But our position is not strong—and will only weaken further when we leave the European Unionby George Magnus / April 9, 2018 / Leave a comment
As March 2019 draws ever nearer, the UK government, parliament, and the rest of us are wondering what sort of future role Brexit Britain might play in a troubled world. Inevitably, we all look to the opportunities—and risks—in Asia, the world’s most economically dynamic and politically dangerous region. Although we Brits are no strangers to Asia our imperial past is long gone. We built our future closer to our European home and now play a relatively minor part on the rising continent. Today, it is Xi Jinping’s Asia, and we will need to think our economic and political strategy through very carefully.
China is the dominant economic power in the region and, like imperial China a long time ago and other regional hegemons in the 19th and 20th centuries, is using its economic leverage to coerce regional neighbours—covertly or otherwise—and those looking in from the outside to advance its economic and political goals. In older times, trade and commercial privileges would be granted or withheld according to a system of tribute in which other countries would offer diplomatic favours, gifts and so on. Today, a modern equivalent is plain to see. In recent years, China has taken action against Norway, Japan, the Philippines, Vietnam and South Korea when they have fallen foul of Beijing’s wishes, and there is every reason to expect this to persist.
China is reorganising and building up its military, especially naval, capabilities, and is pursuing an unashamedly nationalistic and protectionist industrial strategy to be a global leader in technology in the next decade or so. It has about 17 free trade agreements, overwhelmingly with Asian and Oceanic countries. It is trying, not without difficulty, to form a new multilateral agreement called the Regional Comprehensive Economic Partnership. It was the driving force behind the establishment of the New Development Bank (originally known as the BRICS Bank), and the Asian Infrastructure Investment Bank—both viewed as alternatives to US and Japanese-run Bretton Woods institutions. Xi himself is the creator of the Belt and Road Initiative, China’s most assertive strategy to promote its own geopolitical footprint in Eurasia and beyond, and its own economic governance model.
The UK’s overall position in this context is not strong. Asia, defined in the so-called Pink Book of balance of payments data as including the Near and Middle East, is important to UK trade, accounting for about a fifth of our exports and imports in 2016. Much of this, though, derives from long-established relationships with already developed markets in Hong Kong, Singapore, Japan and South Korea. Even though exports to China have grown fast, they are still only just over 3 per cent of total exports (though that is larger than the share of exports to Australia and New Zealand together.) Exports to non-China developing Asia were about the same as to China alone.
The UK, then, is not a big force for trade in Asia. In future, we could try harder to sell finished product exports, for example mechanical and electrical machinery, cars and aircraft and components, but geographically we cannot slot into Asian supply chains centred around China. We could try to reach a free trade agreement with China, but in bilateral deals size matters and confers leverage. If the United States is finding it hard to make trade headway with Xi’s China, the UK has no chance. We would love to sell services, especially financial and legal, into China but access to modern services inside China is heavily restricted, or only opened incrementally where domestic firms have total control of their sectors.
“If the United States is finding it hard to make trade headway with Xi’s China, the UK has no chance”
The UK could, as the government has opined, apply to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership free trade area (TPP11), which is successor to the original Trans-Pacific Partnership. It isn’t a substitute for the European Union in any way, but with Japan, Canada and Mexico among the larger members, it is certainly worth exploring once TPP members can assess the future terms of UK-EU relations. One thing the UK could bring to possible future collaboration in Asia is a bit of its military capability. The deployment of Typhoon fighter aircraft to Misawa Air Base in Japan in 2016, closer collaboration between the UK and Japanese Ministries of Defence, and, for what it’s worth, Boris Johnson’s suggestion that the UK’s two new aircraft carriers, one commissioned last year and one in 2020, might serve in the Asia-Pacific region, are not insignificant developments in what might become a more active UK-Asia involvement.
China has been more interested in investment in the UK as a base in the EU as I have explained before, but this could be compromised over the next few years as Germany becomes China’s preferred investment location. The UK also has technology firms that China would like to buy or invest in, but all advanced economies are looking at China’s investment wish-list now with greater concern in view of the increasingly adversarial relationship between China and the west when incomes to sophisticated technologies.
Ultimately, the government of the day will have to take a view on how the UK might try to take up a position in Xi’s Asia.
When the Theresa May visited China in January, her refusal to “bless” or sanction the Belt and Road Initiative was not taken well. If the current and future British governments are going to stand firm on western values and commercial principles that China rejects, and choose to engage in fair but firm dialogue, they will be at their most effective as part of the EU. Since we have decided to abandon this option, we will have to try to seek out other effective coalitions and collaborations jointly with EU countries where possible, and by looking to establish stronger links with Asia-Pacific nations, such as Japan, India, Australia and the US. After all, these countries are looking themselves at ways of standing together for countries feeling adrift in Xi’s Asia.