China and India make trade harder for Wales

Apr 2 2008 by David Rosser, Western Mail

THERE has been a lot of talk recently of a decoupling of the global economy; the US slowdown will allow China and India to take the wheel, they say.

Experts predict China’s annual growth of 9.6% will be fuelled mostly by domestic demand, and excess capacity generated by a US downturn could be exported elsewhere. The attraction of this is clear; it would maintain the high levels of return for the £7bn invested in China by British business and justify the UK’s position as India’s second largest trading partner. If this scenario holds true then could we all collectively let out a sigh of relief? Can we rely on growing investment from – and into – the Bric block (Brazil, Russia, India and China) to soften the landing?

Given this discussion, it is rather timely that the CBI director-general Richard Lambert and Prime Minister Gordon Brown have recently returned from trade missions to both these rapidly growing countries. What did the visits reveal?

The 30-strong mission to China tackled several themes during the two-day trip to Beijing and Shanghai. Increasing bilateral UK-Sino trade, promoting UK clean energy and enhancing innovation through strong business-university links were among the issues addressed. Talks revealed that while many companies were profitable in China, the overall business environment was “tightening” and local authorities were less willing to accept foreign direct investment. By contrast, the UK was cited as a welcome destination for Chinese FDI (foreign direct investment) with Gordon Brown welcoming the opportunities for British business that could flow from the £100bn sovereign wealth fund, China Investment Corporation. Both Brown and Chinese Premier Wen agreed to increase total UK-Sino trade by 50% to £30bn over several years. Growth in bilateral trade, giving British businesses access to a fast-growing and relatively untapped market and providing investment opportunities for Chinese billions, would bring welcome economic stimulus.

So is Uncle Sam giving way to the Asian tigers? Well, not quite. On February 4 the World Bank cut its forecast for Chinese economic growth this year to 9.6% – a growth rate any EU state would be proud of – but it is a cut of nearly 2% on last year’s.

In 2007, the US imported $321bn worth of Chinese goods making it the largest single trading partner (the UK is 7th). However, only 20% of China’s exports now go to the US. China is predicted to continue its strong growth, fuelled by its 1.3 billion people and exports to Japan, Germany, Russia, India and a rapidly growing trade with Africa that reached £27bn in 2006.

What about India? Having got off to a much slower start than China, the Indian economy is now growing at a rate of 8% a year with foreign exchange reserves of $300bn. The business delegation touched down in Delhi for a series of meetings including an enterprise summit at the Institute of Indian Technology with Gordon Brown and Indian Prime Minister Manmohan Singh. Issues discussed will sound familiar to businesses operating in Wales – infrastructure, climate change, public services and skills. Other issues will not be so familiar – economic liberalisation of retail, banking and financial services to leverage in more FDI. Gordon Brown declared the countries had established a “strategic partnership of equals” and announced £10bn of deals. UK-India trade accounts for £5bn a year split almost equally between imports and exports. Emerging sectors are in IT, biotechnology and healthcare.

FDI from India has surged in recent years to become the 8th largest investor in the UK. We are all familiar with Tata steel’s multi-billion-dollar takeover of Corus and in Wrexham Wockhardt has acquired CP Pharmaceuticals.

So can we rely on the twin economic engines of China and India to give the global economy a soft landing in 2009?

China and India may be where the products are made but often they are not yet where much of the value is added. The Economist reported a University of California study into where the money goes from a typical $224 iPod. Of the iPod’s 424 parts, they discovered that 300 cost no more than 1 cent. The display cost $20, but was manufactured in Japan. China did assemble the 424 parts but that accounted for just $3.70 of the iPod’s value. Apple claimed the largest share by far – about $80. On the one hand this is a clear success story of a US company retaining the R&D of a business, adding value to a product, reaping the reward and outsourcing the manufacture. Alternatively, it’s an example of US investment and US consumer demand directly shaping Chinese economic growth and the future of thousands of Chinese workers.

What does this all mean for Wales? A member of the Welsh Assembly Cabinet recently stated how important it was for Wales to identify and market its unique selling points to foreign investors. Every EU country and UK region is selling themselves as an R&D rich, valued-added economy. In a tighter economic climate, marketing Wales as such will no longer be enough.

David Rosser is director of CBI Wales