By TIAN DEWEN

ON June 23, Britain’s decision to leave the EU, when the “yes” vote won the referendum by a narrow margin, took many countries and international organizations by surprise. After the result was declared, U.K. Prime Minister David Cameron resigned from office. 

After taking the helm, his successor Theresa May visited Germany and France to negotiate a way forward following Brexit. At the moment, the U.K.’s negotiations with EU countries are purely academic, but Brexit proceedings are set to start in six months. 

Chinese President Xi Jinping and British Prime Minister Theresa May at the G20 Hangzhou Summit on September 5, 2016.

The U.K.’s divorce from the European bloc is certain to create instability in China’s relationship with one of its most important partners in the world arena. During President Xi Jinping’s visit to Britain in October 2015, the two countries declared their commitment to building a global comprehensive strategic partnership, but Brexit will undoubtedly pose challenges for bilateral relations.

Maintain International Trade Partnership

As the birthplace of economic globalization, Britain’s development has always relied on international trade. But Brexit does not imply that Britain will break ties with the European or world economy. Once in office, British Prime Minister Theresa May made her first foreign visit to Germany.

After a meeting with Germany’s Chancellor Angela Merkel, Ms. May declared her commitment to building a strong and constructive partnership with Germany which would benefit the people of both countries and forge a close cooperation with the German economy. As Britain’s second largest trade partner and investor, Germany now hosts 1,300 British companies, which collectively employ 220,000 people. 

In a meeting with France’s President Francois Hollande, Ms. May reiterated the same intention to maintain close economic relations with France, and stressed that after leaving the EU, Britain would continue to welcome French people and companies. Economically, Britain is closely bound to European countries, and the renewal of these relations will be the trickiest part of post-Brexit negotiations.

In 2015, the trade volume between the U.K. and China reached US $78.5 billion, making Britain China’s second largest trade partner in Europe, behind Germany. The U.K. also absorbed the largest share of China’s investment in Europe. As of late April 2015, China’s cumulative investment in Britain had reached US $42 billion, with more than 500 Chinese companies operating in the country.

Multiple infrastructure projects pushed forward by the British government are supported by Chinese investment. Data from the U.K. Department for International Trade show that during the fiscal year 2014 to 2015, China had 112 direct investment projects in the U.K., creating about 6,000 new jobs.

Founding members of the U.K.-China Business League, established in London on June 6, 2016, with certificates presented by Chinese Ambassador to the U.K. Liu Xiaoming and former president of the China-Britain Business Council David Brewer.

In September 2016, while attending the G20 Hangzhou Summit, Prime Minister Theresa May declared a golden era of China-U.K. relations, in light of the great potential for cooperation in numerous fields. Britain is committed to deepening its comprehensive strategic partnership with China and enhancing mutual understanding and trust. She stated that the U.K. looks forward to cooperating closely with China in many areas, including trade, investment, finance, security, and law enforcement. This signifies that the U.K. intends to maintain its steady development of bilateral economic relations.

Responding to Ms. May’s statement, President Xi Jinping concurred that the year 2016 marks the start of the “Golden Era” of China-U.K. relations, and observed that 2017 will mark the 45th anniversary of the establishment of ambassadorial diplomatic relations between the two countries. China is willing to join with the U.K. in an effort to lift the China-U.K. global comprehensive strategic partnership to a higher level in the 21st century.

Brexit to Impact Bilateral Economic and Trade Ties

The biggest challenge posed by Brexit comes from the uncertain future of the British economy. If the world’s fifth largest economy goes into recession as a result of the Brexit process, the ramifications for the world economy will be significant, casting a shadow on China’s prospects of economic cooperation with Britain.  

First, Brexit means that the U.K. will leave the EU bloc, a unified single market. This will raise U.K.’s import tariffs and the price of exports to the EU, and increase non-tariff barriers for trade between the U.K. and EU member states, thus raising trade commodity prices and dealing a heavy blow to Britain’s international trade.

Given the high economic interdependence of Britain and the EU, the two sides need to exercise prudence in future negotiations on issues related to market treatment. The EU’s retaining too many of its former favorable terms with Britain would likely fuel euroscepticism. Being overly stringent with the U.K., however, will harm the European economy, which is still struggling to recover. Therefore, the two sides should seek a way to gain maximum benefits for both sides.

Brexit will nevertheless inhibit the U.K.’s access to gains by virtue of the unified EU market. Whatever the proposed plans, investors’ confidence in the prospects for the U.K. economy has been shaken, exerting negative impact on economic development. Britain has still not put forward any plan for discussion. Uncertainty will be a big feature of the Brexit process over the next few years. Currently, China-U.K. trade only accounts for about three percent of China’s total trade volume, so Britain’s economic recession will not hugely affect China’s economy. However, the impact of Brexit uncertainty on the recovery of the world economy will definitely influence China’s economy under the “new normal.”

Fifty-one electric buses, jointly produced by Chinese car maker BYD and British bus manufacturer Alexander Dennis, Ltd, went into operation in London on September 9, 2016.

