In an extract from his book, shadow work and pensions secretary Liam Byrne explores why west should work with east
Any politician that does business with China soon gets familiar with a few phrases that Chinese politicians use a lot: "It's time to drop the cold war mentality"; "don't offer us zero-sum solutions"; "we should move forward on the basis of win-wins". I happen to think there's something in this. In fact, I think there are three big win-wins before us.
1 SAFETY NETS AND MARKET ACCESS
China is urgently trying to rebalance its economy away from exports, towards a bigger homegrown consumer market. The problem is there's almost no welfare state. So Chinese workers save around 30% of their wages to pay for a rainy day, to fund healthcare in emergencies and pensions for retirement. Back in 2009, average pension savings were just $470 for every Chinese worker. And one 2011 study showed ill-health cost China 5bn working days. Now China is building a social security system. It's a big political priority. And it's something we – and our European neighbours – know a lot about.
We should be sharing that knowledge – and as China's consumer market grows, we should be using our membership of our great free trade club, better known as the European Union, to batter open the doors of trade for the sectors where we're strong.
Once upon a time, we used to talk about the City of London as the "jewel in the crown" of our export story. As I've spoken to Britain's expert China-watchers, they think the real opportunity is not the "jewel in the crown" but the "crown jewels"; the 10 great sectors where Britain is home to world-beaters, where we have a big share of global innovation spending: advertising, aerospace and automotive; branded consumer products; civil engineering; education (especially higher education); energy; financial services; life sciences; and, to a degree, retail.
2 PARTNERS IN PIONEERING
If Adam Smith were alive today, he wouldn't be looking around pin factories. He'd be studying the great hi-tech manufacturing centres like Foxconn City, where millions of iPads and iPhones are made.
Yet turn over an iPhone and you can see the words: "Designed by Apple in California, assembled in China". The manufacturing costs of an iPhone are only $6.50, under 4% of the total value of the product. The rest of the cost is Apple's profits (about 65% of the price tag) and the cost of components, largely from Japan and Korea. In other words, China is not taking much of the pie. That's why China wants to "move up the value chain" fast.
Under China's current five-year plan, over $2tn is to be spent on research and development. China wants to be an "innovation nation" by 2020 and a world-leading science power by 2050. So, China needs inventive partners. That's something we're brilliant at – in our universities, in our great R&D leading companies, and in our great cities.
All firms worry about losing intellectual property. But the Germans have a saying: "Our challenge is to sell yesterday evening's technology while we work on today's." I'm afraid that's a fact of life. But the really smart UK companies think long term. Their goal is "to grow with and within China". They know they'll learn huge amounts working with China. More than anywhere else. But the real opportunity is to "go global" with Chinese firms, harnessing British invention and innovation with Chinese production technology and scale in a search for Chinese – and then global – markets.
3 MONEY
Today, Britain faces an investment crisis. Business investment is still way lower than before the crash. And investment in infrastructure needs to rise. Yet in China they're worrying about how to diversify the surfeit of investment funds, from the trillions of dollars it owns of American treasury bills, built up with the earnings from decades of export surpluses. Larry Summers, the former US treasury secretary, calls this "the balance of terror". It leaves China vulnerable to low US interest rates and a falling exchange rate. So China needs to diversify – and as its economy develops it will invest more abroad. Today China invests the same globally as Denmark – about 1.5% of the global asset base. Over the next decade that will change. China may in fact invest $1tn-$2tn globally by 2020.
If Europe captures the kind of share which we've won over the last few years – around 25% – that would mean $250bn-$500bn in Chinese investment, around $25bn-$50bn a year. Over the last five years, the stock of foreign direct investment (FDI) in the UK has increased on average by £60bn a year – around $95bn at current exchange rates. So, if we captured half of the money coming into Europe from China, that could revolutionise foreign investment in Britain, adding between 15% and 25% to the inflow of FDI each year. Over a decade that would make a serious impact on our investment rate in the UK.
• This is an extract from Liam Byrne's new book Turning to Face the East: How Britain Can Prosper in the Asian Century, available from Guardian Books at £8.99