It has taken a long time for the West to wake up to the fact that its policy of economic engagement with China has failed. The stated hope was that multilateral trade and investment would not only open a huge market up to Western corporations, help lift millions of Chinese people from poverty and enable Western firms to avail themselves of cheap Chinese labour, but that as China’s prosperity grew she would converge with the prevailing liberal norms of behaviour. Just because it has not worked out entirely as planned does not mean it was not worth a try. But there comes a time to admit defeat. The direction the Chinese regime has moved in since Xi Jinping took the helm is testimony to the failure.

Instead of convergence, China’s success has cemented the Communist Party’s grip on power. With foreign help, the Party has fulfilled its side of the social contract by delivering rising incomes to the people year in and year out. China is now the largest trading nation in the world.

China’s thirst for imported natural resources combined with her manufacturing prowess have made her the most important trading partner to the majority of countries in the world. Her role in the global supply chain – China now commands a 28% share in world manufacturing, twice as large as her share of GDP – affords her considerable leverage. The promise of access to her large and rapidly growing domestic market has all too often proved an irresistible inducement to compliance or acquiescence when she has made demands upon her economic partners. The tariffs on imported barley and the warning for Chinese tourists and students to fear racist attacks if visiting Australia, is but the latest in a long line of geo-economic policies aimed at dictating the domestic policy of other nations.  Japan, Taiwan, the Philippines, South Korea and others have all felt this influence.

Five thousand miles separate the UK from China, and at the macroeconomic level at least, the two economies have not become as intertwined as those of Australia or Japan. China accounts for just 3.5% of UK exports of goods and services. Reflecting the asymmetry of the relationship, imports from China account for 7% of the UK’s total. We run a current account deficit of about £22 billion with China, a gap that has grown exponentially since China’s accession to the WTO in 2001.

Perhaps more telling, China’s marginal propensity to import from the UK – the degree to which our exports grow as the Chinese economy grows – is a derisory 0.2%. In other words, every £100 of economic growth in China adds about twenty pence to our exports. In contrast, our propensity to import from China is about 5%, so every £100 of economic growth in the UK adds £5 to our imports from China. Nor has this ratio improved as China’s wealth has increased and sterling weakened. By extension, even if China’s economic growth miracle were to continue over the next two decades (a big if, given her demographic headwinds and the dramatic fall in the efficiency of her investment), there is little to suggest that the UK’s exporters will strike gold.

It is true that the UK has taken a disproportionately large share of Chinese foreign direct investment (FDI) into Europe, cumulatively China has invested just £40 billion in the UK in the past twenty years. But to put this in context, the total stock of FDI in the UK currently stands at about £1.5 trillion. So China’s share of FDI is less than 3% and her share of the total capital stock of the UK about 1%. Nor is the UK, with some of the deepest capital markets in the world, operating under a capital constraint – the usual reason, along with the desire for inward technology and skills transfer to actively seek FDI.

The UK exports three times as much to the other global super-power, the United States. America also accounts for nearly 30% of the stock of FDI in this country. In reality, Chinese imports are dominated by the raw materials that are the inputs into her manufacturing system: hydrocarbons and metal ores (neither of which the UK has in surplus), and components for assembly into finished products. FDI from China is more about extracting technology from the host country than dispensing it.

we have drifted blindly into dependence on China for critical constituents of everyday life

Germany has carved out a reasonably balanced trading relationship with China based on the export of capital goods and aided by the advantage of sharing a currency with southern Europe. China’s “Made in China 2025” industrial policy, however, is all about seeking Chinese self-sufficiency in the high-end industries including robotics, artificial intelligence and capital goods, and Germany will be the loser. As clear-thinking practitioners of geo-economic policy, Chinese policy makers are all too aware of their own vulnerabilities and dependencies. Germany’s business model towards China may be living on borrowed time. Its main export to China has been technology and knowhow thus “selling the rope by which they will be hanged” as Lenin would have put it. Japan is in the same predicament.

While the macroeconomic numbers suggest we have little to fear from a voluntary or forced decoupling from China, there are two caveats to that. As even the United States has found, China’s grip on global manufacturing means that we have drifted blindly into dependence on China for critical constituents of everyday life: laptops, phones and active pharmaceutical ingredients for example. In doing so we have subjected ourselves to leverage in a way that even a free trader like Adam Smith warned against. Short term efficiency has been elevated not only above dynamic efficiency and longer-term considerations but also above resilience and even national security in determining our trade patterns.

These supply chains have been put in place over twenty years or more and unpicking them or replicating them will take time. Resilience requires diversification and it is unlikely that China’s international manufacturing role will be diminished rapidly or indeed replaced by a single country. Rather, a process of incremental capacity addition in places such as the Indian sub-continent and Africa (where demography almost dictates the majority of manufacturing growth will take place over the next thirty years), combined with greater automation at home, will slacken China’s stranglehold on critical industries and global value chains.

Additionally, the Chinese Communist Party has cultivated constituencies within the West whose interests lie in maintaining the status quo and the continuation of current trends when it comes to commercial relations. While we are only just beginning to find out the degree to which China has penetrated our academic and research institutions, it has long been apparent that financial institutions and commercial enterprises have been doing Beijing’s bidding in and around Western legislatures.

we have subjected ourselves to leverage in a way that even a free trader like Adam Smith warned against

Excessive commercial influence dictating politics is hardly new and the boot was once on the other foot. William Jardine and the Canton merchant community influenced events that caused the Opium Wars and the resulting uneven treaties that still cast a long shadow over Sino-British relations.

More recently, it was a handful of multinational corporations that, intent on availing themselves of the biggest labour arbitrage in history, turned President Clinton from linking economic engagement with China to its progress on human rights, into an unabashed supporter and facilitator of China’s WTO accession on undemanding terms. Since trade, and therefore China’s accession to the WTO, was managed by EU institutions, there was almost no national debate in the UK, nor any other European country.

Wall Street has benefited from the fees earned by raising capital for Chinese companies on American capital markets, and for China’s party-controlled State-Owned Enterprises in Hong Kong. To ease the flow of business, global banks have recruited heavily from China’s “princeling class” – well connected scions of the party elite. The assistance rendered to the Chinese regime has been rewarded financially and acknowledged. The former chairman of Goldman Sachs Asia received the highest level of “China Friendship Award” reserved for foreign experts who have done the most to further the modernization of China. The opening-up of Chinese capital markets to foreign investors now aims to cultivate a further constituency with a vested interest in Western acquiescence towards China – portfolio investors such as pension funds and the institutions they use. Is today’s investor tomorrow’s hostage?

Driven by the hope of winning favour with the Communist Party, and therefore preferential treatment (or at least protection from arbitrary action against them), the Sino-British commercial and financial lobby will push hard for inaction. Their protestations deserve to be heard, but we must not lose sight of their motivations when we weigh the balance of their interests against wider strategic concerns.

The UK trades more with the rest of Asia than with China. Japan is a greater source of FDI. Australia is one of our closest allies. India is a pluralistic democracy whose disputed border with China is a current flashpoint. From Beijing’s military enforcement of the nine-dash line to its Belt and Road Initiative, and the internationalisation and digitalisation of the Yuan, China’s expansion impacts the Pacific region. The UK will find itself with interests and relationships to defend that will largely coincide with American and European ones. Our friends and allies in the region, our economic partners of good faith, will need support. The UK has benefited enormously from the Pax-Americana and the US security umbrella. If Great Power rivalry requires us to choose sides, as it may well do, we should have no hesitation in knowing who our friends are.