International Agreements Committee
Tuesday 10th November 2026
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14:01
Lord Johnson of Lainston
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Lord Johnson of Lainston
Well, welcome, everybody, and thank you very much indeed to our two guests, Sir Sebastian Wood, the chair of the China Britain Business Council, and Professor Kerry Brown, professor of Chinese studies at King's College London. Just to remind committee members and our guests of the context, we are writing a report on trade in a turbulent world, clearly sparked by significant tariff volatility coming from the United States, but also driven by the issues that organizations such as the World Trade Organization face and surrounding pressures that come from trade with significant trading partners, particularly China. So we're very grateful today to have both of you here to answer these specific questions, which will then feed into our report.
If we could start with Lord German's question.
If we could start with Lord German's question.
14:02
Lord German
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Lord German
Thank you very much, Lord chair, and welcome. Thank you very much for coming to see us today. I'd like to start with a very open question. And it really is to set the scene, I think, of where will you put UK China trade at present? And given that the figures which we've been provided with suggest that each year the deficit between what we import and what we export, both trade and and services together, is getting larger. And therefore, you might ask the question, I suppose worth asking is how dependent are we now? And increasingly dependent on you on trade with China?
And is there a difference between consumer behaviour and trade behaviour and business behaviour in their attitudes towards this? I have a supplementary, if I may, afterwards, but I think just to set that open picture, that'd be grateful. I don't mind whoever wants to feel. Yeah. Well thank you very much, chair. Thank you very much, Lord chairman, pleasure to be here. I'm here in the capacity of chair of the China-britain Business Council, which has been in existence for 70 years. It's the principal UK China Business Association, some 300 member companies and in terms of market cap, represents about half of the market cap of the FTSE 100.
Obviously, China matters enormously in economic and business terms. Globally, it's now the world's largest economy in terms of purchasing power parity. Second largest economy measured just on GDP. Second largest consumer market. And the figure that interests me, given that we have a growth challenge in in the UK and we need to tap into sources of growth globally, is the fact that over the last decade, roughly 30% of the total volume of global growth has taken place in China in that single country. And although structurally, the growth rate in China has slowed down in recent years, that proportion of roughly 30% of global growth remains more or less unchanged.
It's now our third largest trading partner and our fourth largest export destination. If you include Hong Kong. And we've also been the third largest recipient of Chinese worldwide investment since 2005, after the United States and Australia. So it's already very material to the UK economy. We could perhaps talk in a more specific way about areas of particular importance and particular dependence, but I'd like to quickly highlight what I see as three big strategic opportunities for UK business in the next phase of China's development, because the trade between us at the moment is growing slightly faster than China's overall growth rate, which suggests we're seeing increasing complementarity between the economies of the UK and China.
And if you look at China's recently published five year plan, 15th five year plan, there are a number of areas that fit particularly well with the needs and the strengths of the UK, in particular the desire of the Chinese to develop into a modern services economy and to boost services consumption in China. When they looked for a partner in Europe to be their partner of choice in industrial development in the last couple of decades, they. They went naturally to Germany. But we are the services superpower in Europe, and we ought to be China's partner of choice in developing services.
And the governments, the two governments, the Chinese government in particular, do seem to recognise the particular potential of the services relationship with us. And the two governments have started scoping out a possible services free trade agreement between the UK and China, which, if it was if it was adopted, that would be the first services FTA that China has had with any other major Western economy and would send, I think, a very positive signal around the Chinese system about the potential for more services cooperation between us. So that's one growing area of complementarity between us. I'll just highlight one more, which is the wave of Chinese outbound FDI that we are seeing at the moment as Chinese companies try to escape ferocious domestic competition and the overcapacity problems that exist in China to get closer to their overseas customers and to hedge against possible tariff barriers.
And, you know, this represents a real opportunity for UK services companies who can be their partners as they expand globally and also directly for the UK itself as a recipient of FDI, because we do have many advantages in the UK, we are relatively hospitable to foreign direct investment. And China, if we get more, if we get our fair share of that outbound wave of Chinese manufacturing investment, then we will benefit from the latest technology and industrial processes which the Chinese now have, and it will help our own reindustrialisation agenda and help us to be globally competitive as a manufacturing economy.
And is there a difference between consumer behaviour and trade behaviour and business behaviour in their attitudes towards this? I have a supplementary, if I may, afterwards, but I think just to set that open picture, that'd be grateful. I don't mind whoever wants to feel. Yeah. Well thank you very much, chair. Thank you very much, Lord chairman, pleasure to be here. I'm here in the capacity of chair of the China-britain Business Council, which has been in existence for 70 years. It's the principal UK China Business Association, some 300 member companies and in terms of market cap, represents about half of the market cap of the FTSE 100.
Obviously, China matters enormously in economic and business terms. Globally, it's now the world's largest economy in terms of purchasing power parity. Second largest economy measured just on GDP. Second largest consumer market. And the figure that interests me, given that we have a growth challenge in in the UK and we need to tap into sources of growth globally, is the fact that over the last decade, roughly 30% of the total volume of global growth has taken place in China in that single country. And although structurally, the growth rate in China has slowed down in recent years, that proportion of roughly 30% of global growth remains more or less unchanged.
It's now our third largest trading partner and our fourth largest export destination. If you include Hong Kong. And we've also been the third largest recipient of Chinese worldwide investment since 2005, after the United States and Australia. So it's already very material to the UK economy. We could perhaps talk in a more specific way about areas of particular importance and particular dependence, but I'd like to quickly highlight what I see as three big strategic opportunities for UK business in the next phase of China's development, because the trade between us at the moment is growing slightly faster than China's overall growth rate, which suggests we're seeing increasing complementarity between the economies of the UK and China.
And if you look at China's recently published five year plan, 15th five year plan, there are a number of areas that fit particularly well with the needs and the strengths of the UK, in particular the desire of the Chinese to develop into a modern services economy and to boost services consumption in China. When they looked for a partner in Europe to be their partner of choice in industrial development in the last couple of decades, they. They went naturally to Germany. But we are the services superpower in Europe, and we ought to be China's partner of choice in developing services.
And the governments, the two governments, the Chinese government in particular, do seem to recognise the particular potential of the services relationship with us. And the two governments have started scoping out a possible services free trade agreement between the UK and China, which, if it was if it was adopted, that would be the first services FTA that China has had with any other major Western economy and would send, I think, a very positive signal around the Chinese system about the potential for more services cooperation between us. So that's one growing area of complementarity between us. I'll just highlight one more, which is the wave of Chinese outbound FDI that we are seeing at the moment as Chinese companies try to escape ferocious domestic competition and the overcapacity problems that exist in China to get closer to their overseas customers and to hedge against possible tariff barriers.
And, you know, this represents a real opportunity for UK services companies who can be their partners as they expand globally and also directly for the UK itself as a recipient of FDI, because we do have many advantages in the UK, we are relatively hospitable to foreign direct investment. And China, if we get more, if we get our fair share of that outbound wave of Chinese manufacturing investment, then we will benefit from the latest technology and industrial processes which the Chinese now have, and it will help our own reindustrialisation agenda and help us to be globally competitive as a manufacturing economy.
14:08
Speaker 1
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Speaker 1
Great. Thank you. Thanks for inviting me. And so I think I do . I'd make two comments. One is about the bilateral relationship and then about the broader environment bilaterally. I think UK, China, the trade relationship, the investment relationship is underwhelming. It's, you know, the second largest in terms of gross GDP economy in the world. And yet in terms of the proportion of FTE, I mean, China only accounted for 0.9% of UK outward FDI stock, 0.9%. And in terms of investment into the UK, it's only 0.1% of the total stock. So the stories about China buying up all of our high streets and our companies, it's just not happened.
And and since 2007, it's been constantly speculated, you know, why is this huge economy not doing more here? And in fact, it's actually doing less, probably proportionately than it did before. And there's political and other reasons for that in terms of company exposure. I mean, I just looked at this from only November the 6th, so about 9800 UK VAT registered companies export goods to China, and about 95,000 import goods from China. When you think there's 2.73 million companies in Britain, that means in terms of exporting from China, it's only 3.5% of the companies in Britain deal with China.
So the work of the BBC is very important, because it's not an easy thing to do even to import from China, let alone export there. I think on the the contextual issue, finally, is that although it's true that we are, you know, rising as a trading partner in terms of global ranking to to fourth and third, respectively, China is the largest trading partner to, I think over 100 countries. And so the default now is for China to be your largest trading partner. So the UK is not as exposed as others. Although we're exposed we're not as exposed as others.
