Geopolitical tensions key consideration for future China-UK relations

Much room for co-operation, but path to success narrowing

A pattern of light and shade runs through the China-UK relationship, illuminated in different ways at the OMFIF China forum on 22 November in London. At present, shade seems to predominate. The two countries are a long way from the ‘golden era’ extolled by both sides during the 2010-16 premiership of David Cameron, as Rishi Sunak, the new prime minister, made bluntly clear in his inaugural foreign policy speech on 28 November. But the principles of dialogue and co-operation – repeated throughout the OMFIF forum – may still play a role in guiding the path forward.

Geopolitics holds the key. Cameron, in his memoirs which appeared in 2019, wrote of his hope for ‘political leverage’ from improved trade and investment. ‘The trust that we could build from doing business together could lead to trust across a whole range of areas.’ But he admitted to being ‘hard-headed about the threat it posed,’ adding, ‘Naturally, we would always be vigilant when it came to China.’

In today’s frosty international environment, considerably worsened by Russia’s invasion of Ukraine,  Britain’s position is highly constrained. On the one hand, as an open economy running a large current account deficit, the UK has been a natural target for Chinese investment in manufacturing, services, real estate and utilities. Many hard pressed sectors of the British economy would like this co-operation to continue.

On the other hand, as a prime ally of the US at a time when a new form of undeclared cold war appears to be opening, Britain’s freedom to carry on ‘business as normal’ is severely limited.

Britain’s exit from the European Union was at least partly grounded in the desire (legitimate although with exaggerated emphasis) to build up trade and investment links with countries outside Europe. In view of the tensions between Britain’s global ambitions and geopolitical and economic realities, there was criticism at the conference (from the UK side) of Britain’s ‘s incoherence’ as it sought to lay down a sensible policy on China.

Small wonder that the UK – like the US – is emphasising the considerable number of areas where the two sides can co-operate without undue worries about political complications, for example, in education, financial services, medical technology and (especially) efforts to counter climate change.

Investment negotiations have to take account of political and military worries about ‘dual use’ technologies – but this was also the position during the ‘golden era’. China itself feels under much greater duress as a result of trade and investment restrictions. As a result of the Russian war in Ukraine, the US is blocking access in the field of advanced semiconductors, with results that could have a major negative impact on the Chinese economy.

At the 22 November seminar there was talk (on the British side) of the UK government taking protectionist measures under the guise of security considerations. The Chinese are clearly still deeply unhappy about British restrictions on communications company Huawei over the past two years. And a new focus of discontent has been the UK government’s blocking – on national security grounds – of the sale of one of Britain’s biggest semiconductor plants, Newport Wafer Fab, to a Dutch company owned by China’s Wingtech. This undoubtedly reflects US as well as domestic British political pressures. Germany has halted two similar acquisitions.

China faces its own set of unusual problems as a result of the decline in growth, the drawn out nature of the Covid outbreak, new lockdowns and the ensuing street protests that have taken place in several key cities. These have taken place at a sensitive moment for President Xi Jinping, taking on sweeping powers following the 20th party congress. The Beijing government is in a limbo ahead of the accession of new figures in March marking a break with former reformist polices. Against this uncertain background, there is plenty of room for Chinese and British businesses and financial services firms to engage with each other. But the path to success has undoubtedly become much narrower.

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