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Joe Yiu Ip
6 days ago7 min read

Economic Woes: UK and China, Friends or Foes?

Joe Yiu Ip is a first-year Politics and International Relations student. Interested in various areas of geopolitics, including specifically: areas of conflict and the relationship of the West with East Asia. (www.linkedin.com/in/joeyiuip)





Introduction

Four months on, the new Labour government in the UK has struggled to garner public approval as it seeks major tax rises and budget cuts in the face of a “£22bn Black Hole” in public finances; the Institute for Fiscal Studies proposes a possible required £25bn hike in taxes (Emmerson, Johnson and Ogden, 2024). With such financial shortfalls, the government is increasingly looking towards private investment and trade agreements between other nations as the deals in place with the EU largely fell apart when the UK exited the single market. At an International Investment Summit in mid-October, the government took a strong interest in bolstering the UK economy and gaining investment into the nation as many looked back on the cost-of-living crisis and its ongoing effects. The budget on the 30th of October saw Rachel Reeves announce increases in Capital Gains Tax (CGT) from 10-18% (lower rate) and 20-24% (higher rate); a rise in National Insurance (NI) contributions to 15%; abolishing the non-dom tax regime; and stamp duty rises from 2% to 5%. There are also considerations to cutting budgets to the Foreign, Commonwealth, and Development Office (FCDO) (Atkinson, Moloney, and Williams, 2024)

China sees a similar situation with financial optimism declining amongst citizens; data collected from surveys in 2004, 2009, 2014, and 2023 display a staggering decline in respondents who felt their financial situation was better than five years ago, and future expectations in the economy; falling from a high of ~75% in 2014, to a low of <50% in 2023 (Alisky, Rozelle and Whyte, unpublished, 2024, as cited in Ng and Ma, 2024). Alongside the context of the collapse in its housing market and sky-rocketing youth unemployment, the government has introduced a roster of measures to try and boost its economy, including stimulus handouts, lower borrowing costs, and cutting the reserve requirement ratios; how much banks have to hold in reserve (Hoskins, 2024). They are at risk of further tariffs by the US as there is bi-partisan agreement in the US of being ‘tough’ on China, with Trump proposing 20-60% tariffs on Chinese goods which could severely impact exports (Sherman, 2024).


Both nations have also received updated International Monetary Fund growth forecasts, with China being downgraded 0.2 points down to 4.8% this year, and Britain upgraded to 1.1% as falling inflation and low interest rates have stabilised the economy somewhat. (Lawder, 2024a). So, what will bring these two nations together, and what are their current relations?


Current Trade

Currently, UK-China trade relations are in decline, with the previous Conservative government remaining quite critical of China and its influence in the telecommunications sector leading to a wholesale ban of Huawei products within the UK’s networks. Although former Prime Minister Liz Truss was very “infatuated” with Chinese pork markets, her reflection of China did not mirror those of the GCHQ, which only recently labelled China as a “genuine and increasing” cyber risk for the UK (GCHQ, 2024). Alongside that, ongoing geopolitical tensions over Hong Kong and the enactments of the National Security Act in 2020 and 2024 respectively have led to further difficulty in trade. There have also been concerns about the use of Uyghur forced labour in Xinjiang cotton and other areas of China including the manufacture of electronic goods, with some UK businesses cutting ties with the region. China will likely have to convince global investors that their products are not involved with forced labour to reconnect with them.


As mentioned earlier, a rise in CGT, NI contributions, stamp duty and the abolition of non-dom tax status may be highly discouraging to investors, as it means their potential profit is limited in the nation and could result in fewer investments from specifically Chinese investors, due to their interest in sectors such as housing, and financial services, which could be influenced by these new economic policies. However, China remains the UK’s 6th biggest trading partner (5% of overall trade worth £86.5bn), with both governments eager to set up new deals (Gov.uk, 2024). In terms of sectors, the UK imports of cars from China have increased by 20.7% since Q1 2023, whilst China has imported mostly cars, travel services, and oil from the UK (ibid.). During his first conversation with Xi Jinping, Starmer expressed support for broader cooperation between the two nations and openness to “honest discussions” (Jiangtao, 2024), with other ministers scheduled to meet delegations in China. According to Sky News, Rachel Reeves will be attending the UK-China Economic and Financial Dialogue in early 2025, the first such event of high-level financial officials since 2019; David Lammy recently met senior officials in a bid to reset ties by discussing the formation of renewed bilateral relations in multiple sectors and fostering business connections between the nations (Kleinman, 2024; CBBC, 2024).  


What could a deal look like?

What are both nations considering as part of the package of trade-related deals in government and garnering private investment from each other? In a speech at a World Trade Organisation (WTO) meeting in Geneva this July, Simon Manley, the UK’s Permanent Representative to the WTO and UN, noted the requirement of further institutional and regulatory measures to ensure foreign businesses can invest in China fairly and without being confused by last-minute legal decisions that leave them in limbo. He also urged the government of China to ensure fair competition involving state-owned businesses which constitute 4% of global GDP (Manley, 2024). It is unknown whether this suggestion will eventually be implemented. The UK has also placed consideration on softening their approach to anti-dumping measures as both the US and EU have increased anti-dumping measures on multiple sectors such as electric vehicles (EVs), lithium, and aluminium, and China is in response with equal measures on EU brandy. (Lee, 2024; Lawder, 2024b). This may be a measure that could help support mutual economic cooperation between China and the UK.


In addition to these measures, in an overall bid to encourage foreign investment in the UK, Starmer has suggested a crackdown on the red tape that prevents developers and investors from building new housing or working on projects within the UK due to the slow bureaucratic process of approvals. Promising investment from China includes the Chery EV company, which is considering to build a factory in the UK to increase its sales within the country alongside its European investments in Spain (Leggett, 2024). However, projects at Hinckley Point C, and China-owned British Steel plants have seen a loss of interest, with requests for financial subsidies and interventions from the UK government, so there is a concern that the UK is not doing enough to satisfy investors (Ambrose, 2024; Jolly, 2024). As part of this package, the government is seeking to plan and fund and operationalise current Freeports: to encourage business growth and relocation, imported goods will not be subject to taxes or tariffs (Hooker, 2024); the benefit to private Chinese investment may involve the import of manufactured products or the final manufacture of goods in these areas. Britain’s scrutiny of Chinese investment as a national security risk may need to be played down to avoid the wary of investors looking to fund UK projects.


In conclusion, the future of UK-China economic relations is unsteady. Whilst both nations seek to bolster ties, they remain at odds with one another. An increasing concern with China’s security risk to the UK has led to scrutiny of investment and scepticism of Chinese cooperation within the UK, whereas China has seen the UK’s increasing support for Hong Kong protestors as detrimental to their state of internal security. It is hoped that a peaceful resolution of economic issues will provide a basis for further cooperation on the international and domestic stage.


Works Cited

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CBBC (2024). Foreign Secretary David Lammy visits China and meets with CBBC. [online] Focus – China Britain Business Council. Available at: https://focus.cbbc.org/foreign-secretary-david-lammy-visits-china-and-meets-with-cbbc/ [Accessed 23 Oct. 2024].

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