November 12, 2015, by editor
Foreign Policy Implications in UK’s Economic Pivot to China
Written by Kun-Chin Lin.
President Xi Jinping’s state visit to the UK, much feted for ushering a “golden era” of Sino-UK relations underpinned by a promised £30 billion in Chinese investments, critically reflects on the UK’s foreign policy adjustments in response to the 2008 global economic downturn and the related Eurozone crises.
There is a no question that by most realist and liberal-institutionalist measures China has arrived as a global superpower, and the UK is adjusting to the reality of a dramatic relative power shift since the late-1990s. In my undergraduate class on “China in the International Order” at Cambridge, I already take China’s rise as a given rather than a prospect.
There will always be normative debates centred on our principled reservations in acknowledging China’s soft and hard power. A recent Cambridge Union Society debate passed the motion that “This House Welcomes China as a Global Superpower.” Three senior stalwarts of Tory politics argued that China fully deserves our respect for making great strides in overcoming its political and economic backwardness, and that UK should show humility in refraining from judging Chinese leaders by our liberal values and political preferences. In this respect, the Americans are ahead of us, having delinked trade with human rights since their last congressional debate on “most favoured nation” status in 2000 before China’s WTO accession. The reality is that in the current menu of great power bargaining, the realpolitik of American decline and protectionist responses to Chinese mercantilism are served separately from debates over our obligations in a common and sustainable humanity.
This is music in the ears of our influential financiers and their political patrons. The City has never been bound by political ideology in upgrading its niche in the global financial market, having facilitated Soviet dollar deposits in the 1950s, bundling petrodollar into jumbo loans for sovereign borrowers in the 1970s, developed extensive tax havens in British outposts of the Caribbean in the 1980s. The city also engaged in protecting assets of failing foreign regimes in the 1990s, driving financial market liberalisation and internationalisation in the 1990s leading to the collapse of Baring, and freely dealing the complex financial instruments that led to the financial crisis of 2008. Reminbi internationalisation is its latest and most logical extension of the City’s core competence.
However, lost in this justifiable shift to economic diplomacy are fundamental questions of UK’s strategic positioning in the global power shift, and the implied costs of the UK’s pivot to Asia. Is commercial diplomacy risk-free on political alliances? Might these effects undermine UK’s assets and aspirations in international affairs, which had historically supported an exceptional regional and global standing? It is often said that the UK “punches above its weight” in global affairs. How would the “golden era” affect this achievement?
Basically, Cameron’s economic diplomacy represents a hedging strategy. Secondary powers, not wishing to antagonise a great power to being dominated by it, seek to diversify their security strategies to prepare for future uncertainties. Hedging buys time in avoiding balancing and bandwagoning behaviours in response to a rising power. The UK is hedging by de-linking more controversial issues from trade and investment agreements, thus allowing it to tap Chinese economic resources without getting involved in US-China debates over these issues. Three crucial decisions are implied in the UK’s hedging:
1) A narrowing of the permissible agenda in the UK-PRC diplomacy:
Undoubted, the signal is the primacy of commercial interests. It has been observed that in Asia, there are two spheres of influence – China dominates the regional economy while the US maintains a firm grip on the regional alliance structure. Unsurprisingly Xi’s visit to UK was much more focused and less contentious than visit of US a month earlier – where there was a full spectrum of issues discussed including several “negatives” of cyber-espionage, human rights and China’s claims to sovereignty over most of the South China Sea, as well as issue areas of prospective agreement include climate change, anti-terrorism efforts, North Korea, the U.S.-led Iranian nuclear deal and progress toward a two-way investment treaty. While the Obama-Xi summit was less positive than two years ago when they first met in Sunnylands CA, this fuller agenda showed the depth of engagement between the superpowers despite rising uncertainties on the Chinese economy.
It is not that these issues are not important to our national interest. Even far away from home in South China Sea, the Royal Navy – which is undergoing the most dramatic re-equipment since the Korean War – has a presence in support of the Japanese and American principled stance on the freedom of navigation. There are looming questions about NATO, UK-France naval bilateral treaty, and the militarisation of the EU under the Common Security and Defence Policy, which cannot fail to be of strategic interest to China. The question is, by sweeping these issues under the welcoming mat, does the UK undermine its bargaining position in the future when we need to raise them before Beijing?
