Shaun Breslin

UK-China Relations in the Context of Brexit: Economics Still in Command?

Shaun Breslin

It will take many years for us to know the full implications of the historic Brexit vote on June 23, 2016. Even once the final terms of separation between the UK and former EU partners have been established,it will take some time for a whole range of actors to get used to the new arrangements – governments, companies and private individuals will all have to forget the old ways of doing things and learn new ones. And of course, the UK will also have to build new relationships with the rest of the world. On one hand, it might become easier for the UK to forge new sets of relationships, as it will be able to act independently on issues like negotiating trade agreements, rather than the EU having legal competence for trade issues as it does at the moment. However, on the other hand, it might become harder for the UK to get what it wants, given that the bargaining power of one (the UK) is likely to be less than that of many (the EU), and the attractiveness of the UK as a gateway to the rest of Europe (for example,financially) might diminish in a post-Brexit world.

So the key word is quot;uncertaintyquot;; and it is likely to remain the key word for the foreseeable future. In the case of UK relations with China,this uncertainty has been compounded by one of the more immediate consequences of the Brexit referendum vote. Although it did not trigger a formal change of government (as the ruling Conservative Party simply changed its leader rather than ceding power to somebody else), the change inleadership personnel did have significant effects in some areas where the new team's positions departed from their predecessors'. The nature of the UK's relationship with China, while not exactly at the top of political agenda, was one area where questions were raised about the basis of UK policy during David Cameron's premiership, which had been heavily influenced by his Chancellor of the Exchequer, George Osborne. This added an extra level of uncertainty on top of the Brexit insecurity, leading some to question if the much vaunted quot;Golden Agequot; of UK-China relations had come to a rapid and premature end.1See, for example, Jonathan Ford and James Kynge, quot;Beijing Signals End of China-UK 'Golden Age',quot;Financial Times, January 6, 2017, https://www.ft.com/content/4ab22b66-d42d-11e6-9341-7393bb2e1b51.

The change in emphasis from the Cameron to May leaderships shows that individuals really can make a difference in shaping policy. But a change in emphasis is very different from a fundamental shift in underlying principles, objectives and strategies, and the underpinning understanding of the importance of harnessing the economic opportunities that have emerged from China's global rise. Clearly, economic relations have not been the only issue in the bilateral relationship over the years, and what we might call morequot;politicalquot; considerations have had different levels of importance at different times. Nevertheless, how best to build mutually beneficial economic relations has not only been a constant across the Cameron and May governments, but has also been at the heart of the UK's China strategy for the best part of four decades and has remained a common goal for UK governments of different political persuasions.

The main focus of this paper is to identify both the constants and changes that have influenced the nature of UK-China relations in the modern era. Whilst it does consider the balance between different economic and political dynamics, its primary focus is on the specifics of the changing nature of the economic relationship. Whilst Brexit and leadership change are clear examples of how some of this change originates from within the UK,more important sources of change are found in China's economic evolution.Key amongst them has been the emergence of China as a global financial power; and arguably more significantly, perceptions of China's future financial power and how it might be used.

Constants and Continuities

Trying to establish constants over a nearly four-decade relationship runs the risk of oversimplifying very complex factors and sets of relationships. And it's probably possible to find examples and cases that contradict all of the claims that will now be made about the basis of UK-China relations. Nevertheless,accepting this risk, there are arguably four core understandings that have underpinned the UK's China policy over the years.

First, as indicated by Thatcher's comments in 1979, China has been predominantly seen as an opportunity rather than a threat. On one level,while the UK does have broadly defined security interests in East Asia (for example, in maintaining sea lines of communication and the law-based international order), the likelihood of the UK and China coming into direct military confrontation is extremely low. This means that the UK (and indeed other European states as well as the EU) have a very different starting point from the US or some Asian states when developing their China strategy and policies. On another level, the idea that China poses an economic threat has not gained a strong purchase in the UK, especially when compared to the US. The purchase of UK companies by Chinese competitors has occasionally raised public interest. But even then, the focus has often been on domestic failings in the UK rather than Chinese actions. The case of Nanjing Automobile's purchase of MG Rover in 2005 is a good example here. Perhaps the biggest area of concern is over what China might do to the nature of global order and global governance when it has the power to bring about fundamental change. But even this idea of a potential China threat is mitigated by other perceptions of the nature of China's rise.

