Canning the Huawei 5G project is one thing, the way we do it is quite another

There are costs to the UK in shutting out Huawei, but there are bigger costs in ignoring US pressure to exclude them, because the US is our largest export market, writes Hamish McRae

Chinese ambassador Liu Xiaoming said that businesses in China were watching to see how Britain reacted over the Huawei situation (AFP/Getty)

Every day that passes sees global trade relations slip a little backwards. The current spat between the UK and China over the role of Huawei in the British telecommunications system is just one more sign that the world is gradually slipping into two broad economic trading blocs. One will be led by the US, the other by China. There won’t be hard lines between them, for that is not the way the world economy works. But the demarcation will be more explicit and countries will have to choose.

From the narrow UK perspective, this is awkward. On Monday, China’s ambassador to London, Liu Xiaoming, said that businesses in China were watching to see how Britain reacted over the Huawei situation and that Britain might lose its reputation as a business-friendly environment.

Since this warning came on top of the row over the UK offering nearly 3 million Hong Kong people a path to full British citizenship, it was natural to link politics and economics.

“I don’t think there’s any inconsistency in welcoming inward investment and at the same time standing up for the UK’s values and interests and our security,” the UK business minister Alok Sharma replied.

Actually, there are genuine new concerns about Huawei technology now that thanks to the US embargo, it will no longer have access to US-designed components. But in practical terms what matters is not technical considerations, but geopolitics. There are costs to the UK in shutting out Huawei, but there are bigger costs in ignoring US pressure to exclude them. There is a hard economic point here. The US is the UK’s largest export market, bigger than Germany and France put together. You do not jeopardise that, particularly as whatever the outcome of the UK/EU trade talks, the US is likely to become a more important market over the next ten years.

This is just one current issue. There will be many more, between the US and China directly, and between countries in the US sphere of influence and countries that have sought to distance themselves from US policy. It is a particular problem for Germany. If push comes to shove, should it prioritise its exports to China or its exports to the US? It is a bit of no-brainer, but hard to acknowledge that.

Other European nations have not been so successful at broaching the Chinese market, but some have made other ties. In March last year, Italy signed up to China’s Belt and Road Initiative, the Chinese plan to improve land and sea links between the various parts of the Asia/Africa/Europe land mass. It was the only EU country to do so. Since then the two countries have strengthened the relationship in a number of ways, including 100,000 workers moving from China to work in Italian garment factories. It has been argued that this is the reason why Italy was the first European country to be hit by Covid-19. Whether or not that was the explanation for the outbreak in northern Italy, there is no question that Italy has become more dependent on its relationship with China over the past year.

All this is worrying. At an immediate and practical level, Chinese investment has brought many benefits to the recipient countries. Anyone getting into one of the new London taxies should be aware that it is thanks to Chinese investment that this particular vehicle has been created. Ditto a new MG. Ditto a new Volvo.

It is worrying, too, that these tensions should be building up now, with the world economy still pretty much flat on its back from the Covid-19 crisis. Whatever happens in the coming months, the world’s second largest economy will have to be part of the global recovery. The latest IMF economic forecasts 10 days ago predicted that China would be the only major economy to show any growth at all this year. It will be up a tiny bit; the rest of us will all be down.

Beyond this, we have to think about the development of the world economy over the next decade or so. On most predictions China will pass the US to become the number one economy sometime in the late 2020s. It will still be much poorer in terms of per capita GDP than the US, and it will be less sophisticated. But size matters. The West has to accept that. And we have to accept that the assertive political stance of the current leadership will prevail for several years to come.

My own view is that eventually an ageing China will become more relaxed and easier to deal with, but we have to get from here to there. From a UK perspective, we have to accept we have little influence over either US or EU policy, and zero influence over China. What we can try to do is to be orderly, principled and straightforward. It is our interest as an unusually open economy that the world remains open and accommodating. Huawei is a test. If it is to be shut out of helping to build the G5 telecoms network, then so be it. But that decision has to be explained in a gracious and rational way.