China’s rise will change the nuts and bolts of British business

19th June, 2010

Should we feel threatened by the rise of China? The relentless progress of what my colleague Martin Wolf describes as the world’s largest ant colony is giddying. Exports from China have risen by almost half in the past year, causing a political stink in Washington, while Chinese workers are reminding their employers, and rulers, that cheap Chinese labour cannot be taken for granted. China has a habit of outrunning any superlative we can apply to the place. (The statistics about China I included in my book The Undercover Economist – published in 2005 – have been shredded by the pace of Chinese growth.)

Philippe Legrain’s new book Aftershock reports the most eye-catching statistic about China I have seen for a while: that China now exports every six hours as much as it did in the whole of 1978. Consumers have enjoyed cheaper goods, but now that businesses across the world have to compete with the “China price”, it’s hard not to feel nervous about this new economic superpower.

China is also a business opportunity, of course. Peter Mandelson once cited a 19th-century commentator who remarked that “if everyone in China lengthened their shirt tails by a foot, the textile mills of England would spin for a year”. At a recent gathering of business leaders in Manchester, that 19th-century sentiment was going strong. These entrepreneurs were worried about the slump and the tight purse strings of the banks – but about China? Never: China was viewed as one big opportunity, even if shirt tails no longer top the list of Mancunian exports.

This is the right attitude. It’s not that doing business in China is easy. (It isn’t, even for the Chinese: the World Bank “Doing Business” database lists 150 countries in which it’s easier to set up a new business.) But the opportunities are there and they will grow.

Less obvious is the dynamic introduced into our economy by the rise of China, and here a simple economic model may help. Imagine a British economy with eight million workers producing eight million nuts, while four million workers in the more productive bolt industry produce eight million bolts – 12 million workers in total producing eight million nut-and-bolt pairs. When the Chinese arrive, offering to sell two nuts for every British bolt, the British nut industry goes bust and the unemployed workers are hired by the bolt industry. The total output of the 12 million workers is now 24 million bolts, of which 16 million stay in the UK and the rest are swapped for Chinese nuts. Every British worker is still employed and the British economy has twice as many nut-bolt pairs as before.

That is a sketch of the familiar calculations offered in economics textbooks to explain the gains from trade. The textbooks are largely correct, although they omit much, not least the juddering shock of workers having to try to switch from one industry to another.

Yet what has always remained implicit in such accounts is the competition between domestic companies. The aggrieved nut industry might claim to have been put out of business by cheap Chinese competition, and in a way it has been. But it has also been put out of business by the efficient British bolt industry.

If someone invented a machine that would turn a bolt into two nuts or two nuts into a bolt, nothing important would change about the story. Rather than sending bolts to China, the bolt industry would pour them into the machine.

The nut industry would still go bust and the bolt industry would still expand.This is the hidden story of trade. Rather than competing with British businesses, China is altering the playing field on which British businesses compete with each other.

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