Working with China

business and industry, economy, trade

Author(s):  Will Straw
Published date:  13 Mar 2012
Source:  Prospect

Today marks the 40th anniversary of ambassadorial relations between Britain and China. In that period, and particularly over the last 10 years, the relationship has grown exponentially. From a base of virtually zero, China has become Britain’s ninth largest market for Britain’s goods worth £7 billion in 2011 and is third for imports.

Over 100,000 Chinese students study in the UK while increasing numbers are now going the other way. Last year, 600,000 Brits visited China while 150,000 Chinese came to the UK. As China has grown to become the world’s second largest economy so too has its relationship with Britain.

But what of the next 40 years? In 2052, how will we look back on the period that has passed? What will come to define our relationship with China?

The one certainty in the period ahead is that while China’s relative economic power will increase, Britain’s will fall. In recent weeks, Brazil has replaced the UK as the world’s sixth largest economy. Over time, countries like India, Russia and possibly even Indonesia will grow larger the UK. China, meanwhile, will overtake the US at some point in the next two decades.

It is worth caveating this by saying, as the Chinese are keen to do, that being a large economy does not equate to being a rich economy. China is currently around 90th in the world in terms of GDP per capita. Projections from Goldman Sachs suggest that, even in 2050, this will still be around half that of the United States.

That said, China will increasingly be in a position to call the shots in global negotiations. Whether they choose to do so through the G20, entirely in G2 bilateral relations with the US, in a tripartite arrangement including the EU, or through some other forum is yet to be seen (and largely beyond the UK’s control). But there are a number of ways that the UK can maximise its influence and create what the Chinese would call “win-wins.”

Speaking at the joint Central Party School and Wilton Park conference today in Beijing, Labour’s Liam Byrne spoke of investment opportunities for the UK deriving from changes in the social, innovation and financial spheres. China’s 12th five year plan was explicit about the need for greater levels of social protection—particularly healthcare, pensions and social insurance—to help the Chinese economy rebalance from exports and investment to domestic consumption. Throughout the NHS and our leading pensions and insurance companies, British firms and public servants are well placed to guide China with this transition.

Alongside improving its welfare provision, China wants to move up the value chain. This thirst for knowledge provides an innovation opportunity for Britain. Our excellence in educational services such as textbooks, remote English language courses, and examinations in English are likely to become another significant export opportunity. UK universities, meanwhile, are second only to the US in terms of quality. So long as we don’t shut them out through shortsighted immigration policies, Chinese students coming to the UK are likely to enhance our soft power while subsidising our domestic students. Another opportunity comes as many universities (Nottingham being a notable example) set up campuses in China or consider doing so.

And as China wants to develop its human capital, it also wants to improve its management of financial capital. China reiterated its intention to liberalise the renminbi gradually in a widely cited People’s Bank of China report last month. A first step will come in greater trade settlement in China’s currency. For example, China currently accounts for 11 per cent of global trade but the less than 0.3 per cent of all global payments. London is well placed to become an offshore market for renminbi and to help settle these contracts in renminbi. Similarly, China needs to manage and diversify its holdings of (primarily dollar) reserves which account for 43 per cent of its GDP. The City of London is, again, well placed to play a role.

To Byrne’s triumvirate, I would add a climate opportunity. The surprise conclusion late last year in Durban that China was willing to set out a timetable for agreeing to binding carbon emissions reductions targets reiterated their seriousness to tackling climate change. It is less often noted is that it was China that called for the UK to be physically present in the critical fringe meetings that determined the outcome. Chinese officials value Britain’s lead and clarity on the issue. A senior representative from the China Centre for Contemporary World Studies (a think tank attached to the International Department of the Communist Party) told me last week that China regarded the UK as having taken the lead on the issue in Europe (presumably through the carbon budgets set out in the Climate Change Act).

The relationship over the low carbon transition will become increasingly important. China is a huge market for low carbon technology while Britain currently has a comparative advantage in offshore wind and, with serious government commitment, could develop an advantage in carbon capture and storage. That “hard” relationship could be complemented by a “soft” relationship through joint research projects between different universities to create shared intellectual property between the two countries.

No doubt many people will feel uncomfortable that the UK has not been able to do more to address issues around democracy and the rule of law in China. But assisting China’s development and encouraging the related openness is likely to make political reform more, rather than less, likely. Given China’s strong belief in autonomy, we are unlikely to get very far by grandstanding or lecturing as the far more powerful United States has found.

China’s inexorable rise is a significant opportunity for the UK and the global economy. Global trade flows will soon be typified by the phrase “Sold in China” rather than “Made in China.” By strengthening and deepening relationships in a small set of strategic areas, the UK has an opportunity to punch well above its weight over the next 40 years despite profound shifts in the global economy.

 
 

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Will Straw, Associate Director for Climate Change, Energy and Transport

 

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