From Crisis To Opportunity: The Rise Of A Global Middle-Class
Shanghai Institute for International Studies
March 15th, 2010
In a live webcast before this month's National People's Congress, Premier Wen predicted that while 'last year was the most difficult year for China's economic development…this year will be the most complicated'.
Premier Wen's insight is as true for the rest of the world as it is for China. And there is no better place to explain why than Shanghai, a financial hub today for China, and in future perhaps for the whole world.
My speech today is about the responsibilities of politicians, business people and academics around the world to stand up for an inclusive and balanced form of globalisation. The need is urgent: if we do not make the case, the result will be destructive nationalism, embodied in protectionism that harms us all. The potential prize is great: for the growth of the middle class in the rising powers of the East to be of benefit around the world.
China's entry into the global economy is one of the greatest success stories of my lifetime. Since 1979, 500 million people in China have been lifted out of poverty. The pace of the transformation from an agrarian, rural economy to an urban, industrial one is unprecedented. And your economic development has raised living standards, not just in China, but across the world, with Chinese producers driving down the cost of manufactured goods for all of us.
The foundation of our mutual prosperity has been the growing interdependence of economies, connected by more open markets in goods and services. But in the last two years, the economic crisis has refocused attention on the risks of interdependence rather than its rewards.
The financial crisis was unique in its breadth and depth. It is too early to say that the patient is back on his feet, but he is out of intensive care. China played a critical role, domestically and internationally, in helping to avert a deeper, longer recession, through its strong fiscal and monetary expansion and an extra $50bn contribution to the IMF.
Today, speaking as a Foreign Minister not a Finance Minister, I do not want to dwell on the immediate economic measures needed to support recovery, important though they are. My focus is instead on the longer-term.
My argument is this. The growth of a new middle class in emerging economies can fuel the next wave of global demand. And the emergence of new low-carbon, technologies can ensure resource scarcity does not act as a brake on growth or a driver of inflation. The demographic and economic drivers create the potential for an age of opportunity.
But this future is not fated. It remains fragile, and dependent on leadership from all the major economies. It will require a determination to deepen globalisation, by opening up our economies further to flows of goods, services and capital. It will require long-term commitments to investment in energy efficiency and low-carbon energy supply. And it will require us to thicken our cooperation through international financial institutions.
Each step will pose challenges and difficulties for all of us. But standing still is not an option. If we fail to move forward with this agenda, we will move sharply backwards, with open markets unraveling from the force of protectionism, and resource scarcity leading to a destabilising scramble for finite supplies. So today, I want to talk about how the politics of cooperation and multilateralism on which globalisation is based can win out over the zero-sum politics of protectionism and nationalism.
An Age Of Optimism
Global growth in the past two decades has been driven by consumer demand in industrialised countries. In the next two decades, global demand is likely to be powered by a new source: the growth in the middle class in emerging economies.
Economists at Goldman Sachs estimate that two billion middle-income citizens – those earning between $6,000 and $30,000 a year – could emerge within the next twenty years. The United Nation's own projection, based on a narrower definition of an annual income between $4,000 and $16,000, is closer to one billion. Either way, this will be the biggest global economic development since the industrial revolution.
The prize for China – and countries like it, notably India - will be significant. Today, a third of Chinese people are deemed middle-class. Within 20 years it is projected to be over two thirds. The result will be better living standards, reduced poverty and improved welfare. The growth will be concentrated in urban centres. But the dividends of economic growth could be spread to benefit those who remain in villages, through improved health care and education. Even as the workforce starts to shrink, if sufficient progress has been made, productivity growth could continue to propel China up the global league table.
As the Chinese people get wealthier their demand for goods and services will grow and the type of products they want will change. Existing demand for agricultural goods and infrastructure investment will be accompanied by growing demand for services, from health and education to finance and law. Luxury goods, recreation and leisure are all likely to see sharp growth. Use of energy and transport will also increase dramatically.
This is important for countries like the UK. Britain’s expertise in finance, professional services, education, pharmaceuticals, advanced engineering, creative industries and digital technology, means that as Chinese consumers move up the value chain there will be a better fit between our economies than ever before.
For example, McKinsey predicts that by 2012 the Asian market for financial services could be larger than that of the EU or US. This would create huge opportunities for the UK as a global centre for financial services. It would be good for companies like Standard Chartered that have had a presence in China for over 150 years, as well as for firms like Prudential and Standard Life that have a particular expertise that responds to Chinese requirements. A 100-fold increase in the number of Chinese credit cards between 2003 and 2013 is just one example here.