This brings us to the second core understanding and the broad acceptance that the UK simply does not have the power to significantly influence the nature of China's rise. Moreover, whilst not universally endorsed, the dominant position over the years has been that the best way of generating change is to engage China. For example, when the Labour government replaced the Conservatives in 1997, Foreign Secretary Robin Cook sparked a widespread debate over the nature of the UK's foreign policy when he argued that:

Our foreign policy must have an ethical dimension and must support the demands of other peoples for the democratic rights on which we insist for ourselves. The ….Government will put human rights at the heart of our foreign policy.2The full speech is available at https://www.theguardian.com/world/1997/may/12/indonesia.ethicalforeignpolicy.

But any idea that this would lead to a change in, for example, the commercial emphasis in the UK's China policy soon proved to be mistaken.As Cook later argued in explaining UK support for China's WTO entry,there was no necessary contradiction between having an ethical and commercial basis for foreign policy if you accept some of the basic principles of liberal international relations theory:

We consider that the integration of China into the world community in general, including China's accession to the World Trade Organisation is the most powerful external factor likely to strengthen the rule of law and lead to an improvement in the human rights situation in China. Closer integration in commerce is part of this wider picture, and we consider that Government policy in all these areas is complementary.3Robin Cook, quot;China: Response of the Secretary of State for Foreign and Commonwealth Affairs,quot;Foreign Affairs Committee Session 1999-2000, Norwich: HMSO, 2000.

As a result, despite the advocacy of various NGOs, there has been less of a challenge to the primacy of economic relations as is perhaps the case in other countries' China policies.

Futurology and predictions about China's future remains an important factor in driving the UK's policy today.

The third core understanding is that while China's rise presents an economic opportunity for the UK, it is not always easy to turn opportunity into reality. This is partly because the nature of Chinese system means that the Chinese state remains an important actor when it comes to deciding who has access to certain parts of the Chinese economy, and also in supporting the international activities of Chinese companies. Thus, so the argument goes,good political relations at the national level can be important in ensuring that national commercial actors can unlock some of what China has to offer (even fifteen years after China's WTO entry). But it's also partly because accessing the Chinese opportunity is seen as a competitive process.

There are some areas where international cooperation is central to UK policy. For example, the US influence has been central in maintaining the arms embargo on China (operated through the EU). Common ground with the US is also at times an important component of UK behaviour in the UN Security Council. Notably, though, despite this security cooperation,the US was unable to stop the UK (and subsequently other European states)from joining the Asian Infrastructure Investment Bank (AIIB). In Europe,Brussels has established the EU-China Human Rights Dialogue to quot;promote human rights in China.quot;4See the official web page of the EU Commission at http://eeas.europa.eu/archives/delegations/china/eu_china/political_relations/humain_rights_dialogue/index_en.htm.But at the same time, the UK has also maintained its own independent human rights dialogue with China. The EU, rather than individual member states, has legal competence in trade issues (including at the WTO). But when it comes to trying to help UK companies operate in the Chinese market, attracting inward investment from China, and becoming the European centre for the renminbi's internationalisation, it can be a case of competing rather than cooperating – and not just with other Europeans.

Fourth and finally, no matter how important China might be at any given time, much of the discussion of China's global role revolves around what it will become in the future. Notably, and as we shall see later in the paper,even with the growth of the Chinese economy and China's international profile that we have seen since 1979, futurology and predictions about China's future remains an important factor in driving the UK's policy today.

Changes and Challenges

Looking back on the past forty years of the relationship as a whole,the resolution of the Hong Kong issue and the resumption of Chinese sovereignty in 1997 stands out as a key turning point. But if we confine the discussion to economic affairs only, there have also been a number of significant changes – including one that has arguably redefined the entire economic basis of the relationship.

