Sino-British relations: Does Brexit signal a rapid end to the “golden era”?

It must have been a shock. Just hours after the board of the French energy company EDF decided to go ahead with the plan to build a new nuclear reactor in Hinkley Point in Somerset, after a months-long impasse, Britain’s new prime minister Theresa May let it be known that she wanted to reconsider the whole project. The French shook their head in disbelief. After all the back and forth, after all the wrangling, multiple delays and the resignation of a board member? May’s announcement was an unpleasant surprise, to say the least.

Admittedly, there are huge doubts about the economics of the project. The nuclear plant will cost around 18 billion pounds to construct and could, according to new forecasts, gobble up another 19 billion pounds during the length of its lifetime. The so called “strike price” on which the previous government and the energy company agreed is still around twice as much as today’s price of a kilowatt hour of energy. Thanks to the global stock market turmoil earlier this year, EDF is worth much less than it was before, adding further to the doubts that have engulfed the project since its early days.

Still, from a French perspective, Hinkley Point C seems worth taking some risk. The reasoning behind this is clear. France prides itself to be a world leader in nuclear energy. Unluckily, in Europe, this energy source has lost a lot of its allure in the wake of Fukushima. Consequently, the majority of new nuclear plants that are being planned or constructed happens to be located outside of Europe. China is, with a huge margin, the country that is and will be building the largest amount of nuclear power plants on earth, for the foreseeable future.

And that’s where it gets interesting. In order for France to retain its status as a leading nuclear power, it needs to demonstrate that it can successfully develop and build new nuclear plants, ideally in Europe, its home market. China, on the other side, has started to compete aggressively for business outside of Asia and is trying to sell its Hualong One reactor – it is, according to Chinese officials “their own” design – to governments in Latin America, in Africa and the UK. Therefore, the predominantly state-owned French energy company has decided to go ahead with Hinkley Point C, even if the numbers don`t stack up.

Ironically, EDF still needs Chinese capital in order to lift the financial burden that comes along with building the new reactor. About a third of the investment comes from a Chinese consortium, among them CGN, China General Nuclear Power Group. For the Chinese side, the project functions as a bridgehead into the UK. Already in 2014 did the Chinese and the British government sign a Memorandum of Understanding according to which the Chinese would be given the right to design, build and operate a reactor on British soil. To start, a so called test-reactor was to be build in Bradwell in Essex. This agreement fit quite nicely into the Chinese strategy to export its Hualong One technology to foreign countries. That it was the UK, once the most powerful nation on earth, that accepted this, must have appeared as an extremely lucky pull.

But then came the vote for Brexit and with it, the new Prime Minister. Contrary to her predecessor, Theresa May does not have the reputation of being too China-friendly. She is said to have been sceptical about the advances that David Cameron and his Chancellor George Osborne have made to the Chinese, an abrupt U-turn after Cameron’s meeting with the Dalai Lama that led to a sudden shock-freeze of Sino-British relationships.

Only last October did President Xi Jinping travel to the UK, ending a ten-year period during which the Chinese President did not visit the country. He was given everything the UK had to offer: A stay at Buckingham Palace, a ride in the Royal Carriage, a beer with “Dave” in a local pub. Add to that trade deals worth nearly 40 billion pounds and you had both a happy PM and a happy Mr. Xi (whose country was courted by its former oppressor – the Chinese view on the UK – with the world to watch).

Not only the French, but also the Chinese have recently shaken their head in disbelief. For them, a lot is at stake. Will their Hualong One export-strategy fail, now that the UK is no longer that interested in the deal? It seems that Beijing thinks exactly that. Both the Chinese media as well as the Chinese ambassador to the UK, Liu Xiaoming, have criticised May’s decision heavily. Ambassador Liu even went as far as to indirectly threaten the UK: “Right now, the China-UK relationship is at a crucial historical juncture . . . I hope the UK will keep its door open to China,” Mr Liu wrote in the Financial Times.

This happens at a time when the UK has lost some of its attraction for Chinese investors already. Once outside the EU, the country will no longer function as a gateway into the EU. Still, because of its openness, the weakened Pound Sterling and the relative ease of doing business, investors will retain some interest in the UK. Given that there will likely be less investment from Continental Europe, once the UK has left the EU, the country needs these Chinese investors more than ever. But – what an irony – the new government does the opposite: It works very hard on harming its reputation as an open, China-friendly country in the center of Europe. Very bad timing, I guess.

