Introduction
On July 14th, 2020, the United Kingdom(UK) banned future purchase and use of China’s Huawei’s 5G equipment. This brief seeks to understand the problem facing the primary stakeholders of China and the UK with secondary stakeholders being the US, EU nations, and India. We anticipate retaliatory measures from China will impact trade and the subsequent economic health of the UK (Ministry of Foreign Affairs, the PRC, 2020). We plan to demonstrate that a principled approach to future UK-China negotiations will help advance the UK’s goal of resilient trade agreements and simultaneously meet China’s interests in further developing their value added manufacturing industry.
Diagnosis of the United Kingdom
China is a critical trade partner with the United Kingdom, participating in over £79 Billion of £1.5 Trillion in total trade. They are the UK’s 5th largest trading partner behind the United States, Germany, the Netherlands, and France (Office for National Statistics, 2019). The interdependent economic relationship between China and the UK has been damaged by the recent ban of Huawei’s products but also complex geopolitical consequences of the US-China trade disputes. The UK’s long term alliance with the United States places it in a unique and challenging position given their growing relationship with China and the economic challenges the UK faces in light of Brexit and Covid-19.
UK Goals
Based on our analysis, we believe that the UK’s primary goal should be to seek stable trading partners for its critical imports and exports.
UK Interests
We believe the UK has interests in seeking diversified & resilient trade networks, securing essential technologies for competitive infrastructure, maintaining its global influence, ensuring national security, and slowing or at least benefiting from China’s rise to dominance within multiple economic sectors.
UK Strengths
We view the United Kingdom’s partnership with the United States as it’s key strength. We also recognize that the UK’s academic partnership with China is a strength. With only 4% of the UK’s exports and 6.8% of their imports connected to China, they are not overly leveraged or dependent on China. Within the service sector the UK has maintained a trade surplus with China. The UK has the top two international universities in the world (World University Rankings, 2020).
UK Weaknesses
They are facing a declining economy (10-14% GDP anticipated decrease in 2020), increasing budget deficits, increasing debt-to-GDP ratios, and rising unemployment associated with Brexit and Covid-19 (European Economic Forecast, 2020). The UK has an overall £18.3 billion trade deficit with China and an increasing reliance on Chinese exports.
Diagnosis of China
Over the last several decades, China has experienced unparalleled economic growth through international partnerships and domestic manufacturing, leveraging their 1.4 billion people with a high percentage of low income workers (World Bank, 2017).
Goals
China’s goals are well defined by their ‘Made in China 2025’ initiative. They seek to expand their economic influence over finance, electric cars, information technology, telecommunications, advanced robotics, and artificial intelligence (McBride & Chatzky, 2019).
China Interests
Kevin Rudd identified seven core interests that underpin Xi Jinping and China’s interests in domestic and international affairs (Rudd, 2018). We recommend focusing on the following four for this analysis:
Promoting sustainable economic development;
Developing stable relations with 14 neighboring countries;
Deepening the win–win cooperation with developing countries;
Continuing to play roles in reforming the current Western liberal order led by the United States.
China Strengths
China is the 2nd largest economy. They have the largest manufacturing economy in the world and are the largest exporter of goods in the world. State-influenced corporations such as Huawei, Xiaomi, and TikTok have dominated domestic markets and are expanding globally. China has pre-existing academic partnerships with UK universities.
China Weaknesses
China is centrally controlled by the Chinese Communist Party, which enables fast decision making but a low level of economic freedom that tends to increase corruption and inefficiency. Their state controlled policies stymy competition and subsequent intellectual or research gains necessary to develop competitiveness in a global market. Economic growth has been slowing the past several years due to Covid, trade relationship and their evolution from an emerging economy to developed economy. Their per capita GDP is 96th in the world and their movement to an advanced economy results in increased energy demand and a high demand for quality of life products (Observatory of Complexity, 2020). China has multiple disputes with neighbors around the South China Sea, India, and the United States.
Negotiation Strategy
Diagnosis of the bilateral problem
We expect China to increase their tariffs from 8% to 25% on the UK’s top three exports (gold, petroleum, automotives) in retaliation for the impact of the ban on Huawei. Given the UK’s economic challenges due to broken trade agreements (Brexit) and Covid-19, additional stressors to their economy will be significant leverage points for future trade agreements. Exploring favorable economic outcomes with China, EU member states, or the US will help them ensure long-term economic vibrancy and de-leverage that weakness in their international relations.
Guiding Policies
The UK has publicly committed itself to a principled negotiation approach based upon Secretary of State Oliver Dowden’s proclamation of mutual respect on converging interests (Dowden, 2020). A principled approach is a necessary choice based on the UK interest in a strong economic and ideological relationship with the US, due to the positional stance the US has taken on China. And it is necessary to sustain a valuable relationship with China, due to their growing economic influence over the UK.
The guiding policies associated with free-market capitalism and neoliberalism are ideologically dominant at a theoretical level and have implications for the specific actions we recommend the UK take to address their economic problems. And while Covid-19 has impacted the economy and Brexit has broken trade agreements, those are temporal factors of long-term economic sustainability. Balancing policies of engagement and self-reliance is critical for the UK to address the complex causal factors of trade agreements with the US and China.(Landale, 2020).