Initially, the relationship was built on a strong sense of asymmetry with a more advanced and globally powerful UK having things to offer China in terms of technology and knowhow (including at the time in the defence realm). Indeed, somewhat ironically, British high-speed train technology was considered too advanced for China's needs at the time, where moving coal and other materials around the country was considered more important than moving passengers quickly.

As China began to gradually open to the world, the prospect of a future Chinese market for British producers began to take a greater hold. The first significant change in direction (as opposed to just a greater intensity of focus)occurred as China emerged as an offshore production site. This is not to say that the idea of China as (future) market was replaced by something else. On the contrary, this remains an important consideration in the UK and has seen particular spikes at times when it seemed as if China might become more open to foreign actors. Examples here include the return to a reform agenda after Deng Xiaoping's southern tour in 1992, after China's WTO entry in 2001, and around the third plenum of the 18th CPC Central Committee in 2013. Indeed, if anything, the prospect of assessing the Chinese market has become even more important in the UK as new actors – for example, the UK financial services sector – look to China for potential future opportunities.But in addition to seeing China as a market, it was also additionally seen as a cheaper site for producing exports (including exports back to the UK) than manufacturing at home.

This shift in perception, and the shift in manufacturing capacity to China, did not change one key fundamental: the conception of an asymmetric power relationship. This was to change as China emerged as a source of outward investment and international finance. While the growth of Chinese investment in Africa and elsewhere had implications for the UK,it was the financial crisis at home that arguably turned out to be the game changer. Whilst it is hard to be precise about when (and how far) power shifts occur, by the end of the first decade of the new century there appeared to have been at least a shift in perception in China and Europe that the old asymmetries had flipped.

In the EU as a whole, perhaps the biggest symbol of the power shift was the attempt by Klaus Regling to gain Chinese support for the Eurozone bailout in October 2011. In the case of the UK, it was arguably Chancellor of the Exchequer George Osborne's trip to China two years later in October 2013, and Prime Minister David Cameron's visit in December the same year.While there is a case for looking at Xi Jinping's visit to the UK in 2015 as the epitome of the new quot;golden eraquot; of Sino-UK relations – a term much touted at the time – it was the 2013 quot;charm offensivequot; by the UK government that laid the foundations for what was to follow (including the UK joining the AIIB in 2015). With austerity at home, the continued growth of the Chinese economy – and in particular the growth of Chinese overseas investment– was seen as an important route out of economic problems in the UK.Moreover, there was a feeling that Germany had emerged as China's major partner in Europe in previous years and that the UK might be falling behind France as well (not least after Cameron met with the Dalai Lama in 2012).5See Mark Odell, quot;How David Cameron Lost, and then Won, China,quot; Financial Times, March 12, 2015,https://www.ft.com/content/98c6f8f0-c8df-11e4-bc64-00144feab7de.

The Golden Era?

The quot;unconditionalquot; approach to engaging China to attract Chinese investment was far from being universally welcomed in the UK. In particular,George Osborne's visit to Xinjiang in September 2015 was seen as a signal that economics was now not so much the dominant issue in the bilateral relationship as the only issue. Just prior to this trip, Osborne along with his key advisor, supporter and Commercial Secretary to the Treasury, Jim O'Neill(who had come up with the concept of the BRIC group of countries as head of global economic research in a previous career at Goldman Sachs) had explained why it was so necessary to engage China in this way in an opinion piece in The Guardian. In many respects, the title of the piece says it all: quot;It's in Britain's Interests to Bond with China Now: The Future Prosperity of This Country Depends on Us Strengthening Our Relationship with the World's Next Superpower.quot; But the first paragraph is also worth repeating here too:

Take yourself forward, for a moment, and imagine it is the year 2030.Children born today are preparing for exams and starting to think about their future careers. China is now the world's largest economy.Mandarin is taught in schools right across the world. And a new Silk Road for international trade, made up of roads, high-speed railway lines, bridges and airport hubs, stretches from Shanghai and Beijing through Xinjiang to Kazakhstan, Pakistan and Afghanistan before making its way to western Europe and to Britain. This isn't a fantasy.It is the 2030 that most economic forecasters now predict.6George Osborne and Jim O'Neill, quot;It's in Britain's Interests to Bond with China Now: The Future Prosperity of this Country Depends on us Strengthening our Relationship with the World's Next Superpowerquot;, The Guardian, September 19, 2015, https://www.theguardian.com/commentisfree/2015/sep/19/george-osborne-britain-should-bond-china-now.

