Monday, 27 January 2014

Insights from Asia: New Opium Needed

China has always been a tricky country to trade with but there are still ways of tapping into its growing wealth

Your Neighbourhood Economist has just returned from a four week trip around Asia which provided a few insights worth mentioning.  The first of these came during a layover in the bustling metropolis of Hong Kong with its unique mix of the old and new.  It was the history behind Hong Kong becoming a British colony that caught the attention of Your Neighbourhood Economist because it now seems as if history is repeating itself.

Similarities between Past and Present

In the 18th century China was beginning to open up to trade with European countries.  Goods from China including tea, silk, and porcelain were proving popular in Europe but there was nothing that Europeans merchants could tempt the Chinese into buying in return.  Thus, payment for Chinese goods was made in the form of silver which became a drain on finances.  As a solution, Britain increasingly relied on bringing opium into China but this created conflict between the two countries as importing opium into China was illegal.  The result was the Opium Wars which ended with a British victory and the island of Hong Kong being ceded to Britain by the Chinese as part of their surrender.

Move the clock forward a hundred and fifty years or so and some things are still the same.  China is again exporting goods that the West is keen to purchase – nowadays it is not luxuries but items produced using cheap Chinese labour.  Further similarities include the strong grip exerted by Chinese leaders over the management of the local economy.  Western firms are still eager to sell to Chinese consumers but their options for doing so are limited.  However, this is not because foreign companies have nothing with which to entice the Chinese.  This time the reason is that the Chinese government is acting to stall an invasion of multinational firms until local businesses become large enough to compete.

It makes sense for China to keep control over one of its main resources – a domestic consumer market with one billion enthusiastic participants.  Your Neighbourhood Economist would also advise the same policy of protecting up-and-coming Chinese firms from their battle-hardened Western rivals.  There are few things that China needs at its current state of economic development that it cannot provide for itself.  One of the handful of sectors where imports are important is commodities but China already gets most of its supplies from other emerging economies.

What to do differently this time around

All this has left Western governments scratching their heads with regard to selling to China.  Some countries such as Germany have prospered by selling machinery for Chinese firms to use in their factories.  But most other developed countries are struggling to find their own niche products to sell to China.  As a consequence, large numbers of container ships sail back to China mostly empty.  Opium is obviously no longer an option yet countries like Britain do need to find a way to tap into the growing wealth in China.

It is trade in services that is likely to be key.  Britain has lots of creative and business savvy firms specialising in the design and technology sectors.  Finance is one area which is still out of bounds in China but other sectors are open to outsiders.  Education, on the other hand, is a service that China is finding it hard to provide for itself in either sufficient quantity or quality.  Countries such as Britain can access Chinese wealth while also expanding its educated workforce either through Chinese students who study aboard or foreign schools set up in China.  In the future, higher paying service jobs rather than employment in declining industries such as manufacturing are more likely to provide the bulk of “good jobs”.  China will not always be so closed off or in need of education services but a focus on education seems like a winning formula in the meanwhile.

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