Trade with China may be a delicate balancing act but rewards can outweigh the risks - Andrew Milligan

Scottish businesses face a difficult decision – how much should they trade with China? There are considerable growth opportunities. On some forecasts, China’s economy will match that of the USA by the end of this decade. Conversely, there are financial risks. President Biden makes pointed remarks about China’s threat to the world order, whilst consumers are increasingly concerned about well-known ethical touch points.

Andrew Milligan is a Board member of the Asia Scotland Institute and trustee of various charities.

Three sectors, technology, food and the environment summarise the risks and opportunities. They featured significantly in China’s latest Five-Year Plan, alongside its vision to become an advanced economy by 2035. President Xi Jinping’s ‘new development philosophy’ aims at technological leadership; building a large and well-functioning domestic consumer market; and transitioning from being the world’s largest emitter of carbon to carbon neutrality by 2060.

The technological battle will grow in the 2020s. China is pouring enormous sums into national champions involved in, say, quantum computing or photonics. Scottish firms and universities should look to take advantage of the growing Western response. For example, the US national security commission on AI has proposed investing $40 billion in R&D, while the US Senate has passed a $250 billion bill aimed at countering China’s technological ambitions. In March, the Chancellor of the Exchequer committed to public investment in R&D reaching a record £22 billion per year by 2025, with new bodies such as the Advanced Research and Invention Agency funding high-risk, high-reward scientific research. The UK needs to do more; although it was ranked fifth in the Global Innovation Index in 2019, R&D expenditure lags behind other countries. Within Scotland, all eyes will be on the detail of the Scottish National Investment Bank (SNIB) missions when publicised, and whether the Scottish Government provides sufficient financial support for the intellectual ecosystem of our universities and innovation centres.

One sector where Scotland faces opportunities is food and drink. China needs to import considerable amounts of food, not only because it is home to 20 per cent of the world’s population, experiencing ever growing affluent urbanisation, but also because of multiple problems with its agricultural sector, including diseases, floods, water pollution and labour shortages. This helps explain the growing demand for high quality food and drink from other countries. China is now the world's largest importer of food, and this trend is set to grow rapidly; it was the UK’s seventh largest export market in 2019.

China has announced twin objectives of reaching peak carbon neutrality by 2030 and neutral carbon emissions by 2060. As these targets compare poorly with other countries, it would not be a surprise to see revised targets announced at the COP26 conference. Although Beijing has rolled out new policies on nuclear power and renewable energy, its reliance on coal fired power is a major concern. Nevertheless, the environment is a major area where cooperation can and should happen - pollution knows no borders. Pragmatic cooperation is the order of the day, as shown by the first China-EU high level environment and climate dialogue took place in February. Scotland may have few candidates in the EV space but energy storage, wind farms, grid controls, emissions monitoring or green finance are another matter.

No one doubts that there are complex financial, moral and political issues relating to trade with China. It is a strong competitor in some areas, but there are pragmatic reasons to cooperate in others. Scottish businesses and universities should look to take advantage of the emphasis on R&D in the UK and its allies, to export high quality food and drink to affluent Chinese consumers, and to co-operate on environmental matters in relation to COP26. These are just some examples of the delicate balancing act which we face in the coming decade between recognising security risks whilst encouraging considerable contact between our countries at an individual level.

Andrew Milligan is an independent economist and investment consultant to several organisations. He is currently a Board member of the Asia Scotland Institute and trustee of various charities.