In considering UK-China trade from China’s perspective, the UK appears to leave a lot to be desired as a trade partner, and the fact that the UK has not had a high-level trade dialogue in recent years is starting to set it apart among its peers, writes Joe Cash
The prospect of UK-China trade talks recently caused a furore in Parliament. The notion that the government would want to resume the UK-China Joint Economic and Trade Commission (JETCo) was nothing short of a scandal for some MPs. Fortunately for them, the JETCo has been postponed. A lack of preparation time and concern that both sides would bring less to the table than they’d have hoped is the official explanation for its delay. But a JETCo is a far cry from the trade talks various backbench MPs were bristling over.
It would have been an odd principle to hold on to had this continued, considering that, in reality, a JETCo merely serves to signal that trade matters. And there would have been a long way to go before the UK and China found themselves signing a trade deal. Indeed, that would have been to misunderstand the purpose of a JETCo, which, at the most, exists to display a willingness to talk trade — which is obviously important in a diplomatic context. After all, the UK does maintain a trade relationship with China — adding around £13.5 billion to Britain’s economy every year.
The prospect of talks on UK-China trade is of interest to Beijing, and they need not be formal trade talks surrounding the feasibility of a UK-China Free Trade Agreement. As China has proven time and again with the EU, the US and other markets, a brief bilateral on a topic as bland as regional indicators would do. But the UK needs to show it is willing to countenance China. The relationship needs to progress. As China’s diplomats understandably continue to point out, their country isn’t going anywhere, and, if that wasn’t enough, it now has more trade partners than any other country — and the UK is just one of them.
That the UK has not had any high-level trade consultations with China in recent years is beginning to make it a bit of an outlier: France concluded an Economic & Financial Dialogue (EFD) with China just before Christmas; Germany participated in similar bilateral consultations last April; the US has been negotiating with Beijing right through the pandemic; while Japan and South Korea have been meeting with Chinese officials for both trilateral and multilateral trade negotiations for close to a decade.
However, UK-China trade relations appear to have stalled — even if the value of the trade relationship continues to grow. And as David Rennie and Bill Bishop explained so well recently, that makes the UK a target for China’s ‘Wolf Warrior’ diplomats, who, rightly or wrongly, feel that the UK is not buying into China’s rise.
Background
The UK is an important trade partner to China. Britain is Beijing’s eighth-largest goods export market and fourth by the measure of outbound direct investment. Remove Hong Kong from the equation, and the UK gets its foot on the podium in terms of China’s preferred investment destinations. However, the UK has, at least as far as the trade data is concerned, so far refrained from buying into China’s rise. The UK is not a prominent direct investor into the Mainland, ranking outside of China’s top 10 sources of foreign direct investment (FDI), nor is it a major supplier of goods exports. There clearly is scope for the UK to grow in this regard, for it sits behind analogous markets such as Germany and the Netherlands. But by sitting outside China’s various free trade and investment agreements and the Regional Comprehensive Economic Partnership Agreement (RCEP), the UK is at a disadvantage compared with China’s other trade partners.
The above trade partners can also be grouped according to the following free trade and investment regimes:
Excluding the British Virgin Islands, only Brazil, Canada, India, and the UK are not part of an agreement also containing China. But even in this list, Britain stands out. While relations between Beijing and Canberra and Beijing and New Delhi are on ice, excusing their lack of diplomatic engagement on trade, Brazil has at least held high-level trade talks with China between the present day and the start of the pandemic. The last UKChina high-level economic forum was the EFD that took place in London in 2019.
The UK is further disadvantaged by the fact that it has not even had the chance to hold discussions aimed at remedying issues in the trading relationship at the side-lines of multilateral meetings which include China. While Australia and China have formally frozen bilateral trade talks concerning their FTA, the pair continued to talk trade at meetings concerning the RCEP’s ratification.
Similarly, despite the Dutch parliament being one of the first European legislatures to apply sanctions on China over Xinjiang, the Netherlands’ trade negotiators retain a line to their Chinese counterparts through the European Commission and their efforts to resuscitate the Comprehensive Agreement on Investment (CAI) with China. Indeed, as the UK is no longer a member of the European Union, where such trade issues are the competence of Brussels, as it is for France, Germany, and the Netherlands, it is now down to Whitehall, so the UK cannot deploy a ‘good cop, bad cop’ strategy with Beijing because it has fewer irons in the fire.
