How the UK Can Look to China’s Example in Developing New Global Trade Ties

April 19, 2021 Posted by China Briefing Reading Time: 11 minutes

Existing trade proposals are not enough to replace the EU.
What would Beijing do if it, not London, managed the British Commonwealth?
China’s Belt & Road example could be utilized by the UK.

Op/Ed by Chris Devonshire-Ellis

With the British economy now well out of Europe, and with the Johnson Government seemingly committed to replacement trade deals in emerging Asia, now is an opportune time to evaluate what trade agreement assets the UK actually has lined up that would compensate for the loss of EU trade.

The DTI have stated that many agreements with non-EU nations will continue with the UK on the same basis as existed prior to Brexit, with a view to “upgrading” these in time, presumably to improve UK market access.

There is a double-edged sword though as concerns the positioning of the British economy and its GDP. Firstly, the UK consumer market, while wealthy with an annual US$1.38 trillion spend, is not especially large at 68 million.

Secondly, as the UK has become a provider of tech-driven services, applicable over a wide variety of industries, divisions are occurring on a global basis over whose technology can be sold where. China has already come up against this as the West has refused to endorse Huawei’s 5G technologies. India, a market that the UK wishes to target as part of a new trade relationship, will wish to protect its own already advanced domestic IT development industry. British products may not necessarily be welcome as exporting competitors to that. India will want to acquire the technology – and the manufacturing capability.

I wrote about the problems with the UK achieving a meaningful trade deal with India in my Asia Briefing editorial yesterday where I stated that:

“India doesn’t do trade deals that in any way would provide any meaningful access to India’s domestic markets. That is why it pulled out of RCEP, is why its regional SAARC FTA is moribund, and why it is interested in a deal with the Eurasian Economic Union and Central Asia instead. India’s only other trade agreement worth anything is with South America’s Mercosur, again with potential competitors safely thousands of miles distant.

The UK’s businesses are too powerful and determined for India to allow them domestic access. That is not compatible with India plc, capable of raising merry hell in the world’s largest democracy, with definitive threats to topple leaders and political parties. Any UK-India trade deal will be a paper tiger only.”

However, Liz Truss, the UK Secretary of State for International Trade, has another scheme: to have the UK join the Comprehensive & Progressive Trans-Pacific Partnership (CPTPP). That Free Trade Group includes Australia, Canada, Japan, New Zealand, Brunei, Chile, Malaysia, Mexico, Peru, Singapore, and Vietnam, and if actioned, would neatly manage to secure several bilateral trade deals all in one go.

But is it enough? In total, these CPTPP nations accounted for just 8.4 percent of UK exports in 2019. It means that a considerable effort will be needed by British politicians, the DTI and manufacturing exporters to understand the trade dynamics of these comparatively uncharted markets. While I understand infrastructure is being put to place to access that, it will still take years to provide significant growth to UK export trade.

Ms. Truss, co-author of a book alongside Priti Patel, Dominic Raab, Chris Skidmore and Kwasi Kwarteng entitled “Britannia Unchained” has previously presented an argument that Britain should adopt a different and radical approach to business and economics or risk “an inevitable slide into mediocrity.”

That radical option exists, yet it appears to have side-lined by London – a revival, possibly re-branding, of the British Commonwealth.

It is worth recalling the statistics of what is now just called ‘The Commonwealth’ and perhaps imagining what Beijing would do if it possessed such an asset. The Commonwealth is a well-proven, sizable entity with a trade volume of US$14.6 trillion encompassing 53 nations.

It may surprise many that the Commonwealth of Nations has been outstripping the EU in three determinants: population size, the size of the economy, and economic growth rate. The figures shown above are from material recently published by World Tracker as well as the IMF, World Bank, and United Nations. It includes the following countries and territories:

Africa Botswana, Cameroon, Eswatini, Gambia, Ghana, Kenya, Lesotho, Malawi, Mozambique, Namibia, Nigeria, Rwanda, Seychelles, Sierra Leone, South Africa, Tanzania, Uganda & Zambia

Asia Australia, Bangladesh, Brunei, India, Malaysia, Mauritius, Pakistan, Papua New Guinea, Singapore & Sri Lanka

Caribbean, the Americas Antigua & Barbuda, Bahamas, Barbados, Belize, Canada, Dominica, Grenada, Guyana, Jamaica, St.Kitts & Nevis, St.Lucia, St.Vincent & Grenadines, and Trinidad and Tobago

Europe Cyprus, Malta

Pacific Fiji, Kiribati, Nauru, New Zealand, Samoa, Solomon Islands, Tonga, Tuvalu & Vanuatu

The British Commonwealth is similar to China’s Belt & Road Initiative

In terms of size and stature then the British Commonwealth has rather a lot in common with China’s Belt & Road Initiative. That is why it is pertinent to ask what the Chinese would do with it if they were in control. After all, the Chinese economy has been growing at impressive rates for over two decades now, and at a pace far higher than the UK has managed. As I explained in the article The Belt & Road’s Business Secret: Cashflow Opportunities Come After Infrastructure Development the general economic consensus is that the Belt & Road Initiative will assist with development growth and opportunities in the countries in which it impacts.

