Fears of a ‘hard Brexit’, or no deal with the European Union (EU) prior to the UK’s agreed date for leaving the trade bloc in March next year, are continuing to mount given the current political chaos at Westminster.
But despite the last two years of wrangling, British businesses have quietly been making their own moves to counterbalance a potential downturn in EU trade. Indeed, in relation to China, UK foreign direct investment (FDI) has increased three-fold year-on-year, signifying a massive shift towards Asia.
As can be seen by the graph from China’s Ministry of Commerce (MOFCOM) below, Hong Kong, which represents a mixture of Chinese and foreign investment, made up the bulk as has traditionally the case.
But the increase in UK investment into the Chinese mainland has also been substantial. As the South China Morning Post points out, UK investors led the way with inbound capital flows, which resulted in FDI soaring by 169.8% in the first nine months of 2018.
A breakdown from MOFCOM, which was confirmed by the UK Trade and Investment Office in Beijing, shows the full picture:
Such large movements in investment flows are indicative of new UK trade patterns and trends that are starting to take place as a result of Brexit. So what is the future for UK-China trade relations?
UK-China trade agreement
Until now, the UK has been included in the EU’s plans to negotiate a free trade agreement (FTA) with China, a process that has been going on since 2013. The aim on both sides in opening up talks was to provide investors with predictable, long-term access to EU and Chinese markets, thereby protecting both investors and their investments.
But discussions have stalled over a number of issues, not least concerns over access to the Chinese market. At present, negotiations are at an impasse, with no breakthrough expected anytime soon.
While a UK-China FTA would certainly be a priority for London, a deal with the US would be even more desirable, which could prove to be a sticking point. The danger is that Washington could insist, as it did in the recent USMCA agreement with Canada, and Mexico, on elements of a deal that effectively limit the UK from reaching its own arrangement with Beijing.
The USMCA agreement includes a clause - Article 32.10 - specifying that if any of the signatories enter into a free trade deal with a “non-market” country such as China, the others are entitled to terminate the USMCA with six months’ notice and negotiate their own bilateral arrangement.
Although Article 32.10 may have created controversy in Canada, it has also helped US President Donald Trump to isolate China by effectively preventing it from pursuing agreements with Canada or Mexico in case they act as a back-door to shipping products into the US. While Ottawa has claimed the clause will not prevent Canada from seeking a deal with China, USMCA opponents attest that Washington wants to control how other countries trade with China - a situation that Beijing has called “an infringement of sovereignty.”
But because the UK is actively seeking a trade deal with the US as its first priority, how such an arrangement is structured will have a material impact on whether London can stand up for itself and insist on its right to negotiate trade agreements with whomever it wishes.
In other words, what a UK-China free trade deal looks like in future will be decided by whatever is agreed between London and Washington. If such an agreement does come to pass though, China is likely to offer the UK better terms than it would the EU.
Indeed, some academics view the Chinese and Russian political manifestos as being cut from the same cloth in trying to “divide” the EU - and a UK outside of the trade bloc could expect to be rewarded for this situation.
China has a huge political need to be viewed as ‘clean’, which means that UK services and operational standards are of value to Beijing, particularly in relation to financial and legal services. A closer relationship would also fit nicely with China’s ambitions around international investment and expansion based on in its Belt and Road strategy.
Interestingly though, a UK-China trade deal would likely spark additional UK business interest in India and Association of South East Asian Nations countries as British investors start to realise that they are ripe for investment across a number of industry sectors. Vietnam, for example, is a major competitor with China in manufacturing terms, while India, although bureaucratic, is beginning to benefit from the cheap labour dividend that has spearheaded China’s economic rise over the last 25 years.
Even Russia, despite the current political coldness between the two countries, could well become attractive to UK investors once again.
By Chris Devonshire-Ellis, chairman.
This article was first published on China Briefing.
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.
OTHER ARTICLES THAT MAY INTEREST YOU
What will a 'no-deal' Brexit mean for UK business?
