The end of wonderful friendship and beginning of trade woes

by BLOOMBERG/ FILE PIX

When visited London in 2015, aside from enjoying fish and chips and a beer at the pub with then-Prime Minister David Cameron, the Chinese president addressed a joint sitting of Parliament.

Speaking in the Royal Gallery behind the House of Lords, he invoked Shakespeare’s The Tempest, telling lawmakers “what’s past is prologue.”
The visit was a roaring success. A Scottish wool cape was given to Xi’s wife, Peng Liyuan; its fit had been calculated using data technology to measure her size off public photos.

The Duchess of Cambridge wore a scarlet dress to the state banquet honouring, with the Chinese press cooing over her choice of “Chinese red.” Cameron declared the trip evidence of a “golden era of ties” between the countries. It was a stunning turnaround for a relationship that had sunk into a diplomatic freeze just a few years earlier when Cameron met with the Dalai Lama, the exiled Tibetan spiritual leader.

The warmth didn’t last. Fast-forward to 2020, and things are in another downswing, with potentially even greater ramifications for the U.K. as it nears the Dec. 31exit from the European Union’s trading rules.

The departure from the bloc requires the country to negotiate its own accords, including with China, its third-biggest trading partner. The omens are not
good. 

China is asserting itself with multiple countries at the same time as it tries on the role of emboldened superpower to that of the second-biggest economy in the world. Australia and Canada have seen firsthand what happens when Beijing is publicly
criticized or feels slighted.

“China reacts directly to the vulnerability of the country involved, and in this case the U.K. has made itself very vulnerable by withdrawing from the European community and going it alone and not having trade deals lined up with either China or the United States,” says Jeff Moon, a former assistant U.S. trade representative for China affairs. “China is going to maximize that.” 

As Xi tightens his grip at home—with the leeway potentially to rule for life—his army of “wolf warrior” diplomats is becoming more aggressive in defending his policies and actions elsewhere.

“What you see is a kind of a creep in how expansive
its coercive diplomacy has become,” says Susan Shirk, a former U.S. deputy assistant secretary of state and author of China: Fragile Superpower. 

“It’s not really about foreign policy. China is trying to pressure other countries to adhere to the Chinese
Communist Party’s political line.”

In that environment, the U.K. finds itself taking a leading stance against China over Hong Kong, a former British colony.

A treaty agreed ahead of the 1997 return of the city to Chinese rule stipulated a “high degree of autonomy” for Hong Kong. For decades the treaty seemed largely intact.

But recent years have seen an erosion by Beijing of that autonomy, especially with the imposition on the city of a sweeping national security law in June after more than a year of unrest by pro-democracy protesters. 

There’s been a flurry of critical statements from the
British, plus the promise to give holders of British National (Overseas) passports a path to citizenship from January, prompting Beijing to accuse it of “political manipulation.” 

The U.K. has also weighed in on China’s treatment of its Uighur Muslim minority, has barred Huawei Technologies Co. from its 5G networks by 2027, and found itself disparaged by China as the “weak link

in the Five Eyes intelligence sharing network of
which Australia and Canada are also members. 

For Malcolm Rifkind, who as British foreign secretary from 1995 to 1997 played a key role in Hong Kong’s handover, the city represents a core issue for the U.K. that it cannot sacrifice.

“Trade agreements are very important, but you can’t allow that to dominate your foreign policy,” says Rifkind, now a visiting professor at the Department of War Studies at King’s College London.

“We’re not just talking about playing at diplomacy, we’re talking about fundamental interests.”

The Chinese also see Hong Kong as a core interest.

“For China, the Hong Kong issue means a humiliating past, and it is unwise for the U.K. to open old wounds,” says Ruan Zongze, a former Chinese diplomat in London who’s executive vice president of the China Institute of International Studies, the think tank of China’s Ministry of Foreign Affairs.

“The U.K. has misjudged the situation and misjudged its influence. It is even trying to
rope in a few other countries to form anti-China small circles.”

The experiences of Canada and Australia augur ill for the U.K. On a trip to China in December 2017, Canadian Prime Minister was expected to come away with an agreement to formally start trade talks. But a lengthy meeting
with Premier Li Keqiang ended badly as Trudeau insisted any talks include gender and labor rights and environmental standards.

He also raised human rights and China’s use of the
death penalty, according toMargaret McCuaig-Johnston, who served for almost 40 years in senior management positions in Canadian governments, including assistant deputy minister in the Department of Finance.

“Basically, he was shown the door and he
was told no, there would be no negotiation of a free-trade agreement,” says McCuaig-Johnston, now senior fellow in the Institute for Science, Society and Policy at the University of Ottawa.

Things soured further with Canada’s arrest in 2018 of Huawei Chief Financial Officer Meng Wanzhou in Vancouver on a U.S. extradition request.

Beijing locked up two Canadians and halted billions of dollars in agricultural imports in the months
that followed. “Frankly, nobody is talking about a free-trade agreement” anymore, McCuaig-Johnston says. “I think the free- trade agreement is dead.