This is a theme I have continued with this month’s publication of my latest book “Identifying Opportunities Within the Belt & Road Initiative” – downloadable free from the Asia Briefing bookstore. Widely praised, it illustrates how China has combined infrastructure build, financing, and trade incentives to empower regional and localized commercial development.

The Development Bank of Singapore agrees, and has said: “The Belt & Road Initiative will help to improve infrastructure conditions in South-East Asia, enhance the overall investment environment and attract the general FDI inflows. An improvement in power supply and transportation networks, for instance, will reduce the production and logistics costs. This will, in turn, encourage Chinese (and other foreign) companies to invest and build manufacturing facilities. In addition, the infrastructure projects under BRI will create a value chain for services. This will involve not only project financing, but also engineering consultancy, engineering insurance, infrastructure management, legal, advisory and various other types of professional services. Investment opportunities will also arise in these areas.”

These are excellent reasons for London to apply the same strategy to the Commonwealth.

Studying the modus operandi of China with the Belt & Road Initiative as a producer of investment, and the returns and increased trade this implies is of direct pertinence to the UK. How would China develop the Commonwealth if it oversaw what in the UK remains an unfashionable asset? Having studied Chinese outbound investment in a near 30-year career in China, it is apparent that the following mechanisms and trade incentives would take place were the Commonwealth a Chinese asset:

Evaluate trade and investment potential and sign off tax treaties

China has been extremely active through its diplomatic missions overseas and has built a huge resource of trade, economic and related intelligence to allow it to make decisions as how to best prioritize countries along the Belt & Road Initiative. All are actively encouraged, but some are naturally more developed than others. The same is true of the Commonwealth nations. London also has the intelligence of the trade merits of each of the Commonwealth members. If China were managing the Commonwealth it would put in a concerted effort to determine which members offer the most potential in short, medium and long term economic and trade development. Beijing would then introduce trade structures as follows:

Bilateral investment treaties

China has been entering into bilateral investment treaties (BITs) with other countries since the early 1980s, when the nation began its path to reforms under then-state leader Deng Xiaoping. Although many have now been superseded by more complicated and sophisticated trade agreements such as double tax treaties (DTAs) and other bilateral mechanisms, BITs remain important, especially for investors from emerging nations with relatively immature tax laws and regulatory environments. Such treaties also help to underpin the bilateral investment conditions between China and other developed nations.

The purpose of a BIT between two countries is reciprocal encouragement, promotion, and protection of investments in each other’s territories by companies based in either country. These treaties typically cover the following areas:

Scope and definition of investment;
Admission and establishment;
National treatment;
Most-favored-nation treatment;
Fair and equitable treatment;
Compensation in the event of expropriation or damage to the investment;
Guarantees of free transfers of funds; and
Dispute settlement mechanisms, both state-state and investor-state.

The sheer longevity of a given BIT goes some way to explaining their usefulness, and investors into China from other countries should be aware of the contents of these documents. China has over 100 BITs in place and continues to use them in its bilateral relationships. For example, while the BIT signed between China and Switzerland was ratified way back in 1987, others continue to be put into position. It has an impact – trade with BRI partner countries totaled US$1.34 trillion in 2019, outpacing the country’s aggregate trade growth by 7.4 percentage points. Statistics from China’s Ministry of Commerce just released illustrate that inbound FDI to China from BRI signatory nations rose 58.2 percent in Q1 2021. Imagine if the UK had received that from the Commonwealth?

BIT agreements as a rule of thumb provide a useful mechanism for understanding the legal, tax and dispute resolution mechanisms for investors into the country. As such, BITs are a useful starting point to clarify legal and tax treatments under bilaterally agreed conditions and should be understood as a bilateral document of first resort when understanding the investment environment, and protection mechanisms that China offers its many trading partners. These tend to be of particular importance for understanding the rights of companies investing from or into emerging markets throughout Asia, Africa, Latin America and the Middle East.

As mentioned earlier, China has China has over 100 BITs in force for a total of 107, with another 17 under negotiation, while Hong Kong has an additional 20. Currently the UK has 28 in force amongst the members of the Commonwealth, suggesting that some catch up needs to be deployed. To properly set up a modern trade platform with the existing commonwealth, more trade effort needs to be put in place by the UK as concerns codifying and nurturing Commonwealth nations as concerns bilateral trade potential.

Double tax agreements

Double taxation has been dubbed “one of the most visible obstacles to cross border investment,” leaving room for a significant amount of money to be saved under the almost 3,000 double taxation avoidance agreements (DTAs or DTAAs) signed between nations across the globe. To combat such obstacles, DTAs aim to prevent the same income from being taxed by two or more states, while also eliminating tax evasion and encouraging cross-border trade efficiency.

