Today the UK starts the long and tempestuous process of negotiating its exit from the EU and working on a future trade agreement.
But however these talks go (and at the moment, the omens are not promising), post-Brexit Britain will need to aggressively find new partners or strengthen existing ones in order to fill the economic void that will be created from leaving the EU.
The US is a logical, longstanding partner, but in light of President Donald Trump’s decision to pull out of the Paris Climate Agreement and the Trans Pacific Partnership, Britain will need to hedge its bets. The US, at least for the short and medium term future, will make its agenda America First, which obviously doesn’t include Britain.
So with the US on hold, Britain would be well-served to strengthen its economic partnership with China. While China may not seem like the most logical choice given its distant geography and the scores of media reports predicting the country’s economic doom, a strong partnership between the British and the Chinese today could create a windfall for the UK.
First, China’s economy will be much more tightly knitted to Britain’s in the coming years. Since April, Britain and China are now finally connected by a freight rail line. This will speed up trade between the two countries significantly since transport by rail is five times faster than by sea, and 10 times cheaper than by plane.
With this rail link, London can trade with the largest economy in the world by purchasing power parity standards – which could easily replace any lost trade with the EU from a pure market size perspective.
Naturally, it will take some work from British firms to develop new business relationships with this fresh market of Chinese customers, but by beginning that process now, the payoff will be enormous in just a few years.
The opportunity is so significant because China’s economy is not about to collapse as some media stories might assert. China analysts who have predicted its doom have been wrong for more than a decade about their predictions. It is a wonder why anyone even listens to them anymore.
They usually argue that China’s large and rapid debt accumulation is a ticking time bomb.
Large debt loads are not ideal, but they are only problematic when the debt is denominated in someone else’s currency.
When a country borrows in a currency that they have no sovereign control over (such as the case with Greece over the euro), it has less ability to control its destiny because it cannot devalue its currency to lessen the debt burden.
However, when a country issues debt in its own currency, the chickens never have to come home to roost. The US can issue trillions of dollars of denominated debt and live in perpetual deficit spending in both its current and fiscal accounts because the dollar could fall if the current account deficit gets too big.
Likewise, China’s debt is largely denominated in renminbi. Less than a third of its debt is denominated in foreign currencies, so if a credit crisis materialises in China, the Chinese government has the sovereignty and the capacity to clean up the problems swiftly and efficiently.
China is not going to fall apart because of its debt problems. It is also perfectly positioned to accelerate its growth. China’s government has been investing trillions in research and development in all kinds of sectors, ranging from stem cell research to alternative green technology and space exploration. It has come a long way from its reputation for just manufacturing Western knockoffs en masse relying on cheap labour.
And as China is poised to move into the developed country league within a few years, it will devote an even larger part of its economy to the industries of the future.
This will create large untapped markets for the UK, since new industries by definition mean that there are not yet any dominant players.
Just as the invention of the internet created millions of jobs and companies around the world, so will the impact of any new innovation that is coming out of China.
By negotiating with China independently from the EU, the UK may be able to act more swiftly and pragmatically in these type of talks.
Change is never easy, but once the UK has decided on a way forward, it must stay alert and open to the vast possibilities that await it. As Marilyn Monroe famously said: “sometimes good things fall apart so that better things can come together.”
So while the relationship with the EU appears to be falling apart, the UK may find itself in a better situation with closer ties to a vast and growing China.