27 Sep 2017
Topics Europe

The UK’s decision to leave the European Union (EU) raises questions on how its relationship with China will change due to a new order in which Britain loses its share in EU policymaking.

China-UK relations have been characterised by ambiguous policies over the last few decades. In recent years, however, the platitudinous term of a Golden Era' has been bandied about in Britain's efforts to establish stronger trade links with China. China is the UK's seventh largest export market and its third largest source of imports, with the UK having a trade deficit of 19.6 billion (US$26.1 billion) with China in 2015.

It is worth noting that despite political hiccups along the way, such as the outrage caused by the Dalai Lama's visit to the UK in 2012, trade still continued to grow. This was likely partly due to the fact that the UK was protected by its EU membership, according to Professor Rana Mitter, Director of the University China Centre, University of Oxford. He shared this insight during a recent talk titled Brexit Looks East: Will China be Friend or Foe after the UK Leaves the EU?' organised by the Centre on Asia and Globalisation at the Lee Kuan Yew School of Public Policy.

Impact on UK-China trade relations

Before Brexit, China hoped that Britain would act as a champion for Chinese ambitions within the EU by supporting its claim to market economy status and its Belt and Road Initiative. Additionally, the UK could provide a friendly access point for Chinese companies to enter the EU single market.

There has been a long-standing dispute on whether China should be granted market economy status by the Word Trade Organization (WTO). The EU, with its 500 million-strong population, is China's largest trade partner, with the latter sending 350 billion (US$389 billion) worth of goods to the trading bloc in 2015. China has therefore been urging the EU to recognise it as a market economy so that it is no longer vulnerable to EU trade defence measures for protectionism.

With the UK gone, EU trade restrictions on China could now increase. Moreover, if the UK were to continue to support China in return for concessions, it would have to do so as an independent actor at the WTO.

On the other hand, the UK requires trade deals with China perhaps more urgently than the other way around. The UK's economy is dominated by the services sector, and China, as an emerging market, is ideal for the sale of services. China's move towards healthcare reform, for example, provides huge opportunities for the UK, which specialises in pharmaceuticals, to break into the healthcare prescription services market.

However, the UK's departure from the EU now exposes the country to possible vulnerabilities as it recalibrates its relationships with trade partners. Mitter believes that Brexit will weaken the UK's standing in relation to China. Here are some reasons why.

Potential weakening of the UK's economic and political power

The first and most widely discussed concern is an economic downturn. So far, it appears that disaster has not befallen the UK. However, rising inflation and debt seems to suggest that a downturn is indeed inevitable, which would lead to an increased urgency to secure trade deals. The heightened urgency to clinch deals would likely mean having to provide more concessions to China and consideration of the purchase of central British national infrastructure, said Mitter.

Secondly, it appears that the UK will leave the existing Customs Union when Brexit comes into effect, despite Prime Minister Theresa May initially claiming otherwise. If this occurs, it will make the UK less competitive than other members. Up until now, the UK's expertise in services would have allowed greater competitiveness in the Chinese market, but according to Mitter, it runs the risk of being excluded from future services agreements with China.

The third concern is that of weakened negotiating power. According to Mitter, if the UK is going to seek trade agreements from a position of relative weakness, it is going to have less power to exert pressure on China on issues such as human rights.

For example, in Hong Kong, where human rights have faced a watershed moment, Chinese sovereignty appears to have superseded any perceived authority that Britain held with regards to its former colony. Relatively mild statements by British foreign secretary Boris Johnson, who expressed concern at Beijing's influence over Hong Kong's legal affairs, were met with a fierce backlash from China.

This weakness translates into internal security concerns as well. Earlier this year, China warned that its relations with the UK were at a crucial historical juncture when Theresa May delayed the approval of the Hinckley Point nuclear power station, which is receiving massive investment from China. Despite security concerns, the controversial power station was approved, implying that concerns of security may be harder to negotiate at a time when the UK has made itself more vulnerable.

Post-Brexit effect on the UK's ability to attract investment

Mitter summarised the two possible scenarios that could occur in the future, depending on whether the UK chooses to undertake a relatively soft or hard Brexit.

In the case of a relatively soft Brexit, it is foreseeable that the UK will leave the EU in a technical sense but remain in the various important economic mechanisms. As Mitter stated, the EU single market is the most central concept to the EU project. The UK could leave the EU in name only and still participate in the Single Market, so that trade will not be greatly affected, similar to Norway's position with regards to the EU.

As long as the UK's economic relationship with the EU remains relatively unchanged, Chinese investment would most likely continue to flow in. However, British sovereignty would still likely be affected as it would be subject to EU norms and laws even though it would no longer have the power to change them in the European parliament.

On the other hand, the case of a hard Brexit would see the UK leaving all EU institutions and becoming a medium-sized player in the world community and WTO, much like Canada or Australia. Many argue that this would likely lead to an economic downturn in the short term.

In both scenarios, the urgency to obtain trade deals would increase, thus putting the UK in a position of disadvantage when dealing with China.

In both scenarios, the UK's ability to attract investment would be affected once it is no longer in the EU. Mitter believes that those who argued for Britain's sovereignty failed to acknowledge the capacity for growth and protection that EU structures provided for ideologies that are fundamental to the UK, namely liberal politics and trade.

Uncertainties following the UK's decision to leave the EU may have caused its Golden Age' with China to lose some of its lustre, but it remains to be seen how the after-effects of Brexit will change their relationship. As Mitter succinctly concluded: The most foolish person is the one who makes any kind of definite prediction.

This is an event coverage piece forBrexit looks East: Will China be friend or foe after the UK leaves the EU?This piece was written by Prethika Nair.

Topics Europe