2) Coping with economic resilience and power asymmetries:
As Professor Kerry Brown pointed out, one must credit George Osborne for possessing “that rarest of attitudes from Britain’s political elite towards China – a consistent vision.” If the vision is one of economic diplomacy with China for mutual benefits, then one must consider the visit to fall short of substantial discussions to guarantee the UK’s economic interests. While it is unrealistic to expect Chinese money to be a critical factor in sustained growth and overcoming of UK economy’s structural issues, it is not too much to ask if this relationship will enhance our resilience or expose us to new risks.
There is hope that the “Northern powerhouse” policy – led by Lord Jim O’Neill who coined the acronym BRICs in his former role as the chairman of Goldman Sachs Asset Management, now the commercial secretary for city devolution and infrastructure at the Treasury – will draw some Chinese investment away from past focus on London. This would be helpful in addressing the chronic investment imbalances in the UK.
Fundamentally, the bilateral trade and investment relations are highly asymmetric – numbers tell us that UK is far less important to China than China is to the UK. That translates into weak leverage for Britain. Chinese investment in UK has been less than 1% of UK GDP; similarly, UK investment in China is less than 1% of total FDI in China compared 3-6% by US, German, and Asian countries. While Chinese investment into the UK has increased by some 14 fold during the past decade, UK FDI is not about to make the similar rise in importance to the Chinese. During Xi’s visit it is often cited that bilateral trade had reached USD$70 billion last year. This volume is dwarfed by the US-PRC trade of $521 billion or Sino-German trade of $162 billion, casting serious doubts on George Osborne’s hope that UK will become China’s number two trading partner in ten years. UK is not about to become a manufacturing power on the rank of US, Japan, Korea, and Germany. Moreover, import outstrips import by roughly 3 to 1 in Sino-British trade, following a trend of worsening trade deficit which current stands at six times larger than in 2000.
So it is simply not realistic to imagine this new relationship to position UK as the gateway for Chinese economic transactions with the EU. At best we are looking to siphon off the even more important trade and investment relations China has with the EU. In that case, we should be thinking about the prior relationship between the UK and the European common market, which will define the externalities of UK-China relations.
It is relevant to recognise that China has been conducting the same economic diplomacy elsewhere – in Asia after the Asian Financial Crisis of 1997, in Central Asia under the aegis of the Shanghai Cooperative Organisation in early 2000s, and over the past decade in Latin America. Premier Li Keqiang’s trip to Brazil, Colombia, Peru and Chile last May brought offers of infrastructure finance to help China tap natural resources and benefit from lower costs of intraregional trade. In these regions, strictly commercial deals from Beijing are hard to turn down for countries traditionally dependent on Western markets, who are seeking an alternative source of cash flows given member economies’ poor growth and spiralling inflation, and weaknesses in regionalism.
However, the outcome is intensified economic vulnerability, if not dependent development on China. Latin America enjoyed a so-called “golden decade” of economic growth in the 2000s, fuelled largely by Chinese demand for raw materials, but has been hit hard by the Asian giant’s slowdown and the corresponding chill in commodities prices. Brazil saw a FDI contraction of 36 percent from January to August 2015, with Colombia, Guatemala, the Dominican Republic and Uruguay all experiencing contractions of more than 20 percent. Similar shocks have hit Africa and Australia, with the South African rand hitting a 14-year low in a 12% slide this year. While contagion came from the East, solution also seems to depend on Chinese largesse as many of these countries rush to sign more concessions.
While the UK is not going to be affected in the same way by commodity prices and RMB devaluation, it is sensitive to other price-instability issues. For example, the UK government has been under criticism for continuing fossil fuel subsidies, while cutting back support for renewables. The Global Subsidies Initiative, Oxford Energy Associates, and the OECD have separately published reports revealing alarming complex schemes for subsidies. How much would Chinese investment further distort energy and industrial policy? Osborne has committed 2 billion pounds in underwriting Chinese investment in the Hinkley nuclear power plant, plus a price guarantee of £92 per megawatt hour (MWh) for 35 years, which is likely several times above the market rate for energy production.
