China’s Relationship with the United Kingdom from a Potential Post-Brexit Bilateral Trade Deal Perspective

Formally speaking, the Brexit has indeed taken place, a Brexit debacle that generated immense market-wide frustration in light of the (many!) failed negotiation attempts and quasi-ubiquitous lack of clarity when it comes to pretty much any imaginable topic. From reaching pragmatic agreements with the European Union to perhaps another Brexit vote, scenarios abounded to such a degree that the average market observer was left scratching his head.

Now that the formal Brexit formality is behind us, many had (wrongfully) assumed that the United Kingdom as well as its various trading partners can simply move on or, to put it differently, the fact that we are finally entering a period of at the very least relative clarity. Nothing could, unfortunately, be further from the truth. As this point and beyond, a valid case could be made that the more complex dimension of the Brexit is just starting, more specifically determining the future of the United Kingdom in terms of trade agreements.

Right from the beginning, more specifically as of the 2016 vote, the most widely debated as well as ultimately widely-negotiated topic was represented by the future of the United Kingdom’s cooperation with the European Union in terms of trade. This represents the most vital aspect of the entire equation in light of the fact that a political vote of roughly 52% in favor and 48% against leaving the European Union cannot exactly erase economic and cultural ties that have been build not in years or decades but over centuries.

Needless to say, the thought that the proverbial economic umbilical cord can be cut represents an exercise in infantilism at best and recklessness at worst. As such, to even the most ardent critics of the European Union, it is more than clear that a future without strong economic ties between the UK and the European Union is out of the question. More flexible ties than past ones? Of course, but again, there is a limit as to how many economic steps back one can take when it comes to deeply interconnected economies.

Unfortunately, those who thought the Brexit negotiations would be as bad as it gets in terms of market-wide frustration will most likely be proven wrong in light of the fact that it is obvious to pretty much any objective observer that the UK and EU are coming from completely different places, with expectations being anything but aligned.

As far as the United Kingdom is concerned, things would be fairly straightforward in an ideal scenario:

1. Negotiate a new trade framework with the European Union which grants the UK its much-requested independence, while preserving the financial advantages the United Kingdom had as a member of the EU
2. Negotiate flexible and mutually beneficial trade agreements with China, India and other major economies
3. Nurture the UK’s relationship with the United States, with president Donald Trump stating on more than one occasion that he intends to ensure that ties between the two entities deepen considerably
4. Foster economic activity at home as well as re-ignite increased let us call it Commonwealth trade activity

Practically speaking, however:

1. The European Union, through voices such as that of Michel Barnier and other politicians who have been tasked with overseeing Brexit negotiations, have made it clear that if the United Kingdom wants to retain many of its European Union privileges, it needs to tone down its expectations with respect to just how much additional freedom/flexibility it can demand down a notch or two
2. China and other emerging nations most definitely want to increase trade whenever possible but at the same time, it would be geopolitically ignorant to assume that they do not sense weakness as far as the United Kingdom is concerned and therefore, a compelling case could be made that the UK isn’t in as strong of a negotiation position as it lets on
3. Donald Trump… says many things. Unfortunately for the United Kingdom, he can also prove to be a very difficult negotiation partner due to his unpredictable personality. Furthermore, in light of the fact that Donald Trump has a fair bit of experience as a business negotiator and a very aggressive one at that (in many cases overly aggressive), the same principle that has been outlined when it comes to China is valid. On the one hand, Trump most definitely likes the fact that the EU would be weakened in the event of a strong UK economic performance but on the other hand, he most definitely senses the weakness of the United Kingdom as well and it is quite difficult to believe that the US will simply serve an excellent trade agreement on a silver platter
4. Unfortunately, things are quite volatile at home as well as far as the United Kingdom is concerned, with Scotland for example being anything but pleased by the fact that the UK has left the EU and is interested in pursuing its own path in the mid to long-term. The same way, tensions abound when it comes to other regions as well and as far as the Commonwealth narrative is concerned, let’s just say it is one of those things that may sound impressive on paper but in the real world, there is a clear ceiling with respect to how much progress can be reasonably expected

As grim as the entire equation may seem, there are indeed silver linings.

Unfortunately, they can sometimes be… well, contradictory.

For example, China would most definitely be willing to offer a more than worthwhile trade agreement under the right circumstances but the “under the right circumstances” dimension tends to be quite tricky. Why? Simply because if the United Kingdom would embrace the relationship in question with China, how likely would it be that the United States ends up being equally generous? Needless to say, not that likely.

The same principle applies the other way around. The United States, for reasons that have to do with Chinese as well as EU dynamics, would be more than interested in ultra-close relations with the United Kingdom but for that scenario to manifest itself, the United Kingdom would need to make concessions which alienate the EU as well as China.

The same way, the EU itself has a fair bit of leverage in this entire equation, for the simple reason that as a function as its sheer economic size, it has a negotiation ability which dwarfs that of the United Kingdom. It remains to be seen whether it chooses to leverage that ability in a manner that leads to other nations being prudent when negotiating stand-alone deals with the UK.

All in all, when it comes to China as well as pretty much any other trade partner, the United Kingdom has a lot to offer. Unfortunately, however, there are many powerful forces at play which make scenarios revolving around the UK sealing satisfactory deals with a wide range of trading partners in the absence of major challenges… unlikely, to put it mildly.