Of Trade and Trust
'Three Defences' can de-risk trade with China, forestall Trump's tariffs and buttress European commerce
This is an updated version of my essay for Civitas
As President Trump’s prepares for office, so the debate about British grand strategy grows hot. This week, from the carpet of wisdom at the Financial Times, we heard thoughtful writers like Janan Ganesh lament how we ‘squandered the best hand in the world’ and lost pole position between America, the EU and China, while the paper debated in an excellent feature whether it could ever be possible to forestall American tariffs and protect our trade with China, and draw closer to our European neighbours.
Can we really have it all, when advisors to President Trump like Stephen Moore are warning that Britain ‘has to choose’ between ‘socialist Europe’ and the free-wheeling United States?
Personally, I think it will be possible to square this circle and while many I respect might disagree, I think maximising the liberty of commerce for the years to come will require us to think holistically about trade and security, as in fact the best of British grand strategy down the centuries always has.
Perhaps the place to start is to merely note that while Stephen Moore is advising us to make binary choices, this is perhaps a false piety, because the United States is doing no such thing. Indeed, China is the third largest US trade partner, and that trade is not shrinking; it is growing.
Second, let’s not lose sight of the fact that China’s rise has been a global public good. Eight hundred million have been lifted from poverty. For Western consumers – especially low-income consumers, cheaper goods have been a boon and for Western workers – who make and deliver everything from Land Rovers to HSBC bank accounts, China’s prosperity has been good for business.
There has been a ‘China shock’ that has cost jobs (analysts reckon perhaps one in every 150 jobs lost are due to Chinese imports) but economists still struggle to disentangle the impact of advancing trade and technology.
Nevertheless, UK exports to China are today over £30 billion. That may be only 4% of UK exports, but the modern argonauts of British trade are growing our China exports more than six times faster than sales to Europe. Within two decades, China will likely have the largest middle-class in the world, larger than the US and EU combined.
It is in the national interest for trade to grow. Not from some starry-eyed notion that deepening trade links is a guarantee of peace - that is a ‘Great Delusion’ as John Mearsheimer recently put it – but because for all its challenges, China is a $17 trillion economy that is still growing at 4.5%, adding every year the equivalent to global output of a whole economy somewhere between the size of Belgium and Poland.
None of our allies are cutting trade with China, BUT! The wisest are re-thinking and adapting to the challenge - eloquently set out by US national security advisor, Jake Sullivan - of a large non-market economy plugged into the global trading system where economic liberalisation has triggered a retreat from democracy, rather than its embrace.
A free-trading nation like Britain should always cling to the long traditions which we helped pioneer in the world. But with China, we must take with a pinch of salt, the honeyed promise of China’s renewed ambitions to ‘reform and open up’ (the language of this year’s CCP third plenum). I’m not saying that this is merely some crafty mischief, but I feel we might be better off with a hard headed, pragmatic strategy for trusted trade rather than a naive and purist vision of free trade. What would serve us best is a reliable, predictable, safe and well-policed market-square that takes accounts of two imperatives: deterrence and de-risking.
Deterrence centres on the goal of ensuring peace and stability in the Taiwan Strait. This too is a global public good. The latest estimates of the cost of just a blockade of Taiwan are astronomical: somewhere between $2.7 and $10 trillion. No-one can afford that, including China. Maybe that is one reason why, when I met businesses in Taiwan, they were pretty relaxed about the possibility of conflict. They do not think anyone would be stupid enough to risk such a cost.
De-risking is more complicated. On the one hand, we’re trying to preserve our freedom of manoeuvre in the event of a Taiwanese conflict; we want to avoid China weaponising trade dependencies which limit our ability to act if we decide to but we also need to guard against trade that offers our adversaries a military advantage.
Jake Sullivan summarised the strategy required rather well: it is
‘[o]ne that invests in the sources of our own economic and technological strength, that promotes diversified and resilient global supply chains, that sets high standards for everything from labor and the environment to trusted technology and good governance, and that deploys capital to deliver on public goods like climate and health.’
For the UK, I think this requires what we might call the ‘three defences’;
A far tougher approach to fair competition,
A transformation of economic security policy, and
A new strategy for enhancing alliances, with Europe, Africa and across the wide Indo-Pacific.
