trade agreement

In A Globally Connected World—What Happens in Britain Doesn’t Just Stay in Britain

It is a struggle to stay on top of important information.  The deluge of news never stops and bigger networks often just mean more sources for materials.  In the triage and sorting phase, some items get dropped off the list entirely, and analysis of the impact for some news is not done.

One solution that companies often pursue to cut through the clutter is to focus on the immediate and surrounding area.  Distant places are left off the radar screen entirely.  News from elsewhere is either assumed to be handled by some other division or department or is simply not picked up and followed at all.

Hence, in Singapore, firms are often keenly aware of policy changes in Indonesia.  They may be tracking, for example, an upcoming law that will require potentially complicated new handling and labeling for all imported products to indicate halal and non-halal compliance.  (More on this law likely in a later blog post.) 

There is a lot of awareness and activity by firms across the region over Indonesia’s new regulatory structures for mobile phones.  Given the importance of the sector and the impact of some of the regulations that require extensive domestic content in manufacturing, firms are paying attention.

Some news from further away also commands notice.  The slowdown in economic activity from China, of course, also occupies the minds of many company staff in Southeast Asia.  Many ASEAN-based firms buy and sell to China and have supply chains that are deeply integrated across China.   

The corporate structures of firms in ASEAN may, however, make it difficult for companies in this region to fully appreciate the impact of changing circumstances in China on ASEAN production, sales, workplans and so forth.  This is because many companies put China into a different division or department from ASEAN or the rest of Asia Pacific. 

However, getting internal alignment within Asia looks a doodle compared with trying to get staff based in the region to pay attention to events outside of Asia. 

Case in point—the impending referendum in Britain on the EU.  At first glance, this may appear to have nothing whatsoever to do with a company’s sales or production in Southeast Asia.  After all, whether the British vote to stay or leave the European Union is a purely internal matter to be decided on June 23.

But perhaps not quite so fast.  The EU is the largest investor in Southeast Asia.  ASEAN is Europe’s third largest trading partner (outside of Europe), behind the U.S. and China, and Europe is also ASEAN’s third largest partner.  

Most of this trade runs through Singapore where a good chunk of this investment is British, including a substantial amount of British financial services.  Services, overall, are critically important for Britain. 

If Britain opts out of the EU, the trade and investment implications could be important.  It is not just that the stock markets in Europe (and elsewhere) would gyrate.  It is quite unclear what would happen to trade policies in both the EU and in Britain.

The EU has been very supportive of trade agreement and trade liberalization.  Not all of this, of course, has been at the request of the British.  But certainly Britain’s centuries of promoting freer trade has pushed the continent to engage more on a liberalizing agenda than might have, perhaps, otherwise been the case.  Without British persuasion, how likely will it be that the EU will continue to press for freer trade in the future?

Will an EU without Britain continue to advocate for robust, liberalizing trade agreements in this region with Malaysia?  Philippines?  Indonesia?  India?

One of the important arguments, for example, for believing that Vietnam will implement commitments in the Trans-Pacific Partnership (TPP) is that the TPP rules are also backed up by many similar pledges made in the EU-Vietnam trade agreement.  Vietnam’s government therefore is taking on difficult domestic level reforms in various areas like customs not just because the TPP requires new changes, but because EU-Vietnam also will.  The TPP and EU agreements are, in this sense, mutually reinforcing.

Britain and the EU will have to sort out their own trade arrangements between them.  While many of the Brits voting to leave the EU may want to continue to enjoy the benefits of the EU market without change, this is a highly unlikely outcome.  The two sides will apparently have just two short years to negotiate a mutually satisfactory bilateral trade deal that covers goods, services, investment and all the other types of deep integration issues that Britain covets and the EU is probably going to be less enthusiastic about signing with a country that has voted to leave. 

At the same time, a departing Britain will not have access to the same global trade deals the EU has received.  Instead, the British will have to renegotiate trade agreements on their own (with substantially less leverage and power than it had when it was part of the EU).  This includes multilateral, regional and bilateral deals. 

The British would, therefore, have to conclude new trade agreements with countries like Singapore and Vietnam.  These deals might (or might not) repeat the EU commitments in the recently completed agreements. 

In short, the British vote on a possible Brexit June 23 is the sort of news that should be followed (at least a little) in Asia, even by individuals with extremely cluttered inboxes and short attention spans.  In a globally connected world, what happens in Britain may not stay in Britain.

***Talking Trade is a blog post written by Dr. Deborah Elms, Executive Director, Asian Trade Centre, Singapore***