The other final point I'll make contextually is dependency in terms of the way in which China shapes the global architecture of trade and investment, obviously is unavoidable. You know, China is the only country that face down Mr. Trump on tariffs by using its raw it's rare metals. It is. And I think this is probably an important thing to acknowledge. A phenomenal capitalist, the world's greatest capitalist now is the Communist Party of China. It delivers solid stakeholder returns for its key shareholder, the party. It is incredibly mean in terms of its model. If you look at social welfare, China's social welfare proportion of GDP, I think is about 5.6%.
In Britain, it's 11%. To my surprise, in America, depending on how you calculate it, it's more in terms of expenditure on healthcare. China spends only 5.5%, Britain sends 11% in America spends 18% of GDP. So China's capitalist model is without social welfare costs and without labor rights. So this is why the great sort of strategic thinker, Elon Musk likes China because although he doesn't like, you know, kind of socialist economies, he thinks the, you know, kind of labor environment there. And the capitalist environment is incredibly competitive. So I suppose I conclude by saying the greatest challenge and the greatest issue that any economy faces with China is very simple.
It can be summed up in two words be competitive. That's all we can do. It's incredibly competitive. And because of technology, it's about to get more competitive.
And and since 2007, it's been constantly speculated, you know, why is this huge economy not doing more here? And in fact, it's actually doing less, probably proportionately than it did before. And there's political and other reasons for that in terms of company exposure. I mean, I just looked at this from only November the 6th, so about 9800 UK VAT registered companies export goods to China, and about 95,000 import goods from China. When you think there's 2.73 million companies in Britain, that means in terms of exporting from China, it's only 3.5% of the companies in Britain deal with China.
So the work of the BBC is very important, because it's not an easy thing to do even to import from China, let alone export there. I think on the the contextual issue, finally, is that although it's true that we are, you know, rising as a trading partner in terms of global ranking to to fourth and third, respectively, China is the largest trading partner to, I think over 100 countries. And so the default now is for China to be your largest trading partner. So the UK is not as exposed as others. Although we're exposed we're not as exposed as others.
The other final point I'll make contextually is dependency in terms of the way in which China shapes the global architecture of trade and investment, obviously is unavoidable. You know, China is the only country that face down Mr. Trump on tariffs by using its raw it's rare metals. It is. And I think this is probably an important thing to acknowledge. A phenomenal capitalist, the world's greatest capitalist now is the Communist Party of China. It delivers solid stakeholder returns for its key shareholder, the party. It is incredibly mean in terms of its model. If you look at social welfare, China's social welfare proportion of GDP, I think is about 5.6%.
In Britain, it's 11%. To my surprise, in America, depending on how you calculate it, it's more in terms of expenditure on healthcare. China spends only 5.5%, Britain sends 11% in America spends 18% of GDP. So China's capitalist model is without social welfare costs and without labor rights. So this is why the great sort of strategic thinker, Elon Musk likes China because although he doesn't like, you know, kind of socialist economies, he thinks the, you know, kind of labor environment there. And the capitalist environment is incredibly competitive. So I suppose I conclude by saying the greatest challenge and the greatest issue that any economy faces with China is very simple.
It can be summed up in two words be competitive. That's all we can do. It's incredibly competitive. And because of technology, it's about to get more competitive.
14:12
Lord German
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Lord German
Can I just follow up that with the slightly variant position taken by the business, Innovation, Science and Trade Committee in the House of Commons, where they talk about having a risk managed growth you both portray be competitive. We need the growth. I don't know whether you understand what they mean by risk managed growth, but is it a sensible approach that you know that you are always very you're much more cautious than you, than you might ever be with other forms of trading partner.
14:13
Speaker 1
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Speaker 1
I mean, so I of course, of course you must have risk management. But, but, but here's the paradigm change. If this committee were meeting five years ago, China is a technology superpower would not be an issue. We would be so exercised by. But in terms of the five year program that Sebastian just referred to in terms of scientists, in terms of universities, in terms of peer reviewed research, it is now either number one or close to number one. I mean, in the web of science, you know, kind of peer reviewed research kind of metrics. Almost every area China is producing globally important research.
Now in terms of technology and innovation, it's a major player. So the opportunity cost is not so much that we deal with China at peril of taking what we have. The opportunity cost is we need access to the things that China's producing in terms of life sciences, in terms of robotics, in terms of AI, in terms of almost every area. And that means the risk management is not defensive. We have to go on the offensive.
So it's a totally different paradigm. That would be my understanding.
Now in terms of technology and innovation, it's a major player. So the opportunity cost is not so much that we deal with China at peril of taking what we have. The opportunity cost is we need access to the things that China's producing in terms of life sciences, in terms of robotics, in terms of AI, in terms of almost every area. And that means the risk management is not defensive. We have to go on the offensive.
So it's a totally different paradigm. That would be my understanding.
14:14
Lord Hannay of Chiswick
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Lord Hannay of Chiswick
Yes. I please don't take this as a as a criticism of your two opening statements, but nobody could accuse either of you of not accentuating the positive. And you have accentuated the positive. And I'm sure you've made a number of extremely telling points, but could you perhaps address some of the negatives? Do you accept, for example, that China does on occasion subsidize its exports and produce a perfectly good case for dumping duties? Do you accept that they are probably more committed to furthering the interests of their country than a British exporter would be? Who might be more interested in the business arguments?
Could you address some of those arguments? Because I'm not wishing to come from where some of the wilder assertions about our trade relationship with China come from, but I don't think it's probably very wise to ignore that there are some quite sharp negatives.
Could you address some of those arguments? Because I'm not wishing to come from where some of the wilder assertions about our trade relationship with China come from, but I don't think it's probably very wise to ignore that there are some quite sharp negatives.
14:15
14:16
Baroness Verma
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Baroness Verma
Thank you, Lord chairman. And in fact, it's it's very much the sort of question I was going to be putting to both both of you today. And it's and it's actually following on from Professor Kerry, your your comment on be competitive, you know, and and then on the flip side of that, well, they don't have social welfare, but, you know, demands and, and labour rights demands in their country. So it's sort of slightly distorting. And to that extent, what to what extent do you think market distorting practices such as those and others in China create problems for a rules based trade nation like ours, for example?
And as and do you see this problem being resolved more so at multi level? Or is it going to be a bilateral to bilateral level?
And as and do you see this problem being resolved more so at multi level? Or is it going to be a bilateral to bilateral level?
14:17
Lord German
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Lord German
Well taking taking both questions together. Of course there are risks and challenges in trade and investment with with China. I, you know, I would broadly categorize them into sort of three areas. One would be those that relate specifically to our own national security, protecting critically important technology and critical national infrastructure. The second would be undue dependence for critical inputs, you know, supply chain dependence. And the third would be the risk of unfair competition, which. Baroness Verma, I think your your question highlights. And, you know, in all of those areas, the UK should act to protect itself, but in a way that is proportionate and transparent.
For example, on in order to protect our critical national infrastructure and ensure that our national security is protected domestically, we will need. We do have certain limitations on inward investment, which are set out in the National Security Investment Act and all countries. You know, all serious economies have similar measures to protect their. To protect their national security. The Chinese certainly do. But it's important that as we apply the rules set out in the Ncia, which I think is being reviewed at the moment by the government, that we ensure that that they are applied in a way which is predictable and transparent and clear so that we don't inadvertently deter legitimate investment, which would not harm our national security, and so that we don't frighten away investors who could bring very valuable new technology and new industrial process knowledge to the UK and increase our industrial competitiveness .
When it comes to supply chain dependencies. I mean, the area we're talking about is where there's an overlap between sort of critical inputs for our economy and undue sort of concentration of supply, or in the worst case, a single supplier in the shape of China or any other country. And this is not just a geopolitical point. You, you know, no, no, no company and no country wants to have single points of failure in critical supply chains. And that was a lesson, of course, that was brought home to us very strongly during the during the pandemic.
So yes, the UK needs to there needs to be a dialogue with between business and government to identify areas where we are at risk of undue dependence or possible single points of failure in critical supply chains. And then the answer should be de-risking and diversification rather than decoupling. If we decouple from China in those areas, we risk in the short term, making our industry less competitive and damaging our own economy. And we also risk doing, you know, wider, wider danger to our competitiveness in the in the long term by damaging the underlying relationship.
For example, on in order to protect our critical national infrastructure and ensure that our national security is protected domestically, we will need. We do have certain limitations on inward investment, which are set out in the National Security Investment Act and all countries. You know, all serious economies have similar measures to protect their. To protect their national security. The Chinese certainly do. But it's important that as we apply the rules set out in the Ncia, which I think is being reviewed at the moment by the government, that we ensure that that they are applied in a way which is predictable and transparent and clear so that we don't inadvertently deter legitimate investment, which would not harm our national security, and so that we don't frighten away investors who could bring very valuable new technology and new industrial process knowledge to the UK and increase our industrial competitiveness .