DTAs are mostly of a bilateral nature and, while DTA-signing countries are not all members of the Organization for Economic Cooperation and Development (OECD), DTAs are generally based on model conventions developed by the OECD or (less commonly) the United Nations. And while about 75 percent of the actual words of any given DTA are identical with the words of any other DTA, the applicability and specific provisions of each treaty can vary substantially.

From an investor’s perspective, confusion about international taxation can arise when investors are subject to two different and potentially conflicting tax systems. For example, Hong Kong and Singapore adopt a “territorial source” principle of taxation, which means that only profits sourced locally are taxable. Meanwhile, other countries such as China and the United States are on the worldwide tax system, and resident enterprises can be required to pay tax on income sourced both inside and outside of the country. DTAs not only provide certainty to investors regarding their potential tax liabilities, but also act as a tool to create tax-efficient international investments.

China has signed of DTA with 84 countries along its Belt & Road Initiative as follows:

In comparison, the UK has signed off 31 DTA with countries belonging to the Commonwealth as follows:

Free trade agreements

China has developed a strategic position when it comes to entering into free trade agreements – the policy of allowing dutiable and tax reduction on certain products and services being one of the main cornerstones that has projected the nation to be the world’s manufacturing hub over more recent years.

Without doubt, the signing of the China-ASEAN FTA, followed by the recent RCEP agreement in particular, will continue to have a huge impact on China and Asia’s development in global sourcing and the foreign investment related to this.

China also has a Free Trade Agreement with Switzerland, which as a result has become one of the few European nations not to have a China trade surplus. In total, China has signed off FTAs impacting 26 countries or regions countries (including the 10 ASEAN nations), has another 13 under negotiation, and a further eight under consideration. The UK currently has no FTA with any of the Commonwealth countries with the exceptions of Canada and Singapore. While this is a legacy of the UK’s membership of the EU, which signs off agreements strictly on a multilateral basis, it also means that in the past, British trade has been hampered as the UK has not been able to negotiate FTA without EU approval.

China’s trade takeover of the Commonwealth Nations

This apparent lack of effort by London in engaging with the Commonwealth has had more than the impact of the organization slowing slipping into the sunset along with dusty British colonial history. Beijing has spotted this and has actively engaged with Commonwealth members in terms of offering them Belt & Road MoU, which often come with infrastructure developments and other investments, as well as trade benefits such as Double Tax Treaties. In doing nothing, London has effectively allowed Beijing to take over the trade benefits of having the Commonwealth in the first place and relegated the UK role to paying for an occasional state dinner at Buckingham Palace. The effect of London ignoring the Commonwealth’s trade potential has been to hand it to the Chinese. This is a list of Commonwealth Nations who now have a Belt & Road MoU and/or a Double Tax Agreement with China.

Clearly there has been British trade neglect when it comes to putting into place trade agreements with the Commonwealth. It is additionally debatable whether London understands the trade and development potential in the same manner that the Chinese do.

There are ideological differences. China’s socialist model and the need to uplift millions out of poverty to create regional security means that trade requirements impact upon politics. In the West, and certainly the UK, a swing towards politics impacting trade has become the modus operandi.

The problem with the latter approach is that while trade can be measured; financially, economically, and socially, politics remains subjective. It is probable that the UK approach has swung too far along subjective principles at the expense of pragmatic reality. It is exactly this scenario that is derailing the proposed China-EU CAI agreement – being in fact a Bilateral Investment Treaty. Politics over issues such as Hong Kong and Xinjiang, which are not fully understood and over-simplified in Brussels, are derailing an agreement concerned with mutual investment protections.

The issues are unrelated, and mean the EU is sending mixed signals. No wonder Beijing becomes frustrated. That China-EU CAI deal is now likely to collapse. If so, losers will be EU businesses who will end up with less investment protection when it comes to dealing with China. To what beneficial end?

The comparison with how China would utilize the Commonwealth were Beijing were in control is apt. Spending time reevaluating the Commonwealth is not an opportunity that Beijing would turn down, and neither should London.

Right now, the UK is between a rock and a hard place yet has ignored the one trade asset it really could control and benefit from – the Commonwealth. That ought to have been positioned as a trade bloc to provide a soft landing yet has instead been repeatedly diminished under the auspices of raising ghosts of Britain’s colonial past.

But there is a profound difference: those ghosts did not introduce jointly negotiated, mutually beneficial trade agreements. A re-engineering, even rebranding of the Commonwealth could. Members would be treated based on reciprocal trade requirements.

Recognizing this, even belatedly, and applying some British initiative and trade development expertise and Belt & Road style trade agreements to the member countries of the Commonwealth, showing them collectively and individually some long overdue trade attention would be a sound – and obvious trade alternative to assist with Britain’s restructuring of its position within global trade. Now that would indeed unleash the shackles of Britannia.