What does Huawei 5G decision mean for UK and China trade relations?

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China economy dips for first time in decadesTamara Makarenko – COO & Head of Global Investigations for global risk consultancy Sibylline and regular UN advisor – talks about the potential consequences of the UK government’s decision to block Huawei from its 5G network. 

If questions over Beijing’s initial handling of the Covid-19 outbreak had nudged the UK-China relationship onto a downward slope, then Whitehall’s U-turn to exclude Huawei from the UK’s 5G network has undoubtedly shut the door on what was heralded as the ‘Golden Era’ of close bilateral economic ties.

The Huawei decision will further raise the stakes in the already simmering tensions between the UK and China. Beijing, which views Huawei as a poster child of Chinese technological innovation, had repeatedly warned London not to politicise the matter.

In retaliation, Beijing will likely seek to reduce investment in the UK.

Indeed, the message from China’s Ambassador to the UK, Liu Xiaoming, made it clear that China would no longer view the UK as “a business-friendly, open, transparent environment”.

Heeding to the advice of its government, it is also highly probable that Chinese business will roll back on UK-based deals and projects in the foreseeable future.

The technological sector is likely to be at the forefront of this move.

No Tik Tok London HQ 

For example, Tik Tok, which itself was caught in this fast-evolving geopolitical dynamic due to its Chinese ownership, announced over the last week that it would suspend plans to build a new headquarters in London.

Huawei, although no longer involved in the 5G rollout, has a significant and long-standing presence in the UK. It reports that it established its first office here in 2001, employs approximately 1,500 staff, has a research and development centre, and has invested over GBP 2 billion since 2012.

This tech giant will almost certainly downsize its US operations, and it may seek a more business-friendly environment elsewhere as a long-term alternative to its UK R&D sites.

This is not the only potential hit that the UK economy will take from its sliding bilateral relations with China. The media has most recently been littered with news that the UK economy will also lose out on the notable monies brought in by Chinese tourists and students.

Given the importance of Chinese tourists (among the highest per capita spenders) and students (by far the largest group and contributing GBP 1.7 billion a year through tuition fees), a significant dip in Chinese arrivals could hinder the post-Covid recovery for our cash-strapped tourism and education sectors.

Given the asymmetric nature of UK-China economic ties, i.e. Chinese investment and imports far exceed British goods and investment going into China, the impact from worsening bilateral relations will also reflect on this imbalance.

Tamara Makarenko

While Beijing responded to the Huawei ban predominantly with rhetoric rather than tit-for-tat actions, it is worth noting that the Chinese tech firm is only one issue in a growing list of friction points between the two countries. Other issue points include Hong Kong, Xinjiang, and cyber espionage.

China policy 

As Boris Johnson’s government recalibrates its China’s policy amid a hardened stance on Beijing across Westminster, we can expect further deteriorations in UK-China ties, which will ultimately trigger a stronger response from Beijing.

In particular, it is expected that we will see Beijing take firmer action on Hong Kong, where China has passed new national security laws. Beijing has made no secret that it considers sovereignty and non-interference of internal affairs as one of its diplomatic ‘red lines’, thus any British interference would be regarded with a degree of disdain.

Indeed, China was fast to react to the 22nd July announcement by U.K. Home Secretary Priti Patel that the British government would roll-out a special visa policy for Hong Kong’s British National Overseas passport holders. This was perhaps exacerbated by the UK suspending extradition with Hong Kong.

CCTV (China state broadcaster) opted not to air an English Premier League football match as scheduled on the same night, and it also cancelled the televising of the competition’s final round of games this Sunday.

In perhaps more spectacular news, it appears that China is looking to target HSBC in retaliation to Westminster’s Huawei decision and stance on Hong Kong. HSBC has already found itself caught in the middle of this political quagmire, as its share price fell earlier this month after the US looked to punish it over its endorsement of China’s new security law.

The pressures placed on HSBC exemplify what can perhaps act as a litmus test to ‘lesser’ British businesses operating in China.

Lockdown

In the midst of a social environment that has been impacted by months of Covid lockdown, we are experiencing the rapid growth in activism as a preferred route to show discontent with government and the perception of unethical corporate activity. Within this maelstrom, British businesses not directly caught in the crossfires of Beijing or Westminster, may find themselves caught in the crossfires of public opinion.

This could result in lost reputation in the UK for business seen to ignore Chinese action in Hong Kong and Xiajing; and calls for boycott stemming from rising anti-British nationalist sentiment amongst Chinese consumers.

Of the approximately 8,000 British SME’s in China, it is unlikely that any would be directly targeted by Beijing’s punitive sanctions; this is a tool that is best directed against multinationals that would yield greater political significance if China really wanted to set an example, or seek to exert greater influence on Whitehall.

With that said, the potential secondary impact on British SMEs from further deteriorating bilateral ties could be disproportionately higher, as SMEs are less resilient to geopolitical risks. For example, those that are over or solely reliant on Chinese customers could be significantly hit if public sentiment turns against the UK and British brands.

On the flipside, SMEs – if they are adept at utilising intelligence within their operational and strategic decision-making – could be more nimble in adjusting their China strategy. It is ostensibly quicker and less bureaucratic for SMEs to make decisions; and, if they have strong and viable business operations elsewhere, a worst-case scenario China exit could be accomplished more efficiently.

Whether British firms with China interests fall into the SME or multinational category, the advice is similar. In terms of negotiating preparedness and ensuring business resilience, every enterprise must ensure that they have a contingency plan in place that can respond to fast evolving geopolitical scenarios.

For now, the most salient risk for British firms in China is not so much related to sanctions or policy restrictions, but perception and reputation. The situation will require careful monitoring, especially the development in Hong Kong, which is a red line for Beijing.

Hong Kong

With political debates set to intensify in the run-up to the 6th September Hong Kong legislative election, the UK Government’s comments or actions on Hong Kong will face great scrutiny from Beijing. Any comments or actions on Hong Kong could feasibly result in targeted restriction against British assets in China.

Another potential flashpoint to watch would be if the UK imposes sanctions against individuals or businesses for alleged involvement in the new security law, or human rights abuses in Xinjiang. It is probable that, in this scenario, Beijing would apply tit-for-tat measures against British entities.

In short, there are quite a few significant escalation points we need to experience before UK-China ties mirror anything like what is happening between Beijing and Washington. The British firm that successfully navigates this unchartered territory will be the ones whose leadership ensure that the business is fed with timely and trusted information.

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  1. The benefits to the UK economy of reshoring en masse most if not all manufacturing in China back to the UK far outweigh any impact the Chinese might try to impose on HSBC, JLR or other UK firm.

    UK manufacturing output could double in three years in some sectors if reshoring takes place. Secondly, the 30,000 eBay importers of cheap, below cost electronics from China will also be neutralised – none of whom pay much in tax, and avoid VAT at all times.

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