Reaction Weekend

Soft power: Britain needs good relations with China

BY Leo Austin   /  5 July 2019

President Trump wants Britain to side with the US as he raises the stakes in his trade war with China, but to ask the UK to publicly declare for one country over another is not statecraft and is not in the UK’s best interests.

Allow me to pose, and answer, two questions:

How do you get someone onto your side when you’re challenging their leader? Not by telling them that they’re the enemy.

How do the Chinese say no? They don’t. They find a way to save face and remain friends.

These questions matter. No-one else is going to agree to choose publicly between the USA and China. We shouldn’t either. It would be damaging and unsustainable. We need to have a much more nuanced relationship with China than that and there are ways to do it.

We have a couple of big challenges. We need to keep converting the Chinese people to accept international values: that’s the long battle. We need to defend our interests: that’s the short battle.

To win over the Chinese people requires that we argue based on principles. To win on interests requires that we work as a united west. We can’t be seen as Team America, bullying by force.

We need to build a united front between the USA, Europe, Japan and other allies to work as one and to press the issues where we agree: the need to respect international trade rules; remove subsidies; protect intellectual property; and provide symmetrical market access. We haven’t done that because the shrapnel from the White House’s scattergun policy aggression is destroying the partnership.

In February, a survey by Civey for the think tank Atlantic Bridge showed Germans’ trust in the USA plummeting to all-time lows. The USA won’t get the China deal it wants without German help. According to the Rhodium Group, China direct investment in the USA fell 83% in 2018. Chinese imports from the USA fell 27% in the first quarter. As the trade flows away from the USA and China gets what it wants elsewhere, the USA’s negotiating leverage will ebb away and the probability that it will lose will increase measurably. Then, as we submit to divide and rule, we will all lose.

Tough though it is, we need to focus on our long-term aim of getting the Chinese people to understand international values. Thirty years ago, many people believed that China would gradually internationalise and adopt ‘normal’ practices. Now, the common interpretation is that we have failed because we have strengthened the Communist Party and in response they have grown hostile and expansionist.

I lived and worked in China for 22 years. I have advised on some of the most complex investments made by multinationals in China. I’ve sat on the boards of US-listed Chinese companies. I am one of the few westerners to have been trusted to lead a major Chinese company. My perspective is therefore different.

We need to think about the Communist Party and the Chinese people differently. I believe that the game is very far from over and that we have made immense progress on hearts and minds in China. We need to keep pushing hard to ensure that China gets there. Given the Party’s absolute control of information inside China, we have very few touchpoints where we can tell the Chinese our stories in response. Meeting them through trade; getting their children to study in our countries; showing them a different world through tourism – these tactics work and they are still our best bets.

We have a target that we want to convince. She is a 15-year old Millennial in Shanghai. She likes Korean pop, Japanese food, British education and American television. She is Chinese and proud, but she also wants to be part of the modern world and has a healthy scepticism about what she hears from the government. She was one of the tens of millions who shared political memes of Xi Jinping as Winnie the Pooh in 2017 – and watched them get deleted by censors in real time.

Her parents do not think like her, nor do millions of children in the countryside, but in twenty years’ time she is going to be the driving force in Chinese banking, law, media and the arts. There are many things we want to tell her. If we want to be listened to, we need a clear voice and a message based on principle, not on hard power. Not everything we say can be blocked. If we have a simple, focussed message, it will gradually get through. The principles of symmetry and equality of treatment are easily communicated.

That doesn’t mean going weak on security. According to the SIPRI, China’s military expenditure rose nearly eightfold in the 20 years to 2018, standing at almost 40% of the US and six times that of the UK. We need to work out our security red lines and our strategic red lines and hold to them. But outside those red lines we need as much trade, engagement and friendship as we can get. If there are pieces of Huawei kit that we can buy without endangering security, and if it helps us, by all means let’s buy them. That’s what the Cabinet has been doing.

However, 5G is an issue. We are buying Huawei equipment for what I’m told is a 20% reduction in cost versus the competition, but inter-operability with other brands is weak. If we want to buy the next stage of kit from someone else, we might find ourselves forced to buy the 80% again. That’s a poor negotiating position to be in. And if buying Chinese means that our local manufacturers die out or fall behind in technology, then that’s a weak strategic position to be in. We need Nokia and Ericsson to stay strong.

We don’t have to say no in black and white. We control our own tenders and we can manage the competition through adjusting the tender terms. That’s what they would do. It provides plausible deniability and leverage. We can specify the minimum level of inter-operability and if they don’t meet it then, I’m sorry, we did our best and it’s nothing personal. It’s just what the international market requires.

Yet we are making a big order and we also have some leverage to make big asks in any negotiation. The UK government plans to fund 5G infrastructure projects worth £6.8bn. The mobile company, Three, has stated that it alone will invest over £2bn in 5G. If we are open to purchasing some kit from Huawei, then we can require that we control all the code for that within the UK and write all the upgrades using UK-managed teams. That would provide some access for the security services. If our order is the biggest in Europe then we can require that the European coding team is ultimately based in the UK. It would be a good skill-building project given that we don’t have our own 5G manufacturer.

There are elements of the trade negotiation which the Communists are going to have a very hard time implementing. Subsidies are the big one. They are everywhere in China – the carrots against which the stick is measured, deep in the DNA and fibre of the whole system. State owned enterprises represent around a third of GDP and the government decides each year whether it wants profits, employment or scale.

The big banks are state-owned and lending is politically-pressured. According to the OECD, state-owned enterprises held 82% of total China corporate debt in 2018. Where the debt becomes so big that even the banks are threatened, the government directs debt-for-equity swaps and re-capitalises the banks. Debt for equity swap deals worth $334bn had been completed by April 2019. No more interest payments. No more principal repayment. Free loans from one state pocket to another. Which bit of this isn’t a subsidy?

The West will probably end up with a long-term system of import tariffs to deal with these subsidies. It is already careful about state-supported M&A and project finance. If we are going to get measures in place without being portrayed as the privileged West holding down the aspiring new global power then we must start explaining things from a clear position of fairness.

Like any relationship, it’s complex. We can’t make it any simpler by shouting. If we are going to win the long battle ahead then we, in the UK, cannot be seen by the Chinese people to be choosing sides against them. We need to win the war of ideas and to do that we have to act on principles that people on both sides can understand.

Now is the time to choose our principles, talk about them loudly and implement them as a unified team across the west. That means negotiating for symmetrical treatment, making our red lines public, stopping the in-fighting, re-building our trust and taking this step-by-step – and if we need to choose sides, we do it quietly and cleverly. Then we can win.

Leo Austin is a UK-based businessman. He is Senior Advisor to The Conference Board China Center for Economics and Business.


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