21
Examination of witnesses
Charles Lichfield and Dr Francesca Ghiretti.
Q81 The Chair: Good morning everybody, we are live. Welcome to Charles and Francesca. This is the 30th meeting of the committee of this parliamentary Session and it is our eighth evidence session of the inquiry into the UK-US relationship. It is a public session and is being streamed on the parliamentary website as we speak. A transcript will be taken and our witnesses will be allowed to amend the transcript if we get something horribly wrong or they want to amend some point of fact that they have errantly made.
This session focuses on the relationship in the specific context of economic security, and we all join in welcoming our two expert witnesses—I hope I have the pronunciations right—Dr Francesca Ghiretti from RAND Europe and Mr Charles Lichfield from the Atlantic Council, who much to our pleasure has saved any technical embarrassment by flying in from America. I do not know if it is specifically for this; we can flatter ourselves that it is.
Charles Lichfield: You can.
The Chair: It is very good to have you here. We have about an hour for questions. Are either of you against a hard stop? If I clumsily move beyond the 60-minute point, are you in peril in any way? No, okay, but we will try to keep it to about an hour. Can I ask the Members to declare any interests they have when they are asking their questions? Can I ask our witnesses now to give just a brief intro on yourselves? We will then go straight into the question session. Francesca, if you want to just give a brief intro, just to give us some context on your background.
Dr Francesca Ghiretti: Of course. I am the research leader at RAND Europe, where I am also the director of the China Initiative, which is being launched today. Before joining RAND, I worked for the Mercator Institute for China Studies—MERICS—which is Europe’s largest think tank on China, and I did my PhD at King’s College London in the Department of War Studies.
Charles Lichfield: It is a great honour to be here. I am the deputy director of the Atlantic Council’s GeoEconomics Center. I am also the C. Boyden Gray senior fellow, which is a title that allows me to cover transatlantic issues as an economist. I am a British citizen, but I was born in the US so I am also a US citizen. My current stint in Washington has now lasted three years but will hopefully continue—at least a little—beyond today.
Q82 The Chair: You are both very welcome. If I can start, I will take the privilege as the Chair in asking the first question. Please do not leap straight into China because we have a follow-up question on China to come. Could you explain—from your own perspectives—to what extent the United Kingdom and the United States are aligned in their priorities regarding economic security? As I say, aside from China, which we will cover shortly. What are the friction areas as you would see them? Can I come to Mr Lichfield first?
Charles Lichfield: The US and the UK share many principles when it comes to economic security, or at least it was pretty apparent that they did until recently. They believed in an international, rules-based system and open markets. They pushed for the same things in international institutions and generally had a similar approach to dealing with problems to do with supply chains. Usually, market solutions were seen as the priority solution to anything. They have been quite similar for a very long time.
Recently—this predates the Trump Administration—I have seen some frictions. I guess the first difference that has led to some friction is a difference in size. The US can afford to have policies that push US retention of technological dominance and pre-eminence. I know I am not allowed to talk about China in this answer, but the US would like to see itself as technologically ahead of everyone else and puts in place policies—whether you are under Democratic or Republican Administrations—that try to lead to that outcome.
The UK is a smaller market; it is still a very important market but is smaller, so it cannot afford to be technologically pre-eminent in every area. It has to be selective, rational and pragmatic and build alliances so that—with its friends—the West retains some pre-eminence, or at least the ability not to be coerced by adversaries. I would say that is the main difference.
Why does it lead to friction? Even before the Trump Administration came back to power, you saw that the US prioritisation of being ahead—being the technological leader—meant that it was willing to break some principles that it had shared with the UK, so principles of always going with the market solution or opening markets.
When the US saw a need for taking a shortcut, it would do so. The national security prerogative gives the executive branch in the US shortcuts so it can move faster and do things. This has led to some frustrations among allies. The UK is one of them, but there are others that have been frustrated with the US taking this shortcut. The UK obviously has national security policies and sometimes sees economics through that lens, but it cannot take the same shortcuts that the US does.
Q83 The Chair: Is the United States’ ability to be coercive just in technology or a mixture of economic strength and technology?
Charles Lichfield: It is definitely a mixture. The US has financial firepower. Even emerging markets that have, shall we say, a difficult relationship in foreign policy with the US still ideally want to have access to US financial markets. They want to encourage US firms to invest in their markets. So the US absolutely has coercive power beyond just the technology and its military power.
The Chair: Francesca, would you like to complement any of that or add whatever your thoughts are?
Dr Francesca Ghiretti: Charles would probably have said—if he were allowed—that one of the main differences is the approach towards China. The US explicitly targets China in its economic security approach. China is singled out together with a number of other countries, while the UK—much like other European countries—has a country-neutral, country-agnostic approach in its economic security approach. That does not mean that China is not one of the main concerns when it thinks about these policies, but it means that China is not officially singled out. So that would be one of the main differences.
The second one—again related to China—is that the US has been developing what we could call a containment/slowing down of technological development in China, which the UK has not necessarily bought into. Again, this is another area in which the UK is much more similar to European counterparts than the US. It does not mean that it does not share some concerns regarding China’s technological advancement and the risk of these technologies, but it has not necessarily bought into the agenda of containing this technological advancement in China.
The last one would perhaps be slightly different and is selective decoupling. The US—with the previous Administration and this Administration as well—has been advancing selective decoupling in specific strategic areas. We have not necessarily seen that in the UK; it is less evident because the UK—unlike other European countries such as the Netherlands—was not necessarily in the spotlight for export controls that require this type of thinking around selective decoupling.
The Chair: You have crept a toe into China there. Baroness Blackstone has a question.
