Assessing the damage: What will Brexit mean for ASEAN’s developing economies?

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Brexit dominates the European political and economic discussion. As the UK prepares to leave the EU, what will that mean for Southeast Asia’s developing economies?

By John Pennington

Brexit remains as unpredictable and divisive as ever. Those in the United Kingdom (UK), the European Union (EU) and the rest of the world still do not know precisely what is going to happen on March 29 – the date the UK is scheduled to leave the EU formally.

There are two possible outcomes. The first is a “hard” or “no-deal” Brexit where the UK leaves the EU with no agreements in place. All existing trade and economic deals would, therefore, cease to exist from that point forward.

The second is a “soft” Brexit meaning the UK would have negotiated the terms of its departure with the EU. Transitional agreements would lessen the shock of their departure.

The possibility of another alternative, whereby the UK parliament votes to delay Brexit by another two years, is now being discussed. However, this would merely lead to more uncertainty.

Developing economies, particularly those in Southeast Asia, will take the hardest hit

A recent German Development Institute report predicted that Brexit could force 1.7 million people in developing economies into extreme poverty. Regardless of how the UK finally leaves the EU, developing Southeast Asian nations such as Cambodia, Laos and Myanmar are among those with the most to lose.

These low to middle-income countries rely on the Everything But Arms trade scheme. It allows them to export goods to the UK with no customs duties. In the case of a no-deal Brexit, tariffs would rise from 0 to 15% overnight as countries would have to default to World Trade Organisation rules.

Cambodia is particularly at risk because the UK is one of its major trading partners. Almost one-tenth of its exports head to the UK. It is particularly exposed because of the narrow range of products – mainly bicycles, footwear and clothing – it exports. A no-deal Brexit would also be bad for Indonesia, the Philippines and Vietnam, which are be among the ten nations predicted to suffer the most. Vietnam would be at risk because among ASEAN nations, only Cambodia is more heavily reliant on UK exports.

Source Trading Economics: (I)(II)(III)(IV)(V)(VI), (VII)(VIII)(IX)(X)

There are no happy endings in the Brexit story

Whichever Brexit scenario plays out, it will be bad for developing nations’ economies. However, there is a huge difference between the UK leaving with or without a deal. The worst-case scenario – a hard Brexit – suggests a £1.6 billion (US$2.1 billion) or 5% decline in UK exports. That could see the gross domestic product in Cambodia drop by 1%. These are conservative estimates; the reality could be even worse.

A soft Brexit means existing agreements and trade agreements remain in place for 21 months, giving the UK, the EU, and trading partners a period of stability while they negotiate post-Brexit deals. However, even a soft Brexit is a setback for developing economies as they must face up to losing preferential access to UK markets or hope the UK can seal new agreements before they finally leave the EU. During that time, markets could slow down due to uncertainty over the economy’s future.

Although the UK government says it is determined to get agreements with Southeast Asian nations in place as soon as possible post-Brexit, it is likely that these countries will not be its highest priority. The longer ASEAN’s developing nations have to wait for negotiations, the more economic damage they will suffer.

The UK has so far failed to put alternative agreements in place

The UK has exacerbated the situation by its failure to re-negotiate – or roll over – the 40 trade deals currently in place. Had Britain re-negotiated these deals it could have minimised its Brexit upheaval.

Worse, the UK stands accused of pushing countries into deals or risk new tariffs on their exports. Countries with developed economies such as Japan and South Korea can withstand this pressure. Others in the region cannot and find themselves backed into a corner.

“Without the full picture of how the EU and UK will trade in the future, it is impossible for countries to judge what these deals are really worth, how they will work in practice or even how some elements will be enforced,” assessed Liz May, head of policy at Traidcraft Exchange.

What about the rest of ASEAN?

More developed economies with sufficient export diversity are strong enough to cope. Brunei believes it will not be adversely affected by the UK’s divorce from Europe as it has no current deal with the EU.  

The Philippines is clinging to the UK’s assertion that it will still benefit from being part of the EU Generalised Scheme of Preferences Plus (GSP+) post-Brexit. In any case, its exports to the UK account for less than 1% of their total global trade.

The UK has around 1% of market share in ASEAN-4 countries Malaysia, Singapore, and Thailand. This suggests Brexit will have a minimal impact on those economies.

What happens next?

Brexit predictions are difficult at best, and a waste of time at worst. However, in the case of developing economies most at risk – Cambodia, Laos, Myanmar – it is time to prepare for the worst or look to diversify. Cambodia may be able to increase trade with China to recover some of its Brexit losses.

The UK has repeatedly discussed stronger economic ties to ASEAN in the wake of Brexit as part of its ‘All of Asia’ policy. Trade between the UK and ASEAN was worth £36.5 billion (US$48.3 billion) in 2017 and exports are growing.

The UK government wants to put trade deals in place with Southeast Asia. It could join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Negotiating new deals gives ASEAN nations the opportunity to restructure their trade relations with the UK. This is perhaps the one silver lining to a Brexit cloud that continues to hang heavy on the landscape.

“We are determined to ensure that these trade benefits are transitioned into bilateral arrangements immediately after we leave,” said Mark Field, UK Foreign & Commonwealth Office Minister for Asia and the Pacific. “We are doing all this with one goal in mind, to strengthen our partnership economically, diplomatically and politically with ASEAN,” he added.

However, even if the UK can replicate, refine, or build on the existing free trade agreements they have in place, it will take some time. It may well boost trade and local economies in the long-term. However, before that happens, ASEAN’s developing economies will struggle to weather the Brexit storm as higher tariffs lead to a reduction in exports to the UK.