China's automotive sector is already growing fast. BMW Mini increased its exports by almost 40% last year. Every month Jaguar Land Rover ship 2,000 Land Rovers and more than 200 Jaguars from the UK to China. Even though these companies are no longer British owned, together they employ 21,000 people in the UK. As the middle-class explodes, so will this sector. According to research, it is when incomes hit $9,000, that people are most likely to buy a car, and China could account for 42% of growth in the global car market in the next decade.
The UK's aerospace industry is the second biggest in the world. A boom in air travel will create significant opportunities for British or British-based companies. Rolls Royce believes that the Chinese market will require up to 6,500 engines worth $65 billion between now and 2026.
China's education sector is expected to grow tenfold between now and 2025 and the Indian Government wants to create 60 million new university places and provide vocational training for 500 million more Indians over the next ten years. The English language and the global reputation of the British education system means that the UK is well placed to respond to this rising demand. The prospect is not just of more international students coming to the UK, welcome though they are. Nottingham University’s Ningbo campus and Liverpool’s in Suzhou show how Chinese students can enjoy a British or international education without the major expense of studying abroad. More important than the income from these ventures are the links forged, and the ties built between our two countries, that will serve us both well – culturally, politically and commercially – in the years to come.
Sceptics will point out that less than 4% of total UK trade is with China. But with emerging markets now accounting for 80% of global growth, it is clear that economies like China's offer the greatest promise for future development, as they catch up with ours. Indeed, UK exports of services to China increased 60% in 2008 and the UK is the largest EU investor in China. We need to think, and position ourselves for the future.
The Policy Choices
However this future – this age of opportunity – will not emerge by accident, but by design.
In part, this will require domestic policy changes. As China's government understands better than anyone, the speed of this country's growth will depend on the policies it pursues in the months and years to come. Pension provisions and government-sponsored healthcare will give people more confidence to spend rather than save. Liberalisation of the financial sector will increase finance available for consumers and companies. Better protection of intellectual property rights – improved patent application systems and stricter copyright laws – would encourage innovation.
Equally, Britain will only maximise its benefits from these new opportunities if it has a strategy to do so. The UK’s business-friendly environment, with a clear legal framework, stable interest rates and access to finance has long brought international business to our shores. 430 Chinese businesses have already invested in the UK. But our continuing prosperity means positioning ourselves to respond to new areas of demand in emerging markets. That is why the British government's new policy of industrial activism is about creating a platform for the growth sectors of the next two decades.
But national policies, however deftly devised and implemented, will only ever be as effective as the international economic order allows. An economic order without the harmful, persistent imbalances between countries. A global economy, where services, goods and capital can move more freely across borders, tapping into new sources of demand, and driving up productivity. An economic order governed through rule-based, multilateral institutions that restore the trust on which economic activity is based.
This will be very challenging. Domestic economic pressure makes global engagement hard. But the pillars of a new economic order are clear, and there is a strategic role for Sino-British partnership in driving this forward. There are four key principles for all of us to seek to promote.
Openness
First, openness – to trade, ideas, people and investment. At the beginning of 2009, many predicted that the financial crisis would be compounded by protectionist measures mirroring the 1930s, when the Smoot Hawley Tariff Act turned the Wall Street Crash into a decade long depression.
According to Global Trade Alert there has been an increase in protectionist measures, but levels remain well below those of the 1930s. This in part reflects deeper shared interests in open, connected markets. International supply chains have created a strong corporate constituency in favour of low tariffs. Norms of open trade are reflected in global and regional institutions, such as the WTO. But the biggest reason why the protectionist impulse was neutered was that policymakers found alternative ways of creating jobs and growth, through fiscal and monetary measures. Demand management counteracted domestic pressures for protection.
In Britain the Government is committed both to avoiding premature withdrawal of government support, and to halving the deficit in four years. The danger is that if growth remains sluggish, states will be unable to fall back on fiscal or monetary tools to support industry and may be tempted by protectionism as an alternative.
It is therefore essential that those with an interest in open trade create a bulwark against protectionism. There is a clear case for partnership here between the world’s fastest growing economy, China, and its largest single market, the European Union.
A world trade deal could be worth up to $170bn annually. China and the EU should work together with the US to show that completing the Doha round will provide an aggregate boost to jobs in Tennessee and Texas as much as Chongqing and Guangzhou, or Munich and Manchester.
The G20 meetings in Canada in June and Korea in November will help to focus attention on the protectionist threat. But Regional Trade Agreements, such as the EU-Korea deal signed last year can also play a vital role in building momentum, provoking commercial lobbies in other major economies to lobby for better market access.
Concrete steps towards a climate change deal will also be critical in heading off the threat from green protectionism, delivering the carbon price necessary to achieve more sustainable growth. So too will welfare programmes if they seek to protect workers through rights to work and re-training, rather than protecting jobs, as the UK’s ‘job guarantee’ scheme seeks to do.
