China will drive a hard bargain with post-Brexit UK

In her January 17 speech outlining Britain’s rough plan for exiting the European Union (EU), British Prime Minister Theresa May hailed Brexit as an opportunity to advance a “truly Global Britain” that “goes out into the world to build relationships with old friends and new allies alike.”

Two days later, she went further along this line at the World Economic Forum in Davos, Switzerland, stressing that Britain will be the principal advocate of global free market and free trade – almost echoing the words that Chinese President Xi Jinping had earlier delivered in that same venue.

So, May wants the United Kingdom (UK) to become a great, global, trading nation that places great emphasis on the build-up of trade relations with the world’s fastest growing export markets, with China being its main prize. To her dismay, she will soon realize how difficult it is to deal with a Beijing that negotiates from a position of strength.

Expanding trade partnerships

The UK is leaning toward a hard departure from the EU. That means London must broaden trade partnerships with extra-European countries to hedge its economy against the potential fallouts from Brexit.

May and Liam Fox, her hawkish international trade secretary, pointed out many times that China was very interested in clinching a trade deal with the UK, and so a number of other Asian-Pacific countries – India, South Korea, Australia and New Zealand. London needs to revive its trade ties with Beijing, given that British export to the Asian heavyweight suffered a 26 percent annual decline in the January-November stint of last year; all of this as China viewed a 7 percent increase in its export to Britain during the same period, according to Her Majesty’s Revenue and Customs unit.

UK Foreign Minister Boris Johnson keeps repeating that his country will negotiate free trade agreements with non-EU countries even before a final Brexit arrangement is reached. EU rules would prevent London from moving forward this way, but Johnson contends that the British government will be free to pencil in details and then, after the completion of Brexit, sign up formal deals.

Commercial back door and political diktats

No doubt that Johnson’s assertion is technically viable, the question is whether it is also realistically possible, in the sense that Britain’s actual force to strike an advantageous trade deal with a powerful country like China will have to be tested.

To start, it is conceivable that Beijing will wait the end of London’s negotiation with the EU on a trade deal, which is expected to take a considerable time as well. Chinese leaders will presumably want to see all British cards on the table, not least if the UK remains in some way anchored to both the EU common market and custom union. A Britain still linked to the EU trade framework would indeed enable the Asian giant to exploit the British territory as a “back-door” way into the huger European market for its goods.

Then, more importantly, China knows well that London is now in a weak negotiating position. Hence, it will inevitably try to extract great concessions from the British leadership. The Brexit vote in June last year, in fact, left the European country with deep scars – political infighting within the ruling Conservative Party; a polarized public opinion; and, above all, the possible separation of largely pro-EU Scotland from the UK.

In this scenario, China will ultimately call the shots. First, London could be called on to grant market economy status for Beijing and advocate for it within the World Trade Organization. Secondly, the Middle Kingdom could prompt Britain to ease its rules on the protection of sensitive national industries from overseas takeovers.

In the political realm, instead, London could be “advised” to avoid supporting the democratic movement in Hong Kong, a British colony until 1997, when it was handed over to China. In addition, the UK could be asked to uphold Beijing’s Once China policy in the event that new US President Donald Trump takes a different tack towards cross-strait relations. It goes without saying that a move by Britain in that direction would end up damaging its traditional special relationship with Washington, also complicating their negotiations for a free trade deal, which is another key goal of the May cabinet.

Still, China could push Britain to water down its principled position on the South China Sea territorial disputes, with London possibly deciding not to back or join the US freedom of navigation and overfly operations in the region against Beijing’s island-building and military build-up.

A Chinese reminder about free trade

As demand rises, even the price of the good at hand (trade deals in this case) does. Free-trade, free-market Britain should be fully mindful of it; differently, China will offer a reminder to London of what market economy is in the 21st century. Everything has its own limits, also Beijing’s much-trumpeted win-win cooperation.

Thus, China may even save the Queen, but it will make her pay dearly for that rescue.