The PM will lead a delegation to China on Wednesday. With Brexit Britain desperate for trade, it’s time we got down to brass tacksby George Magnus / January 30, 2018 / Leave a comment
On Wednesday, Theresa May will lead her first UK delegation to China, following in the footsteps of her Chancellor Philip Hammond late last year. Liu Xiaoming, China’s Ambassador to the UK, told the Xinhua news agency recently that the purpose is to “push forward the Golden Era for bilateral ties.”
Yet that phrase “Golden Era,” invoked by David Cameron in 2015 and now deployed in peacock-like fashion by UK politicians “as we leave the European Union,” is a misnomer. The UK is very much the minor partner and supplicant in the relationship.
As if to highlight this, it was reported two days ago that previously agreed commercial deals with the UK, and the prime minister’s planned business meetings in China, might be at risk because the UK had not formally endorsed China’s Belt and Road Initiative (BRI). The BRI is Xi Jinping’s most important international relations strategy, designed to cement China’s influence over Asia, the Middle East and beyond. Only last week a US Congressional hearing was warned by experts about the threat the BRI posed to the western world. Perhaps the PM and Donald Trump exchanged words on this at their Davos meeting.
Sino-UK relations are, in any event, now a mirror image of history. The British are “bigging up” the opportunity to do more trade and commercial business with China, much as they did when King George III sent Lord Macartney to the court of the Qianlong emperor in 1793. But back then the dynamic was very different. The mission’s purpose was to demand China open its coastal cities, ports and markets up to trade, establish an official permanent mission in Peking, and extend the reach of the British Empire. The Chinese weren’t impressed.
The British would eventually open China up by force, initiating two Opium Wars. The Chinese have never forgotten, and see Britain as a key player in what they call “the century of humiliation” (roughly 1840 to 1947), which sits as a warning from the past in Xi Jinping’s “Great Rejuvenation” of China. In 2018, of course, the boot is on the other foot, and the irony is not lost in Beijing. Brexit Britain is looking for recognition and favour, but as a petitioner, not a major power. In the European Union, the UK is part of a formidable trading bloc that rivals China. Outside the EU and on our own, the UK will be a minnow. China accounts for just 3 per cent of UK exports. Last year, the total value of UK trade with China was about £58 billion, roughly half the amount that Germany trades with China. The figure for EU-China trade is of course far larger still.So China will not go out of its way to do us any favours.
Both George Osborne and Philip Hammond have negotiated new trade and finance arrangements with China, and the May delegation will have to tread carefully to preserve these and secure additional benefits. Her hosts will certainly expect her to indicate support for the Belt and Road Initiative. The UK government may want China to agree to a future free trade agreement, but this will be all rhetoric. The UK is hamstrung until it leaves the EU customs union, and China won’t negotiate in earnest until it knows more about any future UK-EU trade arrangement. That could be years away.
“Brexit Britain is looking for recognition and favour, but as a petitioner, not a major power”
That does not mean Britain has nothing to gain from these talks. China has interests too. Away from trade, the UK and China have important direct investment relations. The UK has been China’s preferred source of foreign direct investment for many years. Of the more than €100 billion invested by Chinese companies in the EU since 2000, the UK has accounted for about a quarter. The UK has been the perfect bridge to the EU for many of China’s 500 or so companies in the country. China has relished London’s financial status, along with the UK’s business opportunities and conducive regulatory environment.
But what happens next? Officially, China says that Brexit presents risk but that the UK will retain significance. Privately, a number of senior officials think the country is daft to leave the EU, but they will be patient while the UK might still serve their interests after Brexit.
China’s key industrial policy, Made in China 2025, seeks to securedominance in sophisticated new technologies, including AI, big data, and robotics via state enterprises and the private sector tech giants that work hand-in-glove for the Chinese government. Chinese companies are interested in UK small to medium size companies in these areas, and also areas in which Chinese initiatives have not been that successful: life sciences, information technology and aerospace parts and components.
The UK, of course, isn’t the only place where Chinese companies are looking to acquire new technologies and innovation expertise. But Chinese activity in the race to secure technological advantage is beginning to raise some security concerns. In the US, the Committee on Foreign Investment in the US is becoming increasingly vigilant about Chinese acquisitions, and has blocked some. European governments and the EU are similarly becoming more sensitive about China’s access to sensitive sectors and firms.
The risk in the UK is that the government may be prepared to maintain an open door policy, regardless of national security and commercial interests, simply to be able to boast about Brexit Britain’s Golden Era. So we should listen out for any comments this week that may be revealing.
There is one thing that is golden about the Golden Era though. Gold. London is the world’s hub for gold trading, much as Dubai or Singapore is for air passengers. Gold exports form about 7 per cent of the value of UK exports, and in some months as much as 10 per cent. Much of what we export goes to China (and India). It flatters our exports in general, and those to China in particular. This is the only bit of the Golden Era that both glitters, and is gold.
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