Why Brexit might turn Britain into ‘easy prey for toxic investments’.
When it comes to purporting Brexit benefits, trade has an easier case to make than investment.
With regards to trade, leaving the EU wins Britain back the ability to negotiate its own trade deals, paving the way towards a ‘truly Global Britain’ (for an exploration of why this might not be entirely true, see our last Brexit article).
But with regards to foreign direct investment (FDI), member states of the EU already handle their own investment screening, so Brexiting wouldn’t bring any special powers back to Westminster.
However, the EU is becoming increasingly worried about allowing unchecked FDI into the European market. Chinese money not only appears to be buying influence in Brussels, but is also involved in the state-directed strategic acquisition of critical assets, raising concerns in Brussels about technology transfer and Europe’s long term competitiveness.
The European Commission recently proposed a framework for bloc-wide screening of FDI, President Jean-Claude Juncker stating that ‘Europe must always defend its strategic interests’.
Britain on the other hand, has historically aligned itself with the cause of freer trade with China, questioning the EU’s protectionist impulses and fighting to give Chinese investment a more welcome reception.
While Brexiting won’t win us new powers in opening ourselves up to Chinese investment, it might set us on a divergent path to that of the EU-27. Unshackled from the EU’s political agenda, we will be free to pursue an independent policy of turning Britain into a magnet for Chinese cash.
From Osborne Doctrine to Global Britain
Britain’s pursuit of Chinese FDI is a chase that actually came to speed under George Osborne, who (critics suggest) sought to enable the Conservative Party’s austerity agenda with Chinese financing. ‘The Osborne Doctrine‘ came under fire at the time, for obsequiously neglecting human rights issues, but also for selling out British interests in the name of short-term political gain.
It is unlikely that a post-Brexit Britain will become any less open, in fact, the government’s ‘Global Britain‘ rhetoric implies that greater openness to trade and investment will be key in facilitating the UK’s new found independence.
From The Osborne Doctrine to Global Britain, the same criticism can be made, that outsourcing responsibility for critical infrastructure and fuelling the economy with foreign cash is not in Britain’s long term interests.
Franck Proust, a French MEP and the author of a parliamentary report on investment screening in Europe, warns against a ‘British headlong rush to attract foreign investment, either by becoming a tax heaven, or an investors heaven’. Proust told me, post-Brexit Britain will ‘be alone against toxic foreign investments… the UK will not have the luxury to question the origin of these investments, their usefulness for the British economy, or their benefits for British employment’.
For Proust, Britain’s ‘headlong rush’ will be a ‘necessity’ prompted by economic deterioration resulting from Brexit. But whether or not you share Proust’s pessimism about Brexit, ‘dependence on investment’ (albeit framed in more positive terms) does seem to be describe the post-Brexit path of ‘Global Britain’.
The allure of post-Brexit Britain
But all this assumes that post-Brexit Britain will remain an attractive target for Chinese FDI. That is not an assumption shared by all. Pessimists argue that the UK will lose its appeal as an entry hub to the EU if it leaves the single market.
But the message is mixed when it comes to predicting the effect of the UK’s withdrawal on investment flows.
Ahead of the referendum last year, Wang Jianlin, founder of Dalian Wanda Group, commented that ‘many Chinese companies would consider moving their European headquarters to other countries’ if Britain voted to leave.
But after the die had been cast, the tone softened. Tim Summers is generally clear on the negative implications of Brexit, but he admitted to me that ‘there’s still plenty of interest in investing in the UK’ amongst Chinese investors. The disruption of entrenched cross-border supply chains is more relevant to Japanese investment than it is to more recent Chinese FDI, and the fundamental qualities that make Britain attractive to investors will remain post-Brexit.
The financial sector strength of London is one such quality. Whilst some pundits worry that leaving the single market will affect London’s status as a trading hub for Chinese Renminbi (RMB), many are more sanguine.
Oxford University’s Paul Irwin Crookes told me that the picture is mixed, but that ‘knowledge-led eco-systems such as the City of London are difficult to replicate elsewhere because such clusters rely on different types of networks – human, ideational, technological and institutional’.
Accordingly, ‘replacing London’s current position as second only to Hong Kong outside mainland China itself will not be an easy task for any European rival – even Paris’.
But Brexit is unlikely to actively bolster the City’s position as an RMB trading hub. You can debate the extent to which leaving the single market will affect investment flows, but there is no suggestion as to how it might benefit, rather than disadvantage Britain’s appeal.
It is true that the aftermath of the Brexit vote has seen an increase in certain types of investment.
Charles Pittar, Chief Executive of property portal Juwai, claims that Juwai’s UK-centric property enquiries have gone up 60% since the Brexit vote. Pittar therefore finds ‘no indication that Brexit itself is a concern’.
But ‘finding no concern’ is not saying that Brexit will actively increase the UK’s appeal. The UK certainly has assets that will remain of interest to China post-Brexit, but questioning the extent of damage done is not the same thing as calling Brexit a positive force for attracting FDI.
Brexit uncertainty and the depreciation of the pound does seem to have increased the UK’s appeal for opportunistic investors, but this seems a perverse cause for long-term optimism.
The only other way in which Brexit might affect Britain’s long term appeal is by providing political fuel for May’s vision of an aggressively open ‘Global Britain’.
But compared to the concrete negative effects of a single market exit (however much you question the severity of these effects), this is a very vague picture of cause and effect. Besides, the jury is still out on whether May’s “Global Britain” will transform the UK’s economy for the better, or, as Franck Proust puts it, turn the UK into ‘easy prey for toxic investments’.