Will UK’s rapid reaction to globalisation become hampered by its China ties? China basically runs a neo-mercantilist trade strategy. Its motivations in the defunct Doha Round and the new mega-regional trade bloc Free Trade Area of the Asia-Pacific (FTAAP) cast doubt on its readiness to support the next steps in global liberalisation. The Americans are writing the new regulations on product standards, IPR, regulatory harmonisation via the approved TPP (Trans-Pacific Partnership) and proposed TTIP (Transatlantic Trade and Investment Partnership (TTIP). Does the UK want to be caught in the Chinese lower standard alternatives, which have little to offer for our competitive service sectors? This is not to tout the merits of TTIP – there are several aspects of market liberalisation and inter-state dispute settlement mechanisms that are potentially worrisome. Harmonising down to the level of US GMO and pesticide standards is not appealing. But this is where precisely the UK needs to focus its diplomatic attention on, for the economic effects will be far more wide-ranging than a few Chinese-invested nuclear and transport projects.
In this context, asking China to scale back its steel export to UK as a favor to the new partnership is hardly liberal solution to enduring problems of free trade. Not surprisingly, the Chinese said in effect, we will think about it.
3) Leadership in international organisations:
The UK’s enduring foreign policy strategy is one of maximising its international flexibility. Moreover, flexibility has been predicted on substantial leverages on enduring partnerships. Winston Churchill talked about the three interlocking circles of the empire, trans-Atlantic relationship, and Europe. Other bilateral and multilateral relations emanate from these circles of influence.
Will the envisioned Sino-British relationship help the UK get more traction on important issues and forum in international affairs, or would it introduce uncertainties into UK’s core strategic partnerships?
Here again the UK is not the price-setter. It is more appropriate to ask where the UK might fit with President Xi’s ambition for a “new type of major power relations.” From what most China watchers have inferred of Xi’s foreign policy orientation, there has been a clear trend toward a worldview of G2 – that the Sino-American relations is the first-order for most issues of global significance, placing the demand for adjustments on the secondary powers. This mindset represents a significant departure from China’s initial commitment to a multipolar world in the post-Cold War era. Consequently, compared to his predecessor Hu Jintao, Xi is less interested in reassurances and more consistent in taking actions assertive of national status.
What is the “China Dream” for the UK? Is realistic to imagine the UK at the heart a new global network of exchange and influences, via commercial diplomacy with China? Is hedging understood here simply as a means of reducing UK’s deference to American priorities and its historical Eurocentrism? Have departures from these core relationships been reinforced by UK’s relatively cool relations with Russia, the Gulf states, and India in recent years?
How could the UK re-orient without risking downgrading its relations with the EU and US? Can the UK maintain its moral and policy autonomy from Chinese political demands, apart from the collective “soft-power” projection of the US and EU? Allowing China to isolate UK, and possibly prompt a sort of competitive dynamic for Chinese economic favours, would do damage to the collective bargaining position of the European region as well as UK’s national position.
Dr Robin Niblett, Director of the Chatham House, has argued in a recent report that UK can only manage its relationship with China via EU partnership, not going at it alone. In particular, as international organisations – in which UK has historically demonstrated a great deal of network power – are losing legitimacy and facing challenges to their mandates and institutional capacities, UK’s turn to China not only undermines its leadership but generates negative externalities.
In this global power transition, the US is struggling to reconfigure regional and global economic and security architecture in the waning moments of its unipolar moment. The UK has fundamental interest in supporting the US through this process.
What would UK say when India, backed by the US, bids for an UN Security Council seat – and China objects? India has become the premier strategic partner of US in South Asia. This relationship provides insurance against the China threat in South China Sea and Indian Ocean, and addresses common objectives of anti-terrorism and control of nuclear proliferation, among other priorities. India is considering membership of the US-led TPP, and political economic logic dictates that it should be admitted before China and the rest of Asian powers do. One could argue that India’s strong relationship with the US puts it in a better position to bargain with the China. China’s cooperation with India in G20 coalition of the Doha Round provides strong evidence of this leverage.
What would the UK say when future complaints of procedural transparency in project bidding, favouritism of Chinese firms, and corporate social responsibility are raised in the Asian Infrastructure Investment Bank? Would it hold back criticisms given its privileged position in receiving Chinese funds?
Advanced industrial and developing countries are facing common risks to economic resilience from climate change, energy efficiency, ageing populations, digital markets, industrial espionage, citizen privacy, etc. The UK has some of the most innovative solutions to these problems, and should prioritise foreign policies aimed to enhance the impact of its leadership.
In short, there is a complex set of strategic considerations in the next steps in reshaping the UK foreign policy priorities, consequent to the economic pivot to China, which has more to do with UK’s traditional partnerships and its self-directed expectations as a global power.
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