I am of course aware that some people think that Hinkley Point is just one example out of many where China poors money into the UK. Yes, overall, there is still a case for Chinese investments in the UK, after all, assets are now dirt-cheap, compared to the price levels they were at before the 23rd of June. But, don’t forget: Chinese overseas investments are heavily influenced by the central government and by priorities that have been formulated by Beijing. State investments and private investments are often intertwined. Should the British government go ahead and scrap the project – for budgeting reasons, for security reasons – this will consequently have a lasting, negative impact on the relationship between China and the UK.

That’s not to say that the British concerns should be overlooked. Both costs as well as national security are valid arguments when assessing the feasibility of an endeavour such as Hinkley Point C. Tragically, it’s not as if these issues weren’t obvious before. Already two, three years ago, it was clear that Hinkley Point would be expensive, maybe too expensive.

It was also clear that you would have concerns about national security if you handed control over nuclear power plants to companies from an autocratic country such as China – even if those Chinese nuclear companies were controlled by the same regulators as their British counterparts. The plan to have the Chinese design, build and operate a nuclear plant in Britain did raise a lot of eyebrows at the time, in Germany, but also in other countries. I remember having had strong debates with some of my German readers at the time who thought this was really, really dangerous.

But on the British side, optimism prevailed. Only once you digged a bit deeper, you realised why this was the case: The government desperately needs new power plants. It is already behind schedule in replacing the old fleet and cannot find Western firms except EDF to commit to expensive and large-scale projects anymore. Thus, although there might have been security concerns before, Prime Minister Cameron decided to go for the Franco-Chinese solution, making sure to lobby for additional Chinese investment for big infrastructure projects such as HS2. Theresa May, at that time Home Secretary, did reportedly raise her concerns but did not manage to gain much traction.

Unfortunately, Cameron’s strategy no longer looks as good as it did some years ago. Now, after its U-turn with the Dalai Lama-crisis, the UK risks a second U-turn, away from China. Both issues, the desperate need for new power stations as well as the hot-cold-hot-cold-attitude to China stem from the same problem: The lack of long-term, strategic thinking in this country. That makes the UK government look a bit foolish, in comparison to other European countries, but especially in comparison with countries like China that – thanks to their autocratic, undemocratic form of government – plan in decades, not in months.

The fact that CGN is now under investigation in the US for alleged espionage complicates matters even further. With security becoming an ever bigger issue, will Prime Minister May dare to rebuke the Chinese, risking the relationship that was deemed to be so important by her predecessor? I guess I won’t be the only one watching this space.

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May and Merkel – will they get along?

The parallels are all too obvious. They are both females, in their late fifties or early sixties. They are both pastors’ daughters. They both studied untypical subjects (geography and physics). They are both known for being practical, having a strong endurance and, paying attention to details. In addition to all of this, they have fought their way to the top by beating the competition (mostly men) and by making sure that there is actually not too much competition left to challenge them in the future (Merkel has killed off all critics in her party while May was the last Tory-woman standing after a bruising Referendum campaign).

Both are known to be hard workers. Both have the reputation of wanting to get things done and, of just getting on with it, as people say here in Britain. Both Merkel, the German chancellor, as well as May, Britain’s new Prime Minister, have been around for a while (Merkel since 2005, May since 2010). Both are said to be a “safe pair of hands”, a safe bet. Neither of the two has the reputation of being too emotional, chatty, charming, or anything but business.

So, the question goes, will they get along, the German chancellor and her British counterpart? For sure, the relationship between Merkel and May will be crucial when negotiating Britain’s exit from the EU. Both will be studying each others previous negotiating quite closely, and they will be trying to predict the future by investigating the other’s past behaviour in negotiations where a lot was at stake.

From a German point of view, out of the two choices at hand – Theresa May and Andrea Leadsom – May is definitely the preferred option. This is not so much because she was a soft Remainer, but rather because she is expected to behave fairly rationally, pragmatically and reasonably. That’s not to say that Merkel and others should not expect some tough negotiating. Theresa May will, and I am sure that people in Berlin and Brussels will be aware of this, fight as hard as she can to get “the best deal for Britain”.

A lot will depend on the careful calibration of this relationship. Merkel might help May where other European partners don’t want to. But, as the leading representative of one of the most important trading partners of the UK, she can also play a huge role in massaging May into the desired direction.