The ability of governments in the West to sustain popular support for open markets depends critically on being able to demonstrate that there is a global trend towards openness from which their own companies can benefit. So it is worrying that we are seeing more reports of foreign investors in emerging economies encountering new barriers to investment. This not only increases protectionist pressures in Europe and the US. It also deprives China and other emerging economies of cutting edge technologies which in turn raises their own competitiveness. Everyone loses.
The cumulative and unintended consequence of small, industry-specific protective measures can result in an unraveling of the economic interconnectedness on which both our countries’ prosperity is founded. If markets begin to close, the new jobs we need to create to absorb the millions of people coming into the job markets in Europe, the US, India and China, will not materialize. Our shared interest must be in creating a reverse dynamic towards greater openness.
Low-carbon
Low-carbon energy offers a particular opportunity for this. It is the second principle.
2008 will go down as the year of the credit crunch. But, it also saw a resource crunch, through high energy and food prices that contributed to, and exacerbated the financial crisis. Spiraling commodity prices contributed to global imbalances. For instance, the fall in oil prices from their average 2008 levels, has reduced the current account surplus of oil-exporting nations by 8% of their GDP. Commodity price inflation also delayed the loosening of monetary policy, with central banks facing both falling asset prices and rising commodity prices.
To prevent rising commodity prices from thwarting the economic recovery, and to stop the resource crunch from pushing us back towards a destabilizing zero-sum scramble for resources, we urgently need to shift to low carbon development. But it is not just that. The dangers of resource crunch and green protectionsim are real. There is a further point. The low carbon agenda is not about constraining development space but about expanding it. It is not about limiting growth and dividing up the economic pie in a sustainable way; it is about innovation and change to create a new, more productive development path. As Europe talks of smart grids, smart meters, electric cars, and carbon capture, the size of the new markets are very large. If China does the same they are immense. Low carbon is not just an environmental necessity it is an economic opportunity. This afternoon I will see for myself one of China’s largest solar panel factories, in the outskirts of Beijing – a multi-billion dollar business that is exporting to other provinces and the rest of the world.
We made some progress in Copenhagen. But there is much we need to do to build the legally binding international framework we need to keep global warming below the critical 2 degrees; I believe this is an economic opportunity not a threat.
The EU and China have a clear shared interest in working together on energy and resource efficiency. We both want to reduce our dependence on imports of oil and gas. We both recognise not just the economic dangers, but also the commercial potential.
Coal will be an important element of our energy security over the coming decade. But if it is not clean coal our efforts to mitigate climate change will fail. China and the EU are already working together to build one of the world’s first full scale power plants that captures and stores the carbon it emits, so that we can use coal without driving up carbon emissions. But there is more that we can and must do to accelerate investment in the technologies of the future.
The key to delivering energy and climate security will be to push down the costs of low carbon choices relative to high carbon ones. The best way to do this is to accelerate market growth by integrating markets. That would, for example, reduce the price of Chinese–made hybrid and electric cars for European customers, encouraging manufacturers to scale up, further pushing down costs. That’s what the EU single market is all about. And that is how we can best use cooperation on energy and climate to keep markets open.
Instead of the climate imperative being a driver of green protectionism, it could be a driver of green free trade. Building on the ground-breaking low carbon economic zones which our two countries have established over the last few years, we should explore the potential for rapid removal of tariffs and harmonisation of standards on low-carbon goods, broadly defined, across the major economies.
Reform of International Financial Governance
The third priority is reform of the international financial architecture. The current arrangements were designed for a world of comparatively isolated national economies. Today, however, no-one can be insulated from instability without international cooperation.
The shift from the G8 to the G20 as the main forum for global economic governance was long overdue. The imperative now is to ensure it continues to deliver as the immediate crisis passes. The new G20 Framework for Strong, Sustainable and Balanced Growth agreed in Pittsburgh in September is critical here. At its core is the recognition that our policy choices are interdependent. As Premier Wen Jiabao commented yesterday, we need more macroeconomic coordination between nations.
Without a mechanism to ensure a better collective mix there is a risk that spill-overs between countries will undermine financial and economic stability. According to the IMF the difference between getting this right and getting it wrong could be worth up to $6 trillion over five years. So as the British Chancellor, Alistair Darling, has said, this mutual assessment process should now be the central mechanism for international economic coordination.
If we are to forge new forms of global economic cooperation we need to go further and faster in reforming the key International Financial Institutions, strengthening their relevance, legitimacy and effectiveness. Gordon Brown has put forward proposals on behalf of the UK.
