The China Dilemma

One of the first things that Theresa May did after she unexpectedly became Prime Minister in the early summer of 2016 was to review a decision made by her predecessor, David Cameron, allowing Chinese state investment in a new British nuclear power plant. Her decision marked a distinct change from the enthusiastic embrace of all forms of trade with China that had distinguished the tenure of Cameron and his Chancellor, George Osborne, and it introduced a concern about national security that had been generally played down before.

The UK government had long been extremely cautious about permitting Russian involvement in the UK energy sector, while denying that politics had anything to do with it. Now it seemed that some of the same caution was going to be applied to China.

In the end, after a two-month delay - and discussions with civil servants about whether there was any way the Government could renegotiate or even back out of its contract – Chinese funding for the new power station, at Hinkley Point in the west of England, was given a green light, but with “significant new safeguards”. The nature of the safeguards was not defined, but the message was clear. Mrs May’s government was going to ask more questions about Chinese investment in the UK than its predecessor had, and national security was a reason why.

Three years on, the potential upsides and downsides of Chinese investment in the UK have become a recurrent theme of Theresa May’s time at Downing Street, and changed circumstances have made it much harder for her to follow through on her caution. The Brexit vote and the decline in trade with the European Union that could follow have made the conclusion of new trade deals with other countries, especially countries with big and fast-growing economies, a priority. What is more, although the freedom to negotiate bilateral deals was cited as a big advantage of Brexit by those who advocated leaving the European Union, finding new partners is turning out to be easier said than done.

Meanwhile the US Administration - maybe for legitimate reasons of US national security, maybe mainly for its own commercial reasons – is taking a new look at the basis of trade with China, to the point where it is now on the brink of an all-out trade war. President Donald Trump claims, with some justification, that China has broken the terms of its accession to the World Trade Organisation, but he also maintains that some specific forms of cooperation with China – in infrastructure development and telecoms – present a danger to national security.

This could hardly have come at a worse moment, to put it mildly, for Mrs May’s government, not only because of the go-ahead it gave to China’s investment in Hinkley Point, but because the Chinese conglomerate Huawei has become a major player in the UK’s telecoms market over the best part of 15 years and is now bidding to help develop the UK’s 5G capability, too.

Why the UK is so relatively backward in this area and why it has no 5G expertise of its own to call on - especially as it was a global pioneer in the deregulation of the telecoms sector - is a question some have raised. But it does not alter the fact that the UK will need to look abroad if it is not to become a global laggard in the next big telecoms revolution.

In recent months, the UK government had appeared to look increasingly favourably on Huawei’s bid. The security services, too, were said to have expressed confidence that any threat to security could be “managed”. It appears that what was intended to be the final decision was taken last month at a meeting of the National Security Council – a group that brings together senior members of the Cabinet and the security services. According to a leak from that meeting, reported by the Daily Telegraph newspaper, the Prime Minister personally approved Huawei’s involvement in the development of the UK’s 5G, against objections from some of those present.

There followed an urgent inquiry to find out where the leak had come from, and within days, Mrs May had sacked the Defence Secretary, Gavin Williamson, despite his fervent denials that he was not the guilty party. Whether he was or not, he is certainly regarded as a “hawk” on China. Earlier in the year, he had announced that he intended to dispatch the UK’s new aircraft carrier to the South China Sea – a threat that brought sharp words from Beijing and caused the postponement of a top-level trade mission to China.

But Mr Williamson is not alone in his wariness about China. The fact is that there is a debate going on at the very centre of government about UK relations with China, with economic considerations pitted against those of national security. And for the time being at least, with Brexit on the horizon, those who see economic considerations as paramount are winning the argument.

But – and it is a big but –in the United States the debate has long gone the other way, with the current administration of Donald Trump taking a particularly tough line, not just on trade with China, but the security aspect. Nor is it alone. Australia and New Zealand have taken a particularly hard stance, banning Huawei from any involvement in their 5G networks. Canada is considering such a ban. In their view, Huawei’s status as a private company counts for little. China remains in its political structures a communist country and there is no such thing as a fully private company, especially not in such a potentially sensitive area as telecoms.

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This places the UK at odds with at least three and possibly all four other members of the so-called “Five Eyes” group that shares high-level intelligence. Membership of this group is highly prized by the UK, with one retired UK intelligence chief vouchsafing that Five Eyes was always more important to the UK than intelligence-sharing with the EU, and that this was where the UK’s first loyalty had always lain. That will now be tested.

The official position is that none of the Five Eyes countries will allow Huawei or China anywhere near the “core” functions of its telecoms sector. But on a visit to the UK last week, the US Secretary of State, Mike Pompeo, strongly hinted that the UK would have to choose between access to all Five Eyes intelligence and its proposed 5G deal with Huawei. So far, it is trying to sit on the fence. But it is not clear how long that might be possible. It could be that Mrs May – or her successor - will have to reverse track on a decision she herself signed off on against dissent within her Cabinet and NSC.

The Huawei dilemma highlights in the starkest way the dilemmas that the UK will face after Brexit. On the one hand, it will be in the market for bilateral trade deals, with China and the United States at the top of the list because of the size of their economies and the potential for growth. But each presents challenges: China – on security; the US - on food and pharmaceutical standards as well as internet privacy. All this comes together in the UK’s permissive attitude to Chinese involvement in its telecoms infrastructure, and it is hard to see how its current course can prevail.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.