Contingency planning for Brexit
Fears of a ‘hard Brexit’, or no deal with the European Union (EU) prior to the UK’s agreed date for leaving the trade bloc in March next year, are continuing to mount given the current political chaos at Westminster.
But despite the last two years of wrangling, British businesses have quietly been making their own moves to counterbalance a potential downturn in EU trade. Indeed, in relation to China, UK foreign direct investment (FDI) has increased three-fold year-on-year, signifying a massive shift towards Asia.
As can be seen by the graph from China’s Ministry of Commerce (MOFCOM) below, Hong Kong, which represents a mixture of Chinese and foreign investment, made up the bulk as has traditionally the case.
But the increase in UK investment into the Chinese mainland has also been substantial. As the South China Morning Post points out, UK investors led the way with inbound capital flows, which resulted in FDI soaring by 169.8% in the first nine months of 2018.
A breakdown from MOFCOM, which was confirmed by the UK Trade and Investment Office in Beijing, shows the full picture:
Such large movements in investment flows are indicative of new UK trade patterns and trends that are starting to take place as a result of Brexit. So what is the future for UK-China trade relations?
UK-China trade agreement
Until now, the UK has been included in the EU’s plans to negotiate a free trade agreement (FTA) with China, a process that has been going on since 2013. The aim on both sides in opening up talks was to provide investors with predictable, long-term access to EU and Chinese markets, thereby protecting both investors and their investments.
But discussions have stalled over a number of issues, not least concerns over access to the Chinese market. At present, negotiations are at an impasse, with no breakthrough expected anytime soon.
While a UK-China FTA would certainly be a priority for London, a deal with the US would be even more desirable, which could prove to be a sticking point. The danger is that Washington could insist, as it did in the recent USMCA agreement with Canada, and Mexico, on elements of a deal that effectively limit the UK from reaching its own arrangement with Beijing.
The USMCA agreement includes a clause - Article 32.10 - specifying that if any of the signatories enter into a free trade deal with a “non-market” country such as China, the others are entitled to terminate the USMCA with six months’ notice and negotiate their own bilateral arrangement.
Although Article 32.10 may have created controversy in Canada, it has also helped US President Donald Trump to isolate China by effectively preventing it from pursuing agreements with Canada or Mexico in case they act as a back-door to shipping products into the US. While Ottawa has claimed the clause will not prevent Canada from seeking a deal with China, USMCA opponents attest that Washington wants to control how other countries trade with China - a situation that Beijing has called “an infringement of sovereignty.”
But because the UK is actively seeking a trade deal with the US as its first priority, how such an arrangement is structured will have a material impact on whether London can stand up for itself and insist on its right to negotiate trade agreements with whomever it wishes.
In other words, what a UK-China free trade deal looks like in future will be decided by whatever is agreed between London and Washington. If such an agreement does come to pass though, China is likely to offer the UK better terms than it would the EU.
Indeed, some academics view the Chinese and Russian political manifestos as being cut from the same cloth in trying to “divide” the EU - and a UK outside of the trade bloc could expect to be rewarded for this situation.
China has a huge political need to be viewed as ‘clean’, which means that UK services and operational standards are of value to Beijing, particularly in relation to financial and legal services. A closer relationship would also fit nicely with China’s ambitions around international investment and expansion based on in its Belt and Road strategy.
Interestingly though, a UK-China trade deal would likely spark additional UK business interest in India and Association of South East Asian Nations countries as British investors start to realise that they are ripe for investment across a number of industry sectors. Vietnam, for example, is a major competitor with China in manufacturing terms, while India, although bureaucratic, is beginning to benefit from the cheap labour dividend that has spearheaded China’s economic rise over the last 25 years.
Even Russia, despite the current political coldness between the two countries, could well become attractive to UK investors once again.
By Chris Devonshire-Ellis, chairman.
This article was first published on China Briefing.
Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at info@dezshira.com. Further information about our firm can be found at: www.dezshira.com.
OTHER ARTICLES THAT MAY INTEREST YOU
What will a 'no-deal' Brexit mean for UK business?
Contingency planning for Brexit