Working more closely with a stronger Financial Stability Board, we want the IMF, on the basis of more equitable representation, to improve surveillance of the global economy, to highlight vulnerabilities and avert crises. We believe that the World Bank, IMF and regional banks need a broader mandate that reflects the critical economic challenges of this century – closer economic and financial linkages between states, instability and poverty but also climate change.
As the world’s second largest economy, we want to hear China’s views on what structures would be most fair, most equitable and most efficient. The scope for a Sino-British partnership in forging a new economic order is clear.
Markets with values
A social market economy that treats individuals as citizens not merely as units of production is more flexible and ultimately more prosperous than naked capitalism or state bureaucracy. So my fourth and final point relates to the values which I believe our societies must, over time, respect.
Over the last thirty years, China has laid the foundations of what could become the world’s greatest economy. It is pouring the concrete and building the infrastructure - from the superhighways to the high-speed rail connections, new schools and gleaming university campuses. Visiting the Shanghai Urban Planning Exhibition Centre, as I did two years ago, you cannot help but be impressed by the speed of this city’s modernisation, and inspired by the vision for its future.
But as Premier Wen said yesterday, 'social equality and justice form the basis of stability'. The next phase will inevitably be to build the social systems, the legal infrastructure and the framework of rights and responsibilities that will make China's economy not just more productive and more efficient, but more just, more stable, more innovative, more entrepreneurial and more attractive to high quality investment.
The spur for this will come from within. Because people want property rights. But they also want choice, and access to information on which to base their decisions. And companies want to know that they can rely on impartial application of the rule of law, that their ideas and inventions will be protected, that their investment in research and development will drive their profits not someone else’s.
Workers want better working conditions, reliable social welfare provisions, and the right to live where they choose. In Europe the development of the social market economy has involved not just government and private business but the voices of civil society, notably in trade unions.
In western Europe, trade unions played a vital role in post second world was systems of governance - often inside the decision making process, otherwise as a force in society and industry.
The challenge of renewing the collaboration of employees to promote productive business and strong societies remains pressing today, to engage the will power and ideas of the workforce in public, private and voluntary sectors. Chinese systems of law, business, and association are different.
But the contribution of your people, in the workplace, in communities, and as you have been discussing in the party, will be vital to the human values that need to be asserted to make a market economy work.
International markets will support this evolution. Foreign investors seek transparency and fair competition so that they can be confident in their investment. International consumers are not just concerned about the price they pay but the social impact of the goods they buy.
When Greenpeace called for a boycott of Shell in 1995 because of its plans to dump an oil platform at the bottom of the Atlantic, its sales plummeted. Public concern about how the diamond trade was perpetuating civil wars in Africa in the 1990s led to a complete overhaul of the global diamond market. Globalisation is leading not just to the convergence of our economies, but to the growth of a global social conscience. Companies with global ambitions will have to adjust to that fact.
This raises hard questions about the responsibilities of states to their own citizens, and the extent to which the international system has sway. It goes to the heart of doctrine of responsible sovereignty that I set out in Beijing two years ago. Already we are sharing our own best practice experience with you on intellectual property rights and social security tribunals to resolve disputes on pension and benefit entitlements quickly and fairly. We look forward to forging many more similar partnerships in the years to come.
Conclusion
As we emerge from 18 months of crisis, we must acknowledge the problems we face and begin to tackle them. But we must also acknowledge the economic and demographic possibilities on the horizon - the age of opportunity that is ours to seize.
Shanghai is a remarkable demonstration not just to the rest of China, but to the rest of the world. After economic reforms in 1992, Shanghai posted 15 consecutive years of double digit GDP growth; outstripping any other Chinese province. Indeed, though only home to 2% of the country’s population, it contributes 16% of its GDP. This city has flourished - now and throughout its history – when it has been open to the outside world. It reminds us that, just as the world needs China, so China needs the world.
This year the Shanghai Expo has the theme of Better City, Better Life. This encapsulates the benefits that China’s unparalleled growth has brought, and can bring, not just to the growing ranks of its middle class, but to all its people.
I hope the Expo will be an opportunity for cultural exchange as well as commercial engagement. An estimated 70 million Chinese will visit. We hope that those who come to our pavilion or visit our website will learn not just about the economic opportunities of trade with Britain, but about our society, our values and our way of life.
Through our website, Chinese people decided that the British pavilion, which I visited earlier this morning, should be called the dandelion – pugongying. It is a highly appropriate name as it houses 60,000 groups of seeds provided by the Kunming Institute of Botany in partnership with Kew Gardens' important Millennium Seed Bank project. When the Expo ends, these seeds will be sent as gifts to schools all over China. A gift of co-operation, of openness, of sustainability and of shared growth. A symbol of the future that we want to sow together.
