In A Weak Position, UK's May Seeks Post-Brexit Trade Deal With China - Forbes

FEB 7, 2018 @ 08:00 AM 1,366 2 Free Issues of Forbes

In A Weak Position, UK's May Seeks Post-Brexit Trade Deal With China

Sara Hsu , CONTRIBUTOR

I write about the Chinese economy and financial sector.

Opinions expressed by Forbes Contributors are their own.

TWEET THIS

China is the UK’s second largest source of imported goods.

The UK is therefore in a weak position as it attempts to negotiate an independent trade policy with China after Brexit officially occurs.

In a meeting between UK Prime Minister Theresa May and Chinese President Xi Jinping, May made it clear that the UK will pursue its own trade policy with China and other nations post-Brexit. Leading a delegation of 50 British businessmen, Prime Minister May negotiated with President Xi a Trade and Investment Review ahead of the March 2019 departure of the UK from the European Union. However, rather than proving that the UK and China are truly entering a "golden era," May’s eagerness to initiate trade talks with China underscores Britain’s weakness stemming from the Brexit process.

Prime Minister May is attempting to prepare for the controversial Brexit, the final terms of which will come to a Parliamentary vote. Members of May’s own Conservative Party disagree what the final terms should be, however, with some believing that a complete break with the EU is best and others desiring a close economic relationship with the EU.

Trade relationship more important to the UK

The UK-China trade relationship is essential to the UK. China is the UK’s second largest source of imported goods. Of all regions in the UK, the city of London imports the most goods from China, at £8.3 billion in 2016. The UK-China trade relationship is somewhat less important to China now that the UK is no longer planning to serve as the gateway to Europe, but all the more important to the UK as it seeks to stand alone. Essentially, the UK has more reason than ever to negotiate new trade deals, but is far less attractive to trading partners--not a good position to be in.

Some experts in the UK want to increase its services exports to China in order to rebalance this relationship. The UK would benefit from exporting its professional and financial services industries abroad. However, this appears to be unlikely due to China’s exceedingly slow pace of opening in its services sector. Although China has pledged to relax ownership limits in commercial banking, securities, futures, asset management and insurance, but these changes have been criticized as insufficient in removing barriers to entry by foreign firms. The glacially slow process of service sector reform means that the UK won’t have much room to expand in China for quite some time.

Open to the OBOR?

China has encouraged the UK and many other nations to take part in its flagship One Belt One Road (OBOR) project. While former Prime Minister David Cameron jumped on the bandwagon by leading a fund supporting investment in China’s OBOR, current PM May has shown ambivalence toward the project. May has still refrained from formally endorsing the OBOR plan. Pre-Brexit vote, this ambivalence would be unlikely to adversely impact the UK, but as the terms of Brexit come to a head, the UK is that much more vulnerable in its economic relations with China. With less leverage than before, the UK might have to play ball with China in this area.

This might simply entail formal support of OBOR by Prime Minister May, or it may also include further promotion of British cooperation with China in setting up trade and investment collaboration on the project. Even though French and German leaders have been loath to provide all-out endorsement of OBOR, the UK may eventually be forced to out of political expediency in its trade negotiations with China.

Perhaps another bargaining chip lost

The UK may be losing its status as trade gateway to Europe, but to compound matters, it will also potentially lose London as a major financial hub since about one third of financial transactions involve clients in the European Union. Large financial institutions have been contemplating moving to other European financial hubs, including Paris, Frankfurt, Dublin and Amsterdam. London may lose thousands of jobs in the financial sector as a result.

For the UK-China relationship, this means that the UK will be somewhat less attractive as an international base for RMB internationalization. The UK has risen to become the world’s second-largest offshore clearing center for the Chinese currency. Now, China is likely to encourage RMB trading in mainland Europe to offset London’s reduced status as a financial hub.

The UK is therefore in a weak position as it attempts to negotiate an independent trade policy with China after Brexit officially occurs. This may pose a greater challenge to the UK than was expected, as many citizens had hoped to negotiate better trade agreements independently than under the terms of the European Union.

Follow me on Twitter, at @SaraHsuChina.