As to the end result, I am not sure whether it makes a huge difference whether the two get along well, given the gigantic task that lies ahead of them. There is a fundamental issue here that needs to be resolved but that at the same time seems totally unresolveable. How do you keep full access to the Single Market if you plan to reduce the European Freedom of (Labour) Movement? Any negotiator will have to be very witty to achieve anything that comes close to this.

Depending on how the coming months unfold, Merkel could become May’s interconnector into Brussels and other European capitals. However, it could also be the contrary. Merkel might well become a strong adversary to May, should the British Prime Minister try to use the Europeans currently living in the UK as bargaining chips for the negotiations in Brussels.

However, we should not overplay the importance of the relationship between the two. Germany and the UK no longer have closely aligned interests (at least not as aligned as before June 23rd) and so each side will fight with might for what they want to get out of this situation.

Will the death of Jo Cox make a difference?

It’s been a quieter weekend than I expected. Before the death of MP Jo Cox on Thursday, I braced myself for a Saturday and a Sunday full of heated arguments, nastiness and more lies and half-truths. After the attack on Cox though, both campaigns cancelled their events for Friday and Saturday. Rallies were scrapped, battle buses stayed in their garages. Campaigning resumed mildly on Sunday, with Labour leader Jeremy Corbyn attending the Andrew Marr Show, as did Michael Gove. Prime Minister Cameron appeared on the BBC’s Question Time on Sunday, possibly one of his biggest TV audiences.

With the recall of Parliament on Monday, only Tuesday and Wednesday will provide the opportunity for both sides to try to convince the undecided – currently at 12 percent – and reassure their supporters ahead of the big vote on Thursday. The tone of the debate has become noticeably calmer, less aggressive and I assume that the last days before the referendum will not become as outrageous as they would have had Jo Cox not been killed on Thursday.

Since the attack, I have been asking myself whether this could potentially swing the vote. Will the more sombre tone harm the Leave side? Could the death of Jo Cox, a Labour-MP, lead to more Labour-voters showing up at the polling booth (assuming they registered beforehand)? Will it make Leave supporters think twice and ask themselves whether they really want to vote for a side that has stirred up so much hatred and anger in the run-up to the referendum? Or will it impact the Remain-campaign because it takes away several campaign opportunities for leading politicians to address the crowds? Or, another possibility, will it help Prime Minister Cameron to appear more as a unifying figure which might then lead voters to follow him?

The idea has gained some traction. Some – mostly unnamed – campaign strategists and political scientists think that the murder of Jo Cox could actually “help” the Remain side. Honestly, I am a bit sceptical about this. Yes, maybe it might influence those that are still undecided. But those that already know which way they will vote?

I would like to believe it, yes, but I also have in mind what Andre Spicer, a Professor for Organisational Behaviour at Cass Business in School, explained some weeks ago: With issues as complex as the EU, people tend to make up their mind fairly early, on the basis of what they know at that point in time and what they are told by their peers and closest friends. Thus, the flurry of economic studies that has been published during the last couple of months did not shift the mood as much as one would have hoped.

My colleague Stefanie Bolzen, one of our politics correspondents here in London, visited Jo Cox’s constituency on Friday. According to her, the murder will not change people’s voting intentions on Thursday: “The emotional European idea that people will change their mind about voting Brexit is nonsense”, she wrote on Facebook. “European Wunschdenken. Brits far too pragmatic.”

I am thinking along similar lines. My base assumption is now that there will be vote for Brexit. Not because of the polls. I still don’t trust the polls, independent of which side they see in the lead.

It’s because a part of me has come to realise that a large part of the British population wants to believe in simple solutions for complex problems, irrespective of how unrealistic these solutions are and how far-reaching the consequences of those might be. To me, that’s not just a British problem but a problem that many other Western democracies such as Germany, the US and France face. Donald Trump, Marine Le Pen and the “Alternative für Deutschland”, the alternative for Germany, all avail themselves of this trend.

Somewhere along the line, we seem to have lost that stable majority that was endowed with reason and voted rationally. Looking at all those false claims that are being made by the Leave-campaign and the fact that they do resound with voters, I can only come to the conclusion that this is what people want to believe, independent of whether it is true or not. Leave-campaigner Michael Gove, the former education minister, hit the nail on the head when he – under huge applause – exclaimed that people in this country have had enough of experts”.

That is quite worrying to me. Are people really imbecile enough to think that the elites running the Bank of England, the IMF, the World Bank, the OECD don’t know what they are talking about? With a world that is getting ever more complex, I guess our Western democracies will hit a wall fairly soon, unless we rid ourselves of this narrow-minded attitude.

