5 June 2020

Crude talk of ‘de-Chinafication’ is in nobody’s interests


When David Cameron and President Xi Jinping enjoyed a pint at the pub in 2015 it was hailed as the sign of a new, golden age of Sino-British relations. Just five years later a very different relationship between the two countries is emerging.

It’s not just the UK’s hard-hitting pronouncements on Hong Kong, but a number of other important policy moves. An emergency review into the role of Huawei in Britain’s 5G network is underway, along with Project Defend, a government initiative aimed at reducing British dependence on Chinese imports, especially for essential medical supplies.

The UK is not alone in this new circumspection over China, particularly when it comes to economic over-reliance.

Washington and Beijing were already in the midst of a long-running trade-war when coronavirus hit, and relations have only got worse in the last few months. Part of that tussle has been the Trump administration pressurising companies to bring manufacturing back home, especially from China, a trend that has increased since the pandemic. Japan has followed suit and made $2.2 billion available to help its manufacturers shift production out of China. And France’s finance minister, Bruno Le Maire, announced in March that his government was thinking the same way. “We have to decrease our dependence on a couple of large powers, in particular China, for the supply of certain products.”

At one level British economic disengagement from Beijing might be a blessing. Ever since nineteenth century Lancashire cotton mill owners dreamt of adding an inch to the shirttails of every man in China, the world’s largest consumer market by population has held a particular allure for our companies.

But, as everyone who works there knows, it is pretty hard for Western companies to make money in the Middle Kingdom. There are of course some success stories – China contributed the lion’s share of the £1.1 billion in sales that Burberry made in Asia Pacific in 2019 – but many firms struggle with the travails of doing business in China.

Intellectual property theft and state-sponsorship of the local competition may grab the headlines, but it’s the more prosaic issues of sticking to contracts and getting bills paid in full and on time which dominate day-to-day business. And it’s not getting any easier. A pre-Covid survey by the British Chamber of Business in China revealed that 48% of UK companies said that commercial conditions had deteriorated. Given that China is ranked 31st in the World Bank’s Ease of Doing Business index, there are clearly plenty of other markets where British companies might find it simpler to prosper. 

All that said, in a post-Brexit world Britain needs as many economic options as it can find. China, for all its challenges, is now the UK’s fifth largest trading partner, accounting for 4% of British exports, and 7% of imports.

But where the real difficulty lies for politicians who would prefer to rein in our economic relationship is that Britain – and the West more broadly – is hugely reliant on the Chinese supply chain.

According to the Asian Financial Cooperation Association, a Chinese state-backed institution, the country is not only the world’s biggest exporter of manufactured goods but also the largest exporter of intermediates used by factories, accounting for 32% of the overall global total.

China is a dominant or major supplier of materials and components from cars to computers to garments, for example supplying 45% of the world’s textile materials. It also produces massive amounts of a long list of unexpected items, such as 25% of the world’s tomatoes, mainly from the troubled province of Xinjiang. It is the planet’s most complex industrial system, and no other country can compete in its depth and breadth; America and Europe long ago ceded their lead. 

Countries like Vietnam and Thailand may have aspirations to take China’s crown, but their populations are tiny by comparison. The only country with a comparable workforce, India, has not yet developed the manufacturing or supply chain infrastructure it needs to properly take on Beijing – although it is trying.

The British Government may not like it, but UK companies and consumers alike are enmeshed in the Chinese supply chain at a fundamental level. Asda, IKEA, and Marks & Spencer are just three of the major retailers who have exposure, as do industrial champions like Rolls Royce, JCB and Unipart. Standard Chartered and HSBC not only rely on Hong Kong for much of their profits (54% in HSBC’s case), but bank a large chunk of the international trade emanating from China’s manufacturing too.

Put simply, whatever the political weather, Western companies will put up a strong fight against abandoning the Chinese supply chain. Not only is it hard to find alternatives that match the country’s scale and price, but it is also home to over a billion potential consumers.

Apple is a case in point. Although it panders to President Trump’s aspiration to bring production back to America, and has recently announced a shift of a fifth of its global production to India, the Californian firm has made it clear that it cannot move all production away from China for some time to come.

Indeed, its recent dealings with Luxshare-ICT – a fast-growing Chinese manufacturer and rival to longstanding Apple partner Foxconn – show that it is doubling down on its presence there. As China contributes around 15% of Apple’s revenue, this is no surprise: the company knows that its market access depends on a continued manufacturing presence. They also know that with “Wolf Warrior” diplomacy, where the Chinese government punishes against anyone deemed to have slighted Beijing, businesses abandoning Chinese factories are likely to be barred from selling there.

There is another, strategic reason that the West should be wary of squeezing China too hard. The lesson from the US-China trade war is that putting pressure on firms to disengage may actually be accelerating China’s economic integration with the rest of the world.

Since the start of the trade-war in 2018, Chinese companies have been rapidly expanding abroad as they seek to avoid American tariffs. Countries like Thailand, Malaysia, and Vietnam – all allies of the West and export targets for British firms – have been particular beneficiaries of this expansion, with the result that China has increased its influence in south-east Asia.

Encouraging an economic split between the West and China is in no one’s interest, especially if the rest of the world is told to take sides. If that were to happen, then the West, and Britain included, might find itself shut out of many of the world’s markets. 

Western governments may want to take a tough line with China, but there is a balance to be struck. The reality is that full “de-Chinafication” is not possible any time soon if a full meltdown of the global supply chain and the British economy is to be avoided. 

What is possible is a constructive resetting of economic relations where both Western and Chinese concerns are met, to the benefit of both sides. The golden age of Sino-British relations may be over, but perhaps we can still hope for a silver one.

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Sam Olsen is co-founder of Metis Intelligence, a Singapore-based strategic research consultancy.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.