Post-pandemic: reshaping trade ties with China

China – a major player in the global financial and political industry – is an economic powerhouse. Companies have poured into the country for decades, taking advantage of the country’s manufacturing prowess, cheap labour and an enormous market.

In 2020, global trade fell by 8.9%, the sharpest drop since the 2007 economic crisis. The Covid-19 pandemic caused significant disruption to international trade, and China was no exception, suffering huge economic, health and social consequences. However, tough diplomatic rhetoric, turbulent bilateral tensions and a deteriorating US-China relationship reflect China’s growing confidence in international affairs.

UK-China relations experienced a ‘golden era’ during the 2015 – 17 Conservative government but they have become increasingly strained, amid growing controversy over the Chinese multinational company Huawei’s UK 5G mobile phone network and increasing apprehension about the erosion of the ‘one country, two systems’ status quo in Hong Kong. However, the UK Department of International Trade (DIT) is in ministerial talks with the Chinese government for the first time since 2018. The government hopes to reduce market barriers as the annual UK-China Joint Economic and Trade Committee, which has not met for four years amid increasing tensions, is set to re-open.

A Government spokesperson from the DIT told Business Leader: “The UK will pursue a positive trading relationship with China where it supports British jobs and growth, while ensuring that our national security, freedom and democracy are protected. And working with allies, we will hold China to its international commitments.”

Opportunities for UK firms

The number of households in China classed as middle-class has surpassed that of the US at 109 million. This growth in consumption has unlocked various opportunities for UK firms. The DIT noted in a report last September that China’s growing middle-class – which will add another 400 million people in the next decade – is a clear opportunity for UK businesses.

A spokesperson from the China-Britain Business Council (CBBC) says: “China remains one of the world’s fastest-growing markets for UK companies. For example, ONS data shows that China has been the only major market where demand for UK consumer goods (excl. oil and gold) has increased throughout the pandemic.

“Exports to China of these goods have increased by 14.6% over the last two years, whereas comparable exports to other major economies plummeted. Food & Drinks exporters have also benefited from higher Chinese demand, when most of the other traditional export markets suffered a decline.”

UK-China trade reached £81.1bn in the four quarters to the end of Q3 2020. Traditionally, established cities including Beijing, Shanghai and Guangzhou were the go-to. As these markets mature, competition increases and costs rise, UK firms look to underdeveloped cities to expand. Business prospects across various sectors exist in these emerging markets, thanks to urbanisation, low input costs and governmental support.

Regional cities including Dalian, Qingdao and Tianjin provide more clients, new markets and competitive costs. These prosperous regions are mainly located in the Bohai Rim, the Yangtze River Delta and the Pearl River Delta.

Manufacturing and R&D opportunities are abundant in cities such as Chengdu and Xi’an, and service clusters are found in Suzhou, Hangzhou and Wuxi. These cities offer all the business benefits that come with economic expansion, rising purchasing power and a growing population.

China’s economy grew 8.1% in 2021. Growth in the last three months of 2021 was better than expected, though China’s zero-Covid policy means some cities have gone back into lockdown.

Changing Tone

Links between China and the outbreak of Covid-19 has seen an increase in prejudice against the Chinese community in the UK. UK-Chinese relations are a crucial aspect of the UK’s foreign policy, both before and after the pandemic.

David Henig, Director, UK Trade Policy Project European Centre for International Political Economy (ECIPE), recognises the challenges: “The Chinese market remains as it always was for UK firms, potentially large but with a lot of problems, to which the pandemic restrictions have been added.”

British public and political perceptions of China in 2020 were predominantly negative, having worsened significantly over the preceding years. “The tone has certainly changed, but the main drivers are more aimed at the intensifying competition between the US and China as well as the debate regarding the potential cybersecurity risks,” adds the CBBC spokesperson.

