UK-China: The economic relationship after Brexit

Dr Hinrich Voss

About the Author Asset 28

Hinrich is an Associate Professor in International Business. He has investigated how the internationalisation strategy of Chinese MNEs has been shaped by Chinese institutions and has been awarded the Journal of International Business Studies Decade Award 2017 for this research.

Brexit is likely to change the exporting pattern of the British economy. As of autumn 2017, the Brexit negotiations between the UK and the EU are not progressing at an adequate pace, nor in a direction that would suggest that the split from the EU will be achieved with the least possible friction – and frictions are to be expected. With the possibility of a hard Brexit and the erection of trade barriers still looming large, British businesses are well advised to consider alternative export markets.

The Department for International Trade (DIT) is supporting businesses in this endeavour through trade missions and supporting attendance at trade fairs. One of the targeted markets hailed as promising for the future prosperity of the British economy is the Chinese market. There are however serious doubts as to what extent China (or any other market for that matter) can replace the European Union (EU) as an export destination. More than 50 per cent of Britain’s exports are directed towards the EU. Redirecting such a substantial share of economic activity is a herculean task; with or without Brexit.

TRADING WITH CHINA

The UK has a long history of trading with China. China’s economy is considered to be important for the British economy, and business opportunities in China have been promoted to British companies. Ten years ago, research on regional cities by the DIT, the China-Britain Business Council (CBBC) and Leeds University Business School identified second and third tier cities that British businesses should consider for export or investment. Subsequent research has refined and updated the original study.

Under the previous Prime Minister, David Cameron and Chancellor, George Osborne, the relationship with China was elevated to a ‘golden era’ of mutual economic prosperity. Significant Chinese acquisitions of UK-based companies substantiated this claim. But the economic reality has not yet kept step with the British government’s ambitions. The business opportunities that an economy of China’s size presents have so far not been translated in an extensive trading relationship.

This is evident in the export statistics. The UK is directing less than five per cent of its global exports to the Chinese market. For Yorkshire this figure is typically below four per cent (see Figure 1). This represents about a tenth of the share that is directed to the EU.

FIGURE 1. UK AND YORKSHIRE EXPORTS TO CHINA, 2013-17 (% OF WORLD EXPORTS)

The post-Brexit ambition is to significantly increase the share of exports to China. In the words of International Trade Secretary Liam Fox, this will be achieved by being recognised as “the centre of the argument for global free trade; and to become the world’s natural business partner.” So the argument goes, by focusing on the UK’s strength in services, China will require the service industry expertise of the UK for its next stage of economic development. These lofty ambitions deflect from the difficulties businesses face in trading internationally and building long-term, strategic business relationships; in particular in China, as B&Q and Tesco have experienced over recent years.

While British companies can attract Chinese consumers through heritage and history, they face a difficult business environment in China because of local competition, government regulation and a rejection of foreign solutions. Chinese businesses in the service sector have developed into formidable competitors that have been able to keep foreign competitors at bay – Alibaba and Tencent are dominant in the area of e-commerce and Didi in taxi-hailing, for example.

A distribution centre

A distribution centre

Considering the field of new technologies like artificial intelligence and the effective exploitation of big data, the Massachusetts Institute of Technology (MIT) Technology Review lists companies like iFlytek, Face++, and Ant Financial as companies with a promising business model for the domestic and international markets.

Britain is open for business – but is the world open for British business?

While these technology driven sectors have strong Chinese companies, in other sectors, like financial services, the Chinese government tightly restricts international firms from entering and competing. The banking sector is dominated by state-owned banks leaving little space for British banks as fringe players.

A current research project at Leeds University Business School on environmental innovation in China suggests that Chinese firms do not consider foreign firms as role models in this area. They consider themselves as more capable of developing solutions that fit Chinese requirements. Whether or not these companies are correct, it is evident that Chinese sentiment is that there is little to gain from interactions with foreign businesses. China-made solutions and technologies are deemed a better fit for the Chinese market – this should put doubt into proponents of boundless growth opportunities for British firms in China.

The growth of Chinese businesses to dominate particular sectors and to venture overseas indicates that business opportunities do exist in China, but the particularities of the Chinese economy do not make it easy for British firms to exploit them. And this is before we consider the challenges of trading with a distant overseas market that has an unfamiliar business culture to the newcomer. This is difficult to penetrate for the established player, and requires significant time and commitment to develop.

BRITAIN IS OPEN FOR BUSINESS

The British government’s premise of navigating the economy through the post-Brexit frictions seems to rest on the idea of embracing globalisation and free trade. This comes at a time when both concepts are under increased scrutiny of being able to deliver benefits for the whole society and when the UK’s appeal as the gateway and hub for conducting business in Europe is questioned. It is admirable that the British government is promoting itself as “Britain is open for business” – but is the world open for British business?

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