When it comes to supply chain dependencies. I mean, the area we're talking about is where there's an overlap between sort of critical inputs for our economy and undue sort of concentration of supply, or in the worst case, a single supplier in the shape of China or any other country. And this is not just a geopolitical point. You, you know, no, no, no company and no country wants to have single points of failure in critical supply chains. And that was a lesson, of course, that was brought home to us very strongly during the during the pandemic.
So yes, the UK needs to there needs to be a dialogue with between business and government to identify areas where we are at risk of undue dependence or possible single points of failure in critical supply chains. And then the answer should be de-risking and diversification rather than decoupling. If we decouple from China in those areas, we risk in the short term, making our industry less competitive and damaging our own economy. And we also risk doing, you know, wider, wider danger to our competitiveness in the in the long term by damaging the underlying relationship.
14:20
Lord Johnson of Lainston
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Lord Johnson of Lainston
I don't want to interrupt and to repeat what Baroness Firm has said, but could you cover the question, which is extremely relevant in the sense that there are gross market distortions in China? There are there are there are state operating business. And personally, as a free trader, my initial thinking was always, well, that's great. If they want to work for nothing really, really hard and provide me with lots of cheap stuff, that sounds like a good thing on the surface, but actually it's intensely distortive and very unfair. And it is not something that we should necessarily triumph in lower standards in other countries to allow us to have cheaper inputs.
And the second point, which I think is very relevant in terms of technology, you know, there are headlines today in the papers. There are debates in Parliament today. I'm seeing it on the screens around me, which focus on concepts such as espionage from an on an industrial scale and in other areas. So I don't want to put you on the spot, but those are two crucial points which feed back into the trade discussions. And I wondered if and not to talk over Baroness phone, but I think that's more the question, how do we deal with those, and could we have an assessment of their significance?
And the second point, which I think is very relevant in terms of technology, you know, there are headlines today in the papers. There are debates in Parliament today. I'm seeing it on the screens around me, which focus on concepts such as espionage from an on an industrial scale and in other areas. So I don't want to put you on the spot, but those are two crucial points which feed back into the trade discussions. And I wondered if and not to talk over Baroness phone, but I think that's more the question, how do we deal with those, and could we have an assessment of their significance?
14:22
Lord German
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Lord German
Well, there are, of course, cases of subsidy of preferential finance, cheap finance for Chinese companies given to them by state owned banks and so forth. But actually, to reduce this issue of unfair competition to subsidy debate is actually to to narrow the discussion unduly. It's a much wider issue, which is that China has. A very extensive industrial strategy, a sort of end to end industrial strategy, which includes heavy investment in education, in Stem education in particular. I mean, the talent pipeline pouring out of Chinese universities with Stem PhDs is substantially larger than in the United States, for example, heavy investment in infrastructure and logistics to make it much more convenient and easy for industrial clusters to form themselves and then to operate electrification.
You know, China is well on the way to becoming the world's first electro state and is, you know, companies have access to relatively cheap electricity. So all of these things plus, of course, in many cases, direct state support for companies, although anecdotally, what I'm hearing is that that direct support as China is tightening up fiscally at the moment, the government is actually trying to claw back some of the subsidies that it's previously given to Chinese companies. So the problem we face in the West is that the WTO was not really designed to deal with trade between economies that have such dramatically different basic sort of macroeconomic models.
You know, China's huge industrial strategy, state directed capitalism versus more market driven Western economies. And we've had a bit of a taste of that, I think, with Germany, which had a set of policies that were designed really to support industry and privilege industry over domestic consumption. And even in the case of Germany, we had a lot of tension between Germany and its European partners, Germany and the United States. But this is on a different level because China is so much bigger, and because its industrial policy is so much more extensive. And in terms of what we do about it.
Sometimes the WTO, if there's a specific infraction against the rules, then experience suggests that the Chinese will usually, you know, if the WTO finds against them on a particular case, the Chinese will usually respond and try and bring themselves into compliance. The problem, though, is a lot of what's happening is outside the ambit of the WTO rules altogether. And what we seem to be seeing is that the world is moving towards a paradigm of everyone having an industrial policy. Certainly, we've seen that in the United States over the last decade, and the EU seems to be moving in the same direction.
And our own government is talking about reindustrialisation. And we have a you know, we have an industrial strategy now. So that seems to be part of the answer is to invest in your own industry domestically. And the other part of it is, is to move towards more managed trade. The US and China now have a Board of Trade to, you know, to sort of manage tariff levels, which may or may not be WTO compliant, are probably not WTO compliant, but they talk about them and and try and do deals on them. Anyway. We we've got the dialogue between Keflavik, the trade commissioner in the EU, and Hurley Feng, the Chinese vice premier, where they recently agreed an ad hoc deal with voluntary restraint on Chinese exports of hybrid vehicles to the EU and the UK and China have now set up a bilateral body to.
I think it's called the trade remedies mechanism. So we have a nascent sort of mechanism with the Chinese ourselves for managed trade. And I'm going on too long.
You know, China is well on the way to becoming the world's first electro state and is, you know, companies have access to relatively cheap electricity. So all of these things plus, of course, in many cases, direct state support for companies, although anecdotally, what I'm hearing is that that direct support as China is tightening up fiscally at the moment, the government is actually trying to claw back some of the subsidies that it's previously given to Chinese companies. So the problem we face in the West is that the WTO was not really designed to deal with trade between economies that have such dramatically different basic sort of macroeconomic models.
You know, China's huge industrial strategy, state directed capitalism versus more market driven Western economies. And we've had a bit of a taste of that, I think, with Germany, which had a set of policies that were designed really to support industry and privilege industry over domestic consumption. And even in the case of Germany, we had a lot of tension between Germany and its European partners, Germany and the United States. But this is on a different level because China is so much bigger, and because its industrial policy is so much more extensive. And in terms of what we do about it.
Sometimes the WTO, if there's a specific infraction against the rules, then experience suggests that the Chinese will usually, you know, if the WTO finds against them on a particular case, the Chinese will usually respond and try and bring themselves into compliance. The problem, though, is a lot of what's happening is outside the ambit of the WTO rules altogether. And what we seem to be seeing is that the world is moving towards a paradigm of everyone having an industrial policy. Certainly, we've seen that in the United States over the last decade, and the EU seems to be moving in the same direction.
And our own government is talking about reindustrialisation. And we have a you know, we have an industrial strategy now. So that seems to be part of the answer is to invest in your own industry domestically. And the other part of it is, is to move towards more managed trade. The US and China now have a Board of Trade to, you know, to sort of manage tariff levels, which may or may not be WTO compliant, are probably not WTO compliant, but they talk about them and and try and do deals on them. Anyway. We we've got the dialogue between Keflavik, the trade commissioner in the EU, and Hurley Feng, the Chinese vice premier, where they recently agreed an ad hoc deal with voluntary restraint on Chinese exports of hybrid vehicles to the EU and the UK and China have now set up a bilateral body to.
I think it's called the trade remedies mechanism. So we have a nascent sort of mechanism with the Chinese ourselves for managed trade. And I'm going on too long.
14:26
Lord Johnson of Lainston
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Lord Johnson of Lainston
Thank you. Thank you for that. I would like to press the case. I don't know if my colleagues share my view, but there has clearly been distortions of trade through state action and that that and you can have a discussion whether that's the morally right thing or wrong thing to do. I'm very happy to have that, but we have to accept that point. Professor Brown, and how do we as a country respond to that? And I'd be grateful if maybe you could go back to the original question.
14:26
Speaker 1
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Speaker 1
Yeah. I mean, so the negatives and the sort of idea of bilateral multilateral, I mean, we know a lot about those distortions, right? I mean, when China entered the World Trade Organization in November 2001, I think we we you know, I was in the embassy in Beijing when that happened. And I, I remember there was a sort of feeling that in entering the WTO, it would make China more like us, right? More like a market economy. And that didn't happen. In fact, it just allowed China to pump out GDP growth and quadruple the size of its economy in ten years.
So China is really good at entering these agreements and observing the letter, but not the spirit. And, you know, the EU over the period when we were members, constantly wouldn't recognize China as a market economy. But we're where are we today? Right? I mean, what did we not do? Right. Because it hasn't really changed China. The role of the state is absolutely dominant. But that's also the weakness, I guess, because you're looking at a country that's led by leaders who believe technology will answer everything. And, you know, we have to ask, well, will it? You're also looking at a model, which is probably in terms of energy usage, unsustainable.
It's about okay now, but China's hunger for energy is unsatiated. It's producing more renewable energy than the rest of the world put together. It's still 50% dependent on fossil fuels, though. So that's a weakness. And then demographics. So so Chinese leaders believe they will solve the plunging birth rate. So China's population by the end of this century will probably be half what it is today. They believe that they'll solve it by robotics. And well, this is a massive social experiment. And it could go and may well go very badly wrong. Finally, consumption. So for 20 years I've been asked and been talking about consumption in China being so low, it remains unchanged in 1851, before a committee like this in this parliament, a man called Mr.
