Rise of China isn't a toy story

The patient Chinese delegation sat through a long lecture from the US representatives about how unacceptable it was to export toxic products and how standards had to be improved. When it was their turn to speak, they expressed complete agreement with everything that had been said by the Americans.

They too, they said, found the manufacture and sale of such harmful products inexcusable, and they agreed to take immediate steps to stop the export of toxic consumer products. All they asked in return was for the Americans to stop selling them toxic financial products.

The fact that Chinese Premier Wen Jiabao has now come out in public to voice alarm both at the continuing slide in the value of the dollar, and at its massive erosion of the value of China's reserves, should come as no surprise. As the tale above implies, the Chinese have been seething about it for months. However, going public in this way suggests their patience is now exhausted.

It underlines what an uncomfortable time this is for the global financial system. For years, economists have said the global imbalances caused by the US trade and budget deficits would one day have to be corrected. This now appears to be happening, and it is an event of seismic economic proportions.

The correction has the potential to cause as much dislocation when on the mend as when the massive imbalances were being created in the first place. Today's pain may only be paying for yesterday's pleasure, but this will not stop complaints from those who feel the pain.

There is, however, an even more fundamental issue tied up with this. It has been widely assumed for some time that, one day, American economic power will be displaced by the growth of a bigger economy in Asia - in Japan, India or China. Yet no one, however much they could see the likelihood of this happening in the future, expected it really would happen any time soon.

It was deep in the long grass; sometime after 2050, perhaps, but not before. Now people are not so sure. They look at the tremendous upheaval in the financial world, at the fall of the dollar and at the huge growth rate of China, which is closing fast on Japan to become the second-largest economy in the world.

They then wonder at the significance of current events. Is what we are now seeing simply an attempt to correct longstanding imbalances, or is it something more fundamental?

In particular, is what we are seeing the beginning of a once-and-for-all transfer of economic power from America to China - one which signals the end of the dollar's hegemony?

It is a huge question, and one which at this point does not have an answer. It will take years before we can look back to see for sure whether this was or was not a turning point. If it is, it does indeed signal huge dangers because, though it may have lost its economic edge, the US remains the world's leading military power.

The risk is more than just the drift to protectionism that is already apparent. One of the lessons in history is that when countries sense they are on the wane economically, they are often tempted to use military might to shore up their position and stem the decline.

One of the geopolitical risks of the coming decade - a major or a minor one, depending on your taste - is that the United States falls into that trap.

Anyone looking for reasons why the chairman of Her Majesty's Revenue & Customs, Paul Gray, quit his job yesterday need look no further than a report produced by the tax faculty of the Institute of Chartered Accountants in England and Wales.

No one sees as much of the UK tax authority at close quarters as the nation's senior accountancy body. Seldom can there have been a more damning document than this one - produced as a submission to a civil service capability review, and details of which were published in yesterday's Financial Times.

It is well-known there was a glitch last month when hundreds of employers were sent penalty notices for late filing of PAYE returns when they had done no such thing. But the report says this is just one of a series of problems "which in the normal business world would probably have inflicted irreparable damage on the reputation of the organisation".

It has no doubt about why things have all gone so wrong at HMRC. It says it did not believe the management could support the development of a genuinely customer-focused organisation.

It attacked the closure of local offices, the expansion of centralised processing and the increased reliance on call centres staffed by inexperienced personnel. Specifically, it said that few parts of the organisation "would be able to cope with the Revenue's dual targets of improving services while cutting costs by 5% a year in real terms and reducing staff by 25,000 out of a total workforce of 94,000".

The organisation has been set targets by its political masters that were beyond the ability of its management to deliver, and because of this the morale of the employees has collapsed and the tax-gathering system is making the kind of horrendous mistakes you would normally only expect to find in a banana republic.

This is a horrible mess, but one wonders if it should really be Paul Gray who walks the plank. The real responsibility surely lies with the people whose bright idea it was to merge the Inland Revenue with the Customs & Excise in the first place - given that the two have quite different traditions and cultures - and then to combine that with a timetable of massive job losses. In other words, the responsibility lies with Gordon Brown from when he was Chancellor. Axeing Gray is in effect shooting the messenger.

There is an unexplained postscript. The first head of the combined revenue service was Sir David Varney, formerly of British Gas and O2. But he resigned the post abruptly, and before what many thought his full term, apparently to become an adviser to Gordon Brown - though not much has been seen of him in public since.

One wonders if Varney knew he had landed mission impossible and therefore decided to quit early, or indeed whether it was his blueprint for postmerger integration that has proved impossible to implement.