UK-China Trade: Eastern Promise?
UK-China trade has featured highly on Theresa May’s visit to China. The Prime Minister hopes that by the end of her sojourn, a further £9 billion in commercial deals will have been secured between UK and Chinese businesses.
Trade with China is a small but important part of the UK’s overall trade position. China’s share of overall UK merchandise exports is now between 5% and 6%. This is well lower than that of the UK’s more developed trade partners, but nevertheless represents close to an 8-fold increase in China’s share since 2000, on the eve of China’s accession to the WTO. China accounts for around 9-10% of UK merchandise total imports, while the UK accounts for around 2.5% of China’s total merchandise exports (the EU as a whole accounts for around 17%). The UK runs a small surplus with China on services trade. London is, along with only a handful of other cities, a designated Renminbi trading centre.
The UK is particularly keen to talk up its trade with China at this juncture. This is because one of the prospects offered by Brexit is the possibility for the UK to pursue its own free trade agenda with China, unencumbered by the need to reconcile its position with 27 other EU members. Projecting the gains from such an agreement is a fraught exercise, but rough estimates suggest that a free trade agreement between the UK and China could boost bilateral merchandise trade by around 30-35%. That could be worth between £8 billion to the UK per year – which is coincidentally close to the amount Mrs May plans to announce, except those deals would be one-off.
What are the prospects for such an agreement? In the immediate, there is little formally that the UK could do, since it cannot enter into negotiations while it is still subject to the EU’s common commercial policy (which would continue to be the case under any transition period leading up to the UK’s definitive exit from the EU). But there may be several things to do by way of ground-clearing.
China has been active in bilateral and regional trade agreements. Interestingly, it has prioritised those with small-to-medium sized economies. Setting aside negotiations for a Regional Comprehensive Economic Partnership (RCEP, involving China, ASEAN and five other countries in Asia and the Pacific), which are still on-going, China’s main deals of note have been with the likes of Australia, South Korea, Norway and Switzerland.
The last of these could provide some pointers given that Switzerland, like the UK, is closely integrated to the EU, but follows its own trade policy (as the UK might). The agreement liberalised trade in goods (with exemptions in agriculture) and included commitments in services, though the practical effects on the latter may be limited by the use of WTO GATS commitments as the baseline (these are typically more restrictive than efforts on the ground). The adoption by China of higher standards of intellectual property protection was also a key aspect.
In parallel to trade negotiations, efforts were also under way to establish Zurich as a trading hub for the Renminbi, London’s status as the second largest offshore Renminbi trading centre could serve as a boost to UK-China negotiations.
China’s preference for smaller to medium-size partners may reflect its assessment that these partners are less likely to pressure China on “sensitive” matters, including issues such as human rights, environmental and labour matters. The EU for its part has recently stepped up its rhetoric on China, by developing a partnership with Japan and the US to crackdown on distortionary practices at a global level (widely seen as code for China). It has also modified its trade remedies legislation to allow the Commission to take stronger trade remedy action on distorted economies (again seen as code for China).
The UK, could give close thought to how far it aligns itself with recent EU rhetoric and practice. It has the chance to begin developing its own trade remedies approach. Distancing itself from the EU’s approach could be a positive signal to China (adding to the fact that it is not certain how far the EU’s new approach would survive legal challenge at the WTO).
There would be political challenges to such a positioning of course. Competition by China in steel is a sensitive issue in the UK, and the politics of steel would favour an increased use of trade defence mechanisms. The onus would then be on the UK government to demonstrate that the wider costs of trade remedies are greater than the putative benefits to users of trade remedies.
Political challenges also arise because of the problem of counterfeiting. Frontier Economics research suggests that between 40-50% of the global value of counterfeit good production and trade is accounted for by China. As the Swiss case shows, Intellectual Property can be a key part of an agreement. But the issue is not so much whether China takes on enhanced IP commitments, but its capacity to enforce them.
Finally, not all boost to trade come from free trade agreements. An obvious plank of UK policy – and what that does not need to wait for the UK to leave the EU – is to invest in trade promotion. That would need to focus not only on high-profile deals (the sort associated with ministerial visits) but building networks and long term-buyer supplier relationships. China has a key interest in e-commerce – as evidence by Jack Ma’s launch of an e-commerce hub for South East Asia. The UK for its part is a global leader on connectivity, accounting for 11.5% of global cross-border data flows (way above its share of global GDP and population). There is likely fertile ground for a meeting of interests.
A trade deal with China will have its challenges, and won’t stop the UK from catching cold if its negotiations with the UK go awry. But if the UK seriously wishes to pursue that opportunity, there is a lot it could do start working on now – outside of Prime Ministerial visits.