Key questions facing the next UK government on China
As the UK gears up for a General Election, the question of how the UK should relate to China seems far down the agenda of most voters. China has received only cursory references in the manifestos of the three largest parties, and has largely been absent from the televised debates and major policy announcements. This is natural given that elections are largely fought on domestic issues, however the next UK government will very quickly find itself confronted with a number of difficult questions on China that have been put off for too long.
Ranging from the UK’s international treaty commitments to Hong Kong to the security of the green transition and simmering tensions across the Taiwan Strait, the strategic risks presented by China are as real and complex as ever. While the Labour Party’s promised ‘audit’ of the UK-China relationship attempts to buy time, the reality is the UK’s closest allies – from the US to the EU – will be anticipating a more coherent response. This short briefing examines five key questions facing the next UK government on China and begins to map a route through the complexity.
1. Will the UK take action against China’s EVs?
Under the Conservatives, the UK has committed to an ambitious Zero Emission Vehicle (ZEV) quota system where automakers are required to ensure 22% of all new car sales this year are EVs or pay a £15,000 fine for each noncompliant vehicle sold that misses this target which can be offset by buying green credits.
The most likely beneficiaries of the Government’s quota system will be Chinese EV manufacturers, like BYD and SAIC. These companies can produce EVs at scale with excess manufacturing capacity and are heavily subsidised so they can sell them at a lower price point.
A result will be the deepening of the UK’s dependency on China for its green supply chain and on Chinese EV producers, who are legally required under both the PRC Data Security Law (2021) and the PRC National Intelligence Law (2017) to work hand in glove with the state when it comes to data and intelligence collection.
According to the Society of Motor Manufacturers and Traders, Chinese-made EVs have rapidly gained ground in the last four years, with their market share in the UK jumping from 2% in 2019 to 33.4% in the first half of 2023.
In response to the economic and national security threat Chinese EVs pose to their respective automotive sectors, both the USA and the EU have increased tariffs on Chinese EV imports, and in the case of the Biden Administration, they have opened an investigation into data security threats. The UK Government has dragged its feet on its own anti-subsidies investigation and whether it will join the USA and EU in increasing tariffs on Chinese EVs.
Both the USA and the EU oppose the UK becoming a dumping group for cheap Chinese EVs, which may be seen to undermine the integrity of the EU Single Market and make the UK a weak link when it comes to national security. Therefore an incoming government will likely face pressure from both American and European partners to follow suit when it comes to the increase of tariffs and restrictions on Chinese EVs. Any future green technology trade deal between the UK and USA or an EU-UK Security Partnership, will require the next UK Government to align more closely with partners when it comes to taking action against Chinese EVs.
2. Will the UK bring in an outbound investment screening regime?
Just weeks before Prime Minister Rishi Sunak called the surprise General Election, Deputy Prime Minister Oliver Dowden had announced a review into the “small proportion” of the UK’s outbound investments that are at risk of fuelling technological advances in military and intelligence capabilities in countries of concern. This builds upon the introduction of the National Investment and Security Act (2021), which allows the Government to “call in” investments for review in 17 sensitive sectors of the UK economy if they are above a 25% threshold.
Regardless of whether the next UK Government will want to continue this work or not, the interest in this issue across the Atlantic is clear. Dowden’s announcement followed months of lobbying from the Biden administration, with alignment from London’s globally important financial centre seen as critical to ensuring the effectiveness of its own attempts to stymie investment into China’s military and strategic sectors. The EU, too, is launching its own consultation into the possibility of an outbound investment screening mechanism, though progress will likely be slow, and its ability to adopt a centralised approach from Brussels is limited.
While powerful lobbies in the City of London will undoubtedly oppose any attempts to regulate outbound investment flows, the reality is that outbound investment is the obvious gap in the UK’s economic security toolkit. Through the National Security and Investment Act, the UK now has a mechanism to prevent hostile takeovers and other risky investments in the UK’s critical national infrastructure and strategic sectors, but has no means to regulate the outward investments made by UK companies in the strategic capabilities of other countries. An outbound investment regime would follow the same logic as the UK’s existing export controls on China and other countries of concern, which permit trade in the vast majority of goods but limit the export of certain military and dual-use technologies.
All three of the sectors singled out by Biden’s Executive Order – semiconductors, quantum technologies and artificial intelligence – will play a critical role in next-generation warfare and espionage, while China’s ability to catch up with Taiwan’s advanced semiconductor production could change its calculations in considering war across the Strait. Sticking to a ‘small yard, high fence’ approach, an outbound investment screening regime could provide clarity to investors while ensuring that the technologies that will form the basis of hard power over this century are not controlled by the UK’s strategic competitors.
3. Will the UK government block SHEIN's listing on the London Stock Exchange?
For several years, the Chinese fast-fashion producer SHEIN has been at the centre of controversy from allegations ranging from IP theft, using dangerous levels of chemicals in its products, using cotton made from Uyghur forced labour in Xinjiang and its carbon footprint (SHEIN produces around 10,000 new items a day).
