Dr Gerard Lyons is a senior fellow at Policy Exchange. He was Chief Economic Adviser to Boris Johnson during his second term as Mayor of London.

Last week, the Foreign Secretary gave a powerful speech at Chatham House on “Building the Network of Liberty.” One of its central themes was that “now is the time for the free world to fight back, and to use the power of economics and technology to promote freedom not fear.”

It was the prelude to a successful meeting in Liverpool of G7 foreign ministers and those from other democratic countries.  What then is the ‘power of economics’ referred to and its implications?

The UK can have a global influence through its own actions and via global institutions. This can include its hard power, namely defence spending or sanctions; soft power through speeches, wider diplomacy; and participation in global institutions and foreign aid, all of which shape global perceptions of the UK, as well as help it take a leading role in framing the terms of debate on specific issues; and then there is sheer economic clout, particularly in terms of bilateral relationships with other countries or regions.

This is of utmost importance as the UK repositions itself globally post-Brexit, and is of immediate relevance for our relationship with China.

The UK is the fifth biggest economy in the world. The largest seventeen are each more than $1 trillion dollars in size, and of these it is China (second) and Russia (11th) which are most visibly in the G7’s focus, not just in terms of their size, or how free their societies are, but also because of their manoeuvres regarding Taiwan and Ukraine respectively. Others in focus include Saudi Arabia (19th), Turkey (20th), and Iran (26th).

While the Government can’t micro-manage bilateral economic relationships, it can set parameters and incentives that influence behaviour.

Our relationship with China has cooled since President Xi’s state visit in 2015. The UK has rightly opted to highlight human rights abuses, notably with the treatment of the Uyghurs, and has become wary of China’s increasing military might and actions in Hong Kong.

Yet, at the same time, our economic ties with China remain significant and cannot be ignored. It is now one of our biggest trading partners, and has invested heavily in a broad range of UK assets.

Equally, China has a huge presence in the City of London, which the UK should be keen to grow to further cement the capitals’s position as one of the world’s top two global financial centres. Notably, the Chinese continue to rate the UK’s education and university sectors highly.

What then should we do? How to deal with China is not a challenge unique to us. The EU has described the country as a ‘cooperative partner, a negotiating partner, an economic competitor and a systemic rival.’ Furthermore, no one doubts the US’s tough stance on China regarding defence and security, but this is not at the expense of US firms doing business with China. Such stances are not contradictory.

The UK needs a fresh, robust template in its relationship with China. The Government should outline its red lines, so that business and finance can continue to operate. Central to this should be a differentiation between strategic and non-strategic areas.

Strategic areas could include those in which we perceive China as a threat to national security, including defence, intelligence and telecommunications. This might require clarity over the scope of the National Security and Investment Act, and a fresh look at the relationship that certain universities have. Non-strategic areas would be those parts of the economy in which firms and the City can interact and compete with China, freed from politics.

China is also viewed as being ahead of the race towards a central bank digital currency, likely to aid its global influence.  As it seeks to grow its economy and move up the value-curve, there will be opportunities for UK business.

For example, there are areas, such as the green agenda, in which we can be partners. China may be building more coal fired stations, but it is a global leader on renewables.

Equally, globalisation has boosted interdependencies with links across countries and regions. Indeed, we should ask ourselves in the West why it is that the technology for giga factories, which many European governments have been subsidising to attract this year, lies with China, South Korea and Japan. The lesson is to focus on research into the next generation of batteries.

Recent developments suggest a shift in strategic thinking across the globe. For instance, as part of its “dual circulation” economic policy, China is seeking to reduce its dependency upon imports of food, fuel and technology. In contrast, recent months have highlighted the EU’s dependency upon imports of Russian gas.

Strategic dependency on other countries has thus become an important consideration to address, without undermining economic growth and future cross-border investment flows.

Working with others at the World Trade Organisation, we should ensure the protection of intellectual property and fair trade.

The West has been somewhat slow to rival China’s Belt Road Initiative (BRI), and it will take time to see if the G7 can provide an alternative with enough financial power. Positively, the UK recognises the need to act and has revamped its British finance development institution. For many countries the BRI has triggered significant investment and economic growth but at the same time, it has been dubbed a form of financial colonialism with many countries incurring debts.

Last year, the UK announced a temporary cut to its overseas aid from 0.7 per cent to 0.5 per cent of GDP. While understandable given the fiscal hit from the pandemic, reversing this cut as soon as possible makes sense. Not only will it make a much needed difference on the ground, but it will give weight and credibility to the UK’s rhetoric on the global stage.

Indeed, prior to this, the UK had been the only country in western Europe to meet the two international commitments of spending two per cent of GDP on defence and 0.7 per cent on overseas aid.

We should also continue to cement stronger economic and financial ties across the wider Indo-Pacific region, stretching from India in the West to the US in the East. This region is set to be the dominant driver of future global growth. This shift in the balance of economic power to the Indo Pacific is one of two pre-pandemic trends likely to dominate in the future.

The other is the fourth industrial revolution that is already underway. Both of these featured heavily in the Government’s Integrated Review earlier this year, and leveraging off both will make an important contribution to our future economic and diplomatic success.

Post-pandemic, the world will naturally change. This can be summarised by three G’s: grassroots, green and geopolitics. Grassroots goes to the heart of an ongoing debate about whether globalisation has reached its limit. I don’t think it has, but more firms will onshore some operations closer to home in light of supply-chain disruptions. The green agenda will continue to be at the fore of international fora as countries meet ambitious net-zero targets.

Alongside the need for a sensible future working relationship with the EU and delivering upon a pro-growth economic strategy, the UK has the ability to punch its global weight in strategic and economic terms.