After Brexit, an ASEAN−EU trade agreement?

EU Trade Commissioner Cecilia Malmstrom (right) prepares to speak at the University of International Business and Economics in Beijing July 11. (AP/Ng Han Guan)

After the wave of globalization following the end of World War II, a series of recent events suggest that the tide may well be turning. International trade as a proportion of global gross domestic product (GDP) has stopped growing in the last decade.

The momentum for multilateral trade liberalization has stumbled and Doha seems to not be going anywhere (even though the Trade Facilitation Agreement only started to take effect on Feb. 22).

Anti-globalization sentiment has also been growing in the European Union, a group of 28 countries in Europe, which forms a single market allowing for free movement of goods and people, uses a single currency (although the United Kingdom has its own British pound sterling) and applies a customs union.

When the British voted to leave the EU last year, Theresa May replaced David Cameron as the prime minister of the UK. For her and her cabinet, “Brexit means Brexit,” and by the end of March she aims to finalize plans for the UK to leave the EU within two years.

After Brexit, what does the EU now mean for ASEAN? In the decade from 2005 to 2015, the EU28 meant a market of 13 percent of ASEAN’s exports. ASEAN’s main exports to the EU were electrical machinery (25 percent), machinery (15 percent), apparel (8 percent) and footwear (6 percent). The UK accounted for 1.5 percent of ASEAN’s exports in 2015.

The EU-28 meant 10 percent of the sources of ASEAN imports in the same decade. ASEAN’s main imports from the EU included machinery (20 percent), electrical machinery (16 percent), aircraft (5 percent), vehicles (5 percent) and pharmaceutical products (5 percent). The UK was the source of 1.1 percent of ASEAN’s imports in 2015.

The EU also meant 19 percent of total foreign direct investment (FDI) in ASEAN in the same decade. The top EU investors in ASEAN are the Netherlands (6 percent), the UK (4 percent), Luxembourg (3 percent), France (2 percent) and Denmark (1 percent) of total world’s FDI in ASEAN.

Most of the EU’s investment is in wholesale and retail trade, financial and insurance, mining and quarrying, information and communications, and real estate.

Now, does ASEAN matter to the EU? In the aforementioned decade, ASEAN only meant 2 percent of the EU’s export market and 3 percent of the EU’s import sources. But the story will change. If we look at trends over the last three decades, five out of seven gainers in terms on value added in the manufacturing sector were developing countries: China, Korea, India, Indonesia and Thailand.

By 2050, six out of the seven largest economies will be today’s emerging economies. Indonesia will be the fourth. The Philippines, Vietnam, Thailand and Malaysia will be among the top 25 largest economies together with Germany, the UK, France and Italy. So, there will be a shift in terms of source of economic growth and trade.

Second, when it comes to trade engagement, ASEAN has been quite proactive. ASEAN established the ASEAN Free Trade Area (AFTA) in 1992 before the World Trade Organization (WTO), and developed the ASEAN Trade in Goods Agreement in 2009. ASEAN’s main challenge today in terms of furthering integration, both inside ASEAN and with its outside trading partners, is non-tariff measures (NTMs). While the number of NTMs does not reflect the level of protectionism, their transparency does matter to facilitate trade in the region. The initiative to improve transparency on NTMs in ASEAN was rather slow at the start as the issue of NTMs is managed across ministries and institution.

Emmanuel Bonoan, partner of KMPG in the Philippines, said during the ASEAN-EU Business Summit last week, of which Lili Yan Ing was also in the panel, that strong political will was pivotal to improve transparency of NTMs. By April 2016, ASEAN (national think tanks and government officials) together with the Economic Research Institute for ASEAN and East Asia (ERIA), the United Nations Conference on Trade and Development (UNCTAD) and the WTO have developed an NTM database. The database, asean.i-tip. org, allows businesses to access all information on export and import requirements at the national tariff lines.

With or without Brexit, the EU is a key market for ASEAN. But the EU has never been ASEAN’s role model. Considering the development gaps of country members in ASEAN (GDP per capita, human development index, logistics index, R&D, fiscal dependency, and other main economic indicators), ASEAN does not mean in any way to become a customs union and a single market like the EU.

ASEAN aims to become a “production base” of East Asian productions, and thus the ASEAN