Q84 Baroness Blackstone: You started to answer the question I was going to answer in spite of what the Chair asked you not to do. But maybe you can take this a little further in looking more directly at how the UK and the US respectively perceive China in their economic activities. There are obviously differences. It would be good if you could perhaps unpick those a little and say whether these slightly different approaches create some friction between the UK and the US, whether that friction is something we can manage, and if so, how.
Dr Francesca Ghiretti: Two very good examples are between the rapprochement agenda that the UK currently has towards China and the almost non-existent rapprochement agenda, although we could question whether the pause in the US-China frictions of the past few days could possibly be a form of temporary rapprochement. That would be the main difference.
The UK has signalled that it is still very much open to doing business with China, even in areas where people would question whether that business is actually positive or negative and whether there are security concerns or not. That is the main difference.
Some differences will become particularly evident if and when the UK-US deal is implemented. I am thinking specifically about the clauses where economic security points have been touched in relation to Section 232 investigations on aluminium, steel, et cetera. In those cases, there could definitely be big friction between the UK and the US. They are in the deal, but whether they will be implemented is a different type of story.
Baroness Blackstone: Charles Lichfield, what is your view on this?
Charles Lichfield: There are differences in UK and US perceptions of China. At least in how the UK speaks about China and the UK Government—both before the general election last year and since—there is some rather aggressive language about China’s behaviour in the global economy that the UK Government are capable of uttering and putting out there and that guides policy. This is not just to please the US; this is an analysis of what British interests are, and I broadly agree with what has been put out there.
I suppose where the difference lies is that the UK has to be pragmatic about its market size and its willingness to attract Chinese investment when it is into the right sectors, and so generally the words that are used are appropriate. In the UK, it tends to be verbs. In the Integrated Review Refresh 2023, that was protect, align and engage. The engage part is directly with China; the align part is working with allies to make sure that together we build resilience against Chinese economic practices and that we cannot be coerced; and protect is selecting the sectors where we really have to be very careful. This is generally a good approach.
The US often claims that its approach is similar and that it does not simply want to cut off from China. At least under the Biden Administration, there was a feeling that allies were starting to get a little worried about how far the US was going on China. President Biden’s national security advisor, Mr Sullivan, went to another think tank—not mine, the Brookings Institution—to actually use language that was very similar to what was used by EU Commission President von der Leyen, saying, “We also want to de-risk, not de-couple.” There is also this expression “small yard, high fence”.
Speaking as the US, we will also be quite selective in the sectors that we are tough on, but we will be very, very tough on those and then open on the rest. That is not necessarily reflective of what is currently happening, and I am not just talking about tariffs. Also under the Biden Administration, the yards got quite big and the fence was getting higher and higher. In my view, despite the efforts by the US to sound more like allies and sound quite balanced, it became tougher and tougher on China, with good reasons.
One final thing I would mention is the influence of Parliaments, given we are sitting in Parliament today. Both in the UK and US parliaments, there are voices that are very hawkish on China, and a lot of the examples they will use will be to do with economics. Obviously, there are concerns about human rights and lack of democracy in China, but they will often use economic examples. This will be used not to scaremonger but just as examples of Chinese influence growing both in the US and the UK. These groups in both the US and UK parliaments work together. They get on quite well and share information, and this is another important influence on what the executive branches in both countries do.
Baroness Blackstone: So what you are really saying is that the current pragmatic policies of the UK are ones that should be continued because of the strength of the Chinese market and its size, rather than us moving towards the more hawkish US Government position.
Charles Lichfield: We should just be very careful about which sectors we designate as inaccessible to Chinese investment and in need of additional protections. But some sectors really do need the protections; I would not deny that for one moment and am very much in favour of them. We just need to avoid “mission creep”.
We also need to bear in mind what other allies are doing. The UK stands out at this point in the G7 for not having any particular protections for its market against cheap Chinese electric vehicles, and the UK is the outlier here. The EU has also done it. Of course, the fence is not as high as it is in the US. I acknowledge that I was advocating pragmatism and a measured approach, but there is also another concern, which is avoiding being a complete outlier.
We will come back to the US-UK deal, but there was some very good news on the British automobile sector. But at some point, it may be a problem if the US notices that the UK is maybe the most open market to Chinese electric vehicles among big partners of the US.
Q85 Lord Grocott: Inevitably, there is a bit of overlap between some questions. Just to say to you that a recurring theme or question that we have found in the evidence that we have had so far has been the extent to which the current US Administration represents a complete departure from what is normal in US foreign and trade policy, or whether it is part of a continuum that is recognisable from one Administration to the next.
In that context, would you agree that the Trump and Biden Administrations had, in some respects, become increasingly protectionist in their attitude to trade, investment and technology, especially, as we have been saying, in respect of China? Do you think it is likely to be a permanent thing? Do you think it is something where the UK might be following suit? Francesca, would you like to kick off with that?
Dr Francesca Ghiretti: I will perhaps leave to my colleague a deeper analysis of the continuation or departure between the two. I would say just a couple of things on this. There is definitely continuation in terms of content and means—which does not need to be said—especially towards the allies. The types of conversations that are being had at the moment are very different compared to those that happened before. I am not saying there did not used to be a form of strong convincing, and Japan and the Netherlands in the context of the export controls of October 2022 are a good example of that. But it is definitely a different type of approach towards the allies and the partners than it used to be before.
When we talk about protectionism, I am always a little wary of talking of protectionism specifically. What we are in right now is something more like economic nationalism, so there is still a lot of space for collaboration if collaboration brings advantages to the national interest but is narrowed down to those areas. So it will not be collaboration because we think that collaboration brings advantage, not advantage to everyone, but exclusively if it brings advantages to your own national interest.