In September and October 2020, the Sinophone Borderlands Project at Palacký University, Olomouc, conducted a wide-scale survey of public opinion towards China in 13 European countries, including the UK. Overall sentiment towards China in the UK was negative, with 62% reporting ‘negative’ or ‘very negative’ perceptions. When asked about the UK’s foreign policy priorities in China, cyber security, human rights and global issues scored above trade and investment.

Covid-19 was also the phrase most frequently associated with China, according to the survey, suggesting that China’s reputation has been tarnished by its handling of the crisis, alongside its hostile style of diplomacy.

Heing continues: “Hopes of improved operating conditions have really disappeared, and while some firms report a relatively straightforward experience, for others there have been many issues. Increased concern across the west about whether supply chains include forced labour are also likely to make operations difficult.”

The Peng Shuai controversy began with a social-media post. Peng, a former world No. 1 player in doubles, alleged that the former Vice Premier Zhang Gaoli sexually assaulted her. The November 2021 social media post was swiftly deleted, and Ms Peng disappeared for weeks, sparking global concern. The DIT have called on the Chinese authorities to assure the safety of Peng Shuai and are following her case closely.

Threats Going Forward

China remains a challenging place to do business. The effects of travel bans, and the disruption of production and shipping, quickly rippled through global production and supply chains. Henig also acknowledges an uneasiness around disenfranchised workers as an ongoing threat. “Increased concern across the west about whether supply chains include forced labour are also likely to make operations difficult.”

The war in Ukraine is threatening further disruption. Russia’s recent invasion of Ukraine has businesses throughout Europe and the UK bracing for even higher inflation and disruption to their supply chains, amplifying an already tattered economy post-pandemic. China has ruled out joining the international financial blockade of Russia, and Chinese and Russian leaders declared that the friendship between their countries ‘has no limits’. UK businesses need to examine not only their direct exposure to the conflict, but also the exposure of their suppliers.

Between January and February 2020, the Purchasing Managers’ Index for the manufacturing sector in China dropped by almost 50%, according to the National Bureau of Statistics of China, 2020. Regulatory compliance risks, including insufficient time to comply with new regulations, is a growing challenge for UK companies. Furthermore, the Covid-19 crisis highlighted how fragile global production networks are, and how quickly problems arise when China temporarily struggles to supply.

The 2020 World Bank’s Doing Business report ranks China 31st in the world for overall ‘ease of doing business’ and, according to the World Economic Forum, China ranks 28th on the Global Competitiveness Index. Yahoo withdrew from China in November 2021 due to an ‘increasingly challenging business and legal environment,’ according to a statement by the company. This followed on the heels of a similar move made by Microsoft’s LinkedIn, who left because of ‘a significantly more challenging operating environment and greater compliance requirements in China.’

Post-pandemic trade requires measures to boost innovation and mutual respect, as foreign companies continue to complain about lengthy, opaque administrative procedures, with permits, registration and licensing.

Linda Middleton-Jones, MD at International Trade Matters, reinforces the importance of respect and understanding when trading abroad: “Visits, missions, trade shows and conferences in both countries underpin the value and sustainability of both supply and demand in volatile trading conditions. Relationships are key to providing credibility and the loyalty of both parties,
it is imperative to be visible, respectful
and appreciative of both cultures.”

Intellectual Property Rights (IPR)

Intellectual property infringement is widespread in China, and inconsistent with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights. Poor protection and enforcement of IPR continues to be a major concern for EU companies, as China restricts EU companies with rights to key technologies from protecting these rights when their patents are used illegally.

However, there has been increased momentum to protect IPR in China. A CBBC spokesperson says: “China has made considerable progress in protecting intellectual property rights, especially as a lot of IP is now created by Chinese companies themselves. China has also established a dedicated court system specialising in IP cases. This is a global first, as no other country has a similar judicial structure to protect IP. Data from Chinese courts also shows that foreign businesses benefit disproportionally from Chinese rules against counterfeit producers and infringements”.

