In recent years, the world has seen several major events which have caused huge global shifts in trade power. One such event is the departure of the UK from the European Union (EU), known as Brexit. While this development is likely to slow down trade and disrupt supply chain activities between the UK and the EU, it could also lead to hugely beneficial opportunities for countries and businesses in other regions especially Asia. Brexit in particular has made the UK and the EU look to increase trade with other countries.
For Asian economies, Brexit presents many unique opportunities and challenges. There is a substantial amount of trade activity between Asian economies and the UK and the EU, in addition to which many Asian economies consider the UK and the EU to be key investors in their respective countries. Given today’s uncertain times due to the pandemic, there is a growing concern about future investments. Of particular concern in this regard is the ASEAN block countries, who have, over the last decade, made deliberate attempts to attract both UK and EU investors into billions of dollars of potentially lucrative investments in the manufacturing and service sectors. Meanwhile, Japan and China face issues, with some of their leading manufacturers and financial institutions having regional operational bases in the UK which no longer function as gateways for business operations in the EU.
Despite these potential issues, the Brexit decision also provides a number of interesting opportunities for Asian countries. In this regard, countries like Singapore, Myanmar, Malaysia and India could look at building on their historic ties with the UK to establish stronger economic relationships. In order to help realize these opportunities, the UK and the Asian countries are negotiating free trade agreements (FTA). As the UK is no longer bound by the same kind of rigid requirements that being an EU member demanded, the negotiations could in turn lead to more successful, mutually beneficial outcomes.
The ASEAN block comprising Singapore, Malaysia, Indonesia, Brunei, Thailand, Vietnam, Cambodia, Philippines, Laos and Myanmar is seen as one of the next up-and-coming regional economies, with both the EU and the UK looking to boost trade. ASEAN’s economy is predicted to be the fourth largest globally by 2030. The UK has long been the second biggest investor in ASEAN and is also a major exporter to the region. As of now, more than 25,000 UK companies are exporting to ASEAN, making this region the second-largest UK export destination after thehe ASEAN block US. In the meantime, the EU has started bilateral negotiations with individual members of the ASEAN block. The EU is an important trade partner for ASEAN accounting for nearly 15% of ASEAN’s exports. Singapore and Vietnam have FTAs with the EU. The UK also signed FTAs with Singapore and Vietnam in December 2020 and January 2021 respectively. ASEAN countries have also been identified as the next frontier for an e-commerce boom. With the EU and the UK’s trade agreements with some countries in the region, ASEAN seems to be a likely market for major expansion in e-commerce activities. ASEAN countries have seen large increases in internet penetration and this is expected to grow further. Rising internet penetration coupled with a rising middle class in the region points to great opportunities for those looking to sell and deliver ecommerce products in these countries.
For Japan, the impact of Brexit may have severe consequences, despite only 2% of its total export share going to the UK. According to credit research agency Teikoku Databank, there are about 1400 Japanese companies with operations in the UK, with the manufacturing industry accounting for about 40% of these companies. Japanese companies employ about 180,000 people in the UK. The large Japanese companies operating in the UK are Fujitsu, Sumitomo, Mitsubishi, Hitachi, Nisan, Toyota, NSG, Calsonic, Olympus and Mitsui. For these Japanese companies their European production base is concentrated in the UK, making the issue of cross border trade from the UK to the EU a huge concern, post Brexit. In addition to this, there are about 75 Japanese financial firms with operations in the UK. Following Brexit, the ability for these financial firms to operate in the EU is no longer there. Meanwhile, the EU has an Economic Partnership Agreement (EPA) with Japan. The UK also recently signed an EPA with Japan. The EPA between Japan and the EU provides for bilateral cumulation of tariffs. The EPA between Japan and the UK looks better structured as it provides for both bilateral and diagonal cumulation of tariffs.
In the case of China, the effects of Brexit are projected to be felt short to medium term. China has made significant investments in the UK in recent times. Many Chinese companies have made the UK one of their favourite destinations for direct investment. Currently, there are more than 800 Chinese companies in the UK with an annual revenue of £ 91 billion, employing about 71,000 employees (Tou Ying Tracker). China is the UK’s 3rd largest import partner with a 9% share. In the last few years, Chinese companies have completed a large number of acquisitions in the UK, the biggest of which included the purchase of a 33.5% stake by China’s General Nuclear Power Corporation in Britain’s Hinkley Point nuclear power plant. If the British economy were to be impacted on account of Brexit, the value of these Chinese investments would certainly be impaired. Meanwhile, China is aggressively pursuing FTAs with many EU member countries. China has successfully entered into a Comprehensive Agreement on Investments with the EU. Post Brexit, the UK has classified import tariffs on goods imported into the UK as liberalized, simplified and reduced. The liberalized “nil” import tariff in the UK, for kitchen ware, TVs, digital cameras, turbo jets, agricultural products is expected to benefit China in a big way since Chinese exports of these products to the UK are quite substantial.
Korea is considered to be a leader in international trade diplomacy in the Asia region. Korea has already executed an FTA with the EU. Recently, the UK also signed an FTA with Korea on the same lines as the EU Korea FTA. The UK is very important to Korea being its 2nd largest trading partner after Germany in Europe. Korea is the only manufacturing giant from Asia which has FTAs with both EU and UK. Japan and China the other major manufacturing countries in Asia do not have this advantage.
India has an historic relationship with UK and many other countries in Europe like Netherlands, France, Portugal and Spain. There are about 850 Indian companies operating in the UK according to the Confederation of Indian Industries UK Tracker report. They employ about 110,000 personnel and have annual revenue of over £ 50 billion. India has total annual software exports of around $150 billion out of which $30 billion is to the UK and $ 25 billion to other EU countries. India is at an advanced stage of executing an FTA with both the EU and the UK. If completed, this will ensure free movement of professionals from India to the UK and Europe.
From an Asian perspective, Brexit presents the Asian countries with many unique opportunities and challenges. Japan, China and India would be affected because of their investments in the UK. Korea will not be impacted much. ASEAN countries will be a net gainer out of Brexit. The UK is expected to enter into more FTAs with Asian countries and the UK’s negotiation position would be a key item to watch on these FTAs.
Written by Ganesh Ramaswamy, Associate at Kreston Rangamani and first published in International Accountant 118