In terms of the UK, we are asking the wrong question. The question should not be “Should we be more assertive?” but “What does the UK want from its economic security agenda, and what is the role of the US in trying to achieve those goals?” So far, I have not really seen clear goals being set by the United Kingdom in terms of what it wants to achieve through an economic security agenda. That creates that friction of the UK negotiating deals and talking to different counterparts, but it is not really clear what the priorities are at the moment. I realise it is a bit of repetition, but that should be priority number one.
We can then have a conversation around, for example, whether protective measures in the United States have been effective—I will leave this to Charles—or whether actually at the end of the day promotive measures, such as the IRA or especially the CHIPS Act, have been more functional to achieving US goals rather than protection.
Charles Lichfield: I very much agree with the premise of the question on the continuum. US politics is very polarised, and so it seems surprising to a casual observer that many of the international economics policies and protectionism tend to be retained by the next Administration, even if they have campaigned against each other quite vociferously.
To go back to 2021 and the arrival of the Biden Administration, the already high tariffs that had been imposed on China by the outgoing Trump Administration—mainly on inputs so that consumers did not notice the difference at first; toys and things like that were not affected, but a lot of inputs going into US manufacturing that came from China saw very high tariffs imposed on them of 60 plus—were kept by the Biden Administration, which launched investigations into them because the statutes obliged it to look into the efficiency of them.
It drew this out for a very long time, and when it really had to, it said, “Oh, we’re keeping them anyway.” They are still there, and now we have additional tariffs that have come in. They have gone down after the deal that was struck in Geneva recently, but that is only for 90 days. The point is the Democratic Administration that came after Trump won kept the tariffs that Trump had put in place, and the tariffs that we end up with after this volatile period where negotiations are going on—on China and perhaps other countries—will probably be retained by a future Democratic or Republican administration. So the tariff side of protectionism has a lot of continuity and is sticky.
On the promotion side, Francesca rightly mentioned that the Biden Administration tried a more positive approach to attracting investment to the US and making conditions for manufacturing in the US more favourable. Allies were quite jealous of the capacity the US had to do this—the fiscal and legislative capacity and the way the IRA is quite efficient. The IRA will be reformed by the Trump Administration, but I can still use the present tense. It is a tax credit, so when you buy your electric vehicle, it is just cheaper because the tax credit has been factored in. You do not need to apply through some form. There are not budgets negotiated between different states; it is just there.
It is similar for renovating your home and putting in green technologies. These subsidies were very efficient and attractive. There is a question over whether they were effective at bringing manufacturing back to the US. The subsidies were expensive. You will all know that US deficits have been quite high in recent years, and the IRA is part of it.
I pulled out some figures from 2024 on the number of jobs. Forbes managed to allocate or analyse that there were 90,000 jobs created by IRA, so every time markets pay attention to the non-farm jobs announcement—every time that is released every month—that is much higher than 90,000 jobs. So the IRA was historic in many ways, but it is just a drop in the ocean at the US scale in terms of jobs created.
The CHIPS and Science Act is mentioned much less, although arguably it was more about the future and future technologies. That only created 36,000 jobs because there are less labour-intensive industries. So these policies were very expensive and did not necessarily lead to much job creation. There are other advantages of course to having some things produced in the US and the engineering taking place in the US, the technology perhaps being leaked less than it would be otherwise.
But on the positive, subsidy-driven side of protectionism, I am not sure we can say undoubtedly that it was an effective or efficient policy; that should be borne in mind by countries such as the UK, which have more fiscal constraints and do not necessarily have the same legal framework. I understand the jealousy, and in a way it was somewhat hostile to allies because there were local content requirements, but I am not necessarily sure the policies will prove efficient in the long term. We will see.
Q86 Baroness Coussins: I would like to ask you about threats to economic security, particularly on the cyber front. To what extent are the measures and initiatives in the US and the UK to combat threats to economic security aligned with each other? And is it important that they should be? For example, do measures that the US has taken mirror at all the powers that the UK Government have under the National Security and Investment Act, and a whole range of other initiatives that they have taken subsequently? Perhaps you could also comment about the extent to which the threats are, potentially, coming from; non state actors as well as state aligned threats. Perhaps Mr Lichfield to start, please.
Charles Lichfield: Thank you. These are areas where it is important that the US and the UK work very closely together, so it is an opportunity for the UK to demonstrate to the US that it is the closest ally and that it has the most compatibility with US systems, including on intelligence. This is not really my field, but within the Atlantic Council I talk to colleagues who are closer to this. The UK is seen as an extremely reliable partner—one that the US is capable of sharing more information and technology with than others. Maintaining some legislative alignment and alignment in approaches enables that to continue. But I will allow Francesca to answer on the rest.
Dr Francesca Ghiretti: Thank you. I am going to give two different answers. The regulatory frameworks are more or less aligned, in the sense of the US as CFIUS FIRRMA since 2018 with the FIRRMA introduction, and the UK as the National Security and Investment Act. They do not work exactly the same way, but that is not particularly relevant as long as they are effective for the country they are in. I have been asked the question several times, “Does the National Security and Investment Act work as it is or does it need to be reformed?” Currently, it works quite well. In terms of understanding better specific countries’ threats, there are areas that can be strengthened. I have a bias here because, as a China scholar, I am a little more sensitive in terms of the threats that come from Chinese investments. So I would always recommend the more expertise you get in the room when you have these sorts of investments to analyse and make decisions on, the better. But otherwise, it is quite an interesting and useful instrument as it is.
