A No-Deal Brexit? British Businesses May Get a Good Deal under a UK-China Free Trade Agreement

British businesses face a dilemma regarding Brexit. Leaving the European Union (EU), tariffs and duties will be imposed on British exports to the single market and cross-border trade in services will be subject to restrictions. British manufacturers who are pro-Brexit believe that exiting the EU will open up the United Kingdom (UK) to greater trade and services with the rest of the world. As the UK is scheduled to leave the EU on 31 October 2019 without a deal, questions arise as to how the British Government should frame its foreign trade policy. In the following discussion, I provide some insights into the prospects of the UK entering into a free trade agreement (FTA) with China, and resultant benefits for British manufacturers and investors.

The Chinese Government has expressed a strong interest in concluding an FTA with the UK. According to China’s Ministry of Commerce, the British and Chinese Governments are exploring a ‘top-notch’ FTA. Some scholars, however, argue that the Chinese Government’s expression of interest may carry political motives. To date, China does not have an explicit FTA policy. Since signing its first FTA with the Association of Southeast Asian Nations (ASEAN) in 2002, the Chinese Government has concluded only 16 FTAs. A closer analysis of those nations which have an FTA with China reveals a consistent trend: they all have good political and diplomatic relationship with the Chinese Government. Surprisingly, FTAs with China’s major trading partners such as United States (US), Japan, and the EU are absent in the list. With the exception of ASEAN, Singapore, and Australia, none of China’s existing FTA nation partners are amongst the top ten nations with which China trades. This suggests that political rather than economic purposes are the primary considerations for China’s FTAs.

Sceptics have also contended China may use an FTA with Britain as a backdoor to enter a larger market in the US and the EU once the UK has signed FTAs with these countries. The contention is not without merit. Some of China’s FTA nation partners are either an FTA themselves, such as ASEAN, or members of another FTA, for instance the Chile and Peru (associate members of Common Market of the South), Iceland (the European Free Trade Association), and Pakistan (the South Asian Association for Regional Cooperation). We should note that these FTA nation partners are economically less significant to China. For China, however, forging bilateral trade relationships with these nations will enable it to tap into the larger markets in these FTA blocks. But China is beginning to see the benefits of FTAs. The Chinese Government is currently negotiating and constructing 24 other FTAs with countries across the globe. These countries include Canada, Israel, the Gulf Cooperation Council, Norway, and Switzerland. The trade war between China and the US may lead to an interim trade deal, although both sides are exploring an FTA.

Critics have further questioned whether British manufacturers will enjoy any significant benefits from an FTA with China. It may be true that the proposed UK-China FTA may not assist British manufacturers in some of their major exports to China – especially gold and medical products, given the current Most Favoured Nation (MFN) tariff for such products is either zero or low enough to be further reduced under an FTA. Further, British manufacturers are competing against their EU counterparts for exports of these products to China. Any adverse impact on those countries’ exports to China may compromise the prospect of an FTA between the UK and the EU. This has led to calls that the British Government should establish an FTA with the EU first to resolve these issues. It is argued such a proposal is unlikely to materialise in the event of a no-deal Brexit. This is because an EU-UK FTA will set a bad precedent, giving other EU members the impression that they might be able to exit the single market while still enjoying preferential tariffs and duties in the EU.

British manufacturers may benefit tremendously from a UK-China FTA. The biggest advantage for British manufacturers is the potential to tap into one of the largest markets in the world. With a population of 1.38 billion, the Chinese market is nearly three times larger than that of the EU. This big market also includes a middle class that is expanding rapidly. The British automobile industry would be among the biggest beneficiaries under the deal. The current importing MFN rate to China for British-made vehicles is 25 per cent. This rate may be slashed to a single digit under a FTA. But some scholars argue that if the UK exits the EU without a deal, the nation’s predominantly foreign-owned automobile corporations may divert their investment to other EU member countries. Contrary to such a claim, we may find those corporations increase their operations in the UK in view of the potential to enter an enormous Chinese market and to profit from low tariffs for British-made vehicles.

A UK-China FTA may also benefit British investors. They may be able to gain entry into Chinese industries that are exclusive to China’s FTA partner nations. China’s Foreign Investment Law (FIL) may also facilitate their investment. Scheduled to take effect on 1 January 2020, the FIL provides for governmental preferential treatment in sectors promoted by the Chinese Government, such as high-end technology. This incentive is in addition to attractive corporate tax rates under China’s Enterprise Income Tax Law. Further, British investors may have the opportunity to form joint ventures with local Chinese corporations under the proposed UK-China FTA. Under the FIL, British investors will not be compelled to transfer technology to their Chinese counterparts in joint ventures. Currently, such prohibition only exists in the China-Korea FTA. Equally important is China’s highly educated and relatively cheaper workforce. All of these could enhance the competitiveness of British goods and render an FTA with the EU less attractive.

A UK-China FTA may open windows of opportunity for British manufacturers and investors in China. At the time the UK joined the EU, it did not have the option of concluding an FTA with China given that the latter was operating a nascent planned economy. Over the last four decades, China’s economy has grown tremendously and its international policy liberalised. The UK may be leaving the EU without any deal. It might, however, be able to deliver a good deal for British businesses under an FTA with China.