A number of points arise from a study of this one short article. First, it is notable that it is Osborne as the UK Chancellor of the Exchequer and the Treasury as a government body that was taking the lead on the UK's China policy. This is a reflection of how the changing nature of China's global power, and also changing external perceptions of China, lead to changes in the way that international relations is conducted. In the case of the UK and China, the diplomatic primacy during discussions of Hong Kong's future gave way to a greater role for commercial interests and agencies and government, which in turn was replaced by a greater role for finance under Osborne. But if this, and the understanding of China as the most powerful partner, shows important changes in the relationship, we also see some key continuities as well.

The primacy of economic interests and the idea of China as a bigger opportunity than threat is at the heart of the article. So too is the inevitability of China's rise (even if growth slows in the future) on China's terms. And whilst not explicitly stated, the importance of competing with others for Chinese friendship and commercial relationships underpins everything. It is also an excellent example of how the future, rather than the present, still looms large in debates about China, even after what appears to have already been a big power shift in and after the global financial crisis.The emphasis here is explicitly on what China will become rather than what it already is. And with good reason.

When it comes to trade, China has long been a significant economic partner for the UK. Figures from the UK Office for National Statistics7Available at http://visual.ons.gov.uk/uk-trade-partners.show that imports from China valued UK￡38,386 million in 2015, placing China third in the list of leading importers after Germany (￡70,363) and the US(￡59,258).8The UK also imported ￡8,426 million from Hong Kong, some of which will have mainland Chinese origins.While China is also important as an export market for the UK,it came a little lower down the league table in 2015 behind the US (￡96,425 million), Germany (￡48,501), France (￡32,928), Netherlands (￡31,798),Ireland (￡25,679) and Italy (￡17,682), in the seventh place with ￡16,728 million of UK exports.9Figures for the Netherlands can be skewed by the Rotterdam effect, by which goods exported first to the Netherlands and then re-exported to third places. Exports to Hong Kong equalled ￡8,424 million in 2015(almost the same figure as Hong Kong imports), some of which will have subsequently been transported to the mainland.

The final investment agreement on Hinkley Point C nuclear project was signed by the UK government, China General Nuclear (CGN) and électricité de France (EDF) in September 2016, marking the official start of the flagship cooperation project in thequot;golden eraquot; of China-UK relations after twists and turns.

But while Chinese investment into the UK had increased significantly up to 2015 when Osborne and O'Neill were writing, it was still dwarfed by investment from Europe and the US. The Office for National Statistics figures for 2014 (the latest annual figures that would have been available at the time)10quot;International Perspective on UK Foreign Direct Investment (FDI): 2014,quot; Office for National Statistics, https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/articles/internationalpers pectiveonukforeigndirectinvestmentfdi/2014.show Chinese investment in the 26th place with ￡1.1 billion, about half that of investment from India, South Africa and South Korea, and lagging a long way behind the ￡38.2 billion invested from Japan (the leading Asian investor). This is not to say that it is a mistake to assume that Chinese investment will become ever more important in the future – or perhaps even at some point globally dominant. However, it is an excellent example of the extent to which even today, what China might or will become in the future is an important component in shaping how other countries behave towards China today. In this respect, we might suggest that assuming a Sino-centric future has led to some countries treating China as if it already had that power – China has been empowered by its assumed future.

After Osborne, After Brexit

Focusing on George Osborne's period as the main director of the UK's China policy also reminds us that the tenure of political leaders can be ended quite unexpectedly – in this case not by a general election but by Osborne's resignation after being on the losing side of the Brexit referendum and the prior resignation as Prime Minister of David Cameron and his replacement by Theresa May. It also shows us that individuals and their preferences do have an impact on policy – within limits. After Osborne, the dominant view in the UK of China did not fundamentally change, and the main thrust of the UK's policy did not alter either. However, questions were raised about the extent to which previous policy had gone to ensure that the UK was open to China.