There are, however, a couple of things that may become an issue in the future, or at least a point of conversation with the United States. I am thinking particularly about connected vehicles. The fact that the UK is part of the Five Eyes and therefore intelligence information sharing may be an issue, with the US controlling connected vehicles while the UK is not doing so at the moment. So how do we approach hardware, software, the type of data that is being collected and then eventually used? That is one of the points that somewhat connects to the non-state threats in the sense that many of the companies that build this software and hardware are not necessarily states, nor are necessarily state-owned enterprises in some cases, but especially when you talk about systems such as that of China, the line between the state or the party especially and the companies can blur quite quickly. I know that a lot of colleagues and analysts do not necessarily agree with me, but this is my point of view.
That said, for a number of reasons—I mentioned the Five Eyes—the fact that the US is the main trading partner of the UK and the fact that the UK heavily relies on the US for about two-thirds of its defence inputs make collaboration with the United States fundamental for the UK when it comes to economic security, in my opinion.
Q87 Baroness Morris of Bolton: Thank you. I wondered where you think the UK’s main economic security vulnerabilities might lie. Given you have already touched on the coercive power of the US, how might the US seek to leverage these vulnerabilities to secure its support for its own strategic priorities? Perhaps Francesca could start on this one.
Dr Francesca Ghiretti: The first point—and this is a general vulnerability not necessarily one that is specific to the United States—is that the UK is import dependent; it is a country that depends heavily on imports. It is not necessarily a vulnerability if these imports are sufficiently diversified, but it is a thing that needs to be borne in mind. Then when it comes specifically to the US, obviously the import of energy is one of the main points that needs to be addressed, especially in regards to LNG. I would have to double-check, but I think the US surpassed Qatar in 2022 as main source of LNG for the United Kingdom. The US also exports a lot of raw materials to the UK in terms of components for, for example, aircraft or information technology and communication.
So there is a very heavy reliance by the UK on US imports, but there is also a heavy reliance by the UK on the US market. Again, we are probably going to touch upon the US-UK deal, but one of the objectives was to lower the tariff barriers so that UK companies and products could continue to get access to the US market. There are a number of vulnerabilities and all these can be used as levers by the United States. Whether it is realistic that it will use them, I will perhaps leave to Charles.
Charles Lichfield: Thank you very much. Well, you have described the UK’s vulnerabilities very well so I do not have much to add. There is also the fact the UK is an island and so is reliant on ports and, were navigation in the seas to become more difficult, then the UK would suffer faster and more than even economies that are very similar and very close to the UK’s. The fact that undersea cables are quite exposed and the UK is responsible for defending quite a lot of them is another vulnerability.
But if you will allow me, Baroness Morris, I am trying to stay within the remit of the question but turn it around a little. The UK is also quite vulnerable to economic coercion by adversaries of the US and the US could potentially be disappointed in how the UK responds to that coercion and those threats. So to pick up on what Francesca was saying, it is difficult for me to foresee the US prioritising—
Baroness Morris of Bolton: Could you just give an example of how that might look?
Charles Lichfield: Of course. So the UK often has a choice from a market that is an adversary to the US that offers cheap manufacturing and cheap technology and sometimes it is at the cutting edge. China would be one example, but there are others. In the UK, there are fiscal constraints and households also face spending constraints. So those options are often very attractive and the US might be disappointed in the choices made by the UK in terms of its infrastructure investment and whose core infrastructure it uses.
The US has been quite good at expressing to the UK and other allies where it really has a problem, and on Huawei we have seen the UK change its policy; again, this is not just because of US pressures but because the perceptions of the British Government have changed and in 2020 legislation was passed in the UK that put a cap on how much Huawei infrastructure was used. But I can see that happening in a myriad of cases in different sectors.
The consequences with the US Administration, whether it is this one which is more aggressive in how it expresses its disappointment or others, could be problematic for the UK. But to pick up on what Francesca was saying, it is hard for me to imagine that even the Trump Administration, which is happy to admit that it does economic coercion but would not call it that, would see the UK as a priority; the UK is seen as a friend and there are many other countries that it wants to coerce beforehand. So I see the problem in the UK’s economic vulnerabilities, in the fact that it is exposed to making decisions that the US will find disappointing, rather than the UK being one of the priority cases for US economic coercion.
Q88 Lord Bruce of Bennachie: Just following that up and looking at some specifics, we are a small island, as you say, with an open market and we have very few resources—maybe energy and some other things—but we are very dependent. Yet Donald Trump, for example, has made a huge condition in negotiating with Ukraine on access to its rare minerals and China has responded by suspending exports of rare minerals. What is the UK doing about its requirement for rare minerals? I do not hear us negotiating about it.
That relates to a second thing. You have said that, because we are not too much of an irritant and we are seen as a friend, we can negotiate with the United States, but we have just started a negotiation with the EU. At what point do those things collide? The Government will say we can do both, but a lot of people feel that there comes a point where it is more difficult. To what extent is the UK weakening itself by not being part of any trading bloc given the way the world is breaking up? We were a demander or a supplicant always with a junior to partner in any negotiation. So how do we depend on economic security, balance those relationships and secure our crucial access to key minerals and the like?
Charles Lichfield: Thank you for that question. I can answer on critical minerals first and defend the British Government because they do have a critical mineral strategy and did with the US, given we are talking about transatlantic relations. The previous Conservative Government did try very hard to get a critical minerals deal with the US and got quite close. It was outlined in the Atlantic Declaration in 2023 and then it did not happen because the Biden Administration—it was late in 2023—could see the election coming. The Biden Administration were very reluctant to sign any deals that opened market access for the US, which was all to do with their principles and the political priorities they had of talking about workers-based trade and prioritising workers in the US.
So the deal that the UK might have had on critical minerals with the US, subject to this inquiry, fell through because of US domestic politics not because of a lack of preparation or good work done by the British Government, whether it was the previous Government or officials—they were working quite hard on it and it is not their fault that it did not lead to an outcome.
