The chancellor’s gamble with China: What price is Rachel Reeves willing to pay for closer trading ties?
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’s 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 visit 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.
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How much do we trade with China?
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.
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Why is Rachel Reeves flying to China?
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Whether this is a price the chancellor is willing to pay for greater access to the Chinese market is unclear. Certainly, while the UK imports more than twice as many goods from China as it sends there, the country is an attractive market for British financial services firms. Indeed, there are a host of bank executives travelling out with the chancellor for the dialogue. They are hoping to boost British exports of financial services in the coming years.
Still – many questions remain unanswered:
• Is the chancellor getting closer to China with half an eye on future trade negotiations with the US?
• Is she ready to reverse on this relationship if it helps procure a deal with Donald Trump?
• Is she comfortable with the impending influx of cheap Chinese electric vehicles in the coming months and years?
• Is she prepared for the potential impact on the domestic car industry, which is already struggling in the face of a host of other challenges?
• Is that a price worth paying for more financial access to China?
• What, in short, is the grand strategy here?
These are all important questions. Unfortunately, unlike in 2015 or 2017, the Treasury has decided not to bring any press with it. So our opportunities to find answers are far more limited than usual. Given the significance of this economic moment, and of this trip itself, that is desperately disappointing.
This is the highest stakes diplomacy via social media.
The American president just posted on his Truth Social platform: “We know exactly where the so-called ‘Supreme Leader’ is hiding.
“He is an easy target, but is safe there – We are not going to take him out (kill!), at least not for now. But we don’t want missiles shot at civilians, or American soldiers.
“Our patience is wearing thin. Thank you for your attention to this matter!”
Israel-Iran live: Trump says US knows where Iran’s supreme leader is ‘hiding’
It was followed minutes later by “UNCONDITIONAL SURRENDER!”
In real-time, we are witnessing Donald Trump’s extreme version of maximum pressure diplomacy.
He’d probably call it the ‘art of the deal’, but bunker busters are the tool, and it comes with such huge consequences, intended and unintended, known and unknown.
Read more:
The bunker buster bomb which could destroy Iran’s nuclear ambitions
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Nuclear sites targeted in Iran
There is intentional ambiguity in the president’s messaging. His assumption is that he can apply his ‘art of the deal’ strategy to a deeply ideological geopolitical challenge.
It’s all playing out publicly. Overnight, the New York Times, via two of its best-sourced reporters, had been told that Mr Trump is weighing whether to use B-2 aircraft to drop bunker-busting bombs on Iran’s underground nuclear facilities.
Meanwhile, Axios was reporting that a meeting is possible between Trump’s envoy Steve Witkoff and Iran’s foreign minister Abbas Araghchi.
The reporting came just as Mr Trump warned “everyone in Tehran to evacuate”. The nuclear sites being threatened with bunker busters are not in Tehran, but Trump’s words are designed to stoke tension, to confuse and to apply intense pressure.
His actions are too. He left the G7 in Canada early and asked his teams to gather in the White House Situation Room.
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Trump: ‘I want an end, not a ceasefire’
This is a game of smoke, mirrors, brinkmanship and – maybe – bluff. In Tehran, what’s left of the leadership is watching and reading closely as they consider what’s next.
Maybe the Supreme Leader and his regime’s days are numbered. Things remain very unpredictable.
Listen to The World with Richard Engel and Yalda Hakim every Wednesday
From history, though, regime change, even when it comes with a plan – and there is certainly not one here, spells civil war and from that comes a refugee crisis.
These are truly tense and chaotic times.
World
Ukraine war: 14 killed as Russian missile and drone attacks strike Kyiv – including American citizen
Russian missile and drone attacks have killed 14 people in Kyiv overnight, according to Ukrainian officials.
A 62-year-old US citizen who suffered shrapnel wounds is among the dead.
At least 99 others were wounded in strikes that hollowed out a residential building and destroyed dozens of apartments.
Pic: AP
Emergency workers were at the scene to rescue people from under the rubble.
Images show a firefighter was among those hurt, with injured residents evacuated from their homes.
President Volodymyr Zelenskyy described the attack as “one of the most terrifying attacks on Kyiv” – and said Russian forces had fired 440 drones and 32 missiles as civilians slept in their homes.
“[Putin] wants the war to go on,” he said. “It is troubling when the powerful of this world turn a blind eye to it.”
Pic: AP
Ukraine’s interior minister, Ihor Klymenko, said 27 locations across the capital have been hit – including educational institutions and critical infrastructure.
He claimed the attack, in the early hours of Tuesday morning, was one of the largest on the capital since Russia’s full-scale invasion began in February 2022.
Drones swarmed over the city, with an air raid alert remaining in force for seven hours.
One person was killed and 17 others injured as a result of separate Russian drone strikes in the port city of Odesa.
Pic: Reuters
It comes as the G7 summit in Canada continues, which Ukraine’s leader is expected to attend.
Volodymyr Zelenskyy was due to hold talks with Donald Trump – but the president has announced he is unexpectedly returning to Washington because of tensions in the Middle East.
Ukraine’s foreign minister says Moscow’s decision to attack Kyiv during the summit is a signal of disrespect to the US.
Moscow has launched a record number of drones and missiles in recent weeks, and says the attacks are in retaliation for a Ukrainian operation that targeted warplanes in airbases deep within Russian territory.
Kyiv’s mayor Vitali Klitschko says fires broke out in two of the city’s districts as a result of debris from drones shot down by the nation’s air defences.
Read more from Sky News:
New episodes of The Wargame podcast released
US-UK trade deal is ‘done’, Donald Trump says
Pic: AP
On X, Ukraine’s foreign ministry wrote: “Russia’s campaign of terror against civilians continues. Its war against Ukraine escalates with increased brutality.
“The only way to stop Russia is tighter pressure – through sanctions, more defence support for Ukraine, and limiting Russia’s ability to keep sowing war.”
Olena Lapyshnak, who lived in one of the destroyed buildings, said: “It’s horrible, it’s scary, in one moment there is no life. I can only curse the Russians, that’s all I can say. They shouldn’t exist in this world.”
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