Is too much trade at stake for Britain to stand up to Beijing?

When China’s ambassador to London, Liu Xiaoming, warned this month that there would be “countermeasures” if ministers interfered in Chinese internal affairs over Hong Kong, it sent a shudder through Britain’s battered business community.

After four months during which the pandemic has plunged the economy into a recession, this was not a message to fill boardrooms with joy.

To the surprise of many in diplomatic circles, Boris Johnson had offered up to 3 million British national (overseas) passport holders in Hong Kong a path to UK citizenship, following the passing of China’s draconian state security laws covering the region.

Xiaoming responded by hosting an online conference to press home Beijing’s anger at Britain’s apparently firm stance on Hong Kong.

Highlighting the potential ban on the telecoms equipment provider Huawei from the UK’s 5G network, he warned of “consequences” if the UK’s attitude to China became hostile.

Rana Mitter, director of the China Centre at the University of Oxford, fears that sanctions could quickly follow.

“The implication is that Chinese firms will be discouraged from investing in key [UK] infrastructure projects such as nuclear power and HS2,” he says.

Until now, the UK government has maintained a pragmatic view of claims against Xi Jinping’s administration of excessive authoritarianism.

China is the sixth most valuable destination for British exports, making the world’s second-largest economy a crucial destination for the UK’s goods and services.

It is the third-largest export market for British goods (excluding services), with items worth £25.8bn sold there last year, which is more than 7% of total UK shipments, and over double what Britain sold to China in 2012.

Some of Britain’s largest manufacturers are dependent on maintaining access to Chinese markets, among them the carmaker Jaguar Land Rover.

The Chinese market accounted for 25-30% of JLR’s global sales in recent years, but over the past two months made up 50%, with dealerships open there while largely closed in Europe and North America.

In addition, London is a major trading centre for the Chinese currency, the yuan; British pharmaceutical firms have close research links with their Chinese counterparts; and Huawei is poised to build a £1bn research centre near Cambridge.

Beijing’s status as a major trading partner weighs heavily on ministers as they consider how to respond to a succession of charges against the communist government of abuses of human rights, media bias and business ethics, and not just in Hong Kong.

The treatment of the Uighur community in the north-west of the country is an issue of growing concern as reports trickle out of widespread human rights abuses, including the separation and internment of families that refuse to be “re-educated”.

Complaints against China’s state television channel over its coverage of protests in Hong Kong were upheld by the UK regulator, Ofcom, which said it was minded to sanction CGTN, the English-language rolling news channel owned by the Chinese government, for a “serious failure of compliance”.

These criticisms lie behind the creation of a China research group within the Conservative party, headed by the MP and prominent Beijing critic Tom Tugendhat.

Adding to the pressure on ministers, the former MI6 chief Sir John Sawers said last week he had changed his mind about the UK’s ability to use Huawei components without jeopardising national security.

Writing in the Financial Times, Sawers argued that a US boycott of the company was a crucial turning point, as it had forced many of Huawei’s suppliers to cut ties with the company. Without these reputable suppliers on board, there was little hope of telling if Huawei was a benign contractor or acting as a spy agency for Beijing, he said.

Leslie Vinjamuri, an international relations expert at Chatham House, says the UK is now in a tight spot: “When you see China taking such a tough line, it feels as if something has fundamentally changed.”

She sees it as an inevitability that the UK will be drawn into the global power play between the US, China and the EU that could result in pressure on commerce and retaliatory measures.

Australia’s government has already suffered this fate. It called for an examination of the way Covid-19 spread from Wuhan in central China to the rest of the world, only to be told by Beijing that there would an 80% tariff on Australian barley and a suspension of some beef imports. Chinese students and tourists were warned against travelling to the “racist” country.

Nigel Driffield, a trade expert at Warwick Business School, says if Beijing is riled, UK-owned factories in China could be brought to a halt by a simple health and safety inspection. In 2012, a dispute with Japan over islands in the South China Sea escalated into the state-sanctioned looting and burning of Japanese factories on the mainland.

Ever since then, major Japanese companies have operated a one-plus-one policy of replicating in other countries all their factories in China.

Oxford University’s Mitter is optimistic that commercial and trade relations will continue, arguing that the profit motive is important to China, especially when its own economy remains depressed.

“The bottom line is still likely to be whether Chinese firms can make a profit or not,” he says.

“China is a pragmatic actor when it comes to its own interests. When there have been diplomatic spats in the past, which has happened on several occasions, there is no correlation with UK/China trade, which has continued to increase year on year.”

Mitter cites e-commerce firms such as Alibaba, which want to break out of the east Asia market to challenge behemoths eBay and Amazon.

They need the support of the UK to break the US stranglehold on e-commerce.

A straight fight over Hong Kong is likely to undermine those collaborative efforts. However, it remains to be seen whether Johnson will risk Beijing’s wrath.

Close ties

In 1999, China was the UK’s 26th largest export market and 15th largest source of imports. By 2018, it had risen to sixth largest and fourth largest respectively.

In 2019, the UK’s single largest import from China was telecoms equipment, valued at £6bn.

Professional services accounted for £1bn of UK exports to China.

833,000 Chinese visitors to the UK in 2019 spent around £2,000 per head to make a total of £1.7bn.

Chinese citizens make up a quarter of international students at UK higher education institutions.

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