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Trade with China: A “golden era” no more?

By SEC Newgate team
02 February 2021
Public Affairs

A renewed focus on international trade - the UK’s departure from the EU, the beginning of the Biden presidency in the US, and the pressure on supply chains due to COVID-19 for example - has led to questions around China and its trading relationship with the global community. 

In this long read, we look at the UK’s approach to trade with China, and hear views from our sister offices in Brussels, Hong Kong and Melbourne.

Tiffany Burrows, Head of Trade, SEC Newgate UK

UK trade with China, like many countries, has increased significantly over recent decades; China is now the UK’s sixth largest export market and fourth largest import partner (rising from 26th and 15th respectively from 1999). The UK has had a trade deficit with China every year since 1999. In 2019, this was -£18.3 billion; UK imports from China were worth £49 billion (6.8% of all UK imports) whereas exports to China were £30.7 billion (4.4% of all UK exports). The UK did however have a surplus of £3.5 billion on trade in services with China in the same year. In comparison, the UK in 2018 was China’s ninth largest export market and didn’t make it into the top 20 countries for imports into China.

But whilst the trading relationship has strengthened, the diplomatic relations between the two countries have followed a different path. Human rights concerns in Hong Kong and the treatment of Uighur Muslims, and the UK Government’s decision to ban the use of Chinese technology company Huawei’s equipment in the UK’s 5G infrastructure have led to a more strained relationship than had been enjoyed previously.

International Trade Secretary Liz Truss was vocal about China’s actions at last week’s World Economic Forum (WEF): “some of the behaviour by China on areas like forced technology transfer, subsidies by state-owned enterprises, and also IP (Intellectual Property) violations have led to some of the mistrust in the global trading system.People can see things are unfair, that if state-owned enterprises are able to subsidise and able to undermine free enterprise economies, then that can destroy trust in trade”. It is no secret that the UK’s application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is in part to embolden free trade and enhance the rules-based system, a not-so-subtle criticism of China.

The UK Government will have an eye on China’s trading relationships with its regional neighbours, particularly Australia, Japan and Singapore. The UK will also be conscious of its diplomatic and trade engagement with China in relation to the US; it’s worth remembering America’s rebuke expressing concern about the UK’s “constant accommodation of China, which is not the best way to engage a rising power” in response to the UK joining the Asian Infrastructure Investment Bank in 2015. The US will be looking to reset its own relationship with China of course, but that’s a blog for another day.

The UK Government’s challenge therefore lies in balancing a foreign policy strategy reflective of its values with the UK’s increasing economic reliance on China, all the while being mindful of the risks to the UK economy of alienating the Asian power by going one way, or, to a certain extent, its counterweight in the West, by going too far the other way.

Andrea Tognoni, Head of Trade, Cambre Associates

The EU-China Comprehensive Agreement on Investment (CAI) was touted variously as a strategic win for China, a victory for the EU in levelling the playing field or a controversial compromise between Western values and economic interdependence. It is probably a bit of all of the above. The EU may have not made up its mind about China yet, as it struggles to find its geopolitical place – with a track record of hesitation from Libya, to Turkey and beyond. China may be a “systemic rival” for the EU, but not one that Europe can ignore if economic growth is needed. After four years of strained transatlantic relations and wrangling with the UK, ending 2020 with a Brexit deal and Biden’s win meant the EU could focus on its priority: post-pandemic recovery with an emphasis on green and digital. Brussels really did not need an unsolved China deal to start 2021, as this could have meant waiting on Biden or choosing between Washington and Beijing. As EU Director-General for Trade Sabine Weyand said, any “negotiator knows that there comes a time when you have to bank”. 

European businesses, especially in Germany, know this very well, and by extension so does the EU leadership. Hence why the German presidency of the EU Council pushed to get the CAI done. The result is symbolically ironic, as the US now stands out as the one major power without a deal with the EU. Pragmatically, this is not so odd. EU businesses needed to protect their priorities and could not wait for Brexit to re-define the UK’s economic ties with the world or for Biden’s trade plan – of which “buy American” will apparently be an element. For now, it is key for European companies to be able to source and invest in China and compete with local firms, as well as export to the largest and fastest growing middle-class of the world. CAI is a foothold in the Asian market where the next billion consumers will be - and which is increasingly integrating, not least around China, as shown by the Regional Comprehensive Economic Partnership (RCEP).

According to the European Commission, the EU has fulfilled its negotiation objectives. Indeed, a primary EU role – putting its economic integration and might at the service of its Member States – can be deemed well served with the CAI. This is just one element of the EU’s broader strategy. Brussels will continue to beef up its trade and investment defences, such as investment screening or tackling the impact of foreign subsidies on the EU’s single market. China will continue to dominate the EU’s trade agenda. Significantly, the EU opted to tackle bilateral differences from within a relationship.

Nick Maher, Senior Adviser, Newgate Australia

China is Australia’s largest trading partner, enjoying a A$200bn annual trading relationship. This relationship is now under extreme pressure as a range or commodities, including wine, beef, barley and coal, have been hit by new tariffs and sanctions due to escalating political tensions between the two countries. It has been more than three years since the Australian Trade Minister has had a formal meeting with his opposite number in Beijing, with recent requests going unanswered.

New foreign investment, security laws, and an extension of the definition of critical infrastructure focusing on cyber-security and data protection, is also already having an impact on investment flows from China, which have slowed to a trickle. All eyes are now on whether there is any thaw in relations between the Biden Administration in the US and China that will assist Australia, or indeed the extent to which Beijing’s calculus changes should Washington go into bat for Canberra. However, the early restoration of this relationship is unlikely, meaning Australians businesses and exporters will need to continue diversifying their markets, with its eyes particularly on FTAs with the post-Brexit UK and the EU, as well as a closer trading relationship with India.

Fergus Herries, Account Director, Newgate Hong Kong

Foreign direct investment (FDI) into China plummeted at the beginning of 2020 as COVID-19 emerged, but its rapid recovery – culminating in eclipsing that of the US’s last week – has captured headlines. Overall, 2020 saw FDI rising 18% year on year as the country’s status grew as a “safe haven” amid the spread of the coronavirus.

Despite this, outbound investment from China has slowed, after the boom of acquisitions led by State-Owned Enteprises (SOEs) like HNA and Anbang in 2015. In 2019, China’s outbound FDI (OFDI) was $77bn, less than half the 2017 level. This is partly due to a crackdown in the largesse of some of those SOEs which drew question marks from Beijing on some high-profile acquisitions (such as UK football clubs) and which are now undergoing massive restructuring exercises. The US / China trade war has also contributed to this drop. It is worth noting however that OFDI still only accounts for 10% of Chinese GDP (the UK’s is 72%, and the US’ is 39%), indicating significant growth potential as the country’s economy continues to develop.

Where will this OFDI be deployed? The US/China trade war and simmering geopolitical and human rights issues, such as over Doklam in India, the Hong Kong protests, Xinjiang, military build-up in Taiwan and long-running South China Sea disputes have led to a cooling in relations between China and many countries around the world. The ambition of the much-vaunted Belt and Road Initiative of the past few years has also dampened amid growing international scrutiny.

Trade wars such as with Australia are likely to simmer on, despite Xi Jinping specifically stressing multilateralism and a rejection of a “cold war” mindset and talk of decoupling in his address to the WEF online Davos forum. In the address, Xi emphasised China’s alignment with the global south of developing countries and made it clear that the door is very much open for continued free trade agreements with developed economies. What remains to be seen however are what terms this might be on, from both sides of the table.