Japan is the only country that managed to get a critical minerals deal with the US—so well done, Japan—but, if you look at the contents of it, there is not really that much in there; it is stuff to do with not imposing import duties on each other or export quotas and a little about common projects and investment in different parts of the world where the resources exist. But the real reason Japan wanted this—to bring it back to the IRA—was that it could potentially have given Japan some access to subsidies. So people were using critical minerals deals with the US as a sort of proxy to get something that could qualify as a free trade agreement and therefore qualify for subsidies under the IRA. Critical minerals comes up very often, but it is often co-opted into other priorities to do with free trade, et cetera.
So I would not blame the British Government for not pursuing this priority: they are trying, but it is a difficult subject and one that often gets co-opted by different political priorities. That being said, there is a big critical minerals problem and a lot of the critical minerals—both the mining of them and the refineries—are controlled by China, and this is of course a problem.
Then, more broadly on UK economic strategy and how it deploys its trade negotiations to achieve good economic security outcomes and whether this means that there will be friction or tension between the deal with the US and with the EU, there is a limit to how far you can push both, but I do not think we are very close to it now. It would be difficult to have a free trade agreement with both the US and the EU, but what was signed recently—though very good news—is nowhere near a free trade agreement. Free trade agreement means that you are starting to talk about regulations to do with things that usually the British electorate and the Houses of Parliament have been quite sceptical of, such as changing UK agricultural regulations in order to open the market to the US, which is something that I do not think British public opinion is open to and the British Government know this. It is the same on healthcare. So that has always been a constraint on how much can be negotiated with the US, and I know when committees have met previously, this has been discussed in detail.
But because of that, in a way, it protects the UK from going too far with the US, and therefore starting to create problems with the relationship with the EU. The UK is no longer in the EU and can regulate on its own and can decide on its own legislation, but on these key issues where the US would like to make progress with the UK, there is this constraint that the UK wants to remain closer to European approaches and regulations. Therefore, it may sound like bad news if the priority is trade with the US, but in a way it means that everything is in its place, and what is done with the US per sector does not really have any kind of friction with what the UK is trying to achieve with the EU.
I cannot think of any sector where I would be particularly worried that they are pulling each other in different directions, whereas in other parts of the world there are examples where the US and the EU are in a race to sign a free trade agreement with country X first, so that their regulatory approaches flow into that country and their firms have an advantage et cetera. Ukraine might be one of them, but in the UK things are in their place to the extent and public opinion is unanimous enough that I do not think those questions will really be a problem.
Dr Francesca Ghiretti: On the matter of critical minerals, I just want to say I do not know where, for example, the critical mineral partnership at G7 is at the moment. The US was the main advocate and a leader with the previous Administration, and the G7 in general does not seem to be as particularly alive as it used to be as an economic security framework for discussion.
The second point is that it is not as easy as it looks because of what Charles said in terms of the dependencies of the sector on China specifically, especially when it comes to processing. But if we look at business level and not just at country level, we may think that certain countries are not as dependent on China because the mineral is produced somewhere else. In most cases, the companies that are actually mining those minerals are Chinese still. So the exposure is even higher and it is really a problem, not just in general for the economy but, for example, now with the renewed boost for investments in defence. We do not have a clear view of how exposed, for example, defence production is to dependencies on critical minerals from China and on components from China.
If I may just add one thing, the US and the EU actually relatively align on the idea that we need to diversify more supply chains from the Chinese dependencies, so I do not think that would be a matter of friction between the US, the UK and the European Union. If anything, it can be a reason of compromise between the three of them.
Finally, there is the CPTPP. The European Union has started talks with the CPTPP to see whether there is a framework on which the two could collaborate and the UK is already part of the CPTPP. So that is also another area in which, in terms of decreasing dependencies and opening new markets et cetera, the two can find themselves collaborating again.
Q89 Lord Soames of Fletching: Can I follow up? This is probably daft, but are there any sort of showstoppers in this? Lady Morris was talking about the vulnerabilities and I was very impressed, for example, with what Elton John had to say last week; I watched his interview about the question of copyright and AI, which is enormously valuable between any countries that we want to do a trade deal with, particularly America and probably China too. It seems to me that that is so serious for us that we have to defend it. Is that a sort of showstopper in these deals? Are there other issues which really will be insuperable to come to an agreement about?
Charles Lichfield: I would be a little concerned about the differences between what the UK might want to do on AI regulation and this US Administration. This US Administration loves AI, thinks it is all about AI opportunities, and thinks that the concerns that writers, songwriters and filmmakers have are sort of silly and they are not really that interested and even enjoy making fun of them. That is not the approach of this Government, so I think that is an area where there is quite a lot of daylight between the US and the UK, at least under this political configuration.
I commend the UK for its ability to convene on artificial intelligence. It was the first that managed to hold a summit under the previous Government, that both Vice President Harris and the Chinese Government attended, which was a big achievement and I think on the substance, it was not just about handshakes and photos either. They did manage to get a statement out; the statement was vague, but nothing more precise than that would have been possible given who was attending.
So I can see why this is an area that you are thinking about in terms of a trade deal. In terms of the deal that was done recently, and we will get to it in a second, there was not that much there. There was a lot on the hardware. So we, the US and the UK, must co-ordinate on making sure AI chips—the chips that are good enough to run AI systems on—do not make it to adversaries. With or without US pressure, the UK would agree with that. So on the hardware I can see quite a lot of co-ordination, but on what AI is used for and the fate of copyright, there will be—at least for the years to come—quite a lot of daylight between the US and the UK.
Dr Francesca Ghiretti: I am afraid it is a little far from my area of expertise, so I will just refrain from commenting.
