The expected evolution of the China-UK trade relationship

Dr Yu Jie, associate at LSE IDEAS and senior research fellow at Chatham House, dissects the possible evolution of the China-UK trade relationship

COVID-19 acts as a catalyst to provoke many domestic and foreign affairs debate in British politics, including its future relationship with China, the world second-largest economy. While many of the Tory and Labour grandees have called for “reckoning with China”, there are some which have insisted on the need for continued positive engagements with China on global issues. Foreign Secretary Dominic Raab ambivalently suggested “there could not be a return to ‘business as usual’ with China-UK trade relations after COVID-19. The defining emotion for Downing Street is confusion, the direction nebulous.

The defining emotion for Downing Street is confusion, the direction nebulous.

This discombobulated mood highlights the difficult trade-offs the UK faces in its relationship with the Middle Kingdom in a period of frequent changes in Brexit foreign policy coupled with post-COVID 19 world order.

The perspective from China

For the Chinese government, British trade officials’ efforts to boost economic ties cannot happily coexist with the UK House of Commons Foreign Affairs Committee remarks about the Chinese government’s cover-up and disinformation campaign during the outbreak.

On top of the pressure, the UK is under from the United States and other Five Eyes intelligence-sharing partners to revise the decision to allow Huawei’s participation in critical infrastructure, such a controversy could further damage a relationship that was already turbulent.

Seen from Beijing, China has been very clear about what it wants from a relationship with Britain, but Britain appears unable to decide what it wants from China.

The vagueness of post-Brexit policy?

After hailing a so-called ‘golden era’ of bilateral ties during a state visit by President Xi Jinping in 2015, Chinese leaders now see the shock of the Brexit vote steering the relationship in a totally new direction without, apparently, a clear agenda. All of the suspicions that the Communist Party’s leaders had about the dangers of Western democracy have been confirmed in spades. They may have also learned a more pointed lesson from the Conservative party about the dangers of externalising internal party conflicts.

In contrast, China has a very clear set of economic priorities for the China-UK trade relationship irrespective of Brexit or COVID-19.

Firstly, Chinese companies continue to look to the UK to provide a secure home for investment, providing opportunities to enhance their global brand value or to make new acquisitions without the fierce resistance encountered in continental Europe and the US.

Secondly, as China grapples with a shuttered economy and international isolation led by the United States, it is looking to calm trade ties with Western powers committed to the principles of free trade and economic globalisation, like the UK, though not at the expense of relations with the EU.

Thirdly, Beijing remains eager to be recognised by established economies and has high hopes of the UK acting as a supporter for China’s global ambitions as George Osborne did with the UK’s membership of Asia Infrastructure Investment Bank. All three could theoretically be one of China’s prized ‘win-win’ outcomes, and perhaps also benefit the British economy to some degree.

Why is the China-UK trade relationship so important?

It is also important to remember why China has prioritised its relationship with the UK over other major European economies. While British media often focus on China’s interest in education and tourism connections, Beijing has long admired British expertise in financial and corporate governance. As far back as the 1950s, Mao Zedong was championing the desire to become more like Britain’s developed economy.

Today, while France and Germany have been important for providing manufacturing technologies, the UK is a more useful partner for the next stage of Chinese development: a shift to a consumption-led and service-based economy; the move to currency convertibility via Chinese yuan trading in the City of London; and a welcoming and absorbing of Chinese investment abroad. And in fact, the direct investments from China to the UK remains at a very low level compared with continental Europe. And most of the direct investments focus on real estates which well trumped over other sectors in terms of volume.

Yet, an inconsistent message from London jeopardises these economic possibilities by challenging a key element of the Chinese Communist Party’s legitimacy: a resurgent Chinese nationalism. The party has strongly promoted the idea that its leadership has ended over 150 years of foreign bullying of China and helped the country regain its rightful place at the center of world affairs.

The UK is traditionally viewed by the Chinese as a former colonial power which inflicted humiliation on China in the Opium Wars.

So it is no wonder comments on Hong Kong by British Parliamentarians have sparked rage in Beijing. The UK is traditionally viewed by the Chinese as a former colonial power which inflicted humiliation on China in the Opium Wars. Seen in this light, the government must show its people that it can stand up to strong words from Britain.

Anti-China rhetoric and resultant impact

Some parts of the world do not understand the sense of humiliation today’s Chinese feel when they look back on the past, at least in the version that is popularly presented domestically.

Judging by the growing anti-China rhetoric from many parts of the world, China’s relations with the West have soured significantly. This trend could not have come at a worse time, which emboldens China hawks in the United States to promote decoupling amid deteriorating relations between Beijing and Washington. This deterioration also poses a tremendous challenge to post-Brexit ‘Global Britain’.

To reconsider its relationship with China, the British government must better understand how economic and security strands of the relationship are connected and become more skilful at interacting along both lines. To nurture that partnership, London will have to balance mitigating its security concerns with realism about how much it can change the Chinese government’s outlook and political choices. And it will have to accept that it cannot divorce its security stance from its hopes for a profitable economic relationship.