What BREXIT really means for Asia . . .

FOR most of the countries of Asia, growth in their trade with Europe has provided a most welcome source of diversification away from China. That trade may now be threatened, along with investment flows . . .

 

 

Florence Chong

Editor, ATI Magazine

---

 

TO MANY ASIANS, their leaders included, Britain’s vote to split from the European Union goes beyond its immediate newsworthiness or surprise.

The stark reality is that they WILL be affected – directly if the EU slips into recession as the result of turmoil in financial markets.

As a bloc, the EU is crucially important to export-oriented economies in Asia – that goes for China, Japan, South Korea and ASEAN. 

If BREXIT leads to disintegration of the Eurozone or the departure of more member States, the resulting chaos will threaten the region’s economic well-being.

Both Asia’s exports to Europe and inbound investment from Europe will feel the blowtorch.

On the more optimistic side, there could be more opportunities in Europe for Asian companies. If the euro were to collapse, Asian companies would be able to seize the opportunity to buy European brand names and technologies.

But finding a market or markets to pick up the trade slack from Europe would be tough in a world of shrinking demand.

There is no doubt that Asian leaders will attempt to seek clarification of what is likely to transpire when they meet their European counterparts for the 16th Asia-Europe Meeting (ASEM) in Ulaanbaatar, the capital of Mongolia, in mid-July.

Whether every European leader will now attend the bi-annual event is hard to know.

ASEM is an informal process of dialogue and co-operation bringing together the 28 European Union member States, two other European countries and 21 Asian countries.

Political and economic issues have usually been at the top of the agenda since the initial ASEM dialogue in 1996. At that time, there were 15 EU member States and seven ASEAN member States, plus China, Japan and Korea.

It is true that ASEM has hardly produced any earth-shattering initiatives, but it is, nevertheless, a forum where the leaders of North and South can exchange views.

(There may be lessons that ASEAN can glean from BREXIT in juggling the interests of ASEAN’s expanding grouping – witness division within ASEAN over China’s incursions into the South China Sea).

No doubt the issue at front of mind in Asia this year is the likely fallout from BREXIT, and what Brussels can  or will do to avert economic fallout and shore up support for the European Union among the remaining 26 member States. 

Even with its anaemic growth, the EU remains a huge market for Asia’s exporters. It is a market that was worth close to €550 in goods in 2015.  Europe is also a significant inbound investor, particularly to ASEAN.

In 2015, bilateral trade between the EU and East Asia was almost €950 billion. 

A collapse in confidence and demand in the EU would be felt throughout the region, because the European bloc is either the second- or third-largest trading partner of both China and ASEAN.

China is at the frontline if the EU’s economy goes into recession. China lasts year exported €350.4 billion worth of products to Europe, while importing goods worth just €170.5 billion. With exports shrinking around the world, China will not want to see such a key market fall into disarray.

The EU is now China’s biggest source of imports. China and Europe trade well over €1 billion a day. 

Investment flows also show vast untapped potential, especially when taking into account the size of the respective economies. 

China accounts for just 2-3% of overall European investments abroad, but Chinese investment in Europe is rising.

The EU is also critically important to ASEAN, representing a combined market of €118.5 billion in 2015. 

ASEAN as a whole is the EU's third-largest trading partner. European countries exported goods worth €83 billion to Southeast Asia in 2015.

The EU is also by far the largest investor in ASEAN countries. EU companies invested an average €14.8 billion annually in the region between 2006 and 2013).

From July 1, 2016, South Korean imports will enter the EU duty-free, the only exceptions a limited number of agricultural products.

Brussels has a free trade agreement with Seoul, which came into force in July 2011. It is what the EU describes as “the first of a new generation of FTAs”, as it goes further than any previous EU agreements in lifting trade barriers. It is also the EU's first trade deal with an Asian country.

South Korea is the EU's eighth-largest export destination, and the EU is South Korea's fourth-largest export destination (after China, the U.S. and Japan).

Even from a lower base, Japan is the EU’s second-biggest trading partner in Asia after China. Bilateral trade was just over €40 billion last year. 

Japan and the EU have also entered their 16th round of negotiations to establish a EU-Japan Economic Partnership Agreement. 

Equally, the EU is a key market for both Hong Kong and Taiwan in their global trade.

For most countries of Asia - until a decade or so ago - their largest trading partner was the United States, which has since been replaced by China.

But all of these countries desperately want to diversify their offshore markets to reduce their reliance on China.

Growth in their trade with Europe has provided a most welcome source of diversification. It may now be threatened by Europe’s own political upheavals.