The Huawei U-turn will have wide repercussions

The government’s decision to bar Huawei from building the UK's 5G network is not a simple matter of excising the brand name of one manufacturer from telecoms networks. It marks an abrupt and profound reversal of the UK’s stance towards China. That will have repercussions for defence strategy, trade and international relations as well as the organisation of all these within government. It may ultimately prove to affect interest rates and inflation, with an impact on the government’s so far untroubled expansion of borrowing.

The Huawei decision has ended the UK’s “golden era” with China

The move amounts to a screeching U-turn. It comes just six months after the government approved Huawei’s role in supplying parts of the new 5G network, although capped at 35% of the four mobile phone operators and denied a share of core elements because of concerns from the intelligence agencies. The trigger for this change, the government says, was new US sanctions depriving Huawei of the ability to use US components and meaning that the UK and its allies could not verify the security of its equipment. There had, too, been a blowtorch of pressure from Washington to change course.

But it comes, too, after a step up of China’s territorial assertiveness in the region, its persecution of its Uighur minorities and its imposition of extensive new security laws in Hong Kong. When the UK offered a route to residency for three million Hongkongers, a move that China described as “gross interference”, it was clearly an end to the “golden era” of relations between the two countries that George Osborne when chancellor sought to cultivate. Even that may prove an understatement; some Washington analysts are talking of a “new cold war” between the US and its allies and China. The UK’s decisions on China’s role in power stations such as Hinkley will now go a long way to setting the temperature of their relations.

Trade and defence policy will be affected by worsening relations with China

The immediate implications for the UK will be in trade. As the UK tries to build ‘Global Britain’, it will not help to have estranged relations with a country that accounted for £22.6bn of exports (or 3.6%) in 2018. China may well look to strengthen ties with those European countries such as Germany whose companies have built an extensive presence there.

Analysts are also aware that a worsening trade war with China could damage global growth and lead to higher inflation and interest rates. The UK, which will have added to national debt enormously in responding to coronavirus, is vulnerable to a rise in interest rates.

The Huawei decision will also affect defence policy with an impact on the review of foreign, defence and security policy (the “integrated review”) due to be completed this autumn. As a showy sign of commitment, the government let it be known that it would base one of the UK’s two new aircraft carriers, HMS Queen Elizabeth, around the main trade routes of the Indo-Pacific region; that could form part of a flotilla with contributions from other allies. Some military analysts have been sceptical, however, that an aircraft carrier a long way from its home country is anything more than a symbol, and one vulnerable to attack at that.

The integrated review needs to focus on China

For the UK government, this shift in stance will demand several changes. First, it puts more weight on the review underway which will have to be even more integrated than its name implies, taking in trade strategy too. China will be central to these. It is a reminder that economic policy cannot be separated from foreign policy – though with the end of the Brexit transition period fast approaching, that is not a reminder the government should need. Second, it injects even more uncertainty into the economic picture that chancellor Rishi Sunak is attempting to manage. Finally, it shows how much the UK’s fortunes in the next few years and its international strategy are intertwined with those of the US – at a point when that country is struggling itself to control coronavirus and when an unpredictable presidential election is exacerbating cultural and political rifts.  

This latest decision on Huawei may be a good example of changing policy when the evidence on which it is based changes. All the same, the likely need for such a pivot could surely have been foreseen (and UK telecoms spared at least some of the loss of time and investment that will now follow). The US, after all, was hardly coy in making clear its anger at the UK’s tolerance of Huawei. It is to be hoped that the review of foreign, defence and security policy now underway manages a more integrated and astute view of the UK’s stance towards China than the Huawei episode has shown.