Why the West should stop investing in China

29 March 2021

7:27 PM

29 March 2021

7:27 PM

The Prime Minister has called for an international coalition of free countries to oppose the growing influence of China’s authoritarian dictatorship. But it needs to be a lot bolder. The wheels of international diplomacy turn slowly and the government should make full and immediate use of the powers it already has.

Three decisive steps are already possible.

First, we should stop entities under the control or influence of the Chinese Communist Party (CCP) from buying up our companies, especially infrastructure firms. A Chinese company, for example, controls about 25 per cent of North Sea oil and other companies own gas, water and electricity suppliers in the UK. All Chinese companies are under the influence of the CCP, whether they are nominally private or not.

A good deal of confusion is caused by treating all foreign direct investment (FDI) as beneficial, and occasionally our government proudly declares that the UK has attracted more Chinese FDI than other nations. But the headline measure of FDI does not distinguish between investment in new productive capabilities – like the Nissan factory in the 1980s – and foreign takeovers. Chinese companies often take over rival British firms and add little, if any, new output. In practice, the CCP is positioning itself to pressurise the UK government. If it wanted to, the CCP could one day switch off the lights, or perhaps more significantly, turn off the means of recharging our mobiles.

Second, we should discourage UK companies from investing in China, when they could be investing here. In the hope of selling products to Chinese consumers, and in search of lower labour costs, many Western companies have invested heavily in China. A 2017 study by Professor Michael Enright of the University of Hong Kong for the Hinrich Foundation measured the whole economic contribution of foreign investors in China, including the spending of all the relevant employees. The study looked at the contribution of foreign direct investment, ‘foreign invested enterprises’ and foreign affiliates, and estimated that it accounted for about one third of China’s GDP and over one quarter of China’s employment in the years up to 2014. Most were American companies, with a lot of the money channelled through the Cayman Islands, to hide its ultimate destination. Many were British.

The result has been that companies from Western liberal democracies are using their own resources to bolster the economic and military power of an authoritarian dictatorship. Once free to roam the world as their interests dictated, today’s huge international conglomerates could soon find they have to take orders from the CCP.

Third, we should stop becoming reliant on China for so many goods. We should aim to have at least one, and preferably several, home producers so that we can’t be pressurised. The Henry Jackson Society estimated the extent of our dependency in 2020. It thought that ‘strategic dependency’ arose when a nation was a net importer of a product and imported more than 50 per cent of it from China, when China controlled more than 30 per cent of the global output. The conditions were met for 57 categories of goods and services which had applications in ‘critical national infrastructure’, which made us less vulnerable than the USA, where the figure was 114, but nonetheless leaving us in a dangerous position for a much smaller country.

The government has announced that it has a scheme called ‘project defend’ to guard against supply shortages and to reduce our reliance on Chinese manufacturing, but how it will work is not yet known.

If America followed a similar three-part strategy, China would soon notice: stop selling US companies to China, stop investing in China, and reduce reliance on Chinese imports. It’s not long since America’s politicians were proud to be the leaders of the free world, but they have taken a long holiday from their duties. Will President Biden revive America’s historic mission?

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