Anthony O'Reilly: The problem and potential of China

COMMENT

LONDON - While the World Trade Organisation's Cancun negotiations failed on the issue of the West's agricultural protection, the real issue in world trade is the growing manufacturing might of China – barely mentioned in the Mexican negotiations.

There is a real drama that will shape and fashion our futures taking place in China. China has the capacity, the willpower, the structure and the command economy to rip the heart out of manufacturing growth in Europe and America over the next two decades. Many see this as an opportunity, and the flood of international capital into China—confirmed again yesterday by the survey by AR Kearney--testifies to this. Others will argue that China creates a real opportunity, both in terms of its own marketplace and by producing goods that represent a real cap on inflationary pressures in the rest of the world, most particularly in the United States and in Europe. All this is elevated on the altar of globalisation--to a sort of inexorable movement towards a higher plane.

Let me demur. If the headlong pursuit of Chinese expansion is allowed, it will pose a very serious threat to employment in Europe and the United States, and most particularly to the United States' elections in 2004. George Bush will have enormous difficulty in ensuring a real expansion in employment if the present growth of Chinese trade with the United States, at over US$100 billion per year in terms of its trade balance, (or 25 per cent of its trade imbalance) continues unabated.

Along with the flood of American capital--be it Intel, Microsoft or any of the other major new-age companies— that has been pouring money into China, a great deal of US intellectual software and manufacturing skill is also being exported to China but without any guarantees as to its subsequent expropriation.

The Chinese have waited a long time for this day, and their day has come. They are hugely inventive; they are increasingly well educated (and the flood of well-equipped students from their universities testifies to this); they accept extremely low wages and allow environmental conditions that would not be acceptable in the West. And they protect their domestic market in a manner, which even the Japanese can admire.

Allied to these virtues are the vices of a society in change. A command society since 1949, the laws of property, contract and, particularly, the protection of intellectual property rights are still in their infancy. No one doubts that many in Beijing wish a level playing field, but the playing field is not level, and Western companies competing with them in their own markets will find a flexibility in their application of rules that will make the World Trade Organisation (WTO) blanch.

Wal-Mart, the major American retailer, now has over 300 permanent buyers in China, and last year, imported US$12 billion of Chinese goods into the United States with the commendable claim of trying to keep the consumer's price down. But the consumers paradoxically are conspiring in their own demise – or at least the demise of their own jobs.

This indicates the truly staggering potential of China and its capacity to move quickly. Anyone who has visited Shanghai will find a city that is among the most modern and dynamic in the world. Its architecture, work ethic, and sense of commitment has almost no equal and it is a product not of the free enterprise system but of the command economy.

In 1986, I visited Guangzhou on behalf of the H.J. Heinz Company. Heinz decided to build a factory to manufacture baby food. The factory was constructed rapidly, but for a host of restrictions too numerous to mention we failed consistently to make a profit in this market from 1986 until today. The implications of this for a company of Heinz's sophistication and skill are worth probing, and many American companies may have similar experiences over the next decade. Yet, in all of this, China will prosper.

The world has decided that the aims of the World Trade Organisation are best served by including China and not imposing or policing an undue degree of surveillance on their growing economy for a number of reasons -- some good, some bad. The Beijing Olympics in 2008 will be one of these, and it represents an opening of the Chinese market and mind to world influence. That, in itself, is excellent. The problem is the great price that will be paid by the world in employment terms if China does not play the game the way the World Trade Organisation wishes it to be played.

The threat is clear. There are possibly 450 million Chinese in the production/manufacturing economy. There are 850 million people on the bench, waiting to get into the manufacturing and services sector. A company of which I am chairman, Wedgwood, is manufacturing in China a range of ceramics equal in quality and substantially lower in price than anything we could produce anywhere in Europe or the United States. The Chinese have been magnificent in their cooperation, intelligent in their application of new technique, and hugely productive. This is the model of the future, and it is a frightening one.

So, what is the answer? It must be a combination of many things but two are key. First, the Chinese have to impose and police the laws of contract, property and intellectual property rights that we enjoy in the Western world. This has to be done in the most open and transparent way through their judiciary. The judiciary has got to be freed from political obligation, something that will be extraordinarily difficult in China.

Second and most important of all, the hugely undervalued Yuan (remnimbi) must be revalued upwards, not in one immediate leap, but gradually, determinedly and as a matter of policy.

These policies will work to a gradual improvement in the entire world economy. Not to follow them would be to re-ignite the ghost of protectionism and Smoot-Hawley in the United States, and a range of other quotas and tariffs from other trading blocs, including of course the European Union.

Each country can advance special pleading in regard to protecting its sectional interests. There has been, quite rightly, an outcry last week in Cancun at the way in which the developed world has subsidised its agriculture. Each country, be it France protecting its farmers or, particularly, Japan protecting its rice farmers for both political and cultural reasons, can advance special pleadings.

We have to recognise that China is both the problem and the opportunity of the future. Together, China and the West can build a huge, growing and more satisfying market that will bring benefit to all, particularly developing countries, if approached gradually, sensibly and legally.

The converse is the death of globalisation -- the erecting of frontier barriers, the rule of clubmanship, and a slow death for free enterprise and increasingly free markets. Surely the choice is obvious. Let us make the next two years a time for decision in which China must play a most active part in policing its own economy and making it truly responsive to the needs of our global economy. If we fail to create a more level playing field for international trade, all of us – including China– risk loosing the very thing that has so vastly increased global wealth.

* Sir Anthony O'Reilly is executive chairman of Independent News and Media plc, which part-owns the New Zealand Herald through its 44 per cent stake in the Herald's publisher, APN News & Media.