The UK recently jumped on the global bandwagon of blocking Chinese expansion through its newly announced security regime; but the country is in no position to be taking such a hardline approach with one of its largest trade partners.
With the creation of the National Security and Investment Bill (NSI) on November 11 2020, the UK moved its foreign investment regime in line with that of other western powers, namely the United States with its Committee on Foreign Investment in the United States (Cfius).
However, unlike its friend across the pond, the UK should not take such a strong stance when it comes to foreign businesses.
The entire global economy has been negatively impacted by the Covid-19 pandemic; but with the prospects of a no-deal Brexit looming the UK has a second major economic event on its hands. According to the Office of National Statistics, in September the UK's GDP remained 8.2% below pre-pandemic levels.
Since the Brexit referendum in 2016, it is estimated that about one in five overseas investors have either cancelled plans or placed them on hold. Additionally, numerous multinational companies such as Panasonic and Sony have announced plans to move their European headquarters from the UK to the Netherlands, and the exodus away from the City of London is gaining steam as banks look to avoid losing passporting access to the single market.
The crisis that the UK economy finds itself in only accentuates its need for healthy volumes of inward investment. This partly explains why the government rhetoric surrounding the NSI bill has been that the UK remains open for business; and why the UK is unlikely to take as hardline an approach to China as Cfius in the US.
Nevertheless, the UK is performing a tricky balancing act: appeasing the desires of its closest ally while continuing to attract foreign investment – even if that investment stems from China. Of course, neither the UK nor the US would go as far as to suggest that either respective security regime singularly targets China, but it is widely accepted that these preventative measures have been introduced with the Asian country in mind.
In July, under mounting pressure from the US, the UK government reversed its stance on Chinese telecommunications company Huawei; announcing that all existing Huawei equipment will be removed from existing 5G networks by 2027. Insisting that Huawei's technology was the most advanced and cost-effective, the UK had resisted the US government's earlier requests.
The NSI bill threads a thin line as China brings both political concern but potentially large economic rewards for the UK. Billions of pounds have flowed into the UK from many high-profile acquisitions by Chinese companies. A notable example is the Jingye Group's takeover of British Steel in March 2020. The acquisition reportedly saved over 3,000 jobs as the Chinese company promised to invest heavily in the flagging sector.
The US, however, is in a much less perilous position economically. Despite a tumultuous 2020 the country continues to thrive economically and has been able to distance itself from China without suffering too much of a financial blow. The UK does not have the same luxury.
While the final draft of the NSI bill is yet to be released and the details of its implementation remain somewhat of a mystery, it is clear that the UK is in no position to block inward investment from any source, especially one the size and prominence of China. Outside of the EU and the US, China is the UK's largest trading partner. As the UK leaves the European Union and faces an uncertain future with the trading bloc, China is an economic partnership that it cannot afford to lose.
With the NSI bill, the UK will need to tread carefully to find the middle ground between achieving its foreign policy objectives and protecting its economy post-pandemic and Brexit.