Forget the free-trade agreements – here’s how Brexit Britain can work with China

This week on UnHerd we are considering how the West can do business with an ever more powerful China, the world’s biggest exporter and second biggest economy. Here, Bruno Macaes outlines the opportunity Brexit presents.

Leaving the European Union is often presented as an opportunity for the United Kingdom to go out into the world. Global Britain, they call it, a concept not devoid of logic.

By the very nature of their integration project, EU member states have to spend more time than they would like coming to terms with each other. Right now, for example, they are busy trying to reach an agreement on the next multi-year budget, when it might be more advisable for their attention to be fully focused on the clouds gathering over the global economy and global politics.

The UK has its hands full with the Brexit negotiations, but these – one hopes – will eventually come to an end. At which point, it might be advisable to have a strategy for the life outside the EU in place – one which takes into account all the dangers and opportunities presented by that painful separation.

So what kind of Britain will emerge after Brexit? Will it prosper? To know that, we need to know who it will be doing business with. What we can say with certainty is that in this new world Europe will count for far less than it does right now; in this world, four out of the five largest economies in the world will likely be located in Asia – none in Europe.

And so the success of global Britain depends far more on the relationships it can build with those Asian giants, than on strictly domestic political variables. A great British future will rely less on London and Brussels than on a third, hidden pole of magnetic attraction: Beijing.

China is introducing such dramatic changes in the global balance of power that even a seemingly regional question like Brexit cannot be properly solved without bringing its economic might to bear. Relations between China and the EU are going to dominate European politics in coming decades. But the real question is: will Britain be in a better or worse position to deal with China once it has left the EU?

I see a number of scenarios in which Brexit could move Britain’s foreign policy in highly desirable directions. Contrary to conventional wisdom, there is no indication that only large economic blocs can thrive in the new world order. Countries such as Switzerland, Singapore or New Zealand have ridden the wave of global change better than anyone else because they feel the urgency of doing so earlier than others and can adapt more quickly. Britain will be under enormous pressure to adapt to life outside the single market, and swiftly. The best way it can do that is by forging a new economic relationship with China.

In a recent presentation on the future of British foreign policy at the Treasury, I argued that the UK needs to first ask itself what it wants. And to know this, it needs to understand how China is changing and how those changes can affect it. Only once that position is known can Britain confidently exert influence and leverage over Beijing. As I see it, there are two key areas where Britain can make an impact.

The most important issue is technology. As China sets its sights on exercising significant control over the industries of the future, large parts of the European economy will be negatively affected. Germany is already facing increased competition in high-value sectors such as sophisticated industrial machinery, and is worrying about diminished returns once China develops its own technological standards. At present, German companies earn billions every year from licensing fees and royalties. Some of those revenue streams will be diverted to China.

Once released from the European Union and its one-size-fits-all trade negotiations, Britain can play a substantive part in the discussion on these new industries. It’s a discussion about specific standards rather than – as tends to happen now – endless ruminations concerning the role of the state in the economy and other abstract notions. Britain could take the lead in defining relative spheres of influence, in helping consolidate control over standards, and determining areas of cooperation where it could work with China to develop new technologies.

The second key area is infrastructure. Control over critical infrastructure is where competition between countries increasingly takes place. The growth of global value chains means that we must increasingly think of different countries as parts of the same factory floor, across which are distributed the various stages of production. These value chains are held together by physical and digital infrastructure. Whoever controls that infrastructure can organize the most efficient and competitive value chains.

China is leading a bold economic and political project – the Belt and Road – by which it will strive to reorganise global value chains, with its own companies and its state at the steering wheel. This is surely a project in which every country has or should have a stake. It presents a clear opportunity for the United Kingdom to leverage its financial services industry to participate in the Belt and Road, provided it can also acquires managing rights in the initiative, something China has so far reserved for itself.

These moves call for fresh and original thinking. There is no reason for Britain to spend valuable time discussing the outlines of a free-trade agreement with China. Leave the traditional elements of a free-trade agreement – industrial tariffs, regulatory norms, agriculture – for a more convenient time. The priority right now should be technology and infrastructure, the two pillars of the future global economy, upon which Britain and China can build a new economic partnership.

Bruno Maçães’s latest book, The Dawn of Eurasia: on the trail of the new world order, is published by Penguin.

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Bruno Maçães is a Portuguese political scientist, politician, business strategist, author and is currently a non-resident Senior Fellow at Hudson Institute in Washington. He was the Portuguese Europe Minister from 2013-2015

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