Let me take each key dimension in turn.
Defence 1. Ensuring fair competition: labour standards, carbon and subsidies.
As the great David Ricardo observed, trade, like competition, is good for growth. But, while Ricardo recognised trade improves aggregate economic efficiency, he didn’t say much about the perils of distorted competition if one side plays with different rules. But this year’s Economic Report to the US President spelt out the problem better; it declared, trade
‘can…trigger a redistribution of income across factors of production in a manner that increases inequality,’ and that risk grows if competition is unfair.
Hence the need to ensure that competition from China is not unfair and to guard against three things we should deplore; too few labour standards, too much carbon, and too many subsidies.
Today, our guard-rails on trade with China provide very few defences against any of these things.
a/. Labour standards.
We have not put in place effective prohibitions on use of forced labour in supply chains, unlike the US Uyghur Forced Labour Prevention Act.
Indeed, the promise once made in the 2022 Queens Speech to update the Modern Slavery Act with new defences against forced labour in our supply chains has been quietly dropped and I have not seen a commitment from the new government to act on this front.
Nor do we seek to incorporate innovative ideas to raise labour standards into our trade agreements other than fluffy language about asking partners to respect their obligations to the International Labour Organisation.
We certainly do not have anything as imaginative as the new American-Mexico-Canada Rapid Response Labour Mechanism (USMCA) which modernised NAFTA and has helped improve labour standards at Mexican plants.
b/, Carbon.
We do have some ideas to ensure we are not importing tonnes of Chinese carbon embedded in its goods.
About 14% - or 32 Mt CO2e – of the carbon emissions we import embedded into goods comes from China – about half the level we import from Europe.
Our carbon border adjustment mechanism comes into force in 2027 - but would be far more effective (and better for UK trade) if it was a shared project with the European emission trading system.
c/. Subsidies.
Crucially, we have to get far tougher in policing unfair subsidies and guarding against the risk of China dumping industrial overproduction - for example, solar panels - in our markets.
The EU is transforming its approach. It has launched what will be the first of many anti-subsidy investigations into Electric Vehicles before Christmas. Bizarrely, the UK refused to join that investigation. I find that decision pretty strange.
Defence 2: Investment and Export Security
Competition and trade policy is but the first ring of defence. The second guard rail must be our investment security and export control regime. Today, we offer extraordinary freedoms to our adversaries to trade on our shores and to wander in and simply buy our assets as they wish. The lack of controls on exports is a clear and present danger to national security.
Over the last 13 years, foreign direct investment into the UK has grown, but so too has inward investment from offshore sources, dictatorships, and countries classed as ‘unfree’, like China. Indeed, investment from such sources has multiplied over five-fold to almost a quarter of trillion pounds.
In theory, the National Security and Investment Act 2021 lets the government screen takeovers and investments into strategically important UK sectors. The Secretary of State in the Cabinet Office has the power to call-in transactions for further investigation, and to impose conditions or block them, should they threaten our national security.
But, this defence regime has not kept up with the times. The trick, as US National Security Advisor, Jake Sullivan puts it is to build a “small yard with a high fence”. But the last government built a big garden with a low fence. So, while our allies in the US and Europe are reinforcing their defences and protecting strategic assets with a ‘higher fence’, we risk failing to see the wood for the trees.
Our allies are bringing forward reforms that make it harder for those who do not share our values to buy firms that push the boundaries of technology, or amass data on citizens, or safeguard the media freedoms which are so essential to our way of life.
The proposal to merge the mobile phone operators Three and Vodafone is case in point, given the longstanding connections between Three’s owners CK Hutchison and the Chinese state. Yet Parliament had no idea if the deal would be blocked on national security grounds. This is one big reason why the Business and Trade Committee has demanded a detailed plan to toughen up, not weaken the law.
The UK should be open for business, but not open to abuse, and critically in a world where AI is a weapon, we have to now overhaul our export controls to ensure we not simply exporting – for example through university research partnerships – the kind of technology that can be used against us in future conflict.
