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Losing out in China

Even the Dutch are beating the British in the race to trade with China. George Osborne blames the government

24 September 2005

12:00 AM

24 September 2005

12:00 AM

Through all the changes of the past decades, Tiananmen Square still sums up China. I was there last week and the first thing that strikes you is its size. Like many things in China, it is the biggest of its kind in the world. China also has the largest population and the biggest army, produces the most cement, and has put much of this into the world’s largest dam. Combined with the world’s highest rate of sustained economic growth, this makes China both the greatest threat to British economic complacency and the biggest opportunity for UK exporters.

Tiananmen Square also reflects China as it is divided: Mao’s mausoleum, a grisly relic of unhappier times, cuts it in two. The most striking divide in China is between the three fifths of the population who are rural and poor, with millions living on just a dollar a day, and the two fifths who are urban and increasingly rich. Walk around the trendy new cafés of Shanghai and you are swamped by thousands of members of the new Chinese middle class, all typing text messages into their brand-new Nokia mobile phones.

Understanding this divide is crucial to understanding China today. It underlines a fact that we in the UK have already started to come to terms with: we are never going to compete for the low-skilled, low-value products that can easily be transported from China. So we shouldn’t try to. Unless we pay ourselves one twentieth of the wages, we are not going to be able to produce T-shirts at one twentieth of the cost. Even as wage costs start to rise in the coastal provinces there is still a vast, largely untapped pool of ultra cheap labour in the Chinese interior. That’s why Peter Mandelson’s trade war was so futile. The only real losers were British retailers, who lost millions of pounds as their Chinese-produced stock languished in customs warehouses, and the British consumers who will ultimately pick up the bill.

These days, however, China’s challenge is no longer restricted to low-skilled, low-cost work. Increasingly, it is the high-skilled, high-cost work that they are competing for as well. In the Pudong special economic zone of Shanghai, I visited a company called SMIC which manufactures semiconductors. Founded just five years ago by Taiwanese investors, it now has a turnover of more than a billion dollars a year. When I asked the young American-educated finance director why the company was based in China when wages were only a small proportion of the manufacturing costs, he said to me, ‘Where on earth can you find such a large number of highly skilled engineers?’ Sadly, I reflected, not in Britain any more. In fact, Gordon Brown’s higher taxes, excessive regulation and crumbling transport infrastructure are all making it more difficult for Britain to compete with the likes of China for those high-skilled jobs of the future.

It would be very wrong, however, to see China as just an economic threat. It is also a huge economic opportunity. For that emerging middle class is a market for high-quality British products and services. That’s why Burberry has opened a huge new shop in Beijing. It’s why the directors of Glaxo SmithKline whom I met last week are expanding their operations. And it’s why British banks like the Royal Bank of Scotland are keen to provide financial services to a burgeoning enterprise culture that is desperately in need of decent credit facilities.

Yet every member of the Chinese government I met in Beijing said the same thing to me: Britain is not making the most of the opportunities China offers. When I spoke to the Chinese officials in the science ministry they jokingly referred to trade deals with Britain as GATT — the ‘General Agreement on Talk and Talk’. The result is that where once we were China’s greatest European trading partner, we are now third, behind Germany and the Netherlands. We are fifth in terms of joint ventures on technology, behind Sweden. Drive through the special economic zone in Shanghai and you will see a German centre, a Swiss centre and even a Finnish centre — but no British centre.

The senior members of the British government must shoulder much of the blame. For example, Gerhard Schröder has visited China every year of his chancellorship. President Chirac comes regularly and last year brought a delegation of 1,000 French businessmen. Tony Blair’s recent visit was his first in five years and he took Darcey Bussell. Gordon Brown’s record is even worse. He visited China for the first time this year. According to the numerous stories I was told by the local British business community, he did almost nothing to promote UK plc while he was there.

Of course, as you walk round Tiananmen Square and look at the huge portrait of the murderous Chairman Mao that still watches over the crowds, the third crucial element of modern China never leaves. For this great economic powerhouse, with its new middle class and its Gucci superstores, is governed by a dictatorship with a terrible human rights record and an atrocious lack of basic public services.

Sixteen years ago thousands died in the streets around Tiananmen, and some of those protesters are still in prison. Each year China executes more of its citizens than the rest of the world combined. Freedom of speech is stultified. China may be the new frontier of the information age, but if you try to access the BBC news website there, you will find it blocked. Political reforms are promised but have yet to materialise. There is no universal healthcare, no free schooling and no social security system. Thanks to the brutal one-child policy there is a huge imbalance between the sexes (because female babies are killed) and a rapidly aging population.

Pervading everything there is a sense of seething rural unrest at the alarming disparities of wealth. Each day there are dozens of disturbances and riots across the countryside. Faced with these, the new Chinese government is trying to address the alarming imbalance between rich and poor. But, as we saw earlier this year with the ugly anti-Japanese riots and the recent threats to Taiwan, the temptation to stir up nationalist fervour as a distraction from all these problems is great.

Some say that it is not in the interests of Britain to confront China over its poor human rights record and nationalist sabre-rattling: it will make it more difficult for British businesses trying to break into the Chinese market. From what I’ve seen and heard, I think they are wrong. China wants to do business and above all seems to crave international respectability. It wants to be taken seriously as a world player, which is why it is flexing its muscles more in the UN security council. Well, if it wants to be a part of the world community, it should be told in no uncertain terms when its behaviour is unacceptable. Threatening free, democratic Taiwan with military annihilation is unacceptable. Suppressing Tibetan autonomy is unacceptable. Persecuting religious minorities and political dissidents is unacceptable. Until China dramatically improves its dire human rights record and stops menacing its neighbours, I cannot see how the European Union can even contemplate lifting the arms embargo.

It is easy to be pessimistic about China: the threat to our jobs; the risks to global security; the internal repression; the massive social problems. But I am an optimist. China is the greatest boost to our economic prosperity in a generation. It offers the greatest market we have ever seen. Free enterprise should bring in its wake a hunger for freedom and political change. What a shame that the British government has neither the courage to confront the challenges China presents nor the vision to seize the opportunities it offers.

George Osborne is the shadow chancellor and the MP for Tatton.

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