Losing out in China

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.