Mitchell said Britain will not be able to sell much to China because of its thrifty, consuming behavior. And here we are 180 years later, same issue, and it's an issue for the government. So I think those are some pretty profound negatives. But the problem is China's negatives as a global power are now our negatives too. They're our challenges. If the China economy collapses, it's going to basically bring us all down. So on terms of what can we do, I guess I don't see how we can bilaterally do, do, do a great deal, which is not to, you know, undermine what you're trying to do here.
I mean, it's entirely rational, important to know where we are, but we will only have impact in China in acting in concert with others, either in the European Union or with the United States. And at the moment, can can we work with the United States easily? I don't know, I mean, with the European Union, too, we we have this agreement in October. I mean, that I think Britain would probably be pretty happy being part of talking about hybrids, talking about disease control, clean energy. I mean, these things are all important to us. So I guess the only thing I'd say is that we have to really work multilaterally with China, not not against China, with China, because of scale and because of the way in which China divides those trying to negotiate against it or negotiate with it.
If we do it bilaterally, I can't see how we would really have much impact. I think we're just not a big enough.
So China is really good at entering these agreements and observing the letter, but not the spirit. And, you know, the EU over the period when we were members, constantly wouldn't recognize China as a market economy. But we're where are we today? Right? I mean, what did we not do? Right. Because it hasn't really changed China. The role of the state is absolutely dominant. But that's also the weakness, I guess, because you're looking at a country that's led by leaders who believe technology will answer everything. And, you know, we have to ask, well, will it? You're also looking at a model, which is probably in terms of energy usage, unsustainable.
It's about okay now, but China's hunger for energy is unsatiated. It's producing more renewable energy than the rest of the world put together. It's still 50% dependent on fossil fuels, though. So that's a weakness. And then demographics. So so Chinese leaders believe they will solve the plunging birth rate. So China's population by the end of this century will probably be half what it is today. They believe that they'll solve it by robotics. And well, this is a massive social experiment. And it could go and may well go very badly wrong. Finally, consumption. So for 20 years I've been asked and been talking about consumption in China being so low, it remains unchanged in 1851, before a committee like this in this parliament, a man called Mr.
Mitchell said Britain will not be able to sell much to China because of its thrifty, consuming behavior. And here we are 180 years later, same issue, and it's an issue for the government. So I think those are some pretty profound negatives. But the problem is China's negatives as a global power are now our negatives too. They're our challenges. If the China economy collapses, it's going to basically bring us all down. So on terms of what can we do, I guess I don't see how we can bilaterally do, do, do a great deal, which is not to, you know, undermine what you're trying to do here.
I mean, it's entirely rational, important to know where we are, but we will only have impact in China in acting in concert with others, either in the European Union or with the United States. And at the moment, can can we work with the United States easily? I don't know, I mean, with the European Union, too, we we have this agreement in October. I mean, that I think Britain would probably be pretty happy being part of talking about hybrids, talking about disease control, clean energy. I mean, these things are all important to us. So I guess the only thing I'd say is that we have to really work multilaterally with China, not not against China, with China, because of scale and because of the way in which China divides those trying to negotiate against it or negotiate with it.
If we do it bilaterally, I can't see how we would really have much impact. I think we're just not a big enough.
14:30
14:30
Lord Hannay of Chiswick
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Lord Hannay of Chiswick
Yes. Well, thank you very much, because that covers to some extent what I was going to ask you. I mean, looking at the scene now, one could say that through for reasons that are not entirely rational. We're in a period of calm in trade relations between China and the EU, China and the United States in the case of the United States, because the president of the United States appears to be bewitched by the wonders of a strongman leader, and has therefore called off the trade war, which he kept saying he was going to wage with China.
And I'm not saying that's a good thing, but I doubt if it's the present degree of calm is easily sustainable or likely to be sustained, whether under this president who changed his mind rather frequently or under a subsequent, possibly Democrat president. Secondly, the EU has called off, as it were, an immediate confrontation over electric over hybrid vehicles with the Keflavik agreement. But that's a very one product, and it's probably not going to last for very long. So again, the Buy Europe approach may lead to some rather sharp confrontations. Now, my question to both of you is, where should Britain be situating itself in its trade policy in circumstances where our best guess has to be that China, US and China, EU policy is going to remain pretty tense and pretty troubled.
Where where should be, where should Britain be in that? And I think you have professor Brown have begun to answer that by saying that we can't do it on our own view, which I certainly share. But we have to face the fact that the Chinese were not born yesterday and sitting in Beijing. They will be working out how best to keep the EU, UK and the US apart from. In their dealings on trade and probably others like Japan and Korea as well. And that's a perfectly legitimate thing for them to do. But it's not in our interest.
And I'd like to ask you, both of you, therefore, how you think we can best handle this. Should we be trying to discover more common ground with the United States and the European Union on their handling of trade disputes, in the belief that if we discover identify common ground, particularly if it's WTO compliant, this will be have more impact in Beijing than if we are all heading off in different directions. Or do we try to have a solo British response to all this and forget about what the European Union is doing? Forget about what the US is doing, and I think it would be good to have your comment on how we can maneuver in this, because it's far too often stated the obvious, that President Trump is going to be president of the United States for the next two years, and that's just about enough to be thinking about, isn't it?
And we can't nobody can be expected to know anything beyond that period. But we think a bit about what happens beyond that period, because that is going to be extremely important for British companies and the British economy. So could you comment on how we should handle those two big areas of external tension and any others that you identify?
And I'm not saying that's a good thing, but I doubt if it's the present degree of calm is easily sustainable or likely to be sustained, whether under this president who changed his mind rather frequently or under a subsequent, possibly Democrat president. Secondly, the EU has called off, as it were, an immediate confrontation over electric over hybrid vehicles with the Keflavik agreement. But that's a very one product, and it's probably not going to last for very long. So again, the Buy Europe approach may lead to some rather sharp confrontations. Now, my question to both of you is, where should Britain be situating itself in its trade policy in circumstances where our best guess has to be that China, US and China, EU policy is going to remain pretty tense and pretty troubled.
Where where should be, where should Britain be in that? And I think you have professor Brown have begun to answer that by saying that we can't do it on our own view, which I certainly share. But we have to face the fact that the Chinese were not born yesterday and sitting in Beijing. They will be working out how best to keep the EU, UK and the US apart from. In their dealings on trade and probably others like Japan and Korea as well. And that's a perfectly legitimate thing for them to do. But it's not in our interest.
And I'd like to ask you, both of you, therefore, how you think we can best handle this. Should we be trying to discover more common ground with the United States and the European Union on their handling of trade disputes, in the belief that if we discover identify common ground, particularly if it's WTO compliant, this will be have more impact in Beijing than if we are all heading off in different directions. Or do we try to have a solo British response to all this and forget about what the European Union is doing? Forget about what the US is doing, and I think it would be good to have your comment on how we can maneuver in this, because it's far too often stated the obvious, that President Trump is going to be president of the United States for the next two years, and that's just about enough to be thinking about, isn't it?
And we can't nobody can be expected to know anything beyond that period. But we think a bit about what happens beyond that period, because that is going to be extremely important for British companies and the British economy. So could you comment on how we should handle those two big areas of external tension and any others that you identify?
14:35
Speaker 1
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Speaker 1
Yeah, I mean, I think it's quite a brave assumption to think that America will return to predictability when Trump goes. I think we must have learned to be very, very wary. And I of course, in Europe, we also have competition as well as alliances, I think. So China's largest trading bloc is Asean, the Association of East Asian Southeast Asian Nations. That's its largest over a trillion of trade. And I wonder whether, looking ahead, we explore alliances, loose alliances with a way . Broader group of countries who actually have every. They have the same issues we have with China's distortions.
And it's it's competitive, you know, kind of strategy. And I wonder whether a sort of alliance of some sort with Latin American or African or Asean countries or India would be worth thinking about, because in some areas we have the same worries about China exporting excess capacity, the same worries about security. But we at the moment tend to just put all our eggs into EU and US because they're the biggest markets, but they're getting smaller. So I think we have to be very, very entrepreneurial and creative in the alliances that we're talking about. And after all, this is a period of, you know, increasing multilateralism all over the place, which is just different multilateralism that we've had before.
So I think we should consider that.
And it's it's competitive, you know, kind of strategy. And I wonder whether a sort of alliance of some sort with Latin American or African or Asean countries or India would be worth thinking about, because in some areas we have the same worries about China exporting excess capacity, the same worries about security. But we at the moment tend to just put all our eggs into EU and US because they're the biggest markets, but they're getting smaller. So I think we have to be very, very entrepreneurial and creative in the alliances that we're talking about. And after all, this is a period of, you know, increasing multilateralism all over the place, which is just different multilateralism that we've had before.
