Analysis - Impact of Brexit on Europe-China Relations | University of Oxford
EU flag
EU flag
Credit: Shutterstock/Henner Damke (Image ID: 52785547)

Analysis - Impact of Brexit on Europe-China Relations

Published 10 October, 2016. 

The Impact of Brexit on Europe-China Relations

Dr Paul Irwin Crookes, School of Interdisciplinary Area Studies, University of Oxford.

Dr Paul Irwin CrookesDr Paul Irwin Crookes
The decision of the United Kingdom (UK) to leave the European Union (EU) in the referendum of June 23rd 2016 has reverberations well beyond Europe as a political and economic shock of substantial proportions. The future relationship of China, both with the remaining member states of the EU and with the UK, is one example of how a domestic political decision is having global ramifications as change ripples through the international system.

Overarching any analysis about the impact of Brexit must be a sense of caution about what still remains unknown over the shape of future policy outcomes. Two cross-cutting factors are particularly important: the first is a legal and political one — what will the resulting settlement between the UK and the EU actually look like? The answers to this key question will shape the future structure of Britain’s trade relations and investment opportunities with major economic powers such as China. Some clues are emerging from recent speeches given by British Prime Minister Theresa May where not only timelines but also some key objectives became clearer as tighter controls on immigration appeared to trump access to the EU’s single market. Yet speeches do not always represent outcomes and there remains considerable uncertainty over both future market access conditions and possible tariff settings if the UK also leaves the EU customs union.

The second of these factors is economic and is linked to the instability that the UK’s decision has had on British, European and world economies. In an update to the IMF’s World Economic Outlook, Maurice Obstfeld described Brexit as introducing a “spanner in the works” for global growth as well as a cause for growing “downside risks” for EU growth in 2017, whilst the OECD Interim Economic Outlook in September 2016 argued that UK growth could be reduced by up to 1% next year due to the negative impact of the vote. This is bad news for China as it has long valued global economic stability within which to pursue its own reform agenda, but is particularly worrisome now as the country grapples with difficult choices over how to develop “new engines of economic growth”.

With these two caveats in place, it is possible to construct a framework for evaluating the impact of Brexit on specific aspects of the bilateral relationship between the EU and China and the UK and China. Two issues stand out for the business community as particularly important ones to consider: inward direct investment flows from China and the continuing role of the UK as an RMB currency hub.

Foreign direct investment (FDI) from China into the EU as whole reached US$23 billion in 2015 even as the EU’s outward flows declined, with new investments up 28% compared with the previous year’s figures. Traditionally, this has been largely market-seeking FDI as Chinese firms have sought overseas bases from which to pursue ambitious global expansion strategies, with the EU being seen as a key opportunity. However, there is a growing trend in technology-seeking FDI through mergers, acquisitions and joint collaboration between European firms and Chinese partners keen to tap into the EU’s high levels of innovation capability. The UK is also seen as offering a welcome to infrastructure investment that delivers stable long-term returns that continues to be of great interest to China from projects regarded as too sensitive for foreign involvement by other states, such as the nuclear power industry. Despite the pause button having been pressed over the Hinkley Point project by the new May administration in July, the resulting ‘new’ safeguards put in place to cover Chinese involvement do not appear that different from the old arrangements, implying that the Brexit-led change of leadership in Westminster may have little impact on Chinese access to such projects in future.

Nevertheless, these two different types of market and technology seeking FDI from China are likely be impacted by Brexit in different ways. Markets seeking growth could be negatively influenced by the extent to which a ‘hard’ versus a ‘soft’ Brexit may emerge from divorce negotiations. This is because Britain has long been a favoured destination as a base of departure into the rest of the EU and the issue of maintaining seamless access in regulatory and tariff terms to a single market of 500 million consumers is an important one in an overseas firm’s decision making. This implies that a ‘hard Brexit’ which removed such easy access could damage future investment plans and might favour Chinese prioritising other landing points on the continent.

However, technology-seeking incentives work in the opposite direction, wherein it is the capacities inherent in local enterprise sectors that drive decision-making. Here, the UK has thriving high-tech industries in areas complementary areas to Chinese interests, such as environmental, smart-energy technology, advanced machinery manufacturing and metallurgy capabilities to name but a few. Such investment is less dependent on the UK’s place within the EU rather than on Britain’s domestic capacities and willingness to consider overseas acquisitions. In this aspect of the UK-China relationship, the impact on Brexit could be much smaller.

What of London’s place as a major RMB hub for international currency transactions? UK-based financial services firms, in general, are worried about passporting arrangements after Brexit that could limit their ability to market products across the bloc. Specifically, they are concerned about the terms of Britain’s role in internationalising use of the RMB. The UK is now second only to Hong Kong as an RMB economy by weight for customer-initiated transactions, with the next most significant European economy being France, who would require a four-fold increase in activity just to match where the UK is now. This suggests that, to date, the Chinese have seen London as a global financial centre rather than just a European one. There is no current evidence to suggest that this will change because of Brexit.

There are, of course, many continuing uncertainties regarding the fallout from the Brexit vote, with political and economic issues intertwined. Nevertheless, by carefully analysing two particularly important aspects of concern to both European and Chinese enterprises, this article has suggested that a more nuanced picture of different implications are likely to emerge that will depend on the issues under scrutiny.

Paul Irwin Crookes is co-author with John Farnell of a new book entitled The Politics of EU-China Economic Relations: An Uneasy Partnership published by Palgrave Macmillan.