Despite uncertainties, China’s ambitions for IPR continue to evolve. The government have launched a series of regulations regarding IP to improve the quality of patent applications. In September 2021, China released ‘The Outline of Building an Intellectual Property Rights (IPR) Powerhouse (2021-2035)’. By 2025, China aims to achieve clear results in its positioning as an IPR powerhouse and by 2035 wants its IPR to occupy a leading position in the world.

Manufacturing Costs

China was once the world’s factory. However, the CBBC thinks regarding China as some cheap mass marketing haven is an outdated view and most export sectors hold up surprisingly well for two reasons.

“First, Chinese industries are world-leading in economies of scale and have leveraged regional clusters and distribution networks to outperform competitors. Replication of such networks is extremely difficult, especially for smaller countries. Second, China is at the leading edge of innovation in automation and the application of Industry 4.0 technologies, such as AI, IoT and blockchain. This further solidifies China’s advantage in these sectors and helps Chinese firms to maintain – or even expand – market share in these industries,” the CBBC spokesperson adds.

However, a mixture of ongoing problems and fresh threats, including increasing taxes, Covid-19, increased geopolitical tensions, supply chain risk, rising labour costs and louder calls for regulations, has meant a withdrawal from Chinese manufacturing. Increased specialisation drove labour rates up and the speed at which China was able to produce goods started to slow, as the country’s population grew. At the same time, environmental and wage regulations became more prominent.

Middleton-Jones recognises this growing cost. “There is no doubt that China is moving up the value chain in products and aspirations. That may mean that buyers in both countries need to review their offer and prices to meet the needs of the future as traders adapt to climate change, trade wars, Covid closures and increased container cost.”

UK business may look elsewhere, including budding manufacturing base countries like Mexico, Brazil and India. With investment in operational efficiency, customer satisfaction and supply chain transparency, China can continue to serve as a preferred partner for global companies.

Balance of Payments in the UK

The UK’s trade deficit with China has more than tripled in the last year, importing £40.5bn more from China than it exported. The UK has historically run a current account deficit and the pandemic has caused a significant decline in export earnings.

The Business Insights and Conditions Survey reports that 66% of exporters and 79% of importers faced challenges in late December 2021 to early January 2022, with additional paperwork, change in transportation costs and customs duties or levels being the top challenges for traders.

An ONS spokesperson told Business Leader: “Since the start of the pandemic, exports of goods to China have stayed relatively flat. Meanwhile, imports from China have increased by 32% in 2021, compared to the pre-pandemic levels of 2019, becoming the UK’s number one importer in 2021. This increase was driven by rising imports of machinery & transport equipment and chemicals.”

The International Monetary Fund 2020 Annual Report on Balance of Payments Statistics revealed negative net positions of 3% of global GDP. Cross-border transactions changed dramatically in 2020 and global merchandise trade flows fell by about 8%. The current account of the Euro area recorded a surplus of €23bn in December 2021, a decrease of €1bn from the previous month.

As of Q3 2021, the UK’s Balance of Payments stood at -£24.4bn. A current account deficit places the UK as a net borrower with the rest of the world. In the third quarter of 2021, China’s current account registered a surplus of ¥476.2bn, and the capital and financial accounts recorded a deficit of ¥311.9bn.

Made in the UK

In the 20th Century, companies designed and manufactured their products domestically. However, a growing manufacturer pool and a globally connected marketplace means we are wearing clothes made in China and eating food shipped from Spain. An awareness of carbon footprints and the impact of Covid-19 means manufacturing closer to home is an increasingly attractive option.

The UK is the ninth largest manufacturing nation in the world and employs 2.7 million people. Make It British surveyed UK fashion and textile manufacturers about the impact on business owing to Covid-19. The survey found that half of all respondents reported an increase in new business enquiries received.

There is a major upheaval unfolding in Europe and Xi Jinping has some big choices to make. The UK and China differ on some critical matters and increased economic cooperation must not be at the cost of upholding the UK’s values, human rights and labour protection. Both powers must work better together to establish a reliable economic partnership and ensure they prosper in challenging times.