The Threat from China: delayed, but still coming…

The rise of China has been one of the most historically significant developments in world history since the millennium.

Big business has already felt the force of Chinese expansion, for example it’s dumping of steel or solar panels onto the global market, its theft of IP, and its mass production of cheap knock off technology. China – with its huge industrial base, cheap labour, robust domestic chain, superior e-commerce technology, and extreme entrepreneurial spirit – can produce many items for as little as 20% of what the EU or USA can.

For small businesses, however, the seemingly looming threat – not least the much-feared flood of cheap goods – hasn’t really materialised yet. The Chinese economy has been starting to slow down (if you call 6.6-6.7% ‘slow’) and domestic wages have been rising. It’s now tempting for small businesses to regard China as a diminishing threat.

If that’s your view, we urge you to reconsider. Primarily because the cheap exports have mostly been kept at bay by three key factors, all of which are set to change very soon.

One is EU tariffs, which – following a tightening in 2017 to guard against ‘significant market distortions’ – have priced out a whole range of Chinese products from the UK market, especially technology and components, heavy equipment and replaceable parts, and food and consumables. After Brexit, it seems likely that British politicians – especially if faced with escalating demands to bring down bills to ease the cost of living – will increasingly dismantle this tariff wall.

The second is the historic reluctance of many small Chinese enterprises to trade outside their borders. From their perspective, this was understandable: the domestic market of 1.3 billion was booming, knowledge of English in the workforce was rare, Chinese products had a poor international reputation, and gaining licences to export was administratively complex. But intense domestic competition – fused with an explosion of English language learning and international mobility amongst the Chinese middle class – has propelled many of their SME’s to look to the world stage. Their progress is already evident: in the last decade, LCD and LED device exports out of China have risen six-fold; air conditioners threefold; rail locomotives and tankers fourfold; medium-tech products threefold. These push and pull factors are encouraging China’s small – not just its large – businesses to open out to the world.

There are other reasons to be concerned. The first is piracy: foreign companies are all but defenceless against the theft of their technology by Chinese firms, who are experts in reverse engineering and copying – just ask Apple. The same is true of prestige brands like designer clothing labels, jewellery, and upmarket household items. Identical fakes of most western products can be found in every Chinese shopping mall. China does not respect international IP and firms can readily copy western products and manufacture identical (or deliberately near-identical) replicas at a fraction of the price. The more porous and reliant on freer trade the UK becomes, the closer these products are to appearing in the UK market.

Another reason to be concerned is China’s purchase of US and EU debt, which has massively reduced the cost of borrowing. However, there can be no certainty that China – should it suffer its own recession or change its political objectives – will continue to underpin western lending. A change in China’s attitude to debt is widely seen as a key potential trigger of the next recession.

Of course, the continued rise of China presents huge opportunities for smaller UK businesses that can take on Chinese competitors and sell into its huge internal marketplace. That said, it’s fair to say that Chinese authorities are not making it easy, even for small businesses those who can overcome the language barrier. It is notoriously hard to gain market access to the supply of services, not least due to complex product and services approval processes and discriminatory treatment compared to Chinese firms. There are then product standards and import and customs regulations, which are difficult to interpret without specialist Chinese legal advice, as well as the very grave potential for political interference (especially by local officials) if foreign companies are perceived to be having what they regard to be deleterious social or economic impacts.

Taken as a whole, the rise of China is likely to have a much more pronounced disruptive force on the UK economy and business community in the next decade than it has in the previous one, and Brexit makes this still more likely. Successful businesses may suddenly find they are trading in a very different world. Those that need to change tack, and develop in a different direction will be substantially advantaged by the presence of Trade Profit Stabilization (TPS) support which can maintain profitability and at the same time provide additional funds for restructuring retraining or retooling.

If your business enjoys a strong position in the current market, a sensible approach is to shore it up against an uncertain tomorrow. There are many asset protection products on the market but TPS is the only one specially designed to protect the profits of small and medium businesses.