UK-China trade: Is security paranoia preventing a lucrative partnership?

Deputy Prime Minister Oliver Dowden recently told the BBC that China represents the “largest state-based threat” to Britain’s economic security. This type of sentiment has been present throughout UK politics in recent years, with the UK Government blocking numerous attempts to buy UK firms by Chinese companies due to security fears. But is the UK’s fear of the Chinese state justified, or is paranoia preventing a lucrative partnership with the world’s second-largest economy?

The economic opportunity in China for UK businesses

The size of China’s economy makes it undoubtedly attractive, and despite its recent GDP growth falling slightly short of expectations, growing just 0.8% from April to June, it remains an excellent prospect for more UK businesses to get involved in. Many UK firms appear to have already woken up to this fact.

According to Ting Zhang, the CEO of Crayfish.io, a company that provides commercial as well as cultural help and guidance to companies and institutions wishing to do business with China, despite the political tensions between the two countries, the latest UK official statistics show that, in 2022, the total trade in goods and services between the UK and China increased by 18.3% since 2021.

“So far in 2023, the upward trend in bilateral trade looks to be continuing, with business visits happening in both directions – and, with six months of the year still to go, we can be hopeful that trade will continue to grow between the UK and China for the export of both goods and services,” continues Zhang.

Whilst trade between the two is rising, the biggest opportunity for the UK arguably lies in increasing the amount of goods it supplies to China. According to the latest figures from the Department for Business and Trade, the UK’s total trade deficit with China in 2022 was £35.8bn. This is due to a trade in goods deficit of £42.7bn and a trade in services surplus of £6.9bn.

As the UK is a more service-based economy, this figure may not come as too much of a surprise. However, Zhang says that rethinking the UK’s relationship with China and supplying more to the country could create more prosperity.

She continues, “In 2021, the UK’s market share was still only 1.2% of all the goods and services China imported, so there’s still plenty of scope to grow! Exports, as we know, are crucial to a country’s prosperity, and China, as the world’s largest importer for many goods, can help the UK in its efforts to further engage bilateral trade deals post-Brexit.”

However, Jonathan Sullivan, China specialist and Associate Professor at the University of Nottingham says that despite exerting a strong attraction to UK businesses, China has become a more difficult market to operate in.

He explains, “Chinese Government regulation, the demands of Chinese consumers, the rise of Chinese competitors, intellectual copyright and industrial espionage, and an increasingly precarious investment environment – and it is not a slam dunk for any UK company, especially under conditions in which the UK has explicitly identified China as a systemic rival and bilateral relations have deteriorated very significantly.”

Should the UK Government stop interfering?

The deterioration of UK-China relations is, perhaps, epitomised best by the numerous takeover attempts that have been blocked by the UK Government. In the last year, the UK Government has blocked eight takeovers of UK firms by Chinese companies, including one to acquire the UK’s largest producer of semiconductors, Nexperia Newport. With UK economic growth currently being stunted as interest rates continue rising and inflation remains high – despite recently dropping more than expected – this raises important questions over whether blocking these acquisition attempts could be doing more harm to the economy than good.

Zhang says it is hard to assess the longer-term effect on the overall economy but, in the short term, the UK companies involved may suffer an immediate loss of investment opportunities and that could result in job insecurity.

She continues, “In the case of the University of Manchester, which was blocked from licensing IP to Chinese company Beijing Infinite Vision Technology Company Ltd, this illustrates that this was more to do with the UK Government exercising its power to protect national security, even in areas outside of the scope of the mandatory notification regime. But it’s the University that loses out on technology licensing income and on any return on investment in their research.”

The UK’s mandatory notification regime came fully into force at the beginning of January last year and under the Act, businesses and investors must notify the Government of certain ‘notifiable acquisitions’ that relate to 17 sensitive areas of the economy.

However, Sullivan believes the economic impact of these interventions by the UK Government depends on how you define it.

He explains, “Policymakers have determined that Chinese firms are not independent of the Chinese state and that the Chinese state is motivated by systemic rivalry to establish ‘influence’ via economic instruments. Whether this is right or not has been debated for a decade but on the Government side in most Western countries has been decided: China is a threat and economic activity must therefore be seen through that lens. The question of whether enhanced regulation is ‘good for the economy’ has thus been broadened to become ‘is it good for the long-term economic security of the country’.

