27 October 2015

Britain does not need to choose between being European or global


China is a rising economic power, the European Union a declining one. So Britain’s future is best served by hitching its wagon to Beijing rather than to Brussels. As last week’s high-profile visit by Chinese President Xi Jinping shows, Britain can prosper as a global trading power outside the EU.

Not so fast. The EU accounted for 44.5% of the UK’s exports in 2013, China for a mere 3.4%. Whereas half of foreign direct investment in Britain comes from the rest of the EU, Chinese FDI is still tiny. So Britain’s economic relationship with China is not going to be a substitute for its ties with the EU any time soon. Nor should it ever be: because the two are in fact complementary. The much-heralded new “golden decade” for relations between Britain and China highlights how EU membership is not an impediment to doing business globally. On the contrary: Britain’s membership of the EU is part of its appeal to China, as President Xi himself emphasised. So Britain doesn’t need to choose between being European or global: it can – and should – be both.

Chancellor George Osborne deserves huge credit for seeking to bolster Britain’s economic ties with China, which is already the world’s largest economy in purchasing-power terms. While markets and pundits obsess about China’s fragile short-term prospects, its potential for sustained long-term growth remains huge. And whereas the country’s breakneck industrial development has so far notably favoured German firms, which were fortunate to specialise in machine tools and capital equipment that China needed many more of, China’s shift towards a more services-oriented and consumer-driven economy is a much better fit for Britain’s specialties, such as finance, professional services and English-language education. So going after that business makes eminent sense. The City of London has an opportunity to become a major offshore market for Chinese finance: it should seize it.

Seeking to attract Chinese investment is another no-brainer. Britain has huge investment needs, not least in infrastructure. Since the government chooses not to take advantage of record-low interest rates to fund increased infrastructure investment itself, Britain needs to attract private capital to do so. Both the Chinese government and Chinese private investors have huge funds to deploy, which they are trying to diversify away from US dollars and government bonds. So Britain and China are again an excellent fit. While the United States often recoils from Chinese direct investment, ostensibly for security reasons, and many European countries do likewise for nakedly nationalist ones, an economy such as Britain that is running a current-account deficit of some 5% of GDP is wise to welcome foreign capital with open arms.

Cutting the cost and red tape of acquiring a UK visa is another welcome step. Big-spending Chinese tourists, who shell out an average of RMB26,200 (£2,700) per trip, can visit 26 European countries with a single Schengen visa; far fewer bother with the hassle and expense of seeking a UK one too. So streamlining the process makes sense.

The government should go further and do more to encourage Chinese students to study in British schools and universities, as more than 150,000 already do. If the government’s absurd net-migration target precludes it, why not exclude international students from the target? Welcoming more Chinese students would not just make economic sense. It would bolster personal ties between Britain and Chinese people, including its future leaders – the best kind of soft power there is. If they come to appreciate the merits of Britain’s liberal democracy, all the better.

The government’s gambit has been widely criticised. Some accuse Osborne and prime minister David Cameron of putting business ahead of China’s human-rights record. But since British people already buy lots of Chinese goods and British companies already invest in the Middle Kingdom, it would be foolish then to baulk at selling the Chinese more British products and welcoming Chinese capital. In any case, the Chinese government is hardly going to take lessons from a British government whose predecessors in the 19th century fought a war to force open Chinese markets to opium. If political change happens in China, it will come from the pressure of 1.3 billion Chinese not the scolding of 64 million Britons.

Others fret about the impact on the UK’s relationship with the United States. Yet nobody – except the likes of Labour leader Jeremy Corbyn – questions the security alliance through NATO and close ties with the US in many other areas. But just as Britain can pursue closer links with China without jettisoning the EU, Britain’s intimacy with America does not preclude better economic relations with China.  Indeed, the stronger Britain’s ties with China are, the more valuable to the US it can be.

Like it or not, China’s global importance is destined to grow. It is in the West’s interests to accommodate China’s rise, rather than seek in vain to contain it. Constructive engagement is much more sensible than confrontation. America sometimes seem to forget that; Britain is wise not to.

A former boss of mine, Mike Moore, the then-director-general of the World Trade Organisation, was instrumental in welcoming China into the WTO in 2001–2. By joining the multilateral trading system, Beijing was signalling its desire to participate in the liberal global order that the United States largely created. So it is regrettable that instead of pushing forward with global trade liberalisation, the US is now trying to exclude China from the regional trade bloc that it is creating in the Pacific, the recently concluded Trans-Pacific Partnership (TPP), which still requires approval by the US Congress.

If Washington wants to bind Beijing into the liberal international order, it needs to make space for China. But the US is denying China a greater role in global institutions such as the International Monetary Fund (IMF) and World Bank. So it is understandable that Beijing is setting up other institutions such as the Asian Infrastructure Investment Bank (AIIB). It was counterproductive of the US to try to block the AIIB’s development and right of Britain to go its own way and join.

With US-China ties frayed, Britain can seek to become a trusted intermediary between Beijing and Washington, as Tessa Keswick, a deputy chairman and former executive director of the Centre for Policy Studies, recently argued in the Financial Times. And Britain can profitably play a similar role between Beijing and Brussels.

Britain does not need to choose between China and Europe, or China and America. It should make the most of its economic relationships with all three of them.

Philippe Legrain, who was economic adviser to the President of the European Commission from 2011 to 2014, is a visiting senior fellow at the London School of Economics’ European Institute and the author of European Spring: Why Our Economies and Politics Are in a Mess — and How to Put Them Right.