2004 is the year UK politicians should wake up to the rise of Asia. Last year there were worries about jobs transferring from the UK to the new economies of the east. This year, just as manufacturing demand starts to recover, the ghost of Asia returns to haunt European producers.

It is good news there is now more demand. It is good to see banks relaxing just a little, even thinking about refinancing rather than calling in. One big problem remains. The west is scarcely competitive in so many areas, as Asian salesmen scour the world. Western producers may be able to argue about quality, delivery costs and schedules and intellectual property, but there is no getting away from the fact that the Asian item is often cheaper. It is forcing smarter working, lower prices and a big shift of manufacturing out of the EU into India and China.

The leading forecasters expect this process to intensify. The EU itself thinks the EU's share of world output will almost halve, from 18% to 10% over the first half of this century. City forecasters are now saying China will overtake Germany as the world's third largest economy within the next couple of decades.

Japan showed how quickly it can happen. In the 1950s the west gave her technical assistance and encouragement. In the 1960s Japan started to flood the market with cheap and cheerful goods. In the 1970s Japanese products developed a reputation for quality and reliability, and in the 1980s they added style. Now people buy Japanese names for the brand values of a Sony or a Toyota or a Toshiba. It is foolish to sneer today at Chinese products.

So how should the UK respond? The government is under pressure from its own backbenchers, who dislike the daily diet of factory closures and news about transfers of work. The knee jerk reaction of many on the Labour side is to impose non tariff barriers to trade. They seek to find ways of blocking the emerging nations through World Trade Organisation procedures, seeking to introduce higher labour and environmental standards on poorer countries. Rank protectionism can be dressed up as noble ideals.

This strategy will not work. The USA has just lost an important case over steel, where it sought to use protectionist measures to give respite to one of its basic industries. The USA, the EU and the others slug out their disagreements over trade restrictions in the WTO, but wisely the wheels still grind in a liberalising direction. The UK alone is not allowed to break the rules or impose its own restrictions. It has to work through the EU, which is more concerned to protect its rigged markets in agriculture, fishing and intellectual property than to seek new restrictions for manufacturing.

My advice to the Opposition in the UK is to grasp the significance of what is happening globally. In a matter of a couple of decades the Indian and Chinese economies will look huge compared with the European. We will be doing so much more trade with them. The only way we as a nation can thrive in such a cut throat world is to improve efficiency and cut costs. That requires a government that helps industry price itself into markets, not one that seeks to regulate and price us out.

The Conservatives are currently agonising over how quickly and realistically they could become a tax cutting party in government, given the insatiable needs of the public services and the possible costs of public service reform. They must become the tax cutting party from Day One. Only by relaxing the burden on British business will they succeed in helping the UK be competitive. That is what is needed, to build a stronger tax base to pay for the rest.

Cutting regulatory cost requires courage and the power of persuasion. Given the regulatory track record it is easy to argue for far less financial service regulation. Why do we have a Strategic Rail Authority Network Rail when they do so much worse than a privatised industry? Do we require a Food Standards Agency, when the world worked perfectly well without one until recently? Conservatives should offer less intrusive employment market regulation.

When it comes to cutting spending to cut taxes, it's easy given the waste. Let's get rid of all that useless English regional government, and the RDAs and regional quangos that go with it. Let's put Network Rail back into the private sector, to get that massive incubus off the taxpayers' back again. Let's put a staff freeze on all administrative empires in the public sector, yielding big savings from the first year.

These savings could then be wisely spent in pricing British business back into markets. We should aim to have the lowest corporate taxes in the EU – let's get corporation tax down to 20% for a start. We should raise the thresholds for Inheritance tax and Capital Gains substantially, to stimulate more enterprise. We should create very favourable income tax regimes for foreign companies and their top people to give us the edge in attracting them to the UK.

The Opposition should want to make the UK the Hong Kong of the north, open to talent and investment, with low taxes. This could help stem the flood of manufacturing currently leaving our shores for the mysterious east. It could generate a stronger economy with a bigger tax base to pay for those things which the public sector does need to do.