“This is not a straightforward question overall, but in more sensitive sectors (critical infrastructure, power generation, telecoms, etc.) there is good reason to err on the side of caution. The problem is how the Government interprets and regulates Chinese investment in sectors that are not obviously strategically sensitive, and whether ‘concept stretching’ or ‘mission creep’ leads to benign Chinese investment opportunities being curtailed due to the expansion of the securitisation lens. Chinese firms already complain of a ‘hostile environment’ in the UK, which will obviously decrease investment over time, and is reciprocated in China reducing UK firms’ opportunities there.”

Time to rethink UK-China relations?

Bearing the above in mind, perhaps the UK Government needs to be laxer when takeover attempts from Chinese firms occur in industries that are not deemed to be of strategic importance and be more careful to ensure anti-China sentiment does not creep into not-at-risk areas. However, Elliott Wilkes, Chief Technology Officer at Advanced Cyber Defence Systems, says one of the challenges that has long been an issue in dealing with companies based in China is the possibility of encountering Chinese state interference in your work.

“All governments exert influence over businesses in their countries but in the West, this happens through democratically elected representatives and includes checks for the rule of law and human rights. This is not the case in China,” comments Wilkes.

“This interference takes many different shapes, like we’ve seen in the cases of AWS, Google, Apple, and other Western tech giants forced to provide backdoor access to their data, mechanisms to support domestic surveillance. This has often been the price of entry into the Chinese market. However, we’re starting to see this escalate more clearly into foreign surveillance and now intelligence work, with the recent passage of a law that requires individuals and companies in China to assist with protecting state secrets.

“The July 2023 report from the Intelligence and Security Committee in Parliament notes that this new law will enable the Chinese Government to ‘compel the Chinese staff of UK companies to cooperate with them’. This is not just a vague possibility but one the UK intelligence services estimate to be a “highly likely” scenario.”

Wilkes says that businesses need to be aware of a potential conflict with Taiwan if working with China too.

Other risks, according to Sullivan, include Intellectual Property and industrial espionage.

He continues, “There is also a real vulnerability with academic and scientific exchange, especially where there are potential military applications to technology or scientific discovery. However, such behaviours can be mitigated by regulation, management and appropriate protocols, and in my view should not preclude collaboration where there are benefits to doing so.

“When it comes to firms, the crux is the apparent determination by many Western governments that Chinese firms, even private ones, are not autonomous actors, but are controlled/beholden to the Chinese state. This is a blunt view of how Chinese business operates. However, it would be naïve to assume that such connections do not exist. And in many sectors and firms, there is evidence of them. Huawei being the obvious example.”

Zhang concurs that Intellectual Property is one of the biggest concerns for businesses working with China, but says the country also offers enormous opportunities for IP commercialising and for tech businesses to scale up more quickly, thanks to its large consumer market and talent base. However, in the current climate, you barely hear this mentioned anymore.

The anti-China rhetoric we’re currently seeing is not simply paranoia and its basis comes from a very real risk of Chinese state interference. However, the UK Government’s reluctance to do business with China has arguably gone too far, and more care is needed to prevent these negative sentiments from spoiling potentially lucrative business opportunities for UK firms, provided they are without risk.

So, moving forward, what should the relationship between China and the UK look like?

Sullivan concludes, “The prospect of increasing and diversifying the bilateral economic relationship is not great. ‘Derisking’ on the UK side, and ‘decoupling’ on the Chinese side, have momentum, driven by political and diplomatic dynamics that are going to intensify in the coming years. Firms must adapt to this reality (including my own sector of higher education).

“The UK has goods and services that are attractive to the Chinese market, and those that are able to demonstrate their utility will continue to enjoy access, albeit with greater opportunity costs. Hence it is probably more appropriate at this moment to think in terms of resilience and consolidation rather than expansion.

“Ultimately, China is a big economy that the UK is not in a position to cut itself off from completely. But we all must recognise that the nature of our relationship with China cannot now be seen in purely economic terms.”