There are no easy solutions for difficult problems, full stop. I guess that Brits might have to go the hard way before they realise. How about if we have a third EU-referendum, in about 40 years from now?

Brexit – The Norwegian model

One of the frequently discussed post-Brexit models is the “Norwegian solution”. The oil- and gas rich, but sparsely populated country in the North is not a member of the EU, but of the European Economic Area (EEA), similar to Liechtenstein and Iceland. Technically, it is as much a part of the single market as France, Germany or the UK.

Norways is a regular contributor to EU budgets: It pays into the EEA and Norway Grants scheme (388 million Euro anually) and into a number of other EU programmes like Horizon 2020, Erasmus+ and Galileo. According to the Norwegian mission to the EU, the second amounts to 447 million Euro per year, plus nearly six million Euro for the participation in the Schengen agreement as well as 25 million Euro for the European Territorial Cooperation Interreg. In total, Norway, on average, contributes 866 million Euro per year to the EU budget.

Under the EEA arrangement, Norway has to adhere to part of the existing regulatory framework of the EU. Some areas, for example the fishing and agricultural industry, are excluded from that. Nevertheless, Norway has to accept the European freedom of movement which leads to Norwegians working in the EU and EU citizens working in Norway.

On the political level though, Norway is much less involved than a full EU member. Although it can influence new laws and directives in the early stages by trying to work with the respective EU bodies, it is not involved in drafting new regulation nor in decision-making. As the government in Oslo concludes, “Norway is in practice bound to adopt EU policies and rules on a broad range of issues without being a member and without voting rights”. According to Fullfact.org, new EU rules are passed through a committee before they become Norwegian law. Only in significant cases does the Norwegian parliament consider them.

For those in Britain arguing to “take back control”, one of the core straplines of the Leave-campaign, this cannot be the most attractive route to take after a vote for Brexit. Still sending money to Brussels, still introducing EU laws, but having no real say at all? To me, that does not sound too convincing. If we take immigration into consideration, the Norwegian model appears even less attractive, given that immigration is one of the most important arguments cited by the Leave-side.

Under a Norwegian style EEA-agreement, the UK would still have to allow EU-citizens to come and to work here. Assuming that years after a Brexit vote, the economy would finally recover, there is not much that would keep European workers coming to Britain in similar or even bigger numbers than now. The Norwegian solution hence does not solve the immigration dispute.

Regardless of all these objections, the majority of Brits seems to favour this option. 54 percent of those questioned by YouGov for the Adam Smith Institute would support a Norway-style trade deal in case of a Brexit. Among Brexit-supporters, the figure is even higher (79 percent). Just 25 percent of those surveyed would oppose such an arrangement.

Interestingly enough, the Norwegian model is also the one which would cause the least economic damage, compared to other options such as the Swiss model, the Turkish model or the WTO-model, as the London School of Economics, the National Institute of Economic and Social Research (NIESR) and the Treasury have found out in their various Brexit studies. Nevertheless, the economists at NIESR expect that cost for exports will rise ten to 16 percent, compared to today’s levels, as will prices for costs for imports (eleven to 17 percent).

So how does that work? Why would the majority of Leave-supporters vote in favour of a Norwegian-style model, given that immigration is one of the core concerns for why the UK should leave the EU? For me, this is another strong indicator of the lack of coherence on the Leave-side. If European immigration is really the reason for why people think the UK should leave the UK, a continuation of the freedom of labour can obviously not be what people want.

Even if this might be the most economically feasible option on the table (which remains to be seen), it seems quite daring for any politician to negotiate a Norway-type treaty with the EU after a Brexit-vote. That’s why David Cameron has already signalled his opposition to a Norwegian solution should there be a vote for Brexit. The Prime Minister told the BBC’s Andrew Marr show during the weekend that it would be impossible to follow the Norwegian model by remaining inside the single market despite being outside the EU because that would mean accepting freedom of movement and trade legislation made in Brussels. “What the British public will be voting for is to leave the EU and leave the single market”, he said. Were the British public to vote for Brexit, he would take the country out of the single market, the Prime Minister pledged.

But that, of course, remains to be seen as well. I would be very surprised to see David Cameron lose the referendum and still be Prime Minister for long enough to pull the country out of the single market. It might very well be his successor trying to convince voters before the next general election in 2020 that pulling out of the EU was a good idea, even if the immigration issue is – thanks to a Norway-style EEA-agreement – still unsolved.