Second, China and the U.K. reached a consensus on fighting trade protectionism and advocating free trade. However, the post-Brexit U.K. will no longer be able to play a role in advancing China-EU economic cooperation, but will likely cooperate individually with China in the Free Trade Zone. On July 24, 2016, the British Chancellor of the Exchequer Philip Hammond indicated that the U.K. is willing to reach a Free Trade Agreement with China. As China is Britain’s fourth largest export destination and second largest importer, a Free Trade Zone will benefit both sides.

During the Brexit process, however, the British economy will face downward pressure and the EU will probably deter it from making any substantial progress in free trade with China. This imbues with uncertainty China- U.K. cooperation in establishing a Free Trade Zone.

Brexit thus makes China’s relationship with the EU uncertain. As Brexit will impair the EU’s economic and political strength, forcing the bloc to devote more time to internal affairs in the coming years, it’s quite likely that the EU will show reluctance to join America’s efforts to contain the rise of China. This will help China and the EU to further improve their economic cooperation on the basis of equality and mutual benefit. However, Brexit, in addition to the European debt crisis and the refugee crisis, will further foment trade protectionism within the EU, posing problems for China-EU relations.

Third, at present, London is one of the most important trading centers for the RMB outside of Asia. According to the RMB offshore business ranking list, released by the Society for Worldwide Interbank Financial Telecommunication (SWIFT) in June 2016, the U.K. secured second place after surpassing Singapore with a market share of 6.3 percent. In the same period, Germany’s offshore RMB business took up only 0.54 percent of the world total.

Brexit will also likely deal a heavy blow to the British financial industry, as financial institutions in London face the risk of losing service permits from the other 27 EU member states. In addition, according to EU financial regulations, if a financial institution set up in the U.K. is regarded as a third party when entering the EU market, it must satisfy all supervision requirements set by its home country – Britain – as well as the EU country, which will significantly hike supervision costs.

In the post-Brexit era, whether the European Central Bank will allow London to be a euro trading center remains to be seen. London’s position as a financial center, therefore, could be seriously impaired. All these factors cast gloom on the prospects of China-U.K. financial cooperation.

China Values Bilateral Relations

For China, keeping bilateral relations with Britain “golden” is both economically and politically important. While meeting with Theresa May during the G20 Hangzhou Summit, President Xi Jinping reiterated that as permanent members of the United Nations Security Council, and important members of international institutions like the G20, the two countries would not only create mutual benefits by strengthening bilateral cooperation, but also contribute to world peace and development. Xi stated that China would work together with the new British administration to advance bilateral relations by deepening mutual trust and carrying out communication and cooperation in a number of areas.

In the next few years, Brexit proceedings will be the focus of the British government, which will bring challenges or opportunities, or both, to China-U.K. relations. In August 2016, Theresa May’s new administration suddenly decided to suspend the Hinckley Point C nuclear power station project, a joint project involving China, France, and Britain, and a landmark cooperation between China and European countries. It’s said that the decision to delay the project was mainly due to concerns about nuclear safety.

After the G20 Hangzhou Summit, the decision was made in May’s government to restart the project. Economists commented that political consideration had finally outweighed nuclear safety concerns, as the project has positively influenced diplomatic ties between the U.K., France, and China.

During this sensitive post-Brexit era, Prime Minister Theresa May cannot afford to alienate any trade partners. It has been reported that the final agreement on the project is basically the same version as the one that May suspended, but with added safety terms for future foreign investment in key British infrastructure. According to a report in The Times, British firms are bidding for subcontracts on the Hinckley Point C project, accounting for 64 percent of the total £18 billion investment. 

This suggests that the environment surrounding China- U.K. relations will be more complicated. Brexit will compel Britain’s domestic forces, the EU and its member states to shape a new political landscape. China will closely monitor the process as it will no doubt influence China-U.K. relations.    

In the future, to maintain its position as a world power, Britain should strengthen its cooperation with China. While meeting with British Prime Minister Theresa May, President Xi Jinping set out a new plan to advance China- U.K. economic and political relations: The two countries should maintain the current momentum of high-level exchanges, continue to ensure the success of high-level dialogue mechanisms and strengthen strategic communication and overall planning while continuously deepening mutual understanding and trust. Both sides should continue to advance practical cooperation in economy, trade, investment, energy, infrastructure construction, finance, and other major areas, and expand cooperation in emerging areas like urbanization, high technology, and clean energy. The two countries should deepen cultural, education, health, sports, youth, and media exchanges, discuss the establishment of a cooperation mechanism in law enforcement, and continue to push forward cooperation in anti-corruption, fugitive repatriation, and asset recovery. Cooperation on international hotspot issues within frameworks, including the UN, the G20, and the Asian Infrastructure Investment Bank, should be strengthened as well. Both countries should enhance political mutual trust, expand common interests and deal effectively with differences. If all these proposals can be realized, the prospect for strong bilateral relations will remain promising.

TIAN DEWEN is a research fellow with the Institute of European Studies at the Chinese Academy of Social Sciences.