The chancellor's gamble with China: What price is Rachel Reeves willing to pay for closer trading ties?

10 January 2025, 14:27 | Updated: 10 January 2025, 16:15

Given gilt yields are rising, the pound is falling and, all things considered, markets look pretty hairy back in the UK, it's quite likely Rachel Reeves' trip to China gets overshadowed by noises off.

There's a chance the dominant narrative is not about China itself, but about why she didn't cancel the trip.

But make no mistake: this trip is a big deal. A very big deal - potentially one of the single most interesting moments in recent British economic policy.

Why? Because the UK is doing something very interesting and quite counterintuitive here. It is taking a gamble. For even as nearly every other country in the developed world cuts ties and imposes tariffs on China, this new Labour government is doing the opposite - trying to get closer to the world's second-biggest economy.

The chancellor's three-day visit to Beijing and Shanghai marks the first time a UK finance minister has travelled to China since Philip Hammond's 2017 trip, which in turn followed a very grand mission from George Osborne in 2015.

Back then, the UK was attempting to double down on its economic relationship with China. It was encouraging Chinese companies to invest in this country, helping to build our next generation of nuclear power plants and our telephone infrastructure.

But since then the relationship has soured. Huawei has been banned from providing that telecoms infrastructure and China is no longer building our next power plants. There has been no "economic and financial dialogue" - the name for these missions - since 2019, when Chinese officials came to the UK. And the story has been much the same elsewhere in the developed world.

In the intervening period, G7 nations, led by the US, have imposed various tariffs on Chinese goods, sparking a slow-burn trade war between East and West. The latest of these tariffs were on Chinese electric vehicles. The US and Canada imposed 100% tariffs, while the EU and a swathe of other nations, from India to Turkey, introduced their own, slightly lower tariffs.

But (save for Japan, whose consumers tend not to buy many Chinese cars anyway) there is one developed nation which has, so far at least, stood alone, refusing to impose these extra tariffs on China: the UK.

The UK sticks out then - diplomatically (especially as the new US president comes into office, threatening even higher and wider tariffs on China) and economically. Right now no other developed market in the world looks as attractive to Chinese car companies as the UK does. Chinese producers, able thanks to expertise and a host of subsidies to produce cars far cheaper than those made domestically, have targeted the UK as an incredibly attractive prospect in the coming years.

And while the European strategy is to impose tariffs designed to taper down if Chinese car companies commit to building factories in the EU, there is less incentive, as far as anyone can make out, for Chinese firms to do likewise in the UK. The upshot is that domestic producers, who have already seen China leapfrog every other nation save for Germany, will struggle even more in the coming year to contend with cheap Chinese imports.