Shanghai Institute for International Studies
March 15th, 2010
In a live webcast before this month's National People's Congress, Premier Wen predicted that while 'last year was the most difficult year for China's economic development…this year will be the most complicated'.
Premier Wen's insight is as true for the rest of the world as it is for China. And there is no better place to explain why than Shanghai, a financial hub today for China, and in future perhaps for the whole world.
My speech today is about the responsibilities of politicians, business people and academics around the world to stand up for an inclusive and balanced form of globalisation. The need is urgent: if we do not make the case, the result will be destructive nationalism, embodied in protectionism that harms us all. The potential prize is great: for the growth of the middle class in the rising powers of the East to be of benefit around the world.
China's entry into the global economy is one of the greatest success stories of my lifetime. Since 1979, 500 million people in China have been lifted out of poverty. The pace of the transformation from an agrarian, rural economy to an urban, industrial one is unprecedented. And your economic development has raised living standards, not just in China, but across the world, with Chinese producers driving down the cost of manufactured goods for all of us.
The foundation of our mutual prosperity has been the growing interdependence of economies, connected by more open markets in goods and services. But in the last two years, the economic crisis has refocused attention on the risks of interdependence rather than its rewards.
The financial crisis was unique in its breadth and depth. It is too early to say that the patient is back on his feet, but he is out of intensive care. China played a critical role, domestically and internationally, in helping to avert a deeper, longer recession, through its strong fiscal and monetary expansion and an extra $50bn contribution to the IMF.
Today, speaking as a Foreign Minister not a Finance Minister, I do not want to dwell on the immediate economic measures needed to support recovery, important though they are. My focus is instead on the longer-term.
My argument is this. The growth of a new middle class in emerging economies can fuel the next wave of global demand. And the emergence of new low-carbon, technologies can ensure resource scarcity does not act as a brake on growth or a driver of inflation. The demographic and economic drivers create the potential for an age of opportunity.
But this future is not fated. It remains fragile, and dependent on leadership from all the major economies. It will require a determination to deepen globalisation, by opening up our economies further to flows of goods, services and capital. It will require long-term commitments to investment in energy efficiency and low-carbon energy supply. And it will require us to thicken our cooperation through international financial institutions.
Each step will pose challenges and difficulties for all of us. But standing still is not an option. If we fail to move forward with this agenda, we will move sharply backwards, with open markets unraveling from the force of protectionism, and resource scarcity leading to a destabilising scramble for finite supplies. So today, I want to talk about how the politics of cooperation and multilateralism on which globalisation is based can win out over the zero-sum politics of protectionism and nationalism.
An Age Of Optimism
Global growth in the past two decades has been driven by consumer demand in industrialised countries. In the next two decades, global demand is likely to be powered by a new source: the growth in the middle class in emerging economies.
Economists at Goldman Sachs estimate that two billion middle-income citizens – those earning between $6,000 and $30,000 a year – could emerge within the next twenty years. The United Nation's own projection, based on a narrower definition of an annual income between $4,000 and $16,000, is closer to one billion. Either way, this will be the biggest global economic development since the industrial revolution.
The prize for China – and countries like it, notably India - will be significant. Today, a third of Chinese people are deemed middle-class. Within 20 years it is projected to be over two thirds. The result will be better living standards, reduced poverty and improved welfare. The growth will be concentrated in urban centres. But the dividends of economic growth could be spread to benefit those who remain in villages, through improved health care and education. Even as the workforce starts to shrink, if sufficient progress has been made, productivity growth could continue to propel China up the global league table.
As the Chinese people get wealthier their demand for goods and services will grow and the type of products they want will change. Existing demand for agricultural goods and infrastructure investment will be accompanied by growing demand for services, from health and education to finance and law. Luxury goods, recreation and leisure are all likely to see sharp growth. Use of energy and transport will also increase dramatically.
This is important for countries like the UK. Britain’s expertise in finance, professional services, education, pharmaceuticals, advanced engineering, creative industries and digital technology, means that as Chinese consumers move up the value chain there will be a better fit between our economies than ever before.
For example, McKinsey predicts that by 2012 the Asian market for financial services could be larger than that of the EU or US. This would create huge opportunities for the UK as a global centre for financial services. It would be good for companies like Standard Chartered that have had a presence in China for over 150 years, as well as for firms like Prudential and Standard Life that have a particular expertise that responds to Chinese requirements. A 100-fold increase in the number of Chinese credit cards between 2003 and 2013 is just one example here.
