Advantage China

Short-term pain

Print edition : July 22, 2016

The production line at the London Taxi Company in Coventry, central England. The company restarted production in 2013 after the business was saved by Chinese carmaker Geely. Photo: REUTERS

Notwithstanding the painful restructuring of ties with Europe, in the short run China is likely to benefit from the extra elbow room for strategic manoeuvre that it is likely to acquire on the global stage in the aftermath of Brexit.

IT MAY APPEAR TO BE BAD NEWS AT FIRST, but after the storm stirred by Brexit weakens and some calm is restored, China may look differently at the immediate pain that it is expected to suffer on account of Britain’s unexpected divorce from the European Union (E.U.). In fact, China may soon be inclined to conclude that the seismic event that is redefining Europe, if not the globe, could give way to solid opportunities, which Beijing could avail itself of and emerge stronger in the Eurasian backyard.

That, of course, is possible if the pragmatic Chinese quickly absorb the Brexit shock, which is forcing Beijing to shed its London-centred approach for weaving greater influence in Europe.

But what are the immediate costs that China will have to bear on account of the astonishing Brexit vote?

At the outset, it is possible that the hefty Chinese investment in the United Kingdom could fall under some risk, though much would depend on the outcome of the negotiations that London would undertake with the E.U. That process is likely to take a couple of years, despite signals from Brussels that it is in a hurry to knife out Britain from the E.U.

According to some estimates, Chinese companies have invested close to $16.6 billion in a 15-year period starting from 2000. They have acquired high visibility by holding stakes in some of the defining British commercial enterprises, including the London Taxi Company, Heathrow Airport and Manchester Airport. Top Chinese hi-tech and Internet firms such as Huawei and Tencent Holdings have set up research and development centres there.

Second, China’s symbolically significant and image-changing investments such as the Hinkley Point nuclear projects could now enter the grey zone. Even before Brexit, the project’s escalating costs was persuading lead developer Électricité de France to pull out from the project. If this flagship enterprise fails to materialise, China’s plans to expand its nuclear energy footprint in other parts of the globe by showcasing its atomic heft in the heart of Europe will suffer a severe setback.

Third, with Britain out of the E.U., China’s access to the markets of continental Europe could be difficult. Already fears are being expressed that the E.U. minus Britain could turn more protectionist, undermining trade with China. Consequently, Chinese companies that have set up shop in the U.K. may fail to get tariff-free access to the wider European market.

But in the long run, there are opportunities to consider, which if used may far outweigh the current clutch of difficulties that China is encountering on account of its fundamental and unexpected readjustment with Europe.

For instance, it has become amply clear that “class” played a major role in bolstering the “leave” camp. This is an inference which, once internalised, could trigger new thinking, opening new doors of opportunities for China in Britain as well as in other parts of the West.

The unequal distribution of the fruits of globalisation has had palpable social consequences in large parts of Britain. While it has created a wealthy globe-trotting five-star elite that routinely frequents London, New York, Singapore and Dubai, it has also created a new impoverished underclass.

In an insightful article tantalisingly titled “From Brexit to Trump?”, Jonathan Freedland broadly profiles people—the so-called “losers” of globalisation—who voted in droves to force a Brexit on the E.U. “Leavers were to be found—though not exclusively—among those who are poor, either out of work or in what are universally derided as ‘crap jobs’: answering the phones in call-centres or stacking shelves in warehouses, on insecure ‘zero-hours’ contracts without benefits. They live in towns, rather than more cosmopolitan cities, often in the shadow of shuttered factories or closed mines, in places that are rundown, if not outright derelict. This is the England that has been left behind, a match for those parts of the American rust-belt that have rallied to [Donald] Trump.”

Following its accession to the World Trade Organisation (WTO) in 2001, many of the manufacturing jobs in a variety of sectors moved to China, the so-called workshop of the world.

But a new moment has arisen where China can become the locomotive of Britain’s reindustrialisation. With wages at home rising, and conventional exports plummeting, China has a great chance of shedding some of its “overcapacity” to retrigger industrialisation in the U.K.’s rust belt and beyond.

Chinese investment overseas

Already the Chinese have offered a glimpse of what can be done to rekindle first rate manufacturing in the Eurasian supercontinent under the “Belt-and-Road” connectivity template. In an article in, titled “How concerned should China be about Brexit?”, the author Alvin Cheng-Hin Lim points to recent examples of China’s success in planting heavy industry abroad. For instance, in Malaysia, China has invested around $3 billion in a special economic zone that has been fused with an industrial park in Qinzhou, China.

The Great Stone Industrial Park in Belarus is another shining example of successful Chinese investment overseas. Indeed, China has set up a string of factories in South Carolina in the United States. In the post-Brexit scenario, “A concerted effort by China to establish industrial parks and to invest in heavy industry in the U.K., Europe, and the U.S. could meet the popular demand in the West for the return of manufacturing jobs, generate popular goodwill for China, and help reduce industrial overcapacity in the Chinese economy,” observes Alvin Cheng-Hin Lim.

There are also major benefits to be realised in the geostrategic arena. For instance, before Brexit, France proposed sending E.U. naval patrols to defend “freedom of navigation” in the South China Sea. But with the post-Brexit mood in Europe turning inwards, coupled with the possible ascendancy of nationalist parties, which in any case have been calling for the E.U.’s de facto demise, these grandiose schemes are likely to go up in smoke.

Also what happens to the North Atlantic Treaty Organisation (NATO), which has been twinned with the distressed E.U.? Here Russia, China’s top ally, is expected to gain big time. Any dissonance within the architecture of NATO, which was recently threatening to move ever-closer to the Russian borders, would bolster Moscow and its Eurasian Economic Union (EEU) project. So long as the West remains a common threat—in China’s case the threat is posed in the Asia-Pacific by U.S.’ “pivot to Asia”—Beijing and Moscow are likely to fuse the EEU and President Xi Jinping’s Belt-and-Road plan along the Eurasian economic corridor.

Even with the West posing less of a danger in the future after Brexit, the Eurasian connectivity undertaking under the Belt-and-Road plan is important as a building block for transitioning China’s economy. The initiative promises a new channel for Chinese exports of its excess manufacturing capacity into industrial parks, cyber cities, railways and highways along what has also been called the New Silk Road.

Some commentators are of the view that following Brexit, Germany is likely to emerge as a major player in the Eurasian Great Game. With Britain out of the picture, Germany will share the main burden of sustaining the E.U. The extra responsibility is likely to push Germany to seek Chinese support, especially for infrastructure projects in Eastern and Central Europe. Consequently, Brexit can provide a powerful impulse to Germany and its eastern neighbourhood to cooperate with China along the Belt and Road.

Brexit, therefore, has the potential of breaching the Atlantic Alliance, on account of Europe’s increasing reliance on Asia, especially China, to enter a new cycle of revival. In turn, with Eurasia as the core, and the influence of the U.S. waning, the chance of the emergence of a multipolar world—which has been for long China’s geostrategic dream—is brighter than ever before. Notwithstanding the painful restructuring of ties with Europe, in the short run China is likely to benefit from the extra elbow room for strategic manoeuvre that it is likely to acquire on the global stage in the aftermath of Brexit.

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