So I think we should consider that.
14:37
14:37
14:37
Speaker 1
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Speaker 1
But I mean, if you talk to a Vietnamese, as I did in Oxford in the summer, they had a delegation come over. They trust China less than we do. I mean, we have to learn from these partnerships, right? And I think we have probably a lot of similarity with people that we might not think we do on this particular issue of trading with China, because China's dominance is unprecedented for for a country like this, you know, with its system and its values. And I think we just have to explore tactical ways of achieving what we want, which is a relationship with China, where we at least can control risk but get benefits for our growth and don't get eaten alive.
14:38
14:38
14:38
14:38
14:38
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14:38
Lord German
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Lord German
Well, it's modern in modern economic terms. It's a it's a unique new problem that we face. It seems to me that seems to me pretty, pretty clear to have an economy, as I said before, you know, I mean, we had the situation with Germany where Germany's economic policies were built really to service, you know, an incredibly efficient export engine. And with an economy the size of Germany, you could just about accommodate that within a sort of rules based global trading system, although it did cause significant intra EU tensions and transatlantic trade tensions. But when the economy is the size of China.
The problem is an order of magnitude larger. And that is why we are seeing now, you know, this sort of spill, you know, this this move away from the WTO and towards individual economies adopting their own industrial policies. I mean, as we're back on, I'll come back to Lord Hayne's question, but as we're back to that point, the point about Distortive, you know, the distorted global trade picture, what we do about it. Can I just offer a couple of quick thoughts on that? I mean, first of all, I do think that the situation will evolve.
The, the, the demand in China, you know, as China has sought as the leadership has sought to shift capital away from property sector, which was becoming dangerously overinvested and into technology. They have created this technological juggernaut. But at the same time, they've also created a rather deflationary situation inside China with overcapacity. You know, they've moved capital away from very labor intensive areas of the economy, the property sector, and towards relatively jobs, poor areas of the economy, these sort of super modern factories with hardly any workers in them. So there's a there's a problem with deficient domestic demand which the party are determined to address.
And you see it in the sort of regular policy pronouncements. And indeed in the five year plan, which I mentioned earlier. So over time, it's likely, I think, that China that consumption will increase as a proportion of China's GDP, and that will serve to sort of rebalance trade between China and its partners and will mean a growing export opportunity. And that's that's the first thing I think, that we can and should be doing as a country to address the problem of unbalanced trade with China is we should be really, you know, we should be on an export drive to really help many more British companies address the Chinese consumer market.
And, you know, in Cbbc, we're trying to do that with, you know, a program we have running with China's largest online retailers, jd.com and with other with other sort of big banks as partners, just to try to get more awareness of the export opportunity which is growing in China.
The problem is an order of magnitude larger. And that is why we are seeing now, you know, this sort of spill, you know, this this move away from the WTO and towards individual economies adopting their own industrial policies. I mean, as we're back on, I'll come back to Lord Hayne's question, but as we're back to that point, the point about Distortive, you know, the distorted global trade picture, what we do about it. Can I just offer a couple of quick thoughts on that? I mean, first of all, I do think that the situation will evolve.
The, the, the demand in China, you know, as China has sought as the leadership has sought to shift capital away from property sector, which was becoming dangerously overinvested and into technology. They have created this technological juggernaut. But at the same time, they've also created a rather deflationary situation inside China with overcapacity. You know, they've moved capital away from very labor intensive areas of the economy, the property sector, and towards relatively jobs, poor areas of the economy, these sort of super modern factories with hardly any workers in them. So there's a there's a problem with deficient domestic demand which the party are determined to address.
And you see it in the sort of regular policy pronouncements. And indeed in the five year plan, which I mentioned earlier. So over time, it's likely, I think, that China that consumption will increase as a proportion of China's GDP, and that will serve to sort of rebalance trade between China and its partners and will mean a growing export opportunity. And that's that's the first thing I think, that we can and should be doing as a country to address the problem of unbalanced trade with China is we should be really, you know, we should be on an export drive to really help many more British companies address the Chinese consumer market.
And, you know, in Cbbc, we're trying to do that with, you know, a program we have running with China's largest online retailers, jd.com and with other with other sort of big banks as partners, just to try to get more awareness of the export opportunity which is growing in China.
14:41
14:42
14:42
14:42
14:42
Lord Boateng
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Lord Boateng
My question is about how we in Britain, how we in Britain should respond today, because China has been Africa's largest bilateral trading partner now for 15 consecutive years. I am old enough to remember personally chosen Lai's first visit to Africa. And you've made reference in your evidence to us, to the need for what you describe as some sort of new alliance between Africa, Latin America and India. What I have to say to you is that we have an alliance. It's called the Commonwealth. And what I want to know, which involving all those countries. And what I want to know is how you would suggest the Commonwealth and the UK , within the Commonwealth respond to China's dominance in these areas, whether buy out, out and out mobilization of our interests against theirs or by cooperation where we can cooperate on the development front.
And if you could give us some practical suggestions as to how UK policy might assist either of those approaches, and which of those approaches is most likely to be successful from the point of view of developing nations, and from the point of view of our own economies, that would be of interest to the committee.
And if you could give us some practical suggestions as to how UK policy might assist either of those approaches, and which of those approaches is most likely to be successful from the point of view of developing nations, and from the point of view of our own economies, that would be of interest to the committee.
14:43
14:43
14:43
Speaker 1
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Speaker 1
Look, I mean the so the process and ends I mean the Commonwealth. If it could. I have no idea if the Commonwealth could be focused on a specific issue like creating balanced, sustainable, equitable trading relations with a partner like China. I have no idea. But I think we have to be open minded now. Right. On China's impact in Africa. It really depends on the country and the area. I mean, it's very complicated. It doesn't. I think, to answer your question about development, I don't think so. I think China would not view development in the same way, for instance, as Britain.
It wouldn't.
It wouldn't.
14:44
14:44
14:44
14:44
14:44
14:45
Lord German
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Lord German
I would start from the premise that, you know, I mean, we've been talking about Southeast Asia and Africa, but but the three great markets in the global economy today are the United States, the EU single market, and China. We have chosen to leave the EU. We are now an independent trading country. We have to have the best possible trading and investment relationship with all three of those markets we can't afford. It seems to me, to have the United States dictating the terms of our relationship with Europe. We can't afford to have Europe dictating in detail the terms of our relationship with with China.
When you look at the US China relationship, the source of tension is primarily, I think, about strategic competition and national security. So it manifests really as an effort to decouple in areas of sensitive technology. And, you know, the UK has in the past, on occasion been caught in a kind of crossfire. Because of that, the Huawei case comes to mind. And all I would say is that, you know, in future, I think what we need to do is, is have a very, very forensic focus on our own national interests. We certainly shouldn't be in the business of just sort of copy and pasting other countries sort of export controls and investment restrictions.
We should be always considering our own national interests, the economic costs of doing that, and the opportunity costs of doing that, and where it makes sense for us to do that, then we then we do it, but not otherwise. In terms of the EU, China tensions there, I think more about industrial competitiveness and the EU. You know, the EU industrial incumbents in the EU feeling threatened now by very, very competitive Chinese, Chinese firms. And I think there. You know, obviously we're trying to get closer again to the EU single market. And there may be pressure in some areas for us to align with EU rules, for example, on foreign investment, on Chinese investment.
And we we just need to be careful that in doing that, we don't inadvertently damage areas of our relationship with China, which are important to our future competitiveness. But I'm not you know, I mean, it might actually be an advantage for us. You know, if the EU if the price of having made in Europe status for manufacturers that are based in the UK so that they can export into the single market on a level playing field with other EU producers, if the price of that is that we need to have local content rules for foreign investment in the UK, then, you know, Chinese manufacturers may actually welcome that clarity and it may end up increasing our attractiveness as a destination for FDI from China.
If they think that we invest in the UK, we comply with those rules, and we can be confident that we can export on into the single market from from the UK.
When you look at the US China relationship, the source of tension is primarily, I think, about strategic competition and national security. So it manifests really as an effort to decouple in areas of sensitive technology. And, you know, the UK has in the past, on occasion been caught in a kind of crossfire. Because of that, the Huawei case comes to mind. And all I would say is that, you know, in future, I think what we need to do is, is have a very, very forensic focus on our own national interests. We certainly shouldn't be in the business of just sort of copy and pasting other countries sort of export controls and investment restrictions.
