In 2018 the world was still undergoing economic downturn and austerity. In such context China should attach greater importance to deepening bilateral relations and building a free trade zone (FTZ) network of higher standard. As the sixth-largest economy in the world, the United Kingdom is a key partner for China to explore the way of building high-level FTZ and deepen cooperation with developed countries.

Setting up an FTZ is of practical significance for both China and Britain. For the UK, it could reduce the uncertainty brought by Brexit and offset the negative impacts. For China, this is a valuable opportunity to cultivate new development space and upgrade industrial structure; and meanwhile it is expected to accelerate its domestic reforms in environmental protection and intellectual property protection.

China-UK relations have always been especially important. Upon the founding of the People’s Republic of China in 1949, the United Kingdom was the only Western country to establish a diplomatic relationship with China. In March 2015, the UK took the lead in supporting the China-initiated Asian Infrastructure Investment Bank, followed by South Korea, Germany, France, Australia and other countries.

London's offshore RMB market is second only to Hong Kong regarding size and value. And the UK has mature capital markets and financial institutions of global clout. In the global currency system, with the international share of the pound is ranked second only to the US dollar and the euro. The support from UK in terms of RMB internationalization will bring huge impetus to the procedure.

For the UK, the short-term impact of Brexit and the long-term uncertainty will quicken the pace of renegotiating with major countries on economic cooperation and signing bilateral economic agreements with them. In the post-Brexit era, the UK will enjoy greater autonomy in foreign economic policy, which provides an opportunity for further cooperation between China and Britain, which should cover not only trade, but also finance, investment and environmental protection, among others.

China and the UK have a good foundation for economic cooperation. So, if there is a Brexit, the negotiation of a free trade agreement (FTA) between China and Britain will just be a matter of time.

For now, the China-UK bilateral institutional framework is constantly improving, seeing enhanced coordination of macro development strategies of the two countries. For example, the Northern Powerhouse is docking with the Belt and Road Initiative.

China and the UK have also established a comprehensive dialogue mechanism from the top to the minister level, including the Annual Prime Ministers’ Meeting, the Meeting of the UK-China High-Level People-to-People Dialogue, the China-Britain Economic and Financial Dialogue and the China-UK Joint Economic and Trade Commission.

Also, cooperation between the two countries in the economic and trade fields has deepened in recent years. And the trade structures of the two countries are highly complementary: China is known for its manufacturing, while the UK excels in service industry especially the financing industry. From this perspective, one of the biggest challenges in the China-UK FTA negotiations will be whether China accepts the opening of a higher-level service industry.

When it comes to the financing and investment sectors, London has launched the offshore RMB market in 2011, and in recent years there has been increasing cooperation in green finance.

Also, China's investment in the UK is on the rise. In particular, the British industrial chain receiving Chinese investment continues to expand and the investment has been moving upward along the value chain. Therefore, the prospects of a China-UK FTZ is quite attractive.

The biggest uncertainty and difficulty of establishing a China-UK FTA lies in Brexit.

We do not know exactly how Britain will leave the EU, how long it will take or whether it will take place in a soft or hard manner.

In addition, the UK is a developed country and China is a developing one. Differences in not only languages and history but also values and industrial systems may trigger unexpected problems. For example, the different understanding on the new norms of international economic and trade rules.

What’s more, with China's advancement in higher end of industries, the competition between the two countries might be intensified and undermine the base for cooperation.

In a nutshell, China and the UK are looking at a golden opportunity. As cooperation between the two countries could achieve win-win results, both should actively accelerate the process.

Li Wei is a professor with the School of International Studies, Renmin University of China.

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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