The UK should seek inward Chinese investment where this enhances UK manufacturing and technology, but restrict access in sectors critical to national security. To stay competitive, the UK will need to rethink its existing economic model and intervene more heavily in selected sectors.
The most profound long-term challenge China poses for other countries is the combination of its technological leadership and economic power; the latter reflects in particular the country’s vast manufacturing capacity (accounting for almost a third of global manufacturing value added, double the share of the US) and its control of supply chains – such as for rare-earth processing – that are critical for emerging technologies. Adapting to this new reality must be a priority for the UK.
At minimum, as the reach and sophistication of the Chinese economy grow, China is likely to achieve general technological parity with the US while surpassing the US and other advanced economies in a number of areas. For example, China is already a leading player in civilian fields such as electric vehicles (EVs) and military fields such as hypersonic missile technology.
It is therefore plausible that China could ultimately combine its existing supply-chain and manufacturing dominance with its rapidly improving technological capabilities – aided by the use of robotics, artificial intelligence (AI) and efficient new energy technologies – to secure a position of global economic and technological leadership comparable to that of the UK in the 19th century or the US in the 20th century.
The UK does not have the resources to keep pace with China technologically across the board. Adoption of at least some Chinese technology will become necessary if the UK is to remain internationally competitive.
The UK does not have the resources to keep pace with China technologically across the board. Adoption of at least some Chinese technology will become necessary if the UK is to remain internationally competitive, particularly in sectors where China overtakes the US as the dominant player. The biggest risk for the UK is that it finds itself unprepared for Chinese technological leadership and consequently fails to take appropriate steps to increase national resilience and adaptability. In particular, the UK faces the following challenges:
- Mitigating risk from China’s involvement in strategic sectors, particularly those listed in the UK’s National Security and Investment Act (NSIA, see below);
- Mitigating national security risks and malign influence directly introduced by, or arising from exposure to, Chinese digital systems;
- Mitigating vulnerabilities from continued reliance on China-dominated supply chains and Chinese producers in relation to critical technologies; and
- Maintaining the competitiveness of UK firms in the face of China’s technological leadership, overwhelming manufacturing capacity and supply-chain dominance.
All four challenges are compounded by the strategic rivalry between China and the US. As explored in more detail later in this paper (see Section 4), the UK needs to be wary of taking sides, or being seen to take sides, in this great power rivalry. For example, general alignment with the US against China on economic and technological questions is not only impractical, but would be detrimental to the UK’s interests and capacity to adapt its economy in the long term. Some level of economic and technological engagement with China will be unavoidable for the UK, even if this prompts US retaliation.
Mitigating dependencies and securing access to advanced technology
1. China’s footprint in strategic UK sectors
Recent UK governments have been open to Chinese investment in core areas of national infrastructure, including civil nuclear energy and 5G telecoms. Chinese investment in the former has included China General Nuclear Power Corp (CGN)’s original 33.5 per cent stake in the Hinkley Point C power station, for which CGN has now ceased additional funding, and CGN’s 66.5 per cent stake in the proposed Bradwell B site. In telecoms, the political controversy around the use – subsequently banned, under apparent pressure from the US – of Huawei telecoms technology for the UK’s 5G network is a prominent illustration of the contentiousness of a potentially growing Chinese economic and technological presence in the UK.
Under the current Labour government, this presence has come under renewed scrutiny, including through government intervention in April 2025 to prevent the closure of the UK’s last remaining steel blast furnaces. At the same time, the government’s continued pursuit of a net zero energy policy has the effect of encouraging British companies to buy solar and wind energy equipment from China; no credible alternative sources of such equipment exist at the scale required. However, this means dependence on Chinese supply chains, including potentially those linked to the alleged use of forced labour in Xinjiang. In such cases, the UK will need to focus on maintaining or regaining sovereign control of production and supply chains as far as possible.
These examples highlight a broader problem, which is that the UK’s approach to Chinese investment in the UK is too often reactive, driven by the immediate political optics of a specific situation, when development of a systematic strategy would serve long-term UK interests much better. A systematic approach is all the more necessary considering the range of risks that Chinese investment poses in core areas such as energy and digital infrastructure. These risks include:
- Long-term UK reliance on Chinese supply chains;
- Exposure of the UK market and consumers to products produced via forced labour;
- Becoming beholden to foreign state-linked entities for the UK’s capacity to produce key resources (such as steel);
- Increased capacity for Chinese surveillance and data collection via the provision of digital components; and
- Capacity for China to leverage the above vulnerabilities coercively.
