Tough talk but no action as row over alleged Chinese spy exposes UK weakness

A fortnight ago, James Cleverly was gladhanding Chinese officials on a mission to patch up strained relations with Beijing.

“It is an important country, it’s a large country, an influential country and a complicated country,” the Foreign Secretary told journalists, “and therefore our relationship with China will necessarily be just as complicated and sophisticated.”

Just 10 days later, things are even more complicated.

The revelation that a parliamentary researcher had been arrested on suspicion of spying for China has sent shockwaves through Westminster and prompted calls for the world’s second-biggest economy to be labelled a security threat.

It prompted Rishi Sunak to warn Li Qiang, the Chinese premier, that foreign interference in British democracy “will never be tolerated” during an awkward meeting on the sidelines of the G20 conference in India.

Beijing has dismissed the episode as “nothing but malicious slander”.

Yet while the Prime Minister has confronted Chinese officials, ministers have resisted taking a tougher stance. The Government is reluctant to go beyond tough words for fear of angering Beijing and provoking a potentially economically painful backlash.

The deep economic ties between Britain and China mean the UK can ill-afford to risk Beijing imposing punitive tariffs or restrictions, as it has done in the recent past with Australia.

Furthermore, Business Secretary Kemi Badenoch has admitted that Britain cannot hit its net zero targets without Chinese batteries.

“For a lot of our companies, they will source a fair amount of their components from China,” says Mark Swift, of Make UK, which represents UK manufacturers. 

“So if you turned off that tap overnight, it would clearly have a big impact.”

Trade between Britain and China totalled £107.5bn in the year to the end of March, according to figures published by the Department for Business and Trade.

China is the dominant partner, exporting just over £30bn more to Britain than it imports from us. China has become the workshop to the world since the turn of the century, supplying a huge range of goods and parts.

Overall, China is the UK’s fourth-largest trading partner and accounts for 6.1pc of UK trade. British businesses source large amounts of telecoms equipment, office supplies, clothing and cars from the country.

The numbers can mask strong dependencies in specific areas. Swift points out that around 40pc of the UK’s semiconductors are imported from China, while British manufacturers also rely on Chinese steel.

A report by the Independent Business Network found that in 2019 around 52,000 products imported to the UK came almost exclusively from China. They ranged from mercuric batteries used in hearing aids to aniline salt used in the manufacture of dyes.

Swift says the outsourcing of large amounts of UK manufacturing over the past two decades has “hollowed out” swathes of the country’s domestic capacity.

William Bain, head of trade policy at the British Chamber of Commerce, says the flow of electronic goods from China into Britain is particularly significant. Any disruption could cause prices in shops to spike.

Other vulnerable sectors include the luxury industry – think Burberry handbags and Aston Martin supercars – which relies heavily on sales in China. Meanwhile, companies including HSBC, Prudential and even BT have a presence in Hong Kong.

“If the Chinese wanted to, they could do painful things to British companies in Hong Kong, which could be very destabilising,” says Professor Steve Tsang, director of the China Institute at SOAS University of London.

During the Covid pandemic, Australia became the target of Beijing’s ire when it dared to suggest that an independent investigation should be carried out into the origins of the virus following what many regarded as a paltry effort by the World Health Organisation.

The move triggered fury in China, which began by threatening consumer boycotts and imposing heavy duties on Australian barley – pricing the industry out of its main export market.

When this did not prompt Canberra to back down, Beijing unleashed a barrage of further measures targeting Australian products, stripping beef producers of their licences to export, slapping tariffs on wine and blocking imports of copper, wheat, sugar and other goods.

Chinese companies were also ordered to stop purchasing Australian energy products, including coal and liquified natural gas.

Yet Beijing’s response failed to yield its intended result: Canberra still refused to budge and savvy Australian exporters simply redirected their goods to other willing buyers such as Saudi Arabia, Japan, Bangladesh and Vietnam, among others.

Shanker Singham, a trade expert who has advised the UK and US governments, says this outcome highlights the “danger for China in doing some kind of retaliation”.

He also suggests countries that want to take a stand against China should band together, endorsing each other’s investigative findings and jointly implementing targeted tariffs designed to counteract specific unfair practices.

“That’s why it’s so important for a group of countries to have the same approach,” he adds. “Because if that same approach is taken, it’s much more difficult for China to retaliate against everybody.”

Still, trade with China remains enormously valuable to UK Plc, so politicians must tread carefully.

Even Joe Biden’s administration in Washington has argued that a complete “decoupling” from China would be disastrous for the US economy as well.

Instead, the White House has emphasised “de-risking” – urging companies to diversify their supply chains to the point where they are not dependent on profits from China to survive.

“It’s true, not just of the UK, but of most economies these days that we are pretty enmeshed with the Chinese economy,” Shanker adds. “And that is why I think that decoupling is neither desirable nor practical. But at the same time, it is very important we develop mechanisms that deal with the impact of trade distortions.”

In Britain, there are also growing efforts to remove China from supply chains that serve critical national infrastructure.

State-owned China General Nuclear was ejected as a partner from the Sizewell C nuclear project last year amid concerns about national security, while British mobile operators have been ordered to strip all equipment made by Huawei, the Chinese telecoms giant, out of their 5G networks by the end of 2027.

The Procurement Bill recently passed by Parliament bans Chinese technology from sites that are routinely used for ministerial business and a National Security Unit has been set up to scrutinise the supply chains of government contractors.

These policies are intended to strike a pragmatic balance between economic necessity and national security.

Yet as spying allegations continue to grip Westminster, that balance becomes increasingly difficult to strike.