Today’s system of arms export control licensing is also going to need to change. The UK’s export licensing regime may have stopped export of advanced chips to China, but we do not operate a specific, statutory regime to screen and/or restrict outbound investments by UK citizens or companies into China, and the controls such as they are, are weak compared to our American allies. We have a “partial” arms embargo on China and ministers have said they will consult on updating its export control regime but, despite promising to sort this out (under US pressure) and making some sweeping statements in the 2023 Atlantic Declaration, government has only got as far as building an evidence base for possible further initiatives. That is it.
Nor do we use sanctions especially well when China is concerned. America has used sanctions extensively to target China and Chinese entities; indeed over 300 Chinese individuals and entities are on its main sanctions list, for dealing with sanctioned countries like Iran and North Korea and for human rights abuses, repression in Hong Kong, and drugs smuggling. Americans are prohibited from trading in their shares of any company on the “Chinese Military-Industrial Complex Companies List”. The UK by contrast has imposed asset freezes on six Chinese nationals for cyber-attacks and human rights violations in Xinjiang plus a few more in China/Hong Kong for evading sanctions on Russia and North Korea, the UK has also sanctioned a number of entities and individuals based within China.
Economic security is always a balancing act. We like free and open markets. But we can’t be naive about the risks of this. We can’t be, as Ronald Reagan once put it, “innocents abroad in a world that isn’t innocent”. We are not helped by the lack of a single centre of government that ensures concerted action. That is one big reason why we need a new Office of Economic Statecraft tasked with sorting out the intelligence, economic models, and plans for economic resilience.
Defence 3: Re-booting our international alliances
The third line of defence is of course our allies, old and new. The more we can coordinate competition, trade and investment security policy, and diversify our supply chains with our allies the better.
Once upon time, Churchill framed our alliances as ‘three majestic circles’ for which Britain was the junction: the English-speaking world, Europe and the Commonwealth. Today, our alliances are much wider; NATO, the EU, the Commonwealth, our allies in the free and open Indo-Pacific and of course our partners across the Middle East and the Gulf.
The more we can coordinate action with allies the better. But that will need us to re-align our trade diplomacy with our defence alliances and crucially re-engage with multilateral platforms like the Bretton Woods institutions, the World Bank and the IMF, to transform our development leadership in Africa where we should be helping build the green mineral processing industries of the future, which are critical to helping us safeguard supply chains.
Africa is today the arena for a new strategic competition between the West and China. In its earth are the key critical minerals needed to power the green transition. But its leaders are sick and tired of broken promises from the rich North about delivering real partnerships that might lift their nations from poverty.
In particular, if we do not want China to be a lender of last resort to Africa, we should step up our work with multi-lateral institutions like the IMF and World Bank because working multilaterally is a huge force multiplier for any investment we could possibly afford. And it begins to move nations towards not simply a rules-based order but the rights-based order that was the promise of the United Nations.
If only we could summon the imagination to weave into this defence, diplomatic and development mix, a transformation of Britain’s soft power assets – universities, Chevening Scholarships, the British Council, BBC Worldwide and military to military partnerships – we would quickly start to see a transformation in UK equity across the African continent which will soon be home to one in four of the world’s young people.
Conclusion
This was always going to be a difficult moment. As the political scientist, Graham Allison once neatly explained, throughout history the arrival of a rising geopolitical power often sets the stage for war. But, war is not inevitable and the principal task of wise leaders is to preserve the peace. For Britain to play its role, this requires us to master a game of 5-D chess – of co-operation and challenge, de-risking and deterrence, plus a wiser strategy for international development across Africa and the Indo-Pacific because this is a long game best played with allies, both old and new.
It was the great political realist Thomas Hobbes who once wrote that ‘hell is truth seen too late.’ In many ways, we have been slow to adapt to President Xi’s distinctive change of direction in China. It was not inevitable. And nor in the future is it necessarily irreversible. But for the foreseeable future, we will need ‘the three defences’ of a far tougher approach to fair competition; transformation of economic security policy; and a new strategy for enhancing alliances with the EU, Africa and Indo-Pacific with a new Office of Economic Statecraft to sort out the intelligence, economic models and plans for economic resilience needed for the perceptive relationship with China that provides the security to our country and provides security for our people – to take the risks that all traders and entrepreneurs must take if they are succeed.
/Ends.
Compare and contrast: US, UK and EU trade security regimes
Source: House of Commons International Affairs and National Security Hub