Chair: I am sure it is not, but thank you very much. Lord Alderdice.
Q90 Lord Alderdice: Both of you have mentioned the recent UK-US economic prosperity deal, so I want to pick up a couple of questions on that, if I may. It includes a whole section on economic security co-operation. What is your assessment of that part of the deal? Indeed, if you have comments about other parts of it as well, they would be welcome. Charles, could I come to you first on that and the second part of the question later?
Charles Lichfield: My assessment is I am pleased it is there. It is not very long, but, as has been reported accurately, this is the beginning of a conversation. The deal that was done by UK teams—the first one the Trump Administration has done since “Liberation Day” when they brought in the reciprocal tariffs—is an advantage to the UK in that we have clarity on what tariff will be the base rate. It is higher than what the UK would have paid before March, but the clarity is good, and that is a concrete achievement. This is now something that we know will govern how we trade together. But that was the first part of the deal: clarity on tariffs. There may be further negotiations on quotas and some sectors that may get exemptions, but the 10% is the base rate, and we know that now.
The text goes on to mention conversations that will be there for the future. I would put the economic security part of it in that bucket—it is a deal to have future conversations on alignment. There is already a lot of alignment. There are things there that make a lot of sense, for example, co-ordinating on export controls. The US, both the previous Administration and this one, care very much about the diffusion of chips that can run AI systems. This Administration is a little more willing to do deals with countries and bring them into tier 1. One of the achievements of President Trump’s visit to the Middle East is that some countries that were under the previous system not trusted with some AI chips are now trusted. The UK was always there, but there is a conversation, or there are lines about having future conversations to maintain that alignment, which are useful. My general point is that most of us in this room will be happy the economic security items in the deal are there, but it is an agreement to have future conversations.
Lord Alderdice: Francesca, would you like to pick up on that part of the question?
Dr Francesca Ghiretti: Yes, just very quickly. I find it quite interesting that economic security is in the US-UK deal. It is not mentioned, for example, in the agreement between the UK and the EU, which I find to be quite an interesting difference and begs the question whether it is a priority from the US perspective in its relationship with the UK but perhaps is not something that has reached maturity in UK-EU conversations yet, which contradicts what I said before in terms of alignment on being more worried about supply chain resilience. At the same time, there is a gap between being worried and actually being able to do something together. The last perhaps interesting thing is that it is the first example of this type of deal. So, at least personally, I will keep a close eye to see whether these types of clauses will be present in future deals as well.
Q91 Lord Alderdice: Thanks very much. China has criticised the UK-US deal, claiming it could marginalise Chinese products in British supply chains. How might that affect the UK’s efforts to rebuild its relationship with Beijing? I will stay with you, Francesca, and then come to you, Charles.
Dr Francesca Ghiretti: As I said before, this is the first deal of its kind with the United States following the Trump Administration tariffs, so Beijing’s response should be taken in this framework. It is not necessarily a direct warning to the United Kingdom. In part it is, obviously, but it is a warning to the rest of the world that, if in the future you are going to strike bilateral deals with the United States in the framework of the tariffs, these deals will not be accepted by China if they have clauses that may damage the Chinese. So, first and foremost, it was a message for the entire world and countries that will be striking deals in the future. This is important to understand.
Secondly, China is unlikely to retaliate against the United Kingdom at this stage. It is much more likely to retaliate once some of the clauses are enacted. If we look at China’s track record of retaliation, it rarely does anything before action is taken by a third country or a counterpart, beyond adopting regulations. We have seen that in the past five years, China has already adopted quite a sweeping set of new regulations in order to be able to retaliate as quickly as possible, if necessary. It has definitely improved the pace at which it is able to respond if something happens. So, should the UK implement some of these, we are likely to see some response. But until that happens, I would not read too much into this threat.
Lord Alderdice: Charles, would you like to pick up on that?
Charles Lichfield: Francesca has covered it all, and I would agree. I would make a more general point, though, on how the US perceives UK trade policy and how China fits into that perception. When it became clear that Liz Truss was going to become Prime Minister, I had just moved to the US and was trying to make some contacts in the US system under Biden. The UK is such an important ally that US officials pay close attention to UK politics, and Truss was so much in favour of trade with the US and doing a deal that I thought she would be perceived quite favourably.
One of the first concerns that they expressed to me was that the UK was pursuing trade deals everywhere in the world, fast, the priority being to do so in south-east Asia and Latin America. There was no trade deal with China under Liz Truss because she had quite an anti-Chinese shtick, but even doing that was perceived by this US official as entrenching China in the UK’s supply chains. This Government should also be aware of that because they too are prioritising doing deals—not for the sake of doing so; of course, they do look at the substance—but the US might perceive this to be happening in the UK doing free trade deals, opening its market even further to south-east Asia, where China is very present, to Latin America, where it also is very present, to CPTPP, where China is not a member but Vietnam is and so are Malaysia and Peru, where China owns the port. The point is, when you do trade deals with countries other than China with the professed goal of saying, “This is to counter China: we’re building our economic resilience by doing deals with these countries”, there is a risk that some in Washington—this was a Biden Administration official but Trump people would see this too—perceive a danger that you are entrenching China’s position because it already has an advantage in the countries where you are doing the trade deal.
The trade experts in Washington will be very curious to see the substance of deals. They would not criticise the fact that the UK is trying to do them with the likes of India et cetera, but they will be very interested in the substance. It may also explain why there is an agreement in the economic partnership to have further conversations. For instance, how does China, via other countries where these countries are sovereign, exert its influence? Through economic actors and investment. That may be one of the reasons why you have some language on trusted and non-trusted vendors. The US will be interested to see at the next level which actors and which investors, not just which countries.