China's automotive sector is already growing fast. BMW Mini increased its exports by almost 40% last year. Every month Jaguar Land Rover ship 2,000 Land Rovers and more than 200 Jaguars from the UK to China. Even though these companies are no longer British owned, together they employ 21,000 people in the UK. As the middle-class explodes, so will this sector. According to research, it is when incomes hit $9,000, that people are most likely to buy a car, and China could account for 42% of growth in the global car market in the next decade.
The UK's aerospace industry is the second biggest in the world. A boom in air travel will create significant opportunities for British or British-based companies. Rolls Royce believes that the Chinese market will require up to 6,500 engines worth $65 billion between now and 2026.
China's education sector is expected to grow tenfold between now and 2025 and the Indian Government wants to create 60 million new university places and provide vocational training for 500 million more Indians over the next ten years. The English language and the global reputation of the British education system means that the UK is well placed to respond to this rising demand. The prospect is not just of more international students coming to the UK, welcome though they are. Nottingham University’s Ningbo campus and Liverpool’s in Suzhou show how Chinese students can enjoy a British or international education without the major expense of studying abroad. More important than the income from these ventures are the links forged, and the ties built between our two countries, that will serve us both well – culturally, politically and commercially – in the years to come.
Sceptics will point out that less than 4% of total UK trade is with China. But with emerging markets now accounting for 80% of global growth, it is clear that economies like China's offer the greatest promise for future development, as they catch up with ours. Indeed, UK exports of services to China increased 60% in 2008 and the UK is the largest EU investor in China. We need to think, and position ourselves for the future.
The Policy Choices
However this future – this age of opportunity – will not emerge by accident, but by design.
In part, this will require domestic policy changes. As China's government understands better than anyone, the speed of this country's growth will depend on the policies it pursues in the months and years to come. Pension provisions and government-sponsored healthcare will give people more confidence to spend rather than save. Liberalisation of the financial sector will increase finance available for consumers and companies. Better protection of intellectual property rights – improved patent application systems and stricter copyright laws – would encourage innovation.
Equally, Britain will only maximise its benefits from these new opportunities if it has a strategy to do so. The UK’s business-friendly environment, with a clear legal framework, stable interest rates and access to finance has long brought international business to our shores. 430 Chinese businesses have already invested in the UK. But our continuing prosperity means positioning ourselves to respond to new areas of demand in emerging markets. That is why the British government's new policy of industrial activism is about creating a platform for the growth sectors of the next two decades.
But national policies, however deftly devised and implemented, will only ever be as effective as the international economic order allows. An economic order without the harmful, persistent imbalances between countries. A global economy, where services, goods and capital can move more freely across borders, tapping into new sources of demand, and driving up productivity. An economic order governed through rule-based, multilateral institutions that restore the trust on which economic activity is based.
This will be very challenging. Domestic economic pressure makes global engagement hard. But the pillars of a new economic order are clear, and there is a strategic role for Sino-British partnership in driving this forward. There are four key principles for all of us to seek to promote.
Openness
First, openness – to trade, ideas, people and investment. At the beginning of 2009, many predicted that the financial crisis would be compounded by protectionist measures mirroring the 1930s, when the Smoot Hawley Tariff Act turned the Wall Street Crash into a decade long depression.
According to Global Trade Alert there has been an increase in protectionist measures, but levels remain well below those of the 1930s. This in part reflects deeper shared interests in open, connected markets. International supply chains have created a strong corporate constituency in favour of low tariffs. Norms of open trade are reflected in global and regional institutions, such as the WTO. But the biggest reason why the protectionist impulse was neutered was that policymakers found alternative ways of creating jobs and growth, through fiscal and monetary measures. Demand management counteracted domestic pressures for protection.
In Britain the Government is committed both to avoiding premature withdrawal of government support, and to halving the deficit in four years. The danger is that if growth remains sluggish, states will be unable to fall back on fiscal or monetary tools to support industry and may be tempted by protectionism as an alternative.
It is therefore essential that those with an interest in open trade create a bulwark against protectionism. There is a clear case for partnership here between the world’s fastest growing economy, China, and its largest single market, the European Union.
A world trade deal could be worth up to $170bn annually. China and the EU should work together with the US to show that completing the Doha round will provide an aggregate boost to jobs in Tennessee and Texas as much as Chongqing and Guangzhou, or Munich and Manchester.
The G20 meetings in Canada in June and Korea in November will help to focus attention on the protectionist threat. But Regional Trade Agreements, such as the EU-Korea deal signed last year can also play a vital role in building momentum, provoking commercial lobbies in other major economies to lobby for better market access.
Concrete steps towards a climate change deal will also be critical in heading off the threat from green protectionism, delivering the carbon price necessary to achieve more sustainable growth. So too will welfare programmes if they seek to protect workers through rights to work and re-training, rather than protecting jobs, as the UK’s ‘job guarantee’ scheme seeks to do.