In a world of heightened geopolitical tensions, particularly between China and the US, these risks are likely to grow. However, none is unique to Chinese involvement. Any foreign investment in a critical sector presents risks, especially if the investment comes from a major power willing to act coercively to achieve its aims. For the purposes of this analysis, ‘critical sectors’ can be defined as the 17 listed in the NSIA. These sectors are as follows: advanced materials; advanced robotics; AI; civil nuclear power; communications; computing hardware; critical suppliers to government; cryptographic authentication; data infrastructure; defence; energy; military and dual-use technologies; quantum technologies; satellite and space technologies; suppliers to the emergency services; synthetic biology; and transport.
Restrictions on foreign investment in critical sectors need to be accompanied by greater government support for UK sovereign capability.
The UK’s best approach to mitigating risks to critical national infrastructure is likely to be to continue in the direction enabled by the NSIA by restricting China’s involvement in these areas, while not doing so in a way that singles China out from other potential foreign investors. In practice, what this means is favouring UK providers and those from allies other than the US. While China’s involvement in such sectors potentially presents a serious risk to UK interests, so too does collaborating with a more transactional US. This is especially the case given that the UK is far more economically and technologically dependent on the US than on China. In addition, as elaborated below, restrictions on foreign investment in critical sectors need to be accompanied by greater government support for UK sovereign capability; otherwise, problems like those caused by the recent threat of closure of British Steel’s furnaces will be repeated.
2. Risks posed by Chinese digital systems
Legitimate concerns exist about the potential for Chinese digital systems to be used for espionage and hostile cyber operations. Permission to use such systems in critical sectors in the UK should therefore be subject to assessment by technical experts and national security professionals. However, a process for conducting such reviews will need to be re-established. Following the UK government’s decision in 2020 (under alleged pressure from the first Trump administration) not to allow Huawei 5G technology in UK networks from 2027, the Huawei Cyber Security Evaluation Centre (HCSEC) has ceased operations. This dedicated body was set up in 2010 to assess, and identify mitigations for, potential national security risks posed by Huawei’s involvement in the UK’s digital networks.
The establishment of a similar body with a more general remit, potentially covering digital components from multiple suppliers and countries, would be valuable in navigating the many trade-offs between access and security – not only in digital infrastructure per se but also in areas such as transport (e.g. on-board digital systems in EVs) and energy (e.g. wind turbines).
While the government’s exclusion of Huawei from UK systems addressed some digital security issues, it also resulted in the UK continuing to lack cutting-edge 5G network provision. The UK lags behind other advanced economies in terms of 5G availability. As China’s technological lead over the UK increases, similar decisions in the future – whether in telecoms or other sectors – could risk cutting the UK off from beneficial technologies.
As such, this paper argues that decisions on allowing or prohibiting foreign investment in critical infrastructure should be informed by technical assessment based on a strict determination of the UK’s national interests, regardless of whether such decisions put the UK in alignment with the US. In the long term, aligning with US interests that are increasingly divergent from those of the UK could compromise the UK’s ability to secure the technology it needs for its own economic prosperity.
Chinese technology investments – whether in telecoms or other sectors – should be considered where the risks from digital components and systems can be mitigated, and ideally where the terms of any transaction provide for the transfer of technology to the UK. Just to take EVs as an example:
- Risks including access to user data or remote control should be expertly assessed prior to investment. Such risks could be mitigated via measures such as the replacement of Chinese digital components.
- Preference should be given to investment in UK-based manufacturing to reduce supply-chain dependence on China, and to ensure any increase in competitive pressures occurs on a level playing field between UK-based manufacturers rather than pitting them against a flood of cheap imported final products.
- Investments should be conditional on technology transfer or collaborative research and development, including the transfer of skills to UK workers.
- Investment should not be permitted in projects involving government procurement and critical national infrastructure (such as public transport), unless the EVs involved are UK-manufactured and meet acceptable digital security standards.
However, there remain areas in which it will be in the UK’s interests to avoid Chinese involvement. Digital information technologies such as AI large language models (LLMs) are one example. Ideally, the UK needs to develop fully sovereign capabilities in this field; in practice, developing systems in partnership with European and Indo-Pacific allies looks more feasible. Such an approach could help to spread costs and pool expertise while avoiding dangerous dependencies on either China or the US. The creator of an AI system has significant influence over the flow of information. This influence is massively amplified if a system – say, a foreign-developed LLM – comes to underpin parts of the basic digital infrastructure of the economy and government.
Regulation of social media platforms presents UK policymakers with notable enforcement dilemmas. While a case can be made for prohibiting UK government employees who work with classified information from using Chinese apps and platforms such as TikTok, WeChat and DeepSeek, banning the use of such platforms by the general population would risk compromising the UK’s civil liberties. Moreover, such a ban could enable China justifiably to accuse the UK of hypocrisy given that the US social media platform X (formerly Twitter) continues to be freely accessible in the UK, despite being owned by a former member of the US government who has actively used the platform to seek to influence domestic political debate in the UK.
Put another way, the UK government should arguably be as cautious about the role of US technology companies in the UK as it is about the presence of Chinese firms – not only to avoid foreign political interference but also because questions of media power carry extra weight in light of the emerging risk of a global bifurcation of digital platforms between Chinese- and US-operated firms. This risk, if realized, could leave the UK in the unenviable position of having to choose one side to the exclusion of the other. To prevent such an eventuality, the UK government must actively foster the creation of domestic digital platforms and capabilities where possible, and develop these in partnership with allies other than the US.
3. Critical technology supply chains
China’s share of global manufacturing and its dominance of crucial supply chains, such as those for rare earths and other critical minerals, give the country huge influence over technologies that are vital to the UK’s prosperity. Sectors in which China plays a growing or dominant role include semiconductors, robotics, solar panels and EVs.
The UK is vulnerable not only to deliberate economic statecraft on Beijing’s part, but also more broadly to fluctuations in China’s relations with the US. For example, Chinese retaliation in response to US tariffs could not only involve directly restricting exports of rare earths to the US, but extend to putting pressure on third countries seeking to re-export minerals to the US or aligning themselves in some other way with Washington against Beijing. The knock-on effects of a US–China trade war could also include a reduction in both countries’ exports to the UK. While the UK trades much less with China than with the EU and the US, the data obscure significant upstream supply-chain dependencies on China. The headline data on China’s share of UK trade also do not fully capture the growing role of Chinese companies operating in the UK.
China’s upstream supply-chain role also presents a critical obstacle to efforts to ‘reshore’ technology production to alternative countries – although this is not only a problem for the UK. (Attempts by US companies, for instance, to shift production to Vietnam are hindered by the fact that Vietnamese manufacturers themselves often rely on Chinese-produced and -processed raw materials and components.) At the same time, China’s growing success in rolling out AI and robotics across its manufacturing base, with a view to increasing automation, could restrict reshoring options further. Such technologies could enable China to continue low- and mid-level manufacturing at home while its human workforce shifts to high-end manufacturing, reducing or preventing the migration of low- and mid-level manufacturing to other countries.
Meanwhile, extraction and processing facilities for raw materials such as rare earths are often highly environmentally destructive, as well as costly and time-consuming to establish. While it might be possible in principle for the UK to establish alternative sources to China for many raw materials, in practice such a shift could not be made quickly enough to offset continued dependence in the medium term.
Taken together, these factors mean that wholesale reshoring is not a credible economic solution for the UK. Instead, when it comes to countering China’s capacity for economic coercion, the UK’s approach should be one of cultivating reciprocal dependencies by establishing what can be termed ‘strategic indispensability’: this means balancing China’s leverage by ensuring that the UK, in turn, occupies supply-chain niches vital to China. A good approach to emulate could be that of ASML, a Dutch company, which has successfully leveraged its hold on the market for semiconductor lithography machines.
The UK is also vulnerable to accidental supply-chain shocks or disruptions from domestic events in China (the COVID-19 lockdowns were one such example). As such shocks are likely to be temporary, even if they are prolonged, the UK’s focus should be on stockpiling resources vital for domestic manufacturing and on mapping alternative or interim supply chains. This combination – strategic indispensability, stockpiling and supply-chain mapping – would be most effective if pursued in coordination with allies other than the US. The UK’s European partners, as well as countries such as Australia, Canada, Japan, New Zealand and South Korea, face similar economic and technological challenges. Collective action may enable partners to reduce their dependencies on China and more effectively divide labour across critical supply chains where individual countries lack the capacity to develop full sovereign capability.
4. Intellectual property and competitiveness
China’s combination of technological leadership and manufacturing capacity is likely to result in Chinese companies achieving market dominance at the expense of British and other Western competitors across more and more sectors of the global economy. This could result in negative impacts similar to those that the success of Chinese EVs has had on European car manufacturers.
China’s combination of technological leadership and manufacturing capacity is likely to result in Chinese companies achieving market dominance at the expense of British and other Western competitors across more and more sectors of the global economy.
The UK should not hope for a return to norms of international free trade, particularly given the rapid turn of the US towards protectionism and the long-term damage this is likely to inflict on trust in the US-led multilateral trading system. China’s mercantilist approach will continue, and the country’s dominance of manufacturing and critical supply chains will make it increasingly difficult for other countries to compete if they do not adopt similar practices of favouring their own companies.
Moreover, China’s increasing global technological influence – especially in the Global South – in sectors such as EVs, renewable energy, telecoms and AI will add to the strategic, operational and compliance challenges for UK companies. In many cases, these firms will increasingly need to ensure their products or services are compatible with Chinese-led norms and standards as a precondition for maintaining market access in many countries. As China’s technological lead increases over the UK and its allies, this will also present the prospect of UK firms relying more on technology transfer from Chinese companies in order to stay competitive. This, in turn, could reduce the UK’s capacity to exert reciprocal supply-chain leverage over China.
To maintain competitiveness in critical sectors and, by extension, ensure the UK’s economic resilience, policymakers will need to move away from the prevailing economic orthodoxy of the post-Cold War era. Long-held assumptions on global free trade and market deregulation, and the de-emphasis of national sovereign capability (and hence economic security) in favour of market efficiency regardless of where commodities originate, will need re-evaluation. Among other measures, the UK must be prepared to massively increase government support for domestic firms in critical sectors. An emphasis will need to be placed on promoting scalability. Policymakers should also consider the following: restricting or prohibiting Chinese and US investments and acquisitions; offering preferential treatment for domestic firms and those of UK allies other than the US; and subsidizing UK technology companies in critical sectors.
Recommendations
In light of the above factors, this paper recommends that the UK government take the following steps to boost British economic and technological competitiveness in the face of China’s rising global reach and capabilities, and to mitigate the risks of including China in critical supply chains:
- Adopt a ‘UK first, allies (other than the US) second’ policy for majority investments, for investments granting decision-making rights, and for company acquisitions in the 17 critical sectors identified in the NSIA. Foreign investment approvals in these sectors should give preference to companies from allied countries other than the US.
- Develop a system of state support and cooperation with allies (again, other than the US) in the 17 critical sectors, by:
- Expanding government investment, providing subsidies to help UK technology firms scale up, and preferring UK firms in government procurement. Such support should be focused on potentially transformative areas in which the UK is already competitive, such as AI, chip design and nuclear fusion.
- Intervening to prevent the loss of strategic capabilities (such as steelmaking) previously acquired by Chinese companies. Intervention could entail either the outright nationalization of such facilities or their transfer to UK sovereign ownership as UK-registered companies.
- Working with allies to develop ‘strategic indispensability’ in areas such as AI, civil nuclear energy and other transformative sectors. Cooperation should be based on careful division of labour according to each country’s strengths.
- Actively pursue digital sovereignty, working with allies other than the US where necessary. Social media and AI models linked to foreign governments should be registered as vectors of foreign influence, regardless of whether the platforms and services in question are Chinese (registration should thus be required not only of Chinese entities such as TikTok and DeepSeek, but also of US and other platforms).
- Audit and publish findings on China’s economic footprint in the UK on an annual basis. The audit, which should include information on upstream and indirect supply-chain dependencies, could be managed by the proposed ‘China coordination centre’.
- Encourage Chinese investment that creates UK jobs, boosts domestic manufacturing and provides access to advanced technologies, including in critical sectors where expertise and capacity in the UK and among its allies are lacking. This includes in sectors such as robotics, renewable energy technology and EVs, subject to the following provisos:
- Approvals should be conditional on expert evaluation of any risks associated with the use of digital components, and on implementation of appropriate mitigations. Risk assessments could be run by a new body modelled on the former Huawei Cyber Security Evaluation Centre.
- Onshoring of manufacturing into the UK should be encouraged where it offers the potential to mitigate supply-chain dependency on China, subject to the evaluation of specific investments as set out in the NSIA.
- Supply chains in which forced labour is present or suspected must
be avoided.
- Transfer of technology from China to the UK should be encouraged – including via joint ventures – where this offers the potential to enable UK-based manufacturing by UK workers.
- Investments should employ local workers.
- Share best practices with allies and partners (including Taiwan) for evaluating the risks from digital systems and for mitigating cyberthreats.
- Work with allies and partners to engage China in shaping international governance norms relating to technology, including for AI and renewable energy. This should include working to ensure that as China becomes more influential, regulatory development should not be allowed to follow PRC agendas and priorities without challenge.