Coherent Actions [BATNA, Procedures & Substance]
BATNAs
UK
If an agreement is not reached in negotiations, UK exports to China will not be economically viable. For this reason, the UK will need to increase exports to other countries. For gold and petroleum, the UK should pursue trade agreements with India, since they are the third largest importer of gold with a 10.7% market share (Observatory of Economic Complexity, 2018). India is also the 3rd largest importer of Petroleum (9.3%) with currently only 0.045% coming from the UK - and room to grow. This is a strategic alliance, given India’s recent violent clashes with China and China’s expressed interest in stabilizing relations with their neighboring countries. The potential outcome of stronger economic ties between India and the UK will encourage China to seek an agreement. For automotive trade, China accounted for 5.3% of the UK's exported road vehicles versus the US 18.9% and the EU’s 54.3% (Key Automotive Exports, 2019). If anticipated tariffs force the UK out of China’s automotive sector, they must pursue (or have pre-established) trade with the US and the EU, preferably under better trade terms. Given the reset of trade agreements due to Brexit and the imposition the US has placed on the UK through its stance against China, we foresee optimistic dynamics for the UK to leverage new trade agreements.
Procedural Actions
We strongly recommend that the UK establishes the following procedural agreements on location, topics & timeliness.
Location:
We recommend that the UK Ministry of Finance representatives should agree to visit Beijing to demonstrate a conciliatory gesture given the significant impact of the Huawei ban. We discourage a meeting between Xi Jinping and Boris Johnson to mitigate the necessity of other axes of negotiation being forced into the process due to their public facing responsibilities.
Topics:
We recommend a default position that reversing the ban on Huawei is non-negotiable and that tariff topics are limited to the import and export of Gold, Petroleum, and automotive vehicles. And we recommend that academic and university/corporate partnerships be the highest priority topic to be discussed in these negotiations.
Timeliness:
We recommend that the UK initiate negotiations immediately to preempt any positional response from China. We anticipate China will delay negotiations to better understand the position and relations between the UK and the EU and the UK and the US.
Nudges
We recommend framing the UK position as more collaborative in comparison to the US. This would have the effect of not only distancing the UK from the actions and position of the US but also contextualizing the negative consequences for China based on their experience of broken trade negotiations with the US.
Second, we recommend that the UK establishes the default condition that reversing the ban on Huawei is not open for negotiation. This would be effective because it moves the conversation away from the domain of losses about Huawei into the domain of potential gains with future and new agreements that could be favorable for both - utilizing prospect theory to our advantage and leveraging China’s development interest.
Third, negotiators should favor positive terms, such as ‘agreement’ when discussing improvements to China’s value-added manufacturing and use negative terms, such as ‘conflict’ when discussing increasing tariffs. These terms anchor China to be more likely to choose partnership versus penalization.
Substantive Actions
Seeking Common Ground
We believe that university/corporate partnerships that elevate China’s value-added manufacturing have the greatest potential for beneficial outcomes for both parties. This sector leverages the UK's interest utilizing its service trade surplus, its strength as a leader in the university sector, China’s interest in improving their value-added manufacturing, and the role UK universities can play in positively influencing that sector.
Utilizing Incentives
We believe China will impose a 25% tariff on the UK’s top three imports from the UK (gold, petroleum, and automotives), as China has recently applied 25% tariffs on Soybeans from the US(Lee, 2019). We recommend the UK use incentives to prevent these tariffs hikes. Given declining Chinese acquisition and equity investment in the EU due to new restrictive policies (a key mechanism for China to acquire vital technologies), we see university partnerships as an effective way to meet that domestic development of technologies that address China’s interest in developing value-added industries.
These partnerships will need to reflect the ideological and national security interests of the UK, but assuming those are precursors for this scope of negotiation, the common ground between UK universities and Chinese corporations is a strategic negotiation point. These partnerships will increase China’s competitiveness in the value-added industries (Kratz, Huotari, Hanemann, Arcesati, 2020) and simultaneously generate revenue for UK universities and access to the Chinese market - positively impact the UK economy if successful in negotiation, mitigating any negative tariff consequences associated with Huawei ban.
This incentive must commit to a long-term economic benefit for China’s growth that is above and beyond the financial impacts associated with the ban on Huawei. Lastly, the threat of employing our
BATNA would be a negative punishment that would remove positive trade and intellectual partnerships that currently have a direct positive impact on China’s interests.
Conclusion
Our recommended principled negotiation strategy must provide appropriate incentives to balance the punishments associated with the ban of Huawei and the many economic and extra-legal disputes China is engaged with on multiple fronts. The UK has clear economic interests to ensure stability and diversification with its trade agreements while not risking the loss of important ideological, political, and economic partnerships. Our approach highlights critical geopolitical and economic ties between the UK, US, China, and other nations that can be leveraged to meet both disputants interests and advance the UK’s goal of more resilient trade agreements,economic stability, and strategic relationships for their long-term prosperity.
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