The ability of governments in the West to sustain popular support for open markets depends critically on being able to demonstrate that there is a global trend towards openness from which their own companies can benefit. So it is worrying that we are seeing more reports of foreign investors in emerging economies encountering new barriers to investment. This not only increases protectionist pressures in Europe and the US. It also deprives China and other emerging economies of cutting edge technologies which in turn raises their own competitiveness. Everyone loses.
The cumulative and unintended consequence of small, industry-specific protective measures can result in an unraveling of the economic interconnectedness on which both our countries’ prosperity is founded. If markets begin to close, the new jobs we need to create to absorb the millions of people coming into the job markets in Europe, the US, India and China, will not materialize. Our shared interest must be in creating a reverse dynamic towards greater openness.
Low-carbon
Low-carbon energy offers a particular opportunity for this. It is the second principle.
2008 will go down as the year of the credit crunch. But, it also saw a resource crunch, through high energy and food prices that contributed to, and exacerbated the financial crisis. Spiraling commodity prices contributed to global imbalances. For instance, the fall in oil prices from their average 2008 levels, has reduced the current account surplus of oil-exporting nations by 8% of their GDP. Commodity price inflation also delayed the loosening of monetary policy, with central banks facing both falling asset prices and rising commodity prices.
To prevent rising commodity prices from thwarting the economic recovery, and to stop the resource crunch from pushing us back towards a destabilizing zero-sum scramble for resources, we urgently need to shift to low carbon development. But it is not just that. The dangers of resource crunch and green protectionsim are real. There is a further point. The low carbon agenda is not about constraining development space but about expanding it. It is not about limiting growth and dividing up the economic pie in a sustainable way; it is about innovation and change to create a new, more productive development path. As Europe talks of smart grids, smart meters, electric cars, and carbon capture, the size of the new markets are very large. If China does the same they are immense. Low carbon is not just an environmental necessity it is an economic opportunity. This afternoon I will see for myself one of China’s largest solar panel factories, in the outskirts of Beijing – a multi-billion dollar business that is exporting to other provinces and the rest of the world.
We made some progress in Copenhagen. But there is much we need to do to build the legally binding international framework we need to keep global warming below the critical 2 degrees; I believe this is an economic opportunity not a threat.
The EU and China have a clear shared interest in working together on energy and resource efficiency. We both want to reduce our dependence on imports of oil and gas. We both recognise not just the economic dangers, but also the commercial potential.
Coal will be an important element of our energy security over the coming decade. But if it is not clean coal our efforts to mitigate climate change will fail. China and the EU are already working together to build one of the world’s first full scale power plants that captures and stores the carbon it emits, so that we can use coal without driving up carbon emissions. But there is more that we can and must do to accelerate investment in the technologies of the future.
The key to delivering energy and climate security will be to push down the costs of low carbon choices relative to high carbon ones. The best way to do this is to accelerate market growth by integrating markets. That would, for example, reduce the price of Chinese–made hybrid and electric cars for European customers, encouraging manufacturers to scale up, further pushing down costs. That’s what the EU single market is all about. And that is how we can best use cooperation on energy and climate to keep markets open.
Instead of the climate imperative being a driver of green protectionism, it could be a driver of green free trade. Building on the ground-breaking low carbon economic zones which our two countries have established over the last few years, we should explore the potential for rapid removal of tariffs and harmonisation of standards on low-carbon goods, broadly defined, across the major economies.
Reform of International Financial Governance
The third priority is reform of the international financial architecture. The current arrangements were designed for a world of comparatively isolated national economies. Today, however, no-one can be insulated from instability without international cooperation.
The shift from the G8 to the G20 as the main forum for global economic governance was long overdue. The imperative now is to ensure it continues to deliver as the immediate crisis passes. The new G20 Framework for Strong, Sustainable and Balanced Growth agreed in Pittsburgh in September is critical here. At its core is the recognition that our policy choices are interdependent. As Premier Wen Jiabao commented yesterday, we need more macroeconomic coordination between nations.
Without a mechanism to ensure a better collective mix there is a risk that spill-overs between countries will undermine financial and economic stability. According to the IMF the difference between getting this right and getting it wrong could be worth up to $6 trillion over five years. So as the British Chancellor, Alistair Darling, has said, this mutual assessment process should now be the central mechanism for international economic coordination.
If we are to forge new forms of global economic cooperation we need to go further and faster in reforming the key International Financial Institutions, strengthening their relevance, legitimacy and effectiveness. Gordon Brown has put forward proposals on behalf of the UK.