It is possible that some of the questioning had its origins in what was often less than full support for Osborne and his style of working within his own party.But it was also because there were some concerns over the lengths that the previous leadership had gone to in their attempts to encourage Chinese investment. Most notably, questions were raised over the wisdom of pushing ahead with the Hinkley Point C nuclear reactor plan, and the potential security implications of allowing a Chinese involvement in it. One of the questioners was Malcolm Rifkind, the Conservative government's Foreign Secretary from 1995 to 1997. Like Osborne,Rifkind also engaged in a process of futurology by establishing scenarios where a powerful China engages in actions that lead to tensions with the UK, and the use of quot;back-door technologyquot; to shut down Hinkley Point.11Malcolm Rifkind, quot;How China Could Switch off Britain's Lights in a Crisis if We Let Them Build Hinkley C,quot; The Daily Telegraph, August 16, 2016, http://www.telegraph.co.uk/news/2016/08/16/howchina-could-switch-off-britains-lights-in-a-crisis-if-we-let.

However, despite some of the headlines in 2016, the biggest question marks over Hinkley Point have not been over the security implications of Chinese involvement, but over financial and costing assumptions.And despite reservations and a less than glowing report on the financial implications for Britain by the National Audit Office in 2017,12The full National Audit Office report is available at https://www.nao.org.uk/report/hinkley-point-c.the project is going ahead.

Rather than focus on what the UK wants from China, a bigger question might be what China wants from the UK, and whether the UK remains as attractive to Chinese interests outside the EU as it did within it.

In the long run, the more significant change is not the transition from Osborne and Cameron to May, but the implications of Brexit. And here we are still in a situation of simply not knowing what will happen in the long term, and things are unlikely to become much clearer for some time to come.In the shorter term, securing a free trade agreement or some other form of economic agreement with China would be an important sign of a post-Brexit Britain with global ambitions and partners. But there will also be a lot to keep UK trade negotiators busy with existing partners – not just the remaining members of the EU, but also those that the UK only has trade agreements with through its current and soon ending EU membership (of which there are over 70 either already in place or partly in place, and 19 currently being negotiated).

Another issue is whether the UK will be able to maintain its attraction as a global centre for financial and service industries after Brexit. In particular, the position of London as a financial centre will be undermined if the UK loses its EU financial services passport, and thus its current access to the remaining EU member states. What this suggests is that rather than focus on what the UK wants from China, a bigger question might be what China wants from the UK, and whether the UK remains as attractive to Chinese interests outside the EU as it did within it.

Conclusion

Economics and commercial interests remain at the heart of the UK's policy towards China. What has changed from the previous leadership is some questioning of whether the relationship should be advanced and investment attracted whatever the costs – be they financial costs or other less tangible (and sometimes) future costs. Another change is that rather than overwhelmingly focus on China as a post-Brexit non-European economic partner, the May government is taking a broader and more holistic approach.Hence Theresa May's visit to Japan in August 2017 just after the EU and Japan announced a new free trade deal (subject to final negotiations) that a post-Brexit UK will not be party to.

It is perhaps worth repeating that the UK remains incredibly open to China, and very strongly interested in developing greater (primarily economic) interactions in the future; not just in the UK and China themselves, but also along the Belt and Road and in other places that receive Chinese aid and investment. So rather than seeing the post-Osborne UK position on China as representing a move away from the previous one, it is in many ways more useful to see it as move back to more long-standing ways of thinking and acting, one where economic objectives remain central, but where other considerations are also fed into the policymaking process. These other considerations include the importance of developing relations with a whole range of countries, the long-term financial costs of short-term economic deals, and the maintenance of the rules-based international order. It also includes increasingly looking to China to take a leadership role befitting its power capabilities in some areas, for example, using its resources to pressure North Korea to change.As for the implications of Brexit, we simply will have to wait and see what happens as the consequences of this unprecedented divorce are going to take many years to become clear.

Shaun Breslin is Professor of Politics and International Studies at the University of Warwick (United Kingdom) and Co-Editor of The Pacific Review. He is also a member of the Editorial Board of China International Studies.