The United States has implemented substantial tariffs on Chinese imports, and is discovering just how dangerously dependent it has become on products from that country.
We in the West naively believe that dealing with China is like dealing with another western country, this could not be further from the truth.
China is an autocratic single-party state, where survival of the party and its control of Chinese society and influence in the world is the top priority of government. A key part of this is facilitated by ensuring maximum employment. As the Chinese market is relatively small this has been driven by exports. This started as a way of achieving rapid and much needed economic growth for what was until 30 years ago a largely agrarian economy.
Chinese businesses are subsidised to export in various ways that are far from transparent, and while this may not be strictly against WTO rules it is certainly against the spirit of them. In our industry we see this the whole time, for example hydraulic motors being sold here for 1/3 of the cost of a European manufactured unit. They are normally not of very good quality, but people will buy them because they are cheap. Footwear is another product where China increasingly dominates. I recently bought a pair of steel toe capped leather boots from Screwfix for just under £50.00; I see they are now reduced to just under £42.00. The boots are well made and seem to be of good quality. Screwfix is part of Kingfisher, and looking at their accounts their gross profit margin averages about 36% – meaning that the landed cost of these boots was probably about £27.00 per pair. Within that cost is shipping, associated costs alongside UK duty, typically 8%. These boots will be leaving the factory at almost certainly less than £20.00. With the costs of leather, steel, thread, elastic and other materials being fairly universal worldwide it is not possible whatever your labour costs to produce these at this price, without subsidy or as a loss maker to gain market share. Looking at solar panels and associated equipment, Chinese predatory pricing is part of a state policy to squeeze out competition. While we like the low costs, it is not healthy in the long term to be so totally dependent on a potential enemy. This is without even considering killer switches and other security issues.
Some might think that if the Chinese state is choosing to subsidise our consumption and make our lives cheaper then why complain? I have sympathy for that argument, and if we choose as a nation not to invest in our own shoe and boot making capacity then we need to source from the cheapest and best source we can. However, where does one draw the line? We have seen a hollowing out of the UK’s manufacturing capability. All too often, family-owned businesses have developed a strong brand based on a product that they manufacture themselves. They have then been bought by a larger company where the accountants have looked at the costs, and decided that they could sub-contract production elsewhere. In so doing they have lost the feel for the product, and in most cases created a competitor who now has their secret – leaving the original manufacturer little more than a distributor of their own product. Those promoting offshoring say that leakage of control can be stopped through the use of legal agreements, but these aren’t worth the paper they are written on. Chinese businesses are avaricious for new technology and new methods of production, and will not think twice about circumventing an agreement if they see benefit in it.
I receive on average about 15-20 e-mails a day from Chinese companies offering to make the products we sell, for us. I suspect this is an experience shared with most other businesses in the UK. I have repeatedly seen the same story: the western company enters the arrangement with enthusiasm, and while all goes well for a short period one gradually finds that the contractor tail starts wagging the design owner dog. Soon, one sees almost identical products appearing on the market originating from an obscure manufacturer that outwardly appears to have no relationship with the contractor, but clearly does. A competitor unencumbered by the design owner’s costs, gradually grabs market share.
We may or may not see President Trump having success with his shock therapy, but he has identified a problem which we cannot ignore. It is essential that we take our own action to limit the amount we let Chinese suppliers dominate our market. I have mentioned a number of product lines that are a problem (there are many others of course), but there are also service companies that may have western names, but are owned by Chinese companies.
We do our international banking through a company with a UK e-banking licence that is meant to be based in London, but is now owned by the ANT Group – one of China’s largest private companies. While lip service is paid to it being a British company making use of its UK e-banking licence, it is becoming increasingly Chinesified and recently most of the London based staff were made redundant. Customer service contacts may have western style names, however I do not believe they are either western nor based in London. Irrespective of whether they provide a first class service, this serves as an illustration that it is not just in manufactured goods but also in services that we have to be aware of Chinese participation in our economy.
China has been given full membership of the WTO and one would expect that unfair trade practices would be policed. However, within WTO rules a member can declare themselves to be a developing economy and therefore while enjoying all the benefits of membership can enjoy considerably greater flexibility in the use of subsidies, tariffs and other export incentives and import penalties.
The UK being a fully independent member of the WTO has a number of tools at its disposal, which it should be prepared to exercise. Firstly, we must be honest with ourselves that China, whatever it says to the contrary, means us no good and must be viewed as an enemy. As such, while it is important to trade with the Red Dragon, there should be no use of Chinese goods or services within our key national infrastructure, and that should not just be the physical infrastructure of energy, communications and supply of rare earths, but also banking, financial services, transport and the media.
We saw the disruption caused when Russia invaded Ukraine. It doesn’t take much imagination to envisage the chaos that would ensue should China invade Taiwan. The more involvement China has in our economy, the more difficult it will be to aid Taiwan or stand up for any of China’s other neighbours. We too should declare ourselves a developing economy, to allow ourselves maximum freedom to manoeuvre. The usual suspects will decry this as a blow to our prestige, but if it is good enough for the second largest economy in the world it is good enough for the seventh.
China takes a long term view, working on the principle of slowly and gradually compromising western populations so that they are unable to operate without them. We are dangerously close to this state of affairs, and have to unravel the present situation before it gets any worse.
For goods supplied into the UK economy where China accounts for more than 10%, a quota needs to be set at the 2024 level of supply with a 10% reduction each year from 2026 until it is reduced to below an overall 10% market share. Anything supplied over the quota will be subject to 100% tariffs. There are a considerable range of products and services that at the moment China is producing, but they are not subject to the same amount of export support as the key industries of cars and solar panels. In putting reducing quotas on the key product lines we must also put a quota on all other commodity codes, allowing no more than 2-3% Chinese import penetration.
We trade with many countries around the world who are not allies, but only China uses trade in order to trap countries into a form of servitude. We must ensure we don’t fall into that trap. Our leaders have not proved to be very good at taking long term decisions, preferring the quick fix. It is essential that they grow up, and play this particular adversary at its own game.
Alastair MacMillan runs White House Products Ltd, a manufacturer, distributor and exporter of hydraulic components to over 100 countries. He is a supporter of the Jobs Foundation.
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Not exactly new; in the 50s and 60s, ‘Empire Made’ and ‘Made in Hong Kong’ were synonymous with cheap knock off products that didn’t last – ‘buy cheap, buy twice’ (or more). Rather than bemoaning the growth of Chinese exports, stimulating economic conditions to support UK manufacturing is required – but clearly isn’t something any UK politicians will countenance given their continued preference for the EU and allowing it to always gain the upper hand and which now seemingly mirrors trade relations with China. [Incidentally China invading Taiwan, like Russia invading Ukraine should be none of our business.]
Try telling the Government all this – as if they didn’t already know. They are every bit as hostile and dangerous to this country as any rogue state.