The UK’s relationship with China: what does the future hold post Covid-19?

When China joined the World Trade Organisation (WTO) in 2001, it was already experiencing rapid growth. Nevertheless, WTO membership proved to be the springboard for sustained acceleration – illustrating the true value of the predictability of the rules-based trading system. By 2013 China had unseated the USA as the top trading nation in the world.

For China, this was the restoration of its rightful position in the world. Yet, this sentiment was not shared in the West, which regarded China’s rise with suspicion – attributing its success to massive state intervention, particularly after the “Made in China” plan was adopted in 2015.

No more so than in the USA, where disillusionment with what it regards as the inadequacy of current trade rules has led the WTO – which both China and the UK value – to an existential crisis point. The Trump Administration has taken unilateral action to cope with the perceived threat from China, amongst other things raising tariffs contrary to WTO rules.

Although at one point it appeared tensions were cooling, with a truce in the ensuing trade war through the “Phase One” deal agreed between China and the USA in January, Covid-19 has now thrown everything up in the air. As the world faces colossal economic fallout, with estimates of a decline in world trade in 2020 ranging from 13 per cent in an optimistic scenario to 32 per cent in a negative scenario, many also are forecasting an era of de-globalisation.

Undoubtedly, the global trade landscape right now is a harsh environment. But just what does the future hold for China and its trading relationships – particularly with the UK?

In the UK, it is hard to ignore mounting calls to reassess the relationship with China. There is also speculation that the US may seek to bind the UK even more into its orbit through the terms of a Free Trade Agreement (FTA), including a possible ‘poison pill’ as regards the closeness of trade with non-market economies.

Whilst this could be the reality as the USA exerts a magic pull in London, playing on British anxiety about maintaining a ‘special relationship’, it must be acknowledged that the UK still tends to be relatively open to trade and investment. It worries less about bilateral trade balances for example.

The UK has just published the list of tariffs it is going to apply in 2021, after the end of the transitional period. This indicates a degree of liberalisation compared with the past situation as part of the EU. Having left the EU, the UK needs trade and investment, and it wants to diversify its trading partners. To date, it has consistently been behind the curve in maximising the value of trade with China.

Having said that, trade is a two-way street and the UK’s strengths are mainly in services.
The problem with developing services trade is that the barriers – unlike goods – are not at the border. The barriers lie in complex webs of domestic regulations which are sometimes opaque – and sometimes subject to regulatory capture by domestic industries.

Global trade rules are not well developed in services, and there are few if any good examples of FTAs covering services in a meaningful way. In the current bleak global environment, the UK could well be one of the better places for Chinese companies to do business.

How far the China – UK trade relationship can be taken depends in the final analysis on whether the two countries can find a modus vivendi in terms of a robust overall relationship – one which provides both a degree of political space for governments as well as the trust and predictability that businesses on both sides need.

It is not beyond the bounds of possibility that things will look rather different in a year or two’s time. Crisis can also lead to opportunity. However, for now, it is vital that Chinese businesses keep a watchful eye of the horizon and are in a position to remain agile to respond to potential threats.