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The perils of partnership with China

Deals with Beijing can be risky. Are they worth it?

By Isabel Hilton  

Theresa May meets Chinese President Xi Jinping. Photo: WU HONG/POOL/EPA-EFE/SHUTTERSTOCK

When Mike Pompeo, the US Secretary of State, set out to mend fences with Viktor Orbán’s Hungary in mid-February, he took the opportunity to issue a warning: beware, he said, of Chinese entanglements. The Chinese telecoms giant Huawei, Washington’s current bugbear, serves 70 per cent of the Hungarian population and is establishing a major logistics hub in Hungary, while in neighbouring Poland a Huawei employee was recently arrested on espionage charges. But Pompeo’s warning went beyond the security risks of allowing a Chinese operator to install next generation mobile technology. Belatedly, perhaps, the US has noticed, as Pompeo put it, that when the US is absent, others move in.

It is a warning that could be coming
to London soon. The landscape in
which the UK will find itself post-Brexit
is best described by the African saying: when elephants fight, it is the grass that suffers. The UK may be the world’s fifth largest economy, but outside Europe it
is a relatively small market and will be
a conspicuously needy actor, anxious to strike new trade deals to fill the Brexit gap.

It is an inauspicious moment: the president of the US, historically an important partner, has set a belligerent, nationalist mood on trade, as discussed elsewhere in this report. As for China, since reluctantly giving up the opium trade in the 19th century, the UK has not enjoyed notable success in exporting to China, unlike its current EU partner Germany.

It is not for want of trying: large UK business delegations led by senior political figures have been a regular feature
of China’s boom years, but for all the memorandums of understanding signed— some of them more than once—UK exports to China have never thrived. The UK still exports more to Ireland or the Benelux countries than to China. Made in China 2025—that country’s plan to become an advanced high-tech economy—will do nothing to change that.

China’s boom years are over: its economy is now slowing and despite Trump’s best efforts, China is unlikely to dismantle its non-tariff barriers and open the internal market substantially, let alone pick apart the particular combination of state power, finance and industrial subsidy that allows its big firms to undercut western companies in third markets.

“The landscape in which the UK will find itself
is described by the African saying: ‘when elephants fight, it is the grass that suffers’”

That is not to say there is no Chinese interest in the UK. China currently enjoys a large trade surplus with the UK and remains interested in the investment opportunities that a post-Brexit UK will offer. Huawei,
for example, has invested heavily in its UK relationship and has hopes of pioneering the launch of 5G mobile technology. China’s nuclear industry, too, wants to prove that
it can meet the regulatory demands of an OECD country to give it a nuclear kite mark that will assist sales elsewhere.

What the UK must decide is whether the risks, in the current climate, are worth it. Theresa May tried to cancel the French- designed Hinkley Point C reactor, now dependent on Chinese finance, when
she first took office, recognising it as risky and expensive white elephant. The exact Chinese response has never been revealed, but the cancellation was cancelled. The UK is now stuck with Hinkley because China wanted the quid pro quo—the contracts
to build and operate its own designs at Bradwell and Sizewell.

China’s quid pro quo: Hinkley Point C. Photo: ADRIAN SHERRATT/SHUTTERSTOCK

These deals were struck in the giddy days of the Cameron/Osborne love affair with China. Both have continued their personal involvement but, since they left office, the national and international contexts have radically changed.

Today we must add to the national security concerns the question that the confrontation between the US and China has thrust centre stage: how far can we treat China as just another economic actor, when the interests of trade, finance and industrial strategy are seamlessly integrated with the interests of the ruling Communist Party? Companies such as Huawei can protest, with reason, that they are private entities. But given Chinese law, which obliges all individuals and companies to cooperate with Chinese security services,
it makes little difference to the argument:
if the Chinese state can oblige Huawei
to do its bidding, can it be treated as an independent commercial actor, any more than a state-owned nuclear provider?

“The UK still exports more to Ireland or the Benelux countries than to China”

Added to that, the UK must assess its chances, as a smaller partner, of reaching any deal with China that offers it hitherto unavailable advantages. Negotiators might like to check the current concerns in Europe, New Zealand and Australia about opening up to China, as well as the growing list of cancelled and troubled projects from China’s immense Belt and Road Initiative for some cautionary examples.

If the UK were to decide to take those risks, there is now another beast in the woods: the risk of finding itself on the wrong side of the confrontation between China and the US, currently the more important economic and security player for Britain.

The first trade deal that Donald Trump ripped up on taking office was the 24-year- old US-Canada-Mexico North American Free Trade Agreement (Nafta). After much fanfare and exchange of abuse, a new version was agreed. Among the new features, at US insistence, was a so-called “poison pill” clause, which restricts the right of Canada
or Mexico to enter trade talks with a “non- market economy” (read China) and gives the US the right to walk away from the new Nafta if it disapproves of any arrangement reached. The US Commerce Secretary, Wilbur Ross, has made it clear that the US will seek to include this clause in any future trade deals. If the US seeks to impose a similar “them or us” restraint on the UK, what would the UK choose?

These choices are brutal, but these are the current realities. In trade negotiations, size really does matter. As a smaller player in an age of global confrontation, the UK risks becoming the grass.

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