British companies should prepare for sanctions from China: An interview with George Magnus

As the pandemic fuels growing worries about extended supply chains and a growing distrust of China the concept of de-coupling is gaining traction. What lies behind this change in mood is a general sense that the UK, and the West, has become too reliant of China economically leaving us vulnerable. The solution proposed by some is to disengage, or de-couple, from China. But what this means in terms of policy is often far from clear.

To find out more Reaction’s business reporter, Joseph Rachman, interviewed George Magnus the former chief economist of UBS who is now an associate at the China Centre at Oxford University, and a research associate at the School of Oriental and African Studies

What does decoupling really mean in practice? The first shot in the UK was perhaps Huawei. In America we saw the trade war and the recent ban on TikTok. Is it going to remain focused on tech, or will it expand in new ways with potential mass reshoring of industrial production? 

I don’t think that bringing back a lot production from China to the United Kingdom, or to the United States, or anywhere else for that matter, is a realistic proposition. I don’t even think that that is the goal necessarily. When the Americans in particular talk about de-coupling the Chinese talk about the same kind of thing, but they call it self-reliance. Essentially, it’s a variant, or a form, of economic nationalism but one in which where the high level of economic interdependence which has been established between China and the rest of the world is at least partially intended to reverse.

In other, words, in the past we used to go the extra mile to establish closer and closer links with China – production, supply chains, and so on and so forth. Trade, commerce, investment – because everything was worth the economic efficiency and the economic advantage that flowed from it. Now politicians, really on both sides, are saying we’re prepared to pay an economic cost to lessen that interdependence. The de-coupling really is kind of de-gearing, or unshackling, or unhooking if you want to put it that way, some of that relationship in the interests of some form of economic nationalism.

It’s not always bad. We may agree among ourselves that it’s important that we should have a production capability in say medical masks or equipment, to take the pandemic as a current example, from the point of view of health security.

So in concrete terms do you think it’s going to be kept to a few strategic industries? Or do you predict decoupling might go beyond that? 

There are various areas in which we have greater or lesser feelings about the need for security, and it might vary from country to country. But we could be concerned about energy security, agricultural security, technology security, health security. I would say that certainly one of the legacies of the pandemic is we don’t want to be hostage to sole source suppliers, particularly in China, in the event that anything like this should ever happen again. And it would be a good idea to have that capacity to supply either closer to home or at home.

Technology is the major area where this is really being driven home. I suppose, nowadays we would say that telecommunications and advanced technologies are the new oil or the new radar, or whatever it was you thought conferred big advantages in the past.

So, because of the importance of information collection, storage, manipulation, and use as a tool of influence and so on we are becoming much more…again, the Chinese have long been like this. Some of our biggest Western technology firm have been banned in China for over ten years. It’s an ideological thing for them, it’s got nothing to do with protectionism.

We can see this trend in the case of Huawei, we can see in the case of ZTE – both Chinese tech companies. We can see this in the case of TikTok to take a current example. Doesn’t seem very obvious why a video sharing app, mainly for 16-24 year-olds, should be making geopolitical headlines.

Yet, suddenly it is. 

Well, beneath the surface it’s a bit more than that.

Because of data, and where it’s stored, who has access to it, and privacy of American citizens and non-Chinese citizens. 

Yes, quite so.

In your recent articles about Hong Kong, you raised the idea of “financial warfare”, or the “weaponisation of capital”. You were writing specifically with regards to America, but how exposed is the UK to that, especially as the City of London is a massive global financial hub and a big trading centre for the renminbi?

I was talking about the weaponisation of capital or financial war, whichever terminology one prefers to use, which the United States is uniquely equipped to deploy because of the role of the dollar in the global monetary system and the reach of American banks. So, they’ve already passed an act to penalise individuals, and/or institutions which are implicated in the persecution of Uighurs in the western province of Xinjang. And they’ve also passed an act – the Hong Kong Autonomy Act – which provides for the president or congress to apply sanctions to individuals and entities in Hong Kong associated with the implementation of this newly contentious national security law. So that’s something that’s very specific to the United States.

In the United Kingdom, sterling is not a huge global currency and we don’t really have the same kind of financial leverage. But the Chinese are obviously not best pleased with us at the moment – partly because of the reversal of the Huawei decision on the roll out of 5G and partly because of the British government’s offer to allow up to a quarter of a million or so British National Overseas passport holders a path to citizenship. 

What do you think the effect of the offer of citizenship to about three million in total will be? 

Obviously, a lot of these people will be either too old to uproot, or not want to uproot themselves, or not want to leave home. But, the offer itself is the point really. Because the offer is seen by the Chinese as interference in domestic Chinese affairs.

So, they have said there would be consequences relating to both of these matters. The penalties might be – who knows at this stage? – sanctions by the Chinese against British companies including possibly the two big British banks in Hong Kong which are HSBC and Standard & Chartered.

HSBC has come under pressure already, hasn’t it? The bank endorsed the security law, and now is under suspicion that it helped with the arrest of the Huawei executive in Canada.  How difficult do you think the bank’s position is?

