Anthony O'Reilly: The real threat to world trade comes from China

We have to recognise that China is both the problem and the opportunity of the future

World leaders are at last recognising that there are huge imbalances in the world economy that threaten its future stability. The Group of Seven statement at the weekend meeting of the International Monetary Fund that exchange rates should be fixed by market forces reflects this concern.

But what is the greatest cause of these imbalances? The willingness of the American consumer to carry on buying the products of the world and thereby sustain global growth? Or the economic and trading practices of what is - on some calculations - the world's second largest economy, China?

China was not explicitly criticised in the G7 statement. Neither did it figure large in the failed trade discussions in Cancun the week before. But I believe that the growing manufacturing might of China is, in absolute economic terms, the issue.

There is a real drama that will shape our futures taking place in China. China has the capacity, the willpower, the structure and the command economy to rip the heart out of manufacturing growth in Europe and America over the next two decades. Many see this as an opportunity, and the flood of international capital into China testifies to this. China is now the largest recipient of direct investment of any country in the world.

Others will argue that China creates a real opportunity, both in terms of its own marketplace and by producing goods that represent a cap on inflationary pressures in the rest of the world, most particularly in the United States and Europe. All this is elevated on the altar of globalisation to a sort of inexorable movement towards a higher plane.

Let me demur. If the headlong pursuit of Chinese expansion is allowed, it will pose a very serious threat to employment in Europe and the United States, and most particularly to the US elections in 2004. George Bush will have enormous difficulty in ensuring a real expansion in employment if the present growth of Chinese trade with the US, at more than $100bn per year in terms of its trade balance (or 25 per cent of its trade imbalance), continues unabated.

With the flood of US capital - be it from Intel, Microsoft or any of the other major new-age companies - pouring into China, a great deal of US intellectual software and manufacturing skill is also being exported to China, but without any guarantees as to its subsequent expropriation.

The Chinese have waited a long time for this day, and their day has come. They are hugely inventive; they are increasingly well educated (and the flood of well-equipped students from their universities testifies to this); they accept extremely low wages and allow environmental conditions that would not be tolerated in the West. And they protect their domestic market in a manner that even the Japanese can admire.

Allied to these virtues are the vices of a society in change. In what has been a command society since 1949, the laws of property, contract and, particularly, the protection of intellectual property rights are still in their infancy. No one doubts that many in Beijing wish a level playing field, but the playing field is not level, and Western companies competing with them in their own markets will find a flexibility in their application of rules that would make the WTO blanch.

WalMart, the US retailer, now has more than 300 permanent buyers in China, and last year imported $12bn of Chinese goods, with the commendable aim of keeping consumer prices down. But the consumers paradoxically are conspiring in their own demise - or at least the demise of their own jobs.

If WalMart were a country, it would rank ahead of Great Britain and Russia in total imports.

This indicates the staggering potential of China and its capacity to move quickly. Anyone who has visited Shanghai will find a city that is among the most modern and dynamic in the world. Its architecture, work ethic and sense of commitment have almost no equal - and it is a product not of free enterprise but of the command economy.

The world has decided that the aims of the WTO are best served by including China and not imposing an undue degree of surveillance on its growing economy for a number of reasons - some good, some bad. The Beijing Olympics in 2008 will be one of these, and represents an opening of the Chinese market and mind to world influence. That, in itself, is excellent. The problem is the price that will be paid by the world in employment terms if China does not play the game the way the WTO wishes it to be played.

The threat is clear. There are possibly 450 million Chinese in the manufacturing economy. There are 850 million people on the bench, waiting to get into the manufacturing and services sector.

A company of which I am chairman, Wedgwood, is manufacturing in China a range of ceramics equal in quality and substantially lower in price than anything we could produce in Europe or the US. The Chinese have been magnificent in their co-operation, intelligent in their application of new technique, and hugely productive. This is the model of the future, and it is a frightening one.

So, what is the answer? It must be a combination of many things, but two are key. First, the Chinese have to impose and police the laws of contract, property and intellectual property rights that we enjoy in the Western world. This has to be done in the most open and transparent way through their judiciary. The judiciary has to be freed from political obligation - something that will be extraordinarily difficult in China.

Second and most important of all, the hugely undervalued yuan (renminbi) must be revalued upwards, not in one immediate leap, but gradually, determinedly and as a matter of policy.

These policies will work to a gradual improvement in the entire world economy. Not to follow them would be to revive the spectre of protectionism and Smoot-Hawley in the United States, and a range of quotas and tariffs from other trading blocs, including of course the European Union.

There has been, quite rightly, an outcry last week in Cancun at the way the developed world has subsidised its agriculture. Each country can advance special pleading in regard to its sectional interests, be it France protecting its farmers or Japan protecting its rice growers, for political and cultural reasons.

We have to recognise that China is both the problem and the opportunity. Together, China and the West can build a huge, growing and more satisfying market that will bring benefit to all, particularly developing countries, if approached gradually, sensibly and legally.

The converse is the death of globalisation - the erecting of frontier barriers, the rule of clubmanship and a slow death for worldwide free enterprise. Surely the choice is obvious. Let us make the next two years a time for decision in which China must play a most active part in policing its own economy and making it responsive to the needs of our global economy. If we fail to create a more level playing field for international trade, all of us - including China - risk losing the very thing that has so vastly increased global wealth.

Sir Anthony O'Reilly is executive chairman of Independent News and Media Plc