All of this is to say that considering all China’s major trading partners, only the UK has refrained from giving even a tacit endorsement of China taking on a more prominent role in international political economy by entertaining the notion of closer trade ties, even if those ties are maintained by virtue of mutual membership of a multilateral trade agreement.
What about commercial activity within China?
Unfortunately, for all the talk of how much UK plc is ‘In China, for China,’ the picture isn’t any prettier by measure of commercial activity within China.
It is possible to measure this by examining what is known as Mode 3 export data. Drawn from companies operating in China and scaled up at aggregate level, Mode 3 considers services provided by a foreign-invested enterprise as an export. For example, if a London head-quartered accountancy firm uses its commercial presence in Shanghai to audit a Chinese state-owned enterprise and the entire transaction takes place within the Mainland, that transaction counts as a Mode 3 export. However, Mode 3 is still a very experimental way of analysing two countries’ trade relationship, and too often it gives a warped view of the partnership — for example, British Mode 3 exports to China were apparently worth £14.3 billion in 2018, close to trebling the £5.2 billion of other services the UK exported to China which were measured conventionally.
But the UK’s numbers are hardly exemplary even when Mode 3 exports are included. France, for example, exported £46 billion more in Mode 3 exports to China in 2018 than the UK. Thus, even when factoring in Mode 3, the UK remains a relatively average trade partner at best, joining the Netherlands, Italy, and Sweden with Mode 3 export volumes of around £15 billion per year — far behind the behemoth that is German industry in China, which recorded £164 billion in Mode 3 exports that same year.
What about cross-border investment from Hong Kong?
It is widely recognised that Hong Kong distorts the values of bilateral trade flows because it is such a prominent conduit into the China market — Hong Kong’s trade to GDP rate stands around 259%. As a result, it is very difficult to account for the value of British trade and investment traversing Hong Kong on its way into the Mainland. Professor Shaun Breslin of the University of Warwick has tried to disaggregate Chinese trade that passes through Hong Kong in order to work out the real direction of that trade. However, even with the relatively sophisticated data from the Hong Kong Customs Bureau used by Breslin, his research results in a method that provides a loose estimate at best.
Breslin posits that 84.65% of goods that arrive in Hong Kong are re-routed to the Mainland. Taking the Office for National Statistics 2020 data for goods exports to Hong Kong as a reference, that would add an estimated £6.85 billion to UK goods exports to China — just under half the value of goods exported from the UK to China directly that year. That still leaves the UK far outside the Top 10 of China’s import partners. In terms of trade in services, Mode 3 data reveals that UK companies recorded £36 billion worth of transactions that would count as this form of export to Hong Kong in 2019. However, it is not possible to estimate accurately how much of that was in support of Mainland Chinese corporate entities. Food for thought, though.
The CBBC View
It seems clear that the UK could be a better trade partner, not least based on how it compares with analogous markets such as Germany. That is not to say that UK companies are not doing well in China. They are — China is the UK’s third-largest export market. However, the UK is falling behind by several measures, chiefly exports, FDI into China, and trade diplomacy. That could bring problems for British exporters in the long run. The Chinese government’s attention might not last forever, and with its trade officials so involved with the representatives of countries that are also members of the RCEP or the EU-China CAI, for example, it is easy to imagine the UK falling down the pecking order — especially considering that Britain is also a less significant bilateral trade partner than many of those states.
Indeed, as the trade data demonstrates, at present, Britain simply isn’t buying into China’s rise. Not even tacitly, as one could present the members of RCEP as doing. In addition, China is aware that its officials are interacting with the government of a country whose Parliament has indicated it will not support deepening trade ties with China. Hence it is our view that the UK government needs a coherent and consistent China strategy. And it needs to have the support of both the government and MPs in the Chamber. The result of its absence is that the UK is losing ground in China in trade and investment. The resumption of the JETCo and an EFD would be a good first step — but what would be better is if these meetings had been held consistently in the first place.