SHEIN is currently seeking to launch an IPO in the West. Initially, the company hoped to list on the New York Stock Exchange, but US lawmakers have called on the US Securities and Exchange Commission to block any listing on human rights grounds. Anticipating political pressure on US financial regulators over its attempted listing in New York, SHEIN has turned its attention to applying to list on the London Stock Exchange. Seeking a valuation of $50bn, if SHEIN were to list, it would be the second largest valuation on the London Stock Exchange.
SHEIN’s chair met with the Chancellor of the Exchequer in February 2024, and the fashion producer submitted a prospectus to the Financial Conduct Authority in July 2024. Goldman Sachs, JP Morgan, and Morgan Stanley are all advising on the deal.
The Chairs of the International Select Committee, the Foreign Affairs Select Committee, and the Business Select Committee, have all called for the Government to increase its scrutiny of SHEIN ahead of any decision regarding its listing. However, SHEIN’s listing has come at a time when the Government is keen to revive the fortunes of the City of London following the decision of chip designer ARM to list overseas and to encourage UK institutional pension funds to invest more in UK stocks and bonds to bolster the market.
Allowing SHEIN to list without further scrutiny of its human rights record and business practices from financial regulators would damage the City of London’s international standing, undermine its commitments to sustainable investing through Environmental, Social, and Governance (ESG) criteria, and may create a schism between US financial regulators and UK financial regulators.
SHEIN is alleged to have already met with several members of Labour’s Shadow team who will likely become Ministers in the hope of gaining their support for the IPO. The question of whether an incoming government attempts to block SHEIN listing on the London Stock Exchange will become one of the first China issues it has to deal with and will offer outside observers an indication on the direction the wider UK-China relationship may head.
4. How will the UK respond to tensions in the Taiwan Strait?
With much of the world’s attention focused on wars in Ukraine and the Middle East, China has been operating a highly successful ‘grey zone’ strategy against Taiwan. From near-daily incursions of military aircraft into Taiwan’s air-space, punitive trade measures and numerous cyber-attacks, Beijing’s threats are designed to undermine Taiwan’s autonomy, erode its defensive capabilities, and pressure its population towards unification with the PRC. China’s recent ‘Joint Sword’ military exercises around Taiwan suggest that Beijing is considering flexing its muscles against Taiwan in new ways, with drills encircling Taiwan’s outlying islands, while previous exercises threatened ‘on-site inspections’ on ships transiting the Strait. This raises the possibility of China finding new ways to ratchet up the pressure on Taiwan early on in the term of the next UK government, with concerning scenarios including a ‘quarantine’ of Taiwanese goods or attempts to temporarily close sections of Taiwanese air-space.
Though far away, the UK has a core strategic interest in maintaining regional stability and a free and open Indo-Pacific. A firm response to China’s grey zone aggressions against Taiwan is critical to deterring further escalations that could spill over into open conflict. The next UK government must be bolder in clarifying that China’s grey zone tactics are dangerous escalations that are in clear contradiction with both the UK and China’s stated preference for peaceful resolution to cross-strait differences. Having packages of proportionate economic and diplomatic sanctions ready and coordinated with the UK’s allies is crucial to ensuring an effective response to deter a range of escalatory scenarios. In the meantime, deepening cooperation with Taiwan on issues such as cybersecurity and trade – including supporting Taiwan’s application to the CPTPP – can help build Taiwan’s resilience to China’s grey zone aggressions.
5. Can the UK re-start engagement with China?
The previous Conservative government described its three-pronged China policy as “align, protect, engage”, an approach mirrored by the Labour Party’s ‘three C’s’ of “compete, challenge, cooperate”. However, the reality is that the UK has not led major engagements with China since the rapid unwinding of the ‘Golden Era’ approach led by David Cameron and George Osborne, with no UK Prime Minister having visited China since 2018. As a new UK government takes its place, there will be calls to reset the UK’s relationship with China and establish meaningful channels of engagement.
Identifying the right areas for reopening engagement will be a key task for the next government. While attempts to engage China on climate change are worthy, they must be realistic about the extent to which China is willing to compromise on what it sees as primarily an economic security issue. In contrast, action to address the shared global risks posed by the development of AI presents a more feasible route for the UK’s engagement with China. China has already shown considerable interest in this issue, taking part in the Global AI Safety Summit hosted by the UK last year and signing up to the Bletchley Declaration committing to international cooperation in this field. Given the UK’s ambitions to become a global leader in AI, engaging with China through a bilateral dialogue on AI safety presents a significant opportunity for cooperation. Such a dialogue could build upon the success of existing track 1.5 dialogues and could seek to establish common ‘red lines’ on AI development in areas such as bioweapons, weapons of mass destruction and autonomous cyberattacks, as well as common regulations and testing standards.
Similarly, an incoming Government would do well to seek out geopolitical issues on which it might be able to work with China as an interlocutor for a mutually beneficial outcome, whether that is a shared interest in keeping trading lanes open in the Red Sea, the Middle East peace process, or efforts to prevent nuclear proliferation.