Britain needs to face up to post-Brexit realities on China

The decision to delay approval for Hinkley Point C, a French-Chinese nuclear station in Somerset, spells trouble for Britain's go-it-alone future.

Mrs May's decision to defer approval of Hinkley Point C could reflect a broader attitude towards China and Chinese investment.
Mrs May's decision to defer approval of Hinkley Point C could reflect a broader attitude towards China and Chinese investment.

In her first speech as British Prime Minister, Mrs Theresa May promised a "bold, new positive role" for Britain after it leaves the European Union.

Despite the absence of any semblance of a plan, Mrs May pledged that Britain "will rise to the challenge" and emerge from Brexit even stronger than before. And there was a legitimate reason to believe her.

That is, until her government decided to review Hinkley Point C.

The July 29 decision to defer the approval of Hinkley Point C - a proposed 3,200MW electrical nuclear station in Somerset financed by Electricie de France and China General Nuclear Power Group - likely motivated by concerns of national security, could mark a beginning of the foreclosure of Westminster's best option for life after Brexit.

Mrs May's Hinkley Point C decision is worrisome because it seems to indicate a decision by Downing Street against the lone post-Brexit trade model that London could successfully implement ("success" defined as avoidance of recession) - the so-called "Singapore Approach".

Under that model, Britain would unilaterally eliminate all tariffs and rely on the World Trade Organisation Framework, becoming a low-tax, minimal-regulation hub for investment that cuts an extremely favourable contrast with heavily regulated continental European economies.

It is fair to say that this is the only Brexit plan by which success could realistically be achieved because, unlike under the alternatives, whether or not a British exit from the EU is smooth would not depend on whether London secures a series of highly unlikely concessions from Brussels.

Mrs May's decision to defer approval of Hinkley Point C could reflect a broader attitude towards China and Chinese investment.

Under the Singapore Approach, Mrs May's government can leave the EU and avoid economic calamity on its own.

What are the alternatives?

There is the Norwegian model, wherein Britain would join the European Economic Area and retain much of its pre-Brexit relationship with the EU.

Under the Swiss model, Britain would join the European Free Trade Association and then negotiate a series of bilateral agreements to gain access to the EU market. Following the Canadian model, London would negotiate a treaty with Brussels similar to the Comprehensive Economic and Trade Agreement.

And under the Albanian model, Britain and the EU would enter into a trade agreement that establishes a close relationship but does not require London to assume any onerous political or economic obligations.

These alternatives may work for the individual countries, but it is unlikely that Britain will be able to get such concessions from Brussels, or the individual EU countries, after it has voted to leave the EU.

However, for the Singapore Approach option to work, to enable a continuance of British economic growth and an avoidance of recession, Britain needs investors who are willing to take advantage of a low-tax, low-regulation economy and fill the inevitable gap in demand for British goods and services created by Brexit.

And there are few investors more eager than Chinese companies to fill that role.

In fact, with United States investment interest in Britain wavering post-Brexit, and the Russian economy in shambles, China's state-run and private corporations are one of the few sources of of investment into Britain capable of offsetting the effect of leaving the EU.

That is something Mrs May failed to comprehend when she chose to defer the approval of Hinkley Point C. Understandably, China General Nuclear Power Group and the Chinese government reacted with frustration.

Reflecting Beijing's official thinking, an article in the state news agency Xinhua condemned the "suspicious approach" and "unwanted accusations" of the decision.

While some may be quick to dismiss this situation as a sui generis reflection of Mrs May's energy policy, there are signs that her decision reflects a broader attitude towards China and Chinese investment.

On July 31, The Financial Times reported that the British Commercial Secretary to the Treasury , Mr Jim O'Neill, threatened to resign over what he saw as Mrs May's tough position on Chinese investment in Britain in general. Thus, it is not unrealistic to extrapolate a more hostile attitude towards China and Chinese investment from the deferral decision on Hinkley Point C.

As the Xinhua piece noted, that attitude could derail what former British prime minister David Cameron anticipated in an interview with China Central Television last October to be a "golden era" of British-Chinese relations and, in the process, ensure a rather turbulent Brexit.

A combination of Chinese frustration and British recalcitrance could jeopardise everything from London's emerging role as a major overseas yuan trading centre to the £105 billion (S$184 billion) that China plans to invest in British infrastructure over the next decade.

That would certainly then threaten the ability of London to implement the Singapore Approach without a recession or major economic crisis.

Without a strong relationship with China and the economic security that could be derived from it, embracing the Singapore Approach would verge on the irrational, and Westminster would have to focus on a Brexit option grounded in an agreement with the EU.

This would put London at the mercy of the European Commission, an entity that has shown no hesitation to play hardball.

The commission's lead negotiator, French politician Michel Barnier, frequently clashed with former chancellor of the exchequer George Osborne while serving as the EU's internal market commissioner and has been described by former deputy prime minister Nick Clegg as one who "will set alarm bells ringing" for Britain.

With Mr Barnier in charge, the concessions that Britain would need to secure for a pain-free exit become even more unrealistic.

In Sir Arthur Conan Doyle's The Sign Of The Four, Sherlock Holmes says to Watson: "When you have eliminated the impossible, whatever remains, however improbable, must be the truth."

With Mrs May's decision on Hinkley Point C, the Singapore Approach - the one trade model that London could successfully implement on its own without significant strain - edges closer to the impossible.

If that continues, and all signs indicate that it will, Mrs May's government will be forced to confront the cold, hard truth of a very painful Brexit.

  • The writer is the executive editor of the US-based Virginia Journal Of International Law.
A version of this article appeared in the print edition of The Straits Times on August 24, 2016, with the headline 'Britain needs to face up to post-Brexit realities on China'. Subscribe