What Now for UK-China Trade as PM Johnson Has a Brexit Mandate?

Posted by Reading Time: 4 minutes

Op/Ed by Chris Devonshire-Ellis 

Brexit

With yesterday’s British General Election giving the Conservative Party and its leader Boris Johnson a landslide majority in the House of Commons based on the premise of “Delivering Brexit” there can now be no doubt as to the current mentality within the British public – Brexit must be done.

There are several steps to take before this is delivered; however, with a majority of some 74 seats, the largest margin in the past thirty years, Johnson is now able to deliver the votes needed to push through agreement on the UK leaving the European Union (EU).

This can be expected to take the UK formally out of the EU by the end of January, with negotiations as to the nature of a trade and related deals with the EU to follow in a so-called “transition period” lasting another year. That essentially means that until this is hammered out, the UK is unlikely to agree deals with anyone else until the British Parliament knows where it stands on trade agreements with Brussels – likely to be January 2021, at the earliest.

Once that is done, the UK will be free to negotiate trade deals with anyone else – terms of a EU deal notwithstanding. So where does that leave free trade opportunities with China?

In fact, it will be the terms of any UK-US trade deal that will determine the future British trade relationship with China. President Trump immediately stated last night that Britain and the US would now be free to strike a “massive” new trade deal after Brexit.

“This deal has the potential to be far bigger and more lucrative than any deal that could be made with the EU. Celebrate Boris,” Trump said in a tweet earlier today (Friday).

Both Trump and Johnson have stressed the importance of sealing a rapid UK-US trade deal as soon as possible after Brexit. Trump wants it as the UK is a major and wealthy market in its own right. Johnson wants it to enable him to secure alternatives from the EU.

But there are latent problems with the promises of a British-US free trade deal, in that Washington will almost certainly attempt to place restrictions on the terms of any agreement – including restrictions on London agreeing other trade deals with the likes of China and Russia.

Washington is likely to insist, as it has done with the new USMCA agreement between the US, Canada, and Mexico, on elements within the deal that effectively limit Canada and Mexico from reaching their own trade deals with Beijing.

The sticking point is a clause inserted into the USMCA agreement that specifies that if any of the partners enters into a free trade deal with a “non-market” country like China, the other countries party to the USMCA can terminate the agreement with six months’ notice and negotiate their own bilateral agreement.

This clause, Article 32.10 in the USMCA deal, has created controversy in Canada. But it has helped US President Donald Trump isolate China by preventing China from pursuing agreements with Canada or Mexico that serve as a back-door to ship products into the US.

Although Ottawa has claimed the clause will not prevent Canada seeking a trade deal with China, opponents of the agreement state that Washington DC wants to control how countries trade with China, a situation Beijing has called “an infringement of sovereignty.”

With the UK actively seeking a trade deal with the US as its first priority, much of how a future UK-US trade deal is designed will impact on whether London is prepared to stand up for itself and insist on the UK’s right to negotiate trade agreements with whoever it wishes.

A UK-China free trade deal will or will not happen as a result of what can be agreed between London and Washington DC. If it does, then China is likely to be prepared to offer the UK better terms than it would the EU.

Some academics view the Chinese and Russian political manifestos as being aligned in trying to “divide” the EU, and a UK out of the EU could be expected to be rewarded for this.

China has a huge political need to be seen to be clean, meaning UK services and operational standards are of value to Beijing, and within the financial and legal services sectors, in particular. That fits well with China’s outbound adventures into the Belt and Road.

A UK-China trade deal would also encourage additional UK business investment into ASEAN and India as British investors begin to realize that there are, in many industries, more suitable investments to be made with these trade partners.

Vietnam, for example, is a major competitor to China in light manufacturing, while India, although seen as administratively difficult, is beginning to inherit the cheap labor demographic dividend that spearheaded China’s rise over the past 25 years, and has a huge consumer market in its own right.

Russia, too, may become attractive to UK investors once more, despite the current political coldness. It is part of the Eurasian Economic Union, which fills a geographic space between China and the European Union and is a market of 183 million people.

The real issues with Brexit effectively begin today. London is about to throw off the deadweight of EU politicization and is in a position to concentrate on EU trade rather than administration and political wrangling. Now London has a choice. But the benefits of Brexit will be largely lost if the UK just swaps Brussels for Washington.

If Boris Johnson is to be seen as a truly strong British leader, then he really needs to lessen any restrictions Washington will attempt to impose on trade and allow British businesses a free hand to choose who they want to do business with. And that means not allowing the Americans to dictate the terms of trade with China or anyone else.


China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com

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