We should be always considering our own national interests, the economic costs of doing that, and the opportunity costs of doing that, and where it makes sense for us to do that, then we then we do it, but not otherwise. In terms of the EU, China tensions there, I think more about industrial competitiveness and the EU. You know, the EU industrial incumbents in the EU feeling threatened now by very, very competitive Chinese, Chinese firms. And I think there. You know, obviously we're trying to get closer again to the EU single market. And there may be pressure in some areas for us to align with EU rules, for example, on foreign investment, on Chinese investment.
And we we just need to be careful that in doing that, we don't inadvertently damage areas of our relationship with China, which are important to our future competitiveness. But I'm not you know, I mean, it might actually be an advantage for us. You know, if the EU if the price of having made in Europe status for manufacturers that are based in the UK so that they can export into the single market on a level playing field with other EU producers, if the price of that is that we need to have local content rules for foreign investment in the UK, then, you know, Chinese manufacturers may actually welcome that clarity and it may end up increasing our attractiveness as a destination for FDI from China.
If they think that we invest in the UK, we comply with those rules, and we can be confident that we can export on into the single market from from the UK.
14:48
14:48
14:48
14:48
Speaker 2
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Speaker 2
Thank you. And I my question does touch on some of the topics that we've already been talking about. So I want to know how the UK should balance its desire for economic growth through trade with China, against concerns relating to supply chain resilience and strategic dependence. And I think link to that. I'd be interested in your thoughts about the business innovation, science and Trade committee suggestion that we establish red, amber and green zones of economic activity. And perhaps linked to that, you probably saw the article yesterday in the Ft about China experts leaving the government.
Do we have the capacity? Are we able to create those kind of clear demarcations of where we have the ability to, to trade in this way? Now, I'm sort of conscious that a lot of our discussions are it sort of goes to Lord Boateng's comments. They're relatively superficial, I think. I worry about how deep our understanding is of how China is actually thinking and operating. So can we decide in a very structural way that there are certain areas of trade that we can participate in, and do we have the know how to be able to do that?
Well, yeah.
Do we have the capacity? Are we able to create those kind of clear demarcations of where we have the ability to, to trade in this way? Now, I'm sort of conscious that a lot of our discussions are it sort of goes to Lord Boateng's comments. They're relatively superficial, I think. I worry about how deep our understanding is of how China is actually thinking and operating. So can we decide in a very structural way that there are certain areas of trade that we can participate in, and do we have the know how to be able to do that?
Well, yeah.
14:50
Speaker 1
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Speaker 1
I mean, it's clearly going to be a far bigger priority than ever before. I mean, until 20 years ago, China was a marginal player really. And now it's central to everything. And to be honest, the Ft. The report was interesting. But we have China experts. I mean, not not a huge number, but we have them only. I have to say from my personal experience, we allow we allowed to speak publicly very easily. We get attacked by lobbyists. We get attacked by people saying that we're paid for by Beijing. I mean, you know, that we get subjected to for freedom of information requests.
I mean, we have people with strong opinions about China in Britain, and some of them are actually advising government, but they don't really have much knowledge, which is that it's a complicated place that involves a lot of complicated judgments. The strategic dependence issue is a great example. What do we do when some of the amazing farmer companies in China produce really good cures for cancer, for instance, which is very likely in the next few years? What do we do when China comes up with no really important technology in AI, in areas where we need access, the game is now how do we get access to what China has not?
How does China get access to us? I mean, of course it's still acting in espionage as an opportunist, but no country really yet has a technology transfer deal with China. The EU was a huge transfer of technology to China. Siemens, you know, the high speed trains, all sorts of things. Avionics, automotive. Where is the reciprocal deal where we get access to Chinese technology? That's the bit that's missing from everyone's trading relationship with China. The EU doesn't have it. I don't think America has it. We are going to need technology transfer from China. And the final thing I'll say is that in two key areas AI and climate change, we don't disagree with China.
This is not like the Cold War on fundamental issues. Actually, we are more aligned with China than we are maybe with the United States. So those are the areas of opportunity.
I mean, we have people with strong opinions about China in Britain, and some of them are actually advising government, but they don't really have much knowledge, which is that it's a complicated place that involves a lot of complicated judgments. The strategic dependence issue is a great example. What do we do when some of the amazing farmer companies in China produce really good cures for cancer, for instance, which is very likely in the next few years? What do we do when China comes up with no really important technology in AI, in areas where we need access, the game is now how do we get access to what China has not?
How does China get access to us? I mean, of course it's still acting in espionage as an opportunist, but no country really yet has a technology transfer deal with China. The EU was a huge transfer of technology to China. Siemens, you know, the high speed trains, all sorts of things. Avionics, automotive. Where is the reciprocal deal where we get access to Chinese technology? That's the bit that's missing from everyone's trading relationship with China. The EU doesn't have it. I don't think America has it. We are going to need technology transfer from China. And the final thing I'll say is that in two key areas AI and climate change, we don't disagree with China.
This is not like the Cold War on fundamental issues. Actually, we are more aligned with China than we are maybe with the United States. So those are the areas of opportunity.
14:52
14:52
Speaker 1
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Speaker 1
I mean, I think it would need the EU to break that one. And they nearly did it with the common agreement on investment kind of in 2019. But that wasn't ratified. But the EU is the regulator is the great, you know, producer of technology that China has used. And we would need an alliance with the EU to get access to these phenomenal companies in China that are producing really important technology. We will need.
14:53
14:53
Lord Anderson of Swansea
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Lord Anderson of Swansea
The Lord German has already mentioned the Business Committee report in the House of Commons talking about risk managed growth with China and suggesting a traffic light system. Red, green, amber. Now, does that come in detail to you? I would value your comments on that report published only on November the 2nd.
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14:53
Lord German
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Lord German
Yeah. On the on the red, green amber point. It seems to me that. You know, obviously it's properly for the government to respond to that. But we we already have something similar in in the National Security Investment Act, which sets out certain sectors where inward investment proposals would fall into the scope of, you know, sensitive sectors and would need to be reviewed. And then some of those that are reviewed have been reviewed to date, have been rejected. A relatively small proportion have been rejected. But if you like, you know, there's a green category outside those sensitive sectors.
Then there's an amber category where things are called in for review. And then there's a red category where the investment is, is, is rejected. So it's not clear to me that it's fundamentally different from the policy framework that already exists in in the UK. I mean, when it comes to avoiding critical supply chain dependencies, it seems to me that this should be about diversification and de-risking, but not about decoupling. You know, the point that Kerry has already made a couple of times is, is absolutely right. You know, we in the past, we have become accustomed to thinking of China as a country that is catching up with the West and seeks to acquire our technology through, you know, technology transfer arrangements, whatever means fair, means and foul.
But actually that's the wrong paradigm. We need to flip that on its head. We are the catch up country now, and we need to think of ways to gain access to Chinese technology. And it may be possible in negotiating FDI projects to negotiate arrangements that allow for the sharing of technology and sharing of industrial process knowledge. And we don't you know, we shouldn't we shouldn't, you know, we need to take that opportunity. Otherwise our industry will be increasingly uncompetitive globally.
Then there's an amber category where things are called in for review. And then there's a red category where the investment is, is, is rejected. So it's not clear to me that it's fundamentally different from the policy framework that already exists in in the UK. I mean, when it comes to avoiding critical supply chain dependencies, it seems to me that this should be about diversification and de-risking, but not about decoupling. You know, the point that Kerry has already made a couple of times is, is absolutely right. You know, we in the past, we have become accustomed to thinking of China as a country that is catching up with the West and seeks to acquire our technology through, you know, technology transfer arrangements, whatever means fair, means and foul.
But actually that's the wrong paradigm. We need to flip that on its head. We are the catch up country now, and we need to think of ways to gain access to Chinese technology. And it may be possible in negotiating FDI projects to negotiate arrangements that allow for the sharing of technology and sharing of industrial process knowledge. And we don't you know, we shouldn't we shouldn't, you know, we need to take that opportunity. Otherwise our industry will be increasingly uncompetitive globally.
14:56
14:56
Lord Anderson of Swansea
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Lord Anderson of Swansea
You share the concern already mentioned by Baroness by in today's Financial Times about the exodus of senior China experts from senior levels of government. I was in the Foreign Office in 1960 when we had similar concerns about Russia, and the Hayter Commission recommended a massive investment at grassroots level in respect of Russia. Should there be such an infrastructural ground level investment in Chinese studies in the UK, you have a vested interest, Sebastian.
14:56
Lord German
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Lord German
My view is, yes. If you look at the level of UK expertise in China, it is far, far higher than the prevailing level of China expertise in the UK. In the United States there is. There's also a need for more China expertise. But I think, you know, with with a number of honourable exceptions, including the professor sitting on my right, we do not have the the the level and depth of China expertise across our academic and think tank community that you see in the United States. There was a very praiseworthy effort, led by the former diplomat Tim Clissold, to introduce an A level on Chinese civilization into the curriculum.
