China could be a major Brexit beneficiary

UK's potential significance as source of technology and know-how is much greater than raw trade numbers suggest

In June last year, the British people voted, by a majority of about 4 percent, to leave the European Union - an event that immediately became known as "Brexit". On March 31, 2017, the June 2016 vote was converted by the British government into a formal request to the headquarters of the European Union in Brussels. The United Kingdom's severance with the EU will become complete at midnight on March 31, 2019.

What will be the UK's position with respect to the EU after March 2019, and how will China be affected? Will the millions of Europeans living in London need visas to be able to travel freely back home, and will the millions of British citizens living in France, Germany, Italy, Spain and other European countries continue to benefit from government-supplied health coverage?

Additionally, will European judges cease to have any jurisdiction in the UK? Will the UK be able to control immigration? Will the UK be able to trade with the EU without customs inspections, and without paying trade tariffs? Will China find it easier to access British know-how and technology after Brexit, and will the UK still be a good place from which to access the mainland European market?

The British election result in May 2017, which was intended to strengthen Prime Minister Theresa May's negotiating position, actually weakened her. Her opponent Jeremy Corbyn performed better than expected, and her governing majority fell. This outcome has made it much more difficult for the prime minister to achieve a clear, united position toward Brexit within her government.

On one side, led by Foreign Secretary Boris Johnson, are those government ministers who believe that the United Kingdom should leave the EU as soon as possible, and at any price. Others, like Chancellor of the Exchequer Philip Hammond, regard the British split with Europe as extremely negative economically, since the UK after Brexit will give up some or most of its privileged trading relationships with the EU, an economic region that currently accounts for more than half of total British trade in goods and services.

The deep splits within the British government about its approach to Brexit reflect the views of the ruling Conservative Party, as well as the British population as a whole. According to recent surveys, about 50 percent of the British support a clean break with Europe, and the other 50 percent want to remain in the EU. Within the ruling party, a bloc of about 100 members of Parliament firmly supports Brexit, and will not tolerate any delay or dilution of what they see as the reasons for the vote to leave: an assertion of British sovereignty over European laws and jurisdiction, and British control over immigration across British borders, which under EU laws must remain open.

The British position on Brexit is driven therefore by three different and opposing factors. First, the different views on Brexit held within the ruling Conservative Party and within the country as a whole; second, the best post-Brexit solution for Britain; and third, the exit terms for the UK, which the EU will see as lying within the original treaty and in its own self-interest, and will agree to. Meanwhile, May's political weakness, amidst very different views within her government, makes it extremely difficult to take any single position on a range of matters, each of which urgently requires resolution.

Thus, the Brexit outcome is surrounded with huge uncertainty, because everyone knows that it will be impossible for the British government to satisfy simultaneously these three constraints. For example, it might be possible for the UK to agree terms with the EU that would permit a degree of free movement of people, or the continued participation of the European Court of Justice in aspects of British law, while allowing Britain tariff-free trade with Europe. But neither of these conditions would be tolerated by the pro-Brexit group in the ruling Conservative Party, or by many British people. Something has to give. But what? Meanwhile, March 2019, when Britain will formally end its EU membership, comes closer by the day.

Business and the financial markets both hate uncertainty, particularly about something like Brexit, which is so fundamental and imminent. The two main contributors to British prosperity and employment are the financial sector and real estate (where rental income is now a larger contributor to the British economy than manufacturing). Both of these key sectors will be profoundly affected by Brexit.

Under the scenario recently published by the British government, the UK will try to remain within the EU customs union for a short period after Brexit until the longer-term position has been agreed upon. But in any case, it is very likely that London-based financial institutions will need to find a European base to continue to be able to operate within Europe. Most have already done so, with Luxembourg and Frankfurt as the most popular choices. London's financial district will shrink. The only question is, by how much? Real estate prices in London have already started to fall, reflecting the move of bankers away from London to European capitals. This negative trend could cast a pall over housing prices throughout the UK.

In the current situation, where nothing is clear and nothing has yet been agreed upon, uncertainty can only grow. If the possibility exists that the UK has to leave the customs union and pay tariffs on its European trade, foreign multinationals who use the UK as a manufacturing base will rethink their strategies. These include many large auto companies, like Nissan, Ford, Toyota, BMW, Jaguar and Vauxhall. With vehicles as one of the UK's largest and fastest-growing exports, the impact on economic growth and employment would be large.

Therefore, British thoughts have turned to trade partners outside Europe whose British imports and investment in the UK could provide future opportunities for growth. In 2015, Chinese exports to the UK amounted to only 3 percent of China's export total. But for the UK, China's large and fast-growing economy is of great importance, especially as it becomes wealthier and as the Chinese middle-class develops tastes in sectors like tourism and international sports where the UK has strengths. China is the UK's fourth-largest trade partner (after the United States, Germany and France), and the fastest-growing.

For China, the UK's potential significance as a source of technology and know-how in many fields, from artificial intelligence and robotics to education, is much greater than the raw trade numbers would suggest. The EU has recently indicated that in the future, it may block Chinese acquisitions of European companies that previously it would have waved through. It may, therefore, be much easier after March 2019 for China to do a free-trade deal with the UK, accessing important know-how in return for giving some concessions in sectors like banking and insurance. This could provide China with a new strategic partner that has important strengths in key areas that China needs. China could end up as a major beneficiary of Brexit.

The author is a visiting professor at the Guanghua School of Management at Peking University. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 08/25/2017 page10)