David Cameron has led a band of ministers and businessmen to China this week, apparently the largest such delegation since King George III. They are there to promote our exports and the mission follows a similar one to India in July.
China continues to boom with close to 10% growth projected for this calendar year. While growth may abate somewhat in coming years (perhaps to closer to 7-8%pa), China will still comfortably outperform leading developed economies. The thinking goes that we need our exports going to fast-growing countries, like China, to sustain our own overall growth.
And here’s where the challenge comes in because right now, the UK exports only a small amount of its exports to China (c2%) and other fast-growing emerging markets. Most of our exports go to developed economies, particularly in Europe, where growth prospects are weaker. The Prime Minister is fond of saying that more of our exports go to Ireland than the BRIC economies combined.
I’ve wondered before about why this is the case and how it compares with other developed countries. But I’ll wonder again…
||Av. Ann Chg
The table above shows a series of developed countries’ goods exports to China in 2005 and 2009 and the average annual growth rates of this trade between those years (note many went backwards 2008-09). It is UN data with values converted into U.S. dollars to allow comparison. I think it throws up some interesting comparisons and also points to some interesting explanations for trade patterns.
Australia and New Zealand share many of the same barriers the UK has to getting into the Chinese market e.g. language/culture, distance to market, regulatory/legal differences. Yet trade growth with China has been much faster for Australia and New Zealand than the UK. For Australia, China is its number one export destination.
For me the simplest answer is the most important one. It's what these countries are selling. In Australia’s case mainly minerals and fuels like iron ore and coal; in New Zealand’s case mainly dairy, meat, wool, and wood – in other words raw materials and food. These are in essence feeding into Chinese production either through its factories or the mouths of its workers.
But as a side point it might also be worth noting that New Zealand has a free trade agreement with China, the first developed country to have such an agreement and Australia has been in FTA negotiations with China since 2005. Where is the UK on similar arrangements?
How about Canada and the United States? Their exports to China are more similar to the UK’s, including goods like motor vehicles and parts, industrial machinery, and chemicals. Growth in U.S. and Canadian goods exports outpaces the UK’s – though the difference is very much more modest.
A closer look reveals that their exports still include a fair chunk of raw materials including wood pulp, timber, iron and steel, and crude petroleum. Again demand for these exports seems driven by Chinese production. The demand for goods used in production is very different from the demand for goods consumed by a growing affluent Chinese middle class. Similarly the export of raw materials contrasts sharply with UK exports of manufactured goods.
That brings me to the comparison with France. France’s export goods to China are probably most similar to the UK’s and focus on manufactured goods, many for final consumption. From the table above the difference in growth is almost identical; France’s performance has been strikingly similar to ours over 2005-09.
France, who secured their own recent round of Chinese trade deals worth $20 billion, showed very similar growth in exports to China over the last few years. French exports to China include engines and other power-generating machines, aircraft, pharmaceuticals, and vehicles. The UK exports many similar items particularly engines and other power generating machines, pharmaceuticals, and vehicles.
Both countries are coming from a fairly low base – but is that more reflective of Chinese demand than poor penetration from our exporters? I think the close match in performance with France, and relatively modest additional growth for Canada and the U.S., suggests the UK isn’t doing that badly in China, given what we sell.
Does that mean that the trade odyseey from Cameron and Co is a waste of time? Should we give up on our dynamic, modern manufacturing sector and work out ways to send the Chinese more raw materials? I don't think so.
George Osborne said this week that what made this delegation’s trip to China different was not any new announcements or action from the UK or its government so much as the state of Chinese development. In his view, China is now in a position to start buying the sorts of exports the UK produces (including services) in much greater volumes. This is because China is ready to enter a new phase of growth in domestic consumption, rather than simply continually increasing its growth through exports.
If Osborne’s right, I think that’s what makes China such a great opportunity for UK manufacturers now, not its exceptional growth rate per se. The similarity of the UK's export growth performance to China with other developed countries may be reason to believe we haven't been doing too badly. But it also suggests that the competition will be fierce between developed countries seeking to capitalise on a new wave of growth driven by Chinese demand.