to jeopardize trade with China, but she would be concerned with the human rights situation," Hall said.

Ardern's second term could in fact mark a new high point in trade cooperation, as negotiations on pacts with the European Union and U.K. continue. Her government is also a proponent of the Regional Comprehensive Economic Partnership, which also includes China, India, Japan, Australia and the 10 members of the Association of Southeast Asian Nations.

The EU talks will be closely watched in foreign capitals as both sides have agreed to include strong language on environmental protection and, notably, a caveat that allows New Zealand to implement protectionist policies to defend Maori rights.

"They're thinking a lot about environmental and indigenous protection clauses in trade agreements ... [because] there is concern that many deals heightened inequality and led to more disenfranchisement," Hall explained. "New Zealand has a liberalized economy so it doesn't have much to offer in terms of more trade liberalization. But they want to outline new forms of trade agreements."

Both Labour and the decimated National Party will now have one eye on the next election, which is just three years away. The main opposition party has been reduced to a parliamentary rump and the long-term future of its leader, Judith Collins, is in doubt.

But there are questions as to whether Ardern's sky-high popularity can last through 2023, with hard economic times yet to come.

The Australia and New Zealand Banking Group does not expect GDP to recover to pre-coronavirus levels until 2022 and travel restrictions, which have wreaked havoc on the country's higher education and tourism industries, are only expected to be slowly loosened.

"Jacinda is good in a crisis, but the challenge now is delivering," said Dunne. "Because of COVID-19, some people genuinely see her as a savior in almost religious terms. That can't continue indefinitely."

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