U.K. Needs Clear Choice on China Relations


China and Britain have potentially one of the world’s most fruitful international economic relationships. Not only do they account for 16 percent of world GDP, but their two economies are mutually complementary rather than competitive.

China is now the world’s largest industrial producer, having overtaken the U.S., whereas the U.K. is highly specialized in financial and other services. Industrial sectors where the U.K. still retains a strong position, such as high-end pharmaceuticals, are not really threatened by competition from China. These areas will take China a significant period to build its own technology, expertise, and resources. Simultaneously, China has the world’s most cost efficient medium technology manufacturing and the U.K. is one of its top 10 export markets.

China possesses some of the world’s most powerful banks, ICBC being ranked as the world leader on many ratings. It also has the world’s largest annual savings – the raw material of the financial service industry. But China’s banks are extremely interested in internationalizing themselves, while London is highly specialized as a center for international financial operations. China wants to increase the RMB’s international use, and London is by far the world’s most important foreign exchange dealing center, with a turnover higher than New York and Tokyo combined. Britain, therefore, is an ideal center for China’s international RMB operations.

The potential for economic cooperation between the two countries was apparent during Chinese Premier Li Ke-qiang’s visit to Britain this year. Multi-billion dollar deals were signed, together with 40-plus intergovernmental agreements and business pacts, covering multiple areas like energy, high-speed trains and finance. After a period of frosty relations, caused by David Cameron’s meeting the Tibetan separatist leader the Dalai Lama, political relations between China and Britain warmed up significantly this year – with the U.K. Prime Minister and other British ministers being welcomed to Beijing for official visits.

Given the mutually complementary nature of the two economies one might think it would be easy to arrange a “win-win” outcome. This is particularly important for the U.K., as its economy has performed worse than the two other largest European economies, Germany and France, since the international financial crisis began. As shown in the chart, since their pre-crisis peaks, German GDP has increased by 3.8 percent, France by 1.2 percent, but the U.K. by only 0.2 percent.

But, regrettably, Britain periodically continues to shoot itself in the foot over its relations with China – inevitably causing damage to the U.K. economy. This has become a more serious obstacle than technical economic questions which remain to be fully resolved – for example the rules on China’s banks setting up branches in London. To show the issues involved it is clarificatory to make a comparison with Germany.

Among the reasons Germany came through the international financial crisis much more successfully than the other major European economies is undoubtedly its strengthening economic relations with China. Germany and China worked out an international division of labor which plays to the strengths of both economies – an approach which should be copied by the U.K..

Germany’s strength is in manufacturing. It is highly specialized in the production of very high quality machine tools and other investment equipment. China needs to import large quantities of these to upgrade its industrial structure. Simultaneously, China is by far the world’s largest and most cost efficient producer of intermediate technology goods – German imports of which help keep its own inflation at a low level. Chinese companies, such as construction equipment manufacturer Sany, have been investing in Germany to gain access to its expertise. Germany’s Chancellor Merkel has consciously kept the momentum of relations with China moving forward by making seven official trips to China.

As Europe’s economy will undoubtedly suffer a setback, due to the negative side effects of the Ukraine crisis, with its damaging sanctions and counter sanctions, creating the best possible relations with China is even more important for all European economies including the U.K..

British Prime Minister Cameron and Finance Minister Osborne’s trips to China earlier this year, together with Li Keqiang’s visit to the U.K., therefore made it seem as though a new relatively smooth and fruitful period would be opened in Sino-British relations. But unfortunately, instead of building on this, Britain decided to shoot itself in the foot again by creating the same type of problems as with the Dalai Lama – this time over Hong Kong.

This immediate issue was the decision of the U.K. Parliament’s Foreign Affairs Committee to “investigate” the new 2017 system of election of Hong Kong’s chief executive. Not only does the U.K. no longer have legal rights in Hong Kong, since Britain’s former colony returned to China in 1997, but the U.K. committee’s moral position on this looks ridiculous. Britain ruled Hong Kong for 150 years. It never introduced the election of Hong Kong’s chief executive, the governor, in any form whatever. If Britain thought there were some vital issue involved in the method of deciding Hong Kong’s head of government, Britain could have introduced that system while it was ruling Hong Kong – it did not.

The reality is the actions of the U.K. Parliament’s Foreign Affairs Committee damage the interests of the people of Britain – who have most certainly not been consulted over the matter. Given the real choice, “is it more important to secure jobs and incomes in Britain through good relations with China, or to make completely ineffectual statements on a matter over which the U.K. has no jurisdiction?” a crushing majority of the British public would undoubtedly chose the former.

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