They are in a difficult position. What this is doing, this kind of – I was going to call it a spat but it’s more than a spat. The new adversarial nature of the relationship between Britain and China means that companies can, and might, get drawn into decisions which they will not have necessarily planned for and where they might have to choose between being subservient to British law or Chinese law. And it’s not the kind of situation that companies normally like to find themselves in, but that’s the way it is. It’s possible, I can’t foretell or predict at this point, that under certain circumstances they could be in the crosshairs.

You mentioned HSBC and Standard & Chartered as two examples. They’re both banks, do you think any other industries are going to be vulnerable? We talked about technology but Britain’s not a massive producer of silicon chips or other technologies. Is there anything we might find ourselves vulnerable on other than finance? 

Well, Jaguar-Landrover for example has a big operation in China. The British Chamber of Commerce in China is not small. It’s not a big as the EU chamber which I think has about 1,500 to 1,600 members. We don’t have as many as that. But there are a lot of British companies that are obviously in China – oil companies, other energy companies, car manufacturers as I said.

So we do have companies that could be at risk – and the Chinese do have some form over the last ten years in singling out the companies of countries with whom they have fallen out, at least temporarily. So, it is something that we might have to be prepared for actually.

Are we seeing the unpicking of globalisation as we know it where capital and business moved freely across the world?  

I think that things are more dangerous now. As I said, in the past ten years there have been instances where China has singled out Japanese businesses, or South Korean businesses, or Filipino businesses, or Vietnamese businesses… But these have basically been put down to petulance, and aberrations. The effects were never particularly long-lasting or effective.

What is different now is just the hate that’s basically built up in the relationship between China and Britain, China and the United States, China and Europe is such that if you get in a kind of tit-for-tat cycle… For the example, the Americans shut down the Chinese consulate in Houston and then the Chinese shut down the American consulate in Chengdu. That might be the end of it, but it might register on both sides as “We owe them.”

So the next time something terrible happens, or there’s an argument, you get this kind of to-and-fro where each side ups the ante on the other. Then it becomes something more than petulance then it becomes something that really starts to unravel the flow of trade and commerce and investment. I would argue that’s already happening really.

You use the word hate. That’s a really dramatic word to use; relations are bad but do you really think we are on the point of hate now? 

I wasn’t sure I had used the word hate. It must have slipped out.

I don’t know about hatred. I think there is a heightened sense of annoyance and ideological assertiveness on both sides. In the last two or three weeks we’ve had very strongly worded statements from Mike Pompeo the Secretary of State, Christopher Wray the FBI Director, the Attorney-General Barr, and Richard O’Brein the National Security Advisor. Each of them laying out in very, very strong terms almost an ideological opposition to what China is, what it represents, what it’s trying to do.

The Chinese by the same token have done exactly the same. They’ve never really hidden an ideological agenda, but it’s become more marked since 2012 when Xi Jinping came to power. Just a couple of weeks ago Wang Yi, China’s Foreign Minister, almost threw done that same sort of ideological gauntlet to the United States. So, it’s definitely not just a trade spat anymore – if that’s what it ever was in 2018 when this started. This has now become something about standards, beliefs, values. It’s pretty serious stuff, I think.

Has the UK thrown down the ideological gauntlet as well, or is it being drawn into it? We have not the same sort of dramatic statements, though we have had the building pressure around Huawei and the China Research Group making trouble on the Tory backbenches. 

The CRG certainly does have, or many of the participants certainly do have, a more ideological agenda. I wouldn’t say it’s common to all of the participants.

I think that the British government has been, as you might expect, a little understated. Dominic Raab, the most virulent thing I can remember him saying recently was that “There can be no going back to business as usual.” But, I think his defence of the Hong Kong citizens, who it is proposed we offer a route citizenship to, and in the government’s turnaround on Huawei, we have been pretty adamant about where we have nailed our colours. But I think we haven’t been quite as, shall I say, virulent about our opposition to China as some in the US administration have. We’ve been a little bit more moderate, I would say, by and large.

Is this the end of the UK and China’s “golden decade”, if it ever truly existed? Is this a wise move by the British government? And, if it isn’t, what does a good, or a proper, relationship with China look like? 

That’s a good question. That golden decade lasted about three-and-a-half years as far as I can make it stretch. I think it was ill-thought out, or even not very clearly thought about, when the previous government led by David Cameron and George Osborne actually hatched it. I can kind of understand what they were thinking at the time. I just think they went about it the wrong way and the rhetoric that they used was just incorrect in my view.

In this country, before the pandemic, I don’t think there was a very substantial, widely resonating anti-China or China-sceptic view, but we almost certainly do have that now. So, something clearly has changed. I think the nature of the relationship was inevitably going to have to endure a reset and the pandemic has really provided the catalyst.

What sort of a relationship will we have? I don’t think anybody really knows. At the moment the US-China relationship is going downhill with no off-ramp. I don’t really anticipate there’ll be any change there until at least after the presidential election, and that assumes that there’s a change of leadership and we have a Biden presidency. Having said that what changes in the United States would not necessarily be content but style and approach and language, which is important even if the relationship is frostier in the future.

I think for Britain that remains true as well. I think we can probably arrive at some sort of arrangement with China whereby we talk and we collaborate on things where we have mutual interests. Hopefully we’ll get to the point where that can happen, but both sides will have their new red lines and we may disagree for the foreseeable future about technology and security.