Working more closely with a stronger Financial Stability Board, we want the IMF, on the basis of more equitable representation, to improve surveillance of the global economy, to highlight vulnerabilities and avert crises. We believe that the World Bank, IMF and regional banks need a broader mandate that reflects the critical economic challenges of this century – closer economic and financial linkages between states, instability and poverty but also climate change.
As the world’s second largest economy, we want to hear China’s views on what structures would be most fair, most equitable and most efficient. The scope for a Sino-British partnership in forging a new economic order is clear.
Markets with values
A social market economy that treats individuals as citizens not merely as units of production is more flexible and ultimately more prosperous than naked capitalism or state bureaucracy. So my fourth and final point relates to the values which I believe our societies must, over time, respect.
Over the last thirty years, China has laid the foundations of what could become the world’s greatest economy. It is pouring the concrete and building the infrastructure - from the superhighways to the high-speed rail connections, new schools and gleaming university campuses. Visiting the Shanghai Urban Planning Exhibition Centre, as I did two years ago, you cannot help but be impressed by the speed of this city’s modernisation, and inspired by the vision for its future.
But as Premier Wen said yesterday, 'social equality and justice form the basis of stability'. The next phase will inevitably be to build the social systems, the legal infrastructure and the framework of rights and responsibilities that will make China's economy not just more productive and more efficient, but more just, more stable, more innovative, more entrepreneurial and more attractive to high quality investment.
The spur for this will come from within. Because people want property rights. But they also want choice, and access to information on which to base their decisions. And companies want to know that they can rely on impartial application of the rule of law, that their ideas and inventions will be protected, that their investment in research and development will drive their profits not someone else’s.
Workers want better working conditions, reliable social welfare provisions, and the right to live where they choose. In Europe the development of the social market economy has involved not just government and private business but the voices of civil society, notably in trade unions.
In western Europe, trade unions played a vital role in post second world was systems of governance - often inside the decision making process, otherwise as a force in society and industry.
The challenge of renewing the collaboration of employees to promote productive business and strong societies remains pressing today, to engage the will power and ideas of the workforce in public, private and voluntary sectors. Chinese systems of law, business, and association are different.
But the contribution of your people, in the workplace, in communities, and as you have been discussing in the party, will be vital to the human values that need to be asserted to make a market economy work.
International markets will support this evolution. Foreign investors seek transparency and fair competition so that they can be confident in their investment. International consumers are not just concerned about the price they pay but the social impact of the goods they buy.
When Greenpeace called for a boycott of Shell in 1995 because of its plans to dump an oil platform at the bottom of the Atlantic, its sales plummeted. Public concern about how the diamond trade was perpetuating civil wars in Africa in the 1990s led to a complete overhaul of the global diamond market. Globalisation is leading not just to the convergence of our economies, but to the growth of a global social conscience. Companies with global ambitions will have to adjust to that fact.
This raises hard questions about the responsibilities of states to their own citizens, and the extent to which the international system has sway. It goes to the heart of doctrine of responsible sovereignty that I set out in Beijing two years ago. Already we are sharing our own best practice experience with you on intellectual property rights and social security tribunals to resolve disputes on pension and benefit entitlements quickly and fairly. We look forward to forging many more similar partnerships in the years to come.
Conclusion
As we emerge from 18 months of crisis, we must acknowledge the problems we face and begin to tackle them. But we must also acknowledge the economic and demographic possibilities on the horizon - the age of opportunity that is ours to seize.
Shanghai is a remarkable demonstration not just to the rest of China, but to the rest of the world. After economic reforms in 1992, Shanghai posted 15 consecutive years of double digit GDP growth; outstripping any other Chinese province. Indeed, though only home to 2% of the country’s population, it contributes 16% of its GDP. This city has flourished - now and throughout its history – when it has been open to the outside world. It reminds us that, just as the world needs China, so China needs the world.
This year the Shanghai Expo has the theme of Better City, Better Life. This encapsulates the benefits that China’s unparalleled growth has brought, and can bring, not just to the growing ranks of its middle class, but to all its people.
I hope the Expo will be an opportunity for cultural exchange as well as commercial engagement. An estimated 70 million Chinese will visit. We hope that those who come to our pavilion or visit our website will learn not just about the economic opportunities of trade with Britain, but about our society, our values and our way of life.
Through our website, Chinese people decided that the British pavilion, which I visited earlier this morning, should be called the dandelion – pugongying. It is a highly appropriate name as it houses 60,000 groups of seeds provided by the Kunming Institute of Botany in partnership with Kew Gardens' important Millennium Seed Bank project. When the Expo ends, these seeds will be sent as gifts to schools all over China. A gift of co-operation, of openness, of sustainability and of shared growth. A symbol of the future that we want to sow together.
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