I think he wrote an article recently in the Financial Times about it. It was endorsed, very widely endorsed, including by many, many vice chancellors from Russell Group universities and the Department of Education, sadly, does not seem to have taken this idea on board. And I think it would be a very good idea. There's a structural problem with Chinese language training in schools in the UK, which is that Chinese kids who are studying in schools in the UK get a guaranteed a star if they do Chinese language. And that skews the the grade distribution and means that it's far harder for British kids to get a a star in Chinese language.
But in any case, you know a study of Chinese civilization, given the. How important China is, has become and is going to be in the future, seems to me to be an eminently sensible component of our of our curriculum for our young people in future, and could easily then lead more of them to study Chinese civilization or indeed Mandarin when they go to university. And that would be a good thing.
I think he wrote an article recently in the Financial Times about it. It was endorsed, very widely endorsed, including by many, many vice chancellors from Russell Group universities and the Department of Education, sadly, does not seem to have taken this idea on board. And I think it would be a very good idea. There's a structural problem with Chinese language training in schools in the UK, which is that Chinese kids who are studying in schools in the UK get a guaranteed a star if they do Chinese language. And that skews the the grade distribution and means that it's far harder for British kids to get a a star in Chinese language.
But in any case, you know a study of Chinese civilization, given the. How important China is, has become and is going to be in the future, seems to me to be an eminently sensible component of our of our curriculum for our young people in future, and could easily then lead more of them to study Chinese civilization or indeed Mandarin when they go to university. And that would be a good thing.
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Lord Johnson of Lainston
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Lord Johnson of Lainston
That's I don't I think to give his his credit, he wasn't saying he made that decision. I think that was one of the rationales behind not propagating it further. We we listened. We hear your points though. We're going to. Come on. Do you have a supplementary question? We're going to come on to the last question and then maybe a few Supplementaries.
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Baroness Lawlor
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Baroness Lawlor
I think we've talked enough about the legally based international trade, and I don't think that I've heard anything to reassure me that we will see a future where Chinese respects, and there is sufficient evidence and way of proving that it respects international law in respect of trade treaties. There are subsidies, there are distortions, there is a surplus. They have all the tools. Now, perhaps you could comment on this view, which I take from this session. The second point, which is in respect of the universities where Sir Sebastian referred to catch up. The UK is in a catch up position.
It depends on what your measure are. If your measures are that we are a democratic Western economy which does things and preserves certain liberties, and we have a certain way of organising our life which is democratic and not autocratic. That means that we have a different measure to a measure of catching up. We can't catch up with China in the way it does business. And I want to mention one other dependency which I'd like you to comment on. So three comments. It's the university sector. Our business bias Committee has put universities in the Green Zone.
This is the zoning exercise we've heard so much about. Now, I'm not sure that that's a very sensible zone to put it in, because it creates a dependency. And dependency also distorts an economy. So if you take the universities with 154,000 Chinese students studying in the UK at the moment, I can assure you that that does have an effect on how we teach and what we teach. It has an effect on the kind of universities Britain has excelled and has four universities in the top ten or top 20 now, in a way that only is rivalled by America.
And there is a distortion there. There is also, with all due respect to Professor Brown, a distortion in your own institute where I think it's. Doctor, I'll have to. I can't pronounce. Yes. Has given the major donation 99% to that institute. But it's not the only one. It happens all over the UK. You have Chinese institutes, Chinese this and Chinese houses and so on. But it creates a distortion no matter how well-meaning, how many critics you have. The case of the problem for us is that that person has advocated and presses for the integration of the Hong Kong economy into China, the Chinese economy.
That surely is not in line with Britain's interests or its own democratic and free market ethos. And for all one says about the United States or other economies, they share an aspiration for democracy and for the rule of law. And therefore I can't see that putting your hands up on any of these matters and saying, we've got to do business with them, is the answer.
It depends on what your measure are. If your measures are that we are a democratic Western economy which does things and preserves certain liberties, and we have a certain way of organising our life which is democratic and not autocratic. That means that we have a different measure to a measure of catching up. We can't catch up with China in the way it does business. And I want to mention one other dependency which I'd like you to comment on. So three comments. It's the university sector. Our business bias Committee has put universities in the Green Zone.
This is the zoning exercise we've heard so much about. Now, I'm not sure that that's a very sensible zone to put it in, because it creates a dependency. And dependency also distorts an economy. So if you take the universities with 154,000 Chinese students studying in the UK at the moment, I can assure you that that does have an effect on how we teach and what we teach. It has an effect on the kind of universities Britain has excelled and has four universities in the top ten or top 20 now, in a way that only is rivalled by America.
And there is a distortion there. There is also, with all due respect to Professor Brown, a distortion in your own institute where I think it's. Doctor, I'll have to. I can't pronounce. Yes. Has given the major donation 99% to that institute. But it's not the only one. It happens all over the UK. You have Chinese institutes, Chinese this and Chinese houses and so on. But it creates a distortion no matter how well-meaning, how many critics you have. The case of the problem for us is that that person has advocated and presses for the integration of the Hong Kong economy into China, the Chinese economy.
That surely is not in line with Britain's interests or its own democratic and free market ethos. And for all one says about the United States or other economies, they share an aspiration for democracy and for the rule of law. And therefore I can't see that putting your hands up on any of these matters and saying, we've got to do business with them, is the answer.
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Speaker 1
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Speaker 1
Yes, very briefly. So the claim about my institute is not true. Endowments are 100% from a funder, right. That's the way endowments work. We're very lucky to get that money. Minguela has never, ever. And I'll say this, I mean, on oath told me what to say, what to think. And the problem is for the funding. Well, where's the funding going to come from? I'm afraid we were looking for funding from different places. We need to fund China studies in Britain. The government won't fund it. Same with universities. I'm terribly sorry, but there's been very powerful arguments made for the unsustainability of funding of universities through student fees.
For a period of time, we took international students, but that's declining. Actually, the figure you quoted of 145,000, I think it's gone down to 110,000 from China. We're lucky at King's in being competitive because of our global ranking, but because of the rise of Chinese universities in global rankings now we will not get in the future. So you guys will have to come up with a way of getting funding for universities. Everything you say, I completely would agree, but where's the money going to come for this? We don't have to deal with China.
It's absolutely fine. You can make a policy decision to have nothing to do with the place, but it's a massive opportunity cost. And as I say, when Chinese companies produce really important technology in cancer and other areas, are we going to say no to that because of the issues you've talked about? It's an opportunity cost. It's complicated. I don't deny that. But it's not something where we can just say, yes, we don't want you or no, we do want you.
We have to balance things. So I think that's rational.
For a period of time, we took international students, but that's declining. Actually, the figure you quoted of 145,000, I think it's gone down to 110,000 from China. We're lucky at King's in being competitive because of our global ranking, but because of the rise of Chinese universities in global rankings now we will not get in the future. So you guys will have to come up with a way of getting funding for universities. Everything you say, I completely would agree, but where's the money going to come for this? We don't have to deal with China.
It's absolutely fine. You can make a policy decision to have nothing to do with the place, but it's a massive opportunity cost. And as I say, when Chinese companies produce really important technology in cancer and other areas, are we going to say no to that because of the issues you've talked about? It's an opportunity cost. It's complicated. I don't deny that. But it's not something where we can just say, yes, we don't want you or no, we do want you.
We have to balance things. So I think that's rational.
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Lord Johnson of Lainston
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Lord Johnson of Lainston
Chip in? Can I just ask in your answer to consider the point again, we keep returning to a very different type of economy. And you can have lots of debates about whether a certain type is better than others. I personally think that there's been a gross misallocation of capital. Industrial policies are political decisions rather than economic ones. It results in misallocation of capital. That's highly distortive, which is what we're seeing now as a result. But could you touch back again on firstly answering questions of Baroness Lawlor, but the distortion principle, and I still don't think we've heard very clearly how we manage that and how significant you see it is.
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Lord German
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Lord German
Well, when it comes to universities, obviously foreign students are an enormously important education export for this country. And because China is a very large education partner, we have a large number of Chinese students. It's about, as you say, 100 of the order of 150,000. We have even more Indian students. So I would, you know, pose the sort of the question is how Distortive is is that and should we should we be, you know, imposing quotas on the number of foreign students from any given country into our universities? It seems to me that it seems to me that, you know, we're not really economically we're not really in a position to do that.
And Chinese students bring three
And Chinese students bring three
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Speaker 1
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Speaker 1
It seems to me that, you know, we're not really economically we're not really in a position to do that. And Chinese students bring three benefits. They bring direct. revenue to the. universities and they their living expenses in the UK. I think the, you know, they're worth in in the. billions on, on an annual basis for the UK economy. That's money we can ill afford to do without. Secondly, they bring some outstanding.