Australia, the world’s most China-dependent developed economy, finds itself embroiled in a dispute that’s affected exports of everything from coal to beef to lobster to wine. 

China has warned tourists—and its overseas students—to stay away. 

As of Nov. 25 more than $500 million worth of Australian coal was on ships anchored off Chinese ports, with more than 50 vessels waiting a month or longer to offload.

Beijing’s retaliation comes at a bad time, with Australia just emerging from its first recession in almost 30 years. Iron ore and liquefied natural gas, which are a significant proportion of Australian exports to China and are crucial for China’s own
economy, are for now unaffected.

Australia’s sin? In April it called for a probe into the
origins of the coronavirus, banned Huawei from its 5G network, and has actively pushed back against China’s territorial expansionism in the South China Sea. In November a Chinese diplomat in Canberra gave a document to Australian media outlets
outlining 14 grievances and accusing the nation of “poisoning bilateral relations.”

On the surface, the U.K.’s trade relationship with China is less exposed. China exports a lot more to the U.K. ($65 billion in 2019) than it imports from the country (Britain is not even among the top 15 exporters of goods to China).

But there’s the elusive prospect of China’s domestic market, which many bigger economies have also struggled to gain access to.

Now, “China may just tell the British, ‘We don’t need you,’” says Moon, the former assistant trade representative.

“What the Chinese will frequently do, almost always do, is claim: ‘It’s all your fault. You need to take action. We’re not going to tell you what action
you need to take, but you need to take action.’ And then you get in a cycle where you are negotiating against yourself.” 

Beijing may also use the U.K. as a tool in a broader
divide-and-conquer strategy when it comes to talks with the EU and the U.S. China’s protection of its behemoth state-owned enterprises is a sticking point in both sets of negotiations.

“I would not be surprised if the Chinese didn’t insist on some favourable terms for their SOEs that would undercut the interests of the EU and U.S.” in those other talks, Moon says.

Former Chinese diplomat Ruan also cited the China-EU investment-pact talks when it came to the U.K.

“The wheels of China and the EU are rolling forward. Once the investment treaty is signed, China-EU relations—to use a metaphor—will be entering the era of high-speed rail. But the U.K. is still looking at the world using old lenses,” he says.

One question for the U.K. in any talks is to decide which parts of the economy are off-limits and which are on the table, says Julia Friedlander, a former U.S. Treasury official who served on the National Security Council in 2017.

“How do you find a way to technocratically draw a boundary there and use your financial, economic, and regulatory levers to force that, rather than making it about Cold War 2.0 or decoupling?” asks
Friedlander, now a senior fellow for trans-Atlantic relations at the Atlantic Council.

“There is no such thing as actually decoupling from China.”

So far the U.K., Canada, and Australia have largely
resisted getting into a tit-for-tat with China over trade and politics, though Australia has flagged potential World Trade Organization action and exchanged angry words with Beijing over
propaganda.

“We aren’t turning around and banning their
manufactured products,” says McCuaig-Johnston.

“That would be making a linkage between one thing to a very different thing. We don’t do that as a matter of policy. We’ve had all this retaliation, and we haven’t done anything to oppose it.”

Still, she suggests the Canadian government activate so-called Magnitsky-style laws—named for U.S. sanctions legislation first levied against Russian citizens—against Chinese officials involved in the detention of the two Canadian citizens.

The challenge for each of the countries is how to keep politics and economics on somewhat separate tracks as China bleeds the lines between the two.

Rifkind, the former British foreign secretary, believes it’s possible.

“During the whole of the Cold War we had economic relations with the Soviet Union,” he says. 

“There were no prohibitions on trade. So I would hope that there will be not only a continuing, but an improving, level of trade between China and the United Kingdom.”

Shirk, who chairs the 21st Century China Center at the University of California, San Diego believes China won’t walk away from trade talks with the U.K. despite the tensions over Hong Kong.

“The British government should and can put these on two tracks and simply move forward. China also has a lot of economic interests right now,” she says

“They are going to want trade agreements that show they remain open to trade and investment. It’s kind of a test of their priorities and how pragmatic is because, if he really cuts off his nose
to spite his face by trashing the trade agreement with the U.K., then I think the rest of the world will see that, and it will intensify the global backlash against the Chinese government.”

Some current and former officials say that, above all, a conversation needs to keep happening. And equally that greater collective action by “like-minded” countries against China can bring some pressure to bear.

“Saving face is very important in China,” says John Hewson, a former Liberal Party leader in
Australia. “That doesn’t mean abandoning our stance on Beijing’s human-rights record—just allowing both parties to recognize that
they have different values.”

McCuaig-Johnston argues for caution on the part of the U.K. in any trade talks with Beijing. “The lesson I am drawing is that the more points of engagement we have with China, the more places they have to turn the screws.”

Although Australia signed
its trade deal with China in 2015, she says, “basically China ripped it up, tossed it out, and they are doing whatever the heck they want on trade.”

In the end, it may come down to Xi and
what he wants. And what that is is not all that clear.

“He’s pretty opaque,” says Rifkind. “He obviously sees himself as the greatest leader since Mao Zedong.”

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