Lord Alderdice: Francesca pointed out that having a deal or understanding is one thing, but when it comes to the reality of it and there is a specific product, for example, that is different and there could be a very prompt reaction. Do you have in mind any specific product or products where you expect things to take off if something happens? You mentioned EVs; I do not know whether that is one.
Charles Lichfield: EVs and connected vehicles are where we can already see daylight between the US and the UK, where perceptions are very different. In the US, connected vehicles and EVs are perceived as a national security threat, whereas even in the European Union, which has taken more action to slow the pace of Chinese EVs arriving on European roads, it has done it purely for economic reasons and to protect manufacturers in Europe, not really out of national security concerns. So the US is special in seeing this as a national security threat and would expect the UK to have the same perception. When you talk to experts in the UK Government, some do perceive this to be a threat, but for now, no action has been taken. Sorry to give back to you the sector that you already mentioned.
Chips is also a very sensitive one because, to take it back to my initial answer, this is an area where the US still perceives it has some technological pre-eminence. That is debatable. It is already fraught because in creating export controls and anti-diffusion laws so that you have a tier of countries you can share these chips with—provided these countries comply with your export controls and the chips do not make their way, say, to China—one of the perverse consequences, even with all those rules, is that it encourages China to invest and not to make itself dependent on US producers, but rather to create its own domestic producers.
DeepSeek was one of these Sputnik moments where people realised that China was perhaps more advanced on AI than we thought, although experts that we have been talking to say the facade was very impressive, but in terms of having the scalability to make this applicable in professional context and being able to use this at work, DeepSeek was not quite where the US AI is. But AI and chips would be another sector that I would mention. This is where the US perceives it still has an advantage and wants to maintain it. The UK is perceived as being in tier 1, a place that the US can share this technology with, but will also have to do a lot to stay in that tier.
Q92 Baroness Fraser of Craigmaddie: I want to pick up very much on that relationship between trade and intelligence. Intelligence sharing is something that we know is very valued in the US-UK relationship. But there is a tension between what is Government and what is private companies. In western economies, individuals and privately owned firms are driving economic decisions. In this context, how would you assess the US and UK Governments’ respective approaches to sharing intelligence, given that much of it has to be shared with private sector companies? You have explained about the complexity of some of this. Where do approaches diverge, and do any differences risk undermining bilateral co-operation on economic security? Francesca, do you want to start?
Dr Francesca Ghiretti: First, I have to admit this is not really my area of expertise, so I will say a couple of things but bear that in mind. Secondly, I do not know much about how things work in the United States. What I can say about the United Kingdom is that, obviously, there is an issue when it comes to security clearance. You have people within companies that are vetted and receive security clearance, but then the obstacle is that those people, oftentimes, cannot discuss the content of the information with the broader company, so then you would have to vet whole companies. This is not just primes; it is multinationals, it is small and medium enterprises. There is first the question of how feasible that is, especially if we want a comprehensive approach to economic security.
The alternative is to declassify more things and make them more accessible, but even then there is the obstacle for small and medium enterprises of information overflow. Many companies do not necessarily have a desk or a unit that is dedicated to following these things, and they may be punished because of their lack of size compared to larger economies. The first question to ask is whether there is anything we can do to make sure that small and medium enterprises have easier access to the information that is already available out there before even thinking about intelligence sharing.
Charles Lichfield: I agree with all that. The UK has some advantages here in that the systems the US and the UK have for security clearances talk to each other. They are very compatible; they trust each other. If you bring companies into that, the data that is pulled out of and shared with UK firms will be of a more privileged nature. The US would be more willing to share it and have those conversations. It really depends on the sector. In the UK, the defence sector, even in small and medium enterprises, is careful about this and knows what it is doing. Pharma would be pretty good as well and used to defending its intellectual property.
You may have a few more problems with SMEs or even start-ups that have stumbled on technology that is suddenly extremely sensitive but that do not necessarily have the culture or even know that what they have created or invented is extremely sensitive. There, I would say the onus is on the Government to have the capacity to perceive this, spot it and get in touch with them quickly. As part of the UK economic security strategy, those teams have been set up, but it is a constant battle.
I know the question was about how firms behave. For some sectors, it is good; for others it is a work in progress. But in terms of intelligence sharing, this is a key way for the UK to get its foot in the door in the US Administration on economic security. The intelligence relationship is already good. In terms of economic security, it is a new field, but this can be done by using the fact that the UK is trusted on intelligence and the fact there is a desperate need for data in economic security. The US is doing work on inbound and outbound investment screening. Outbound investment screening is a new field, and so the first thing you do is set up some data. Where is the money going? Which sectors? Where are the problems? There is just a lack of data.
It is the same on supply chains. You can work with HS codes, which is what customs authorities usually use, but the perception among experts is that is not enough and you need to go even deeper into company data. The US system, certainly under Biden and probably under Trump, has found this very difficult because the US is so big and its economy is huge. Firms do not necessarily have the culture of speaking to the Government, or they are building this up. So smaller, closer allies of the US have found this as a way to get a conversation going: “Well, we’ve done this work. We’re smaller, but we’ve identified where our vulnerabilities are. We’ve done the data. We’ve seen also on investment where exactly it’s coming from, and we can share this with you”. That gets a conversation going on economic security.
Australia has done that very well. It was mentioned to me in passing by Biden people—so far I have not spoken to many Trump officials about this—who complained they were having terrible difficulties getting these surveys going and putting a good dataset together. They mentioned that the UK and Australia had come to them and said, “Well, we’ve done it. Obviously, this is smaller. We don’t have the same size, but we’re happy to share it”. Then that gets the conversation going on economic security, which is a good thing.
