Wake Up. Our trade with China is pathetic

The upturn in Beijing could lift the world economy. But without drastic change Britain will see none of it.

With America adopting the plot-line from Thelma & Louise, with the eurozone held together only by the monetary sticking plasters provided by Mario Draghi and with the UK suffering stagnation, is there any reason to believe that 2013 will be better for the global economy than 2012?

The answer, I think, is yes – so long as you choose to look in the right places. China is bouncing back. The world's second-biggest economy appears to have responded well to another round of stimulus measures. After a mid-2012 dip, brought on by a collapse in eurozone demand for Chinese exports, business optimism is now recovering.

A China-led global recovery will certainly liven up proceedings. It will also serve to emphasise how the world economy's centre of gravity has shifted so far in such a short space of time. For those of us used to a US-dominated world, China's success provides an enormous wake-up call.

Despite the West's persistent difficulties, the world economy has performed very well over the past ten years. The extraordinary dynamism of the Middle Kingdom has been a key driver of that success. Whereas per capita incomes in the West have hardly budged, delivering by far the worst performance in the postwar period, those in China have risen at their fastest-ever rate. Thanks to this remarkable improvement, China is exerting an ever-bigger gravitational pull on the rest of the world.

Those countries with strong trade connections with China have benefited hugely from its success. Not surprisingly, the winners include China's close neighbours. South Korea's exports to China have risen dramatically in recent years and now account for more than 12 per cent of South Korea's national output. Singapore and Malaysia have benefited similarly. Likewise major commodity exporters, such as Australia, Saudi Arabia and Angola: they may not be the most obvious bedfellows but, when it comes to China, they are intimately entwined.

Much energy has been expended on the domestic reasons behind the West's lack of economic progress, but little attention has been paid to the role of China. While Asian nations and the world's commodity producers have unambiguously benefited from China's rise, the same cannot be said either about Western Europe or about North America. And it certainly cannot be said about the UK.

Western companies have invested heavily in China over the years, which doubtless boosted their profits. At the same time, offshoring and outsourcing has reduced the bargaining position of Western labour. More than anything else, China's arrival on the world stage has dramatically increased the supply of cheap labour. Western workers may blame domestic austerity for the absence of decent wage increases but heightened competition from China and elsewhere in the emerging world must surely be a bigger constraint. After all, wage gains in the Western world were paltry long before the financial crisis.

Western nations seem to be engaged in the economic equivalent of mutually assured destruction.

China's insatiable demand for commodities has also placed increasing strains on Western economies. Ten years ago, when oil prices were a mere $20 per barrel, few thought raw materials prices would rise so far; Brent crude costs $110 a barrel today. Strong Chinese growth has pushed up not just our fuel bills but also our food bills.

Not all the news is bad, of course. Thanks to cheap Chinese production, prices of many consumer goods are a lot lower than they might otherwise have been: good news for those buying iPhones, iPads and iPods. And, through their savings, the Chinese have, over many years, helped to lower the cost of borrowing in the Western world: that we chose to use this windfall gain to go on a debt-fuelled spending binge probably says more about us than it does about them.

Altogether, China's enduring success has had a highly ambiguous impact on Western economies. We have been slow to spot the costs and too willing to assume the benefits. China may be growing quickly, its consumers may be spending more freely, its infrastructure spending may be booming and its companies may be building more and more factories, but for Western exporters China remains a sideshow.

For all the opportunities available in China, Western nations seem to be engaged in the economic equivalent of mutually assured destruction, still too dependent on trade with each other. Germany has done better than most, with 2 per cent of its national output exported directly to China in 2011, a fourfold increase over the last ten years. Germany's prospects, however, are still dominated by relations with the rest of Europe: its exports to the EU account for a staggering 24 per cent of national output. Thanks to those European ties, Germany found itself flirting with recession as 2012 drew to a close, despite signs of a robust Chinese recovery.

The UK is in an even worse position. Measured as a share of national output, its exposure to the rest of Europe is a lot lower than Germany's, but its exposure to China is almost imperceptibly small. A pathetic 0.4 per cent of our national output heads to China. We are 22nd on the list of the country's "top exporters", beaten not only by the commodity producers and China's near neighbours but by all the other members of the G7. Put another way, we have ended up with many of the costs stemming from China's success yet with few of the benefits.

For all our domestic woes, we shouldn't forget that we have so far missed out on the world's biggest economic opportunity. It's not always easy doing business in China. That, however, is no longer a suitable excuse. Whatever the rights and wrongs of the UK's difficult relationship with the rest of the EU, Britain will only be able to dig itself out of its hole if it does better with China. For British business, I can't think of a better new year's resolution.

Stephen King originally wrote this article for The Times newspaper, published on 2 January 2012.