China should be encouraged to build electric cars and renewable energy technology in the UK as part of a new pragmatic trading relationship that would benefit both countries, a former Tory chancellor has said ahead of a landmark visit by Rachel Reeves to Beijing early in the new year.
Philip Hammond, who was chancellor from 2016 to 2019, and the last UK minister to take part in formal economic discussions with China before the process was abruptly ended, told the Observer that while Reeves should never “compromise security for trade”, there were vital economic sectors where deals could be struck.
“Chinese advances in electrical vehicle technology and renewable energy technology do actually offer us a route to delivering on our strategic objectives such as electrification,” Hammond said. “Why wouldn’t we encourage the Chinese to build renewable energy technology and electrical vehicles in the UK, just as the Japanese did in the 1980s?”
At the same time, Jim O’Neill, a former chairman of Goldman Sachs Asset Management and an ex-Treasury minister who made his name by identifying the rise of four leading emerging market economies – Brazil, Russia, India and China – also said Chinese production of electric cars in the UK should be considered.
“If we are genuinely interested in developing trade relationships more to help us achieve stronger growth, then we have to balance the competing interests proportionately – security, defence and the desire for growth,” O’Neill said. “We need to approach it [by thinking about] how they might genuinely benefit more from our strengths, and how we can benefit from theirs. And in making this decision, does it compromise the non-economic interests? The production of electric cars in the UK is an obvious area to explore.”
Reeves will lead a large UK delegation to China in the second week of January. Treasury sources said that the British business part of the delegation would be headed by the HSBC chairman, Mark Tucker. It is expected that any deals with the Chinese that would be to their advantage would be in return for greater UK access for Chinese financial services.
Reeves, who will meet China’s vice-premier He Lifeng in Beijing, before going to Shanghai to see British firms operating in the world’s second largest economy, is desperate to find ways to generate growth in the UK following a wave of gloomy announcements about stubbornly high inflation and low growth in the domestic economy.
Last week, referring to Reeves’s November budget in which she increased costs for business by raising employers’ national insurance contributions and the national minimum wage, the Bank of England noted “significant uncertainty around how the economy might respond to higher overall costs of employment”. This was after its monetary policy committee had held the benchmark interest rate at 4.75%.
It also cited risks to the economy from geopolitical tensions and global trade uncertainty. This appeared to be a reference to US president-elect Donald Trump’s plans to slap huge tariffs on imports into the US, including 60% on goods from China.
Reeves’s visit is intended to restart the process of economic and financial dialogue that was put on ice after Hammond’s last visit to China as chancellor in 2019. The energy and climate change secretary, Ed Miliband, will also visit China early in 2025 for talks on clean energy and climate change. Kickstarting a new era of closer relations with China – let alone discussing the Chinese increasing their manufacturing interests in the UK – will prove hugely controversial after the Chinese businessman Yang Tenbo, who had links to Prince Andrew, was recently expelled from Britain on suspicion of spying.
Hammond said, however, that Reeves should enter talks with the Chinese “with her eyes open”, aware of the need not to compromise UK security, but also with a pragmatic attitude and with British economic interests in mind.
“You can have any conversation with the Chinese; there is nothing off limits, so long as it is in private,” Hammond added. “What they will not respond well to is lecturing in public but in private you can discuss the most difficult subjects.”
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He said that in 2015, in an attempt to heal a rift with China over a 2012 meeting between David Cameron and the Dalai Lama, the Tory government of which he was part had overdone attempts to make it up to China, and struck the wrong tone. “With the benefit of hindsight, we overhyped the rapprochement with China. We had this terrible business with the Dalai Lama, and Cameron and Osborne put a lot of time and energy into trying to reopen the relationship. As you often do when the pendulum has swung too far one way, you push back further than it wants to go.
“With hindsight, Osborne talking about the ‘golden era’ of relations between the UK and China and ‘deep and close partnerships’ was a mistake. We were raising expectations about a level of closeness that there could never be because of differing cultural and political traditions. Rather, we should be talking about a pragmatic, mutually beneficial relationship which recognises its boundaries and … works to maximise the benefits for both sides within those boundaries.
“I am pretty optimistic that this is how Labour is now thinking.”
Suggestions that the government could approve large-scale Chinese car production in the UK follows the release of figures, published by the Society of Motor Manufacturers and Traders (SMMT) last week, showing a 30% year-on-year drop in car production in this country.The SMMT said this was due to a combination of factors, including strategic product decisions and weakness in key global markets.