Q93 Baroness Crawley: Can I ask you both about the future of the rules-based international economic order? First, does it have one? Secondly, is the WTO now fit for purpose? Thirdly, what role, if any, could the UK-US economic security partnership play in shaping that rules-based future?
Charles Lichfield: The rules-based international order, which most people in this room appreciate, was born after World War II. The US played perhaps the biggest role in shaping it, although the UK maybe came the honourable second in this endeavour. It was nice to see it re-upped in the Atlantic Declaration under the previous Administration. This Administration does not care very much for it in the US. That is obvious but worth stating for the purposes of this session. Even mentioning that locution of words usually leads to some sort of eye-rolling and huffing, “This again!” It is important to bear that in mind; it is not a good way to start a conversation with the Trump Administration, to start with a sort of starry-eyed view of the international rules-based order, even if it has many virtues and it is wonderful that it was once created.
It is not a way to get a foot in the door, unlike maybe datasets, which is unfortunate but that is just the reality. They do not like the institutions. You mentioned the WTO. They do not like the IMF. They do not like the World Bank very much. People took a lot of solace from Secretary Bessent’s speech during World Bank/IMF spring meetings when he said the US would at least continue to participate, but he had a long list of grievances that will be difficult for these institutions to follow up on. The US still benefits from its being there and from having created and enforced a lot of these rules, but the so-called Washington consensus is no longer a consensus in Washington, and it is not a good way to start a conversation with them. I will leave it there.
Dr Francesca Ghiretti: I believe that support for the WTO was gone long before the second Trump Administration. Some measures that the Biden Administration already adopted were not particularly WTO compliant. That said, I believe that a form of rules-based international order still exists and will continue to do so. For some reason, countries still go to the WTO, even though it is not functioning particularly well, and that says something about the need of countries for such an institution.
I am not sure what this means in terms of reform. We have been talking about reform of the WTO for ever. Admittedly, the US has been the main obstacle to that, although not the only one. I am wondering whether perhaps the relationship between the UK and the United States can try to reignite, from a UK perspective specifically, the G7 as a platform for economic security. Now that economic security is a priority in the UK-US, at least in their on-paper relationship, perhaps it will also be in bilateral deals with other countries. I am wondering if those conversations can be brought back in terms of G7, G7+ in an effort to create a form of at least a minimum common denominator and understanding of how to do economic security among partners.
Q94 The Chair: Any more for any more? If you are not on a dead stop, it is a temporary Chairman’s privilege to ask a question just to put everything you have said in a strategic context about economic security. With my background as a military person, I grew up in a world where, by and large, the relationship between countries was judged as being you are either a friend or a foe. It is now more sophisticated, and even military people see there is a spectrum of relationships between countries, where at the one end you have co-operation, then you have competition, then confrontation and, ultimately, conflict. We, the military, like to avoid the conflict and we spend most of our time deterring it, and actually we are, in historic terms, at an all-time low in hot wars. Therefore, the relationship between nations now appears to occupy that space of confrontation and competition, and at some parts of that, it is almost a sub-threshold form of warfare.
Therefore, my question is: is the subject of economic security enjoying an exceptional profile in the context of modern history, and is it going to intensify? We feel as if there is a huge amount of this acrimonious exchange going on, which is a form of sub-threshold warfare, if you like. Is this here to stay, and might it get worse? Or do you think that we are simply giving greater profile to something that has always existed?
Can I come to Francesca first, because I could see that, Charles, you were looking to the sky for some inspiration. I will be expecting great things in a minute.
Dr Francesca Ghiretti: As the opening act for Charles’s enlightened response, I have no doubts that economic security is benefiting from an exceptional moment, though if we look at the literature, the Cold War was also a time when there were a lot of conversations and thinking around economic security that are not that different from those we are having these days, despite the setting being different. What I would say is I do not think it is going to be a linear progression of worsening of the economic security relationship; it is going to come in waves, and this is what we have seen so far. We are going to have moments of acceleration, and then we are going to have moments of relaxation. I find it particularly interesting how the debate on China, both in the UK and in the European Union, has changed so quickly, especially following the arrival of Trump at the White House. You really do see that economic security is much more flexible. It goes a little more in waves compared to the thinking that it is going progressively worse and worse.
Charles Lichfield: I feel I will disappoint you after that introduction, but what Francesca said is right: economic security has waxed and waned as a priority for longer than most people perceive. Between the two world wars, the UK Government had a very sophisticated economic security doctrine. I think it was the only country that had it, and I would advise having a look. There is a very influential UK official, Jonathan Black, who served as the G7/G20 Sherpa. He is back in that role actually, but he took a sabbatical at Oxford to write a piece of research on this, which is very interesting and shows that the UK has been thinking about these things for longer than we perceive. Our most recent memory is that the UK just promoted market solutions to most things, and that generally worked, and now that that no longer is working, the UK is having to adapt. Well, there is more of a history to it.
It is sometimes important to look at things in a wider and longer historical context. Although the challenges and the technologies are very new, the UK has advantages. Like Francesca, I would advise that the UK focuses a little more on cultivating its being essential to the global economy, which it is—because of the City of London, its universities and because of things that it is still pre-eminent on—having a greater awareness of that and managing to suggest to the world that these are cards that the UK has. It does not have as many as the US, but it does have some and it is possible to suggest both that the UK does not want economic warfare and does not want economic security to deteriorate, but were it to happen, these are the cards that the UK has. That is a perfectly valid and balanced strategy, and it would be good to see that.
The Chair: Can I close by thanking both our witnesses? It has been a very good session, very much worth the journey. Many thanks for your attendance and your contributions. You will receive a transcript of all that, and if you want to, within certain tolerances, you can play with it, but do not completely alter what you have said or else that will throw us completely. I can now declare the public session closed.
