The British Ambassador to China was reported recently to have asked the Foreign Secretary, “Why can’t we treat China like France?”.
Liz Truss’s reply to the ambassador was: “Because France does not kill its citizens”. It’s a reasonable response, but there is another that the leadership election and particularly the latest ITV debate between the rivals has brought out into the open.
Not so long ago, the UK declared a golden age of relations with China. We allowed China’s companies, notably Huawei to embed itself into UK supply chains. Our elites allowed themselves to become spokesmen and women for Chinese interests. We even at one point had a Belt and Road minister.
In the ITV debate, Rishi Sunak, the former Chancellor and one of the favourite candidates to be PM, noted that provided we had certain protections against China (although it is not clear what those are), then we could trade with them like we trade with any nation. It is this fundamental lack of understanding of what China is or has become under Xi that is deeply troubling.
The private sector, especially investment banks and other big corporate interests, have long pushed a China agenda. Now they are so far embedded in the Chinese economy, they cannot extract themselves. For much of the financial services industry, money is to be made from normal competitive capitalism as it is to be made from China’s market distortions and state-led economic model.
Banks and funds can always arbitrage the differences between a regulatory system that is competitive and one that is in hock to powerful state-controlled interests. I remember, when dealing with the first WTO dispute on telecoms services in Mexico, being told by Wall Street that the regulatory bias in Mexico favours the incumbent, and new entrants should be punished for trying to access that market! They were, in effect underwriting the fix. They continue to do that in China now.
We cannot expect banks and funds to take a different approach. They will do what the regulatory environment lets them get away with. That is why a clear understanding of what we are dealing with is so important and I fear that the UK is only just realising what the Americans realised some time ago.
China is a systemic market distorter. It fundamentally changes its market structure to give it commercial advantage not just in terms of keeping our firms out, but in getting better access for its firms all over the world, including critically Africa, Asia and Latin America.
In these markets, it finds common cause, and often co-investment, with Russia. We will not be protected from this until we have robust mechanisms to deal with China market distortions. It is most emphatically not business as usual here.
If they continue to operate as they do in global markets, a decoupling (as we have just done with Russia) is not an impossible outcome and we must prepare for it and the disruption it would cause. But we cannot pretend that a few tinkering policy changes will “protect us from China” so that we can deal with them as if they are anyone else.
The British Ambassador to China’s comment – as reported – is evidence of one school of thought. This school of thought suggests that China is like France because both of them put their thumbs on the scales of the markets, and tip the results. But this is a massive misunderstanding. Yes, France does have its state companies (comparatively few) and yes, it does often confuse market economics with mercantilist commercial objectives, but it is fundamentally a competitive market economy with distortions.
China is fundamentally a massively distorted, state-led economy with occasional windows of competition. This is a difference in kind, not just degree.
I have suggested to both the UK and US governments a way of dealing with these distortions in a sufficiently robust and aggressive manner. This includes ensuring that all our trade agreements include disciplines on distortion, and that we are able to correct distortions if a sufficient nexus can be found between the distortion and its anti-competitive effect.
It is only by using such robust policies that we can make progress in this area, but we must be prepared for China not to be moved by such approaches. In that case policy tools must be applied that we would never apply in general.
China is a unique problem in global trade and economic terms, because it has the ability to set the agenda around the world in ways that others cannot. It therefore has a geopolitical impact that must be factored into policy reactions also.
For almost a decade, the UK was wilfully blind to this. Finally, the administration of Boris Johnson understood the scale of the problem. China is banking on the next UK government failing to build on that realisation with actual robust responses.
The author is CEO of Competere, and former advisor to the UK Secretary of State for International Trade, and former cleared advisor to the US government.