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Speaker 1
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Speaker 1
Where Chinese. universities now are, I think, the strongest group of universities globally in terms of the number of papers which are cited internationally. And thirdly, of course, Chinese students who've been here and lived here for a few years and spent time here are more. likely in the. future if they go into.
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Lord Boateng
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Lord Boateng
Many outstandingly talented foreign students. I mean, I, as a former chancellor, now Pro-Chancellor of a university in the UK, I welcome Chinese students. I think they make a great contribution to our university. What I want to know is how are we in Britain and how are you in the various circles in which you you move academic and business. How are you encouraging and supporting British students to work in Chinese universities? I've had the pleasure of lecturing at University of Peking when I was Chief Secretary , as as chairman of the English Speaking Union. I've been all over China listening and judging, debating competitions, which is you used to co-sponsor with China, China Daily, where critical thinking was actively encouraged both by the China Daily and by the local party secretaries.
But I'm not clear about what your proposals are and indeed, what your members are doing to encourage and support British students to study in China and to encourage China to .
But I'm not clear about what your proposals are and indeed, what your members are doing to encourage and support British students to study in China and to encourage China to .
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Speaker 1
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Speaker 1
Make much sense or carry much credibility. Well, you know, I mean, what I would say is that. It goes to the point that was raised earlier of the the the lack of a significant China component in our. educational curriculum in the UK. We don't have enough young. people studying Chinese or studying about China at university. If we had more, then we would .
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Lord Boateng
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Lord Boateng
Undoubtedly have more young British people going to China to work. Isn't that rather a chicken and egg? Because if in fact you offered more opportunity for young people to study in China, might they not do what? In my experience, having met them, bright, young, able Chinese students do urge their parents and urge .
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Lord Johnson of Lainston
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Lord Johnson of Lainston
Their government to enable them to study in the UK. So? So before the pandemic, the British Council had a generation UK programme where quite a lot of young British went to. China was very successful. But now, because of the British. Council's financial problems, that doesn't run. So our greatest problem as a university, getting people to, you know, go to China, is that young people don't tend to want to go abroad. And when they go to China, on the whole, they're impressed. They like it. But the figures are way down than before the pandemic. It's a problem.
The pandemic was a great watershed because I think we were really building up, you know, an accumulating interest in China. And lots of people were going. There were direct flights between Beijing and London and Beijing with British Airways and British airlines that don't exist. Now. Tourist numbers have fallen. I mean, that kind of thing really helps. And I think we can put money into elitist, you know, sort of. So Britain produces about. 260 graduates in Chinese language from its universities every year. That hasn't changed for about 40 years. But actually the Swire Foundation supported a Mandarin excellence programme that had.
15,000 young British people engaged with Chinese, and they seem to really enjoy it. So at the grassroots .
The pandemic was a great watershed because I think we were really building up, you know, an accumulating interest in China. And lots of people were going. There were direct flights between Beijing and London and Beijing with British Airways and British airlines that don't exist. Now. Tourist numbers have fallen. I mean, that kind of thing really helps. And I think we can put money into elitist, you know, sort of. So Britain produces about. 260 graduates in Chinese language from its universities every year. That hasn't changed for about 40 years. But actually the Swire Foundation supported a Mandarin excellence programme that had.
15,000 young British people engaged with Chinese, and they seem to really enjoy it. So at the grassroots .
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Lord Johnson of Lainston
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Lord Johnson of Lainston
There is a Hong Kong effect on their desire to go there. I don't think that our young people want to go abroad, period. I mean, it's a generic issue. It's very hard to know. No, I mean, it's very hard, as you said earlier about learning foreign languages. It's very the pressure on people with the debt they take to do degrees in Britain means they just want to get their degree and get working as soon as possible.
And a year abroad is regarded as .
And a year abroad is regarded as .
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Lord Johnson of Lainston
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Lord Johnson of Lainston
It could be that they could actually study there. Yes, it's an interesting point. I'm not sure if I agree with my my children want to go and work and do university in America that's abroad. And it's a question of how it's labelled. There's clearly a lot of work to do here. I don't know, we've gone over time, but if any member who hasn't, I'm going to hold on a second, David, if you don't mind.
Lord MacDonald or.
Lord MacDonald or.
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Speaker 1
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Speaker 1
Just one of you for this question. Sebastian. I think undue. concentration in critical supply chains and in some cases , that may mean dependence on China alone for critical inputs. And I'm not necessarily making a a. geopolitical point here. I mean, there are all sorts of reasons why having a single point of failure in a critical supply chain is. undesirable for a company.
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Lord Johnson of Lainston
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Lord Johnson of Lainston
In the way that British industry hopes? So who wants to answer that? Kerry, do you want to answer that question? Oh, right. So British policy, I've written a book about this, a history of Britain's relations with China for the last 400 years, called The Great. Reversal and British policy towards China for most of that time was we didn't want China that was too strong because it would push us around. We didn't want China that was too weak because it would cause problems and collapse, and we didn't want to get involved with that. And I suppose that that policy was.
probably one we could pursue until about ten years ago, right? 10 or 15 years ago. Nothing in our history of interaction with China for 400 years shows that it is ever likely to be. predictable and, do, you know, become like us. It's never done that. It never will do that. So it will play according to the rules, but it will play with Chinese, meaning it will play with the Chinese feeling. And I think that that's just always going to be the case. Otherwise it would cease being China. I think that one of our great challenges.
geopolitically and economically, is not that China will be dominant and try and push us around so much, but that as we are unable to get involved in geopolitical and other issues because of our economic weakness and what have you, China will not step in in the Middle East and in other places. I think that we're going to have a problem getting China to be a security provider when we can no longer do that. That's not today, but maybe in the future. So I think our challenge is not China being aggressive and assertive. It will be.
And some things that are a direct interest to it. Our challenge will be China just not .
probably one we could pursue until about ten years ago, right? 10 or 15 years ago. Nothing in our history of interaction with China for 400 years shows that it is ever likely to be. predictable and, do, you know, become like us. It's never done that. It never will do that. So it will play according to the rules, but it will play with Chinese, meaning it will play with the Chinese feeling. And I think that that's just always going to be the case. Otherwise it would cease being China. I think that one of our great challenges.
geopolitically and economically, is not that China will be dominant and try and push us around so much, but that as we are unable to get involved in geopolitical and other issues because of our economic weakness and what have you, China will not step in in the Middle East and in other places. I think that we're going to have a problem getting China to be a security provider when we can no longer do that. That's not today, but maybe in the future. So I think our challenge is not China being aggressive and assertive. It will be.
And some things that are a direct interest to it. Our challenge will be China just not .
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Lord Johnson of Lainston
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Lord Johnson of Lainston
And they are its priority. China wants predictability. It doesn't really want what's happening with the tariffs with Trump. And it doesn't really want what's happening in the Middle East. China wants predictability. It is facing a demographic time bomb. It's got. 25% unemployment for its young. It is facing. massive issues with its environment. I don't think it wants unpredictability.
So to that extent, it wants a. utilitarian rule based system not underpinned by values but underpinned by. functionality and use.
So to that extent, it wants a. utilitarian rule based system not underpinned by values but underpinned by. functionality and use.
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Speaker 1
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Speaker 1
Managing risk. One last quick comment. Yeah, I mean, I, I think that. You know, obviously there's been considerable damage inflicted on the system of rules based. international trade, not just by China's economic model, but also by the behavior of the United States in the last decade or so. And, you know.
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Speaker 1
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Speaker 1
China may feel greater political need to position itself as a defender of the rules based. international trading trading system and upholding. WTO rules. I think the Chinese are there was a point in my briefing which I failed to memorize adequately, but there was a point about the Chinese actually engaging in discussion on the interim dispute settlement mechanism.
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Lord Johnson of Lainston
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Lord Johnson of Lainston
Talking about it, but I believe that doesn't cut a lot of grass. We coming to the end of our session, I'm afraid we went on a trip to see the WTO and it. What came back from the discussions we had when we were in Geneva was actually. China was being quite. cooperative in trying to make the WTO work. Specifics about dispute settlement processes, I'm afraid we should .
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Lord Johnson of Lainston
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Lord Johnson of Lainston
To help industry or anything. Yeah. Good. I think that we've covered an enormous amount of ground today. It's worth us having some further thoughts. Certainly extremely grateful to both of you for coming and talking to us. This is a this is a very complex issue. And you rightly say there are no clear answers necessarily one way or the other. And that's exactly what we're trying to get our heads around in this committee is how do you deal with an economy that's very different to ours? How do we make sure that we accommodate that and also profit and prosper from it?
So your answers have been enormously helpful. And .
So your answers have been enormously helpful. And .