Huawei: China’s trade fight is the last thing the UK needs

07/17/2020 Business

“The way he treats Huawei will be closely followed by other Chinese companies,” said China’s ambassador to the United Kingdom, Liu Xiaoming, during a press conference. “Mutual trust was undermined. It will be very difficult for companies to have the confidence to have more investment.”

But that brief The “golden age” in relations between the United Kingdom and China may already be over. The UK has hit China where it hurts and a Violent reaction is inevitable. Telecommunications equipment was the UK’s largest import from China last year at a value of £ 7 billion ($ 8.8 billion), according to customs data.

The ban is “the reversal of a long-standing policy by successive British governments of trying to attract Chinese companies to invest in the UK, and in particular to attract Huawei,” said Tim Summers, a senior consultant at the Asia Pacific program in Chatham. House, a group of experts from the United Kingdom.

The action against Huawei may lead other Chinese companies to think twice before investing in Britain if they are concerned that the policy may interfere, he added.

How Beijing responds is very important to the UK, which is facing the worst coronavirus-induced downturn of any major economy, a growing job crisis and the threat of a no-deal Brexit, or at least billions in additional costs related to doing business with the European Union.

Despite government intervention to protect jobs and revive the economy, nearly a third of British companies plan to reduce the size of their workforce in the next three months, according to a report by the British Chamber of Commerce released on Thursday.

Companies warn that 'big bet' on Brexit could increase Britain's growing job crisis

Britain needs all the friends it can get as it strives to replace the trade deals it enjoyed as a member of the EU and find the new opportunities that Prime Minister Boris Johnson promised will emerge from Brexit.

China was the third largest UK export market in 2019 after the United States and the European Union, accounting for 4% of all UK goods and services exports at a record value of £ 30.7 billion ($ 38.7 billion), according to the National Statistics Office.

Last year, gold, oil, motor vehicles and medicines accounted for two thirds of UK goods exports to China at a combined value of £ 15.5 billion ($ 19.5 billion). Jaguar Land Rover, the country’s largest automaker, makes about a fifth of its sales in China, according to its annual report. The country is also a vital market for luxury brands, including the likes of Burberry (BBRYF), which generates 40% of revenue in the Asia Pacific region and Scottish whiskey distillers.

Going nuclear?

China’s domestic investment is equally vital. According to the American Enterprise Institute, the value of Chinese investments and contracts in Britain has exceeded $ 81 billion in the past decade. An analysis by Cambridge Econometrics suggests that the UK-China relationship supports more than 100,000 jobs, largely due to the billions spent by Chinese tourists and students.

London has also been a major beneficiary of Beijing’s moves to relax control of its currency. The city is the main hub for trade in the Chinese yuan, or renminbi, with an average daily volume of £ 82 billion ($ 103 billion) in the third quarter of 2019, according to the City of London Corporation. There are over 30 Chinese institutions in London’s financial district, and more were planning to open representative offices, the corporation said in February.

An agreement between the Shanghai and London stock exchanges further deepened those financial ties.

These links may now be at risk. China could delay regulatory approvals for new stock lists or freeze market access for UK companies, said Paul Triolo, head of geotechnology at the Eurasia Group in a research note. It could also suspend investments in nuclear power or pause talks on a trade deal, he added.

Many UK companies rely on Chinese suppliers, who imported almost £ 47 billion ($ 59 billion) of goods last year.

A recent report by the Henry Jackson Society, a group of experts, found that the UK depends on China for more than 50% of its supply of 229 products, including laptops, mobile phones, various drug compounds, and products with industrial applications. such as safety glass and boots with a steel cap.

Strained relationships

Britain is already on thin ice. The UK government has angered Beijing by condemning its imposition of a controversial national security law in Hong Kong and offering millions of Hong Kong citizens a path to British citizenship.

Ambassador Liu warned last week that Britain will have to “bear the consequences” if it treats China as a “hostile country.” Chinese state tabloid The Global Times said in an editorial on Wednesday that retaliation should be “public and painful” for the UK.

Beijing did not hesitate to apply tariffs to imports of barley and beef from Australia after its government led calls to investigate the origins of the coronavirus.

But China may be reluctant to take a similar line with Britain, as it remains a valuable market for Chinese products, and countries like Germany and the Netherlands, which are even more important to Chinese companies, will closely follow any reaction.

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Taking a “harsh retaliatory stance” could close the door on future investment elsewhere in Europe, said Veerle Nouwens, a researcher at the Royal United Services Institute, a British defense and security think tank.

“Regardless of Chinese grandeur, we cannot forget that China is also recovering economically from the pandemic. Therefore, it may appear that the costs of reacting strongly against the UK may outweigh the benefits of doing so,” added Nouwens.

Retaliation is likely to be moderate

There are other factors that could make it more difficult for Beijing to significantly harm trade between the UK and China.

For example, Chinese consumers and businesses will still want to buy British brands and visit the UK, said Summers of Chatham House. “Those kinds of things are not going to completely change overnight,” he added.

UK luxury shops, restaurants and universities desperately need Chinese travelers to return. Travel and tourism expenses have been decimated by the pandemic. Members of Walpole, the British luxury goods association, say they see only 5-10% of their normal sales volume, according to CEO Helen Brocklebank.

China sent more students to the UK than any other country in 2018-2019, an increase of 34% compared to four years earlier, according to the UK Higher Education Statistics Agency. Those 120,000 students spent an estimated £ 1.9 billion ($ 2.4 billion), according to the Cambridge Econometrics report. And more than a million Chinese tourists visited the United Kingdom last year, five times more than in 2009.

Blocking access to education abroad would be difficult and politically risky for Chinese President Xi Jinping at a time of social instability in China, said Charles Parton, a veteran British diplomat and senior associate member of the Royal United Services Institute.

“We are going to see some kind of punishment, but I don’t think we should exaggerate how bad it will be,” Parton told CNN Business. Parton pointed to disputes between China and other countries, such as South Korea, that still saw overall export growth to China during the years when economic sanctions were applied.

While there may be some “missed opportunities,” the threat is “greatly exaggerated,” he said.

– Sharon Braithwaite, Shawn Deng, Isaac Yee and Sherisse Pham contributed to this report.

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