October 4, 2017
We will make the best of the new reality” is how Singapore’s Prime Minister, Lee Hsien Loong, concluded his Facebook post containing his immediate reaction to Brexit on 24 June 2016. PM Lee’s response is not only a good illustration of his social media savviness, but also of Singapore’s pragmatic approach towards the tumultuous political events of 2016.
15 months on from the Brexit referendum result and Singapore has not witnessed any great impact on its economy; some short-term financial market volatility was felt and there were of course some practical implications for visas. The tangible issue lies in the new reality, which is still very much unclear, and in the questions posed in the same Facebook update, which remain largely unanswered:
“The next few years will be uncertain ones for Britain and Europe. Leaving the EU is as complicated as joining it. What new arrangements will be made? Will Brexit hurt investor confidence more broadly, and the global economy? How will Britain’s leaving affect the rest of the EU? How will this affect us, living in Asia but part of the same globalized world?”
The uncertainty associated with Brexit is where the real problems arise for a country and region that is highly dependent on exports and foreign investments. The 10 countries that make up ASEAN are a major destination for global FDI, with the region receiving US$120 billion in 2015, which represents nearly 16% of the world’s FDI amongst developing countries.
Furthermore, over the last decade, GDP growth has consistently surpassed that of any other region in the world. The combined GDP of ASEAN’s 10 countries is over US$2.8 trillion, and if counted as a single entity, would rank sixth in the world.
What’s clear is that the world has opened its eyes to ASEAN’s potential and future growth, and that the global and indeed European appetite to capitalise on the burgeoning economic opportunities in the region continues to grow apace. The key question is how can the EU and UK companies contribute to and benefit from the tremendous (trade) opportunities and potential ASEAN has to offer?
The EU is the largest investor in the South East Asia region, accounting for about a quarter of the total FDI in ASEAN (EUR 234 billion in 2015), topping the FDI inflows of the United States and China combined. Bilateral trade in goods has almost doubled in the last 10 years; the EU is ASEAN’s largest trade partner (after China) with a share of over 13% of its market, while ASEAN is the EU’s largest trade partner outside of Europe (behind only the US and China), with trade totalling over EUR 200 billion last year.
Testament to the business as usual attitude was the mere 12% of this year’s EU-ASEAN Business Sentiment Survey respondents who stated that Brexit will affect their trade and investment plans. On the contrary, in the shadow of Brexit, European businesses remain keen, even emboldened, to pursue closer ties between the EU and ASEAN; discussions have already begun on a region-to-region FTA, which will be instrumental in achieving this. The EU has two already finalised FTA negotiations with Vietnam and Singapore and negotiations ongoing with another four countries.
The 2017 EU-ASEAN Business Sentiment Survey found that 94% of European businesses plan to expand or maintain their current levels of operations and headcount in the ASEAN region, a statistic that highlights the fact that appetite for regional integration also comes against a backdrop of increased trade and investment activity.
ASEAN is of increasing importance to the UK; ASEAN is the UK’s eighth biggest export market, worth $17.4 billion in 2015, more than twice the value of UK shipments to India, and more than 3,000 British businesses now operate in the region. Under David Cameron Britain signed a number of agreements such as the Vietnam-UK Strategic Partnership and the Treaty of Amity and Association with ASEAN. It also became a strategic partner of Indonesia and re-established diplomatic relations with Laos, while also acting as the prime mover behind the move to lift EU trade sanctions against Myanmar in 2013; the role of the UK in ASEAN goes beyond commerce.
This importance is further demonstrated by the UK’s relationship with ASEAN member Singapore, which is the UK’s largest trading partner in the ASEAN region and its fifth-largest outside the EU. The UK is also the fourth-largest FDI investor in Singapore. As a result, it is likely that the UK will wish to enter into FTAs with ASEAN or with individual member states of ASEAN as soon as possible after Brexit has taken place. As the terms of the EU-Singapore FTA have been agreed, the UK could use it as a basis for its own FTA with Singapore and other members of ASEAN going forward. As well as hopefully decreasing the time period for negotiations, ASEAN member states would have the added advantage of only having to negotiate with one party rather than 28 member states.
The prospect of FTAs creates an exciting opportunity for ASEAN as well as those operating businesses within it. They would create the ability to forge deeper relationships and economic ties with a country which is still the fifth largest economy in the world. This could lead to large increases in trade and revenue. The UK has much to gain from closer relations. Currently its businesses do more trade with Belgium than Indonesia, Malaysia, Vietnam and Singapore combined. The opportunity cost will be even starker in a few years’ time: by 2030, ASEAN is projected to be the fourth biggest market in the world after the US, EU and China and should deliver more than $2 trillion in new consumption by 2020, according to the IMF.
While the rhetoric in the immediate aftermath of the referendum result from ASEAN leaders was positive on the impact of Brexit, most countries of ASEAN, and especially Indonesia, have the UK as one of their primary export destinations in Europe; any negative impact on the UK economy after Brexit will influence ASEAN economies exporting to the UK as well.
The negative economic impact of Brexit on the UK will be in trade and investments, as global business and investors would be less eager to spend or invest their money in the UK. Consequently, it could spark a chain reaction, affecting investments in ASEAN region as well, due to the uncertainty about the economic situation in the UK. The UK has so far been a key trading partner for ASEAN states, and a committed proponent of trade liberalisation. In 2015, trade with Indonesia alone reached $2.3 billion. This fact indicates the size of the interaction between the UK’s economic situation after Brexit, and its economic relationships with ASEAN.
As a close trade partner to ASEAN and a critical entry point for the region’s businesses in Europe, uncertainty created by Britain’s decision to leave the EU complicates the equation for foreign businesses. Companies in ASEAN will need to examine the implications of a potential loss of access to the Single Market via subsidiaries in the UK. However, there is also the matter to consider of potential upside of new trade deals between the UK and ASEAN states as a result of the UK’s new-found post-EU status.
ASEAN investors with interests in the UK and/or Europe will also need to consider that any new visa requirements following Brexit may mean that citizens of the UK will not be able to work in Europe with the ease with which they currently do (and vice versa). This could increase costs for businesses and also make the recruitment, movement and retention of employees more problematic. Given the level of worker migration that has occurred in the EU over the last 20 years or more, free movement of people is one of the main issues which the UK will have to negotiate with the EU and the outcome of such discussions is awaited by a plethora of stakeholders.
Going forward, while not welcoming the referendum result, leaders of various ASEAN countries have issued positive statements regarding the pursuit of future FTAs with a post-Brexit UK. Singapore’s Prime Minister, Lee Hsien Loong, while candid in his assessment that “Brexit weakens the EU, and we are not sure that it strengthens the United Kingdom”, did stress the historical and ongoing trade ties that make Britain an attractive trade partner in the future. Equally, Malaysia’s Prime Minister Najib Razak said that he welcomed the opportunity to have a closer economic partnership with the UK: “Malaysia will be happy to discuss setting up a trade arrangement between our two countries as soon as possible. We know that trade between our countries will benefit our economies and our peoples.” In recent weeks, President Jokowi of Indonesia was less sanguine in his appraisal of Brexit, saying that it should serve as a lesson of something not to be repeated in ASEAN.
With or without Brexit, the EU is a key market for ASEAN, however what the process has highlighted is that the EU has and never will be ASEAN’s role model. Considering the development gaps of country members, ASEAN has no intention to become a customs union and a single market like the EU. The Brexit crisis has reinforced the view that the EU is not a body to be replicated elsewhere, and that ASEAN and the EU are distinct bodies with different agendas.