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(b) Possible effects of policy action
17. How far either party might deliberately take action damaging to existing economic relations between the United Kingdom and China, would depend upon the circumstances of the "loss" of Hong Kong. In the worst case the loss of Hong Kong could lead to something akin to economic warfare between the United Kingdom and China. We would be at risk in respect of exports of the order of £32 million. Our imports from China totalled £34 million in 1966. While about 10 per cent of these imports are quota controlled textiles, they consist mainly of foodstuffs, raw materials and semis, which would tend to be replaced by imports from third countries (perhaps at higher cost) rather than by increased United Kingdom production. Subject to some re-deployment of the resources at present used for exports to China into other uses beneficial to the balance of payments, a cessation of our trade with China could have an adverse effect on the balance of payments of up to say £30 million.
18.
In certain circumstances on the other hand Her Majesty's Government might wish to make economic concessions to China: the main possibilities
are
(1) an increase in quotas for imports of manufactured goods from
China (which could be supplied by use of Hong Kong's capacity)
and
(2) releases of sterling to Chinese control from Hong Kong's
blocked balances.
The effects on the United Kingdom economy of such concessions would depend on the quid pro quo. Broadly, however, in so far as the quid pro quo were economic (e.g. increased opportunities of a United Kingdom trade with China, or Chinese compensation payments for United Kingdom property seized in Hong Kong) the effects, depending on the precise terms of any deal, could range from beneficial to the United Kingdom economy to marginally damaging.
19. The foregoing is hypothecated on a situation of a forcible take-over (or analogous situation) which would justify the immediate blocking of Hong Kong's sterling balances (and no trade concessions to the enlarged China). Even in these circumstances, however, Her Majesty's Government might feel constrained to make economic concessions for strictly
political purposes
perhaps the most obvious possibility is "ransom" for United Kingdom citizens "captured" in Hong Kong by the Chinese.
20. The loss of Hong Kong might however take place in quite different circumstances i.e. there might be a negotiated withdrawal in the con- text of which blocking the balances would be inappropriate not least because the balances would be a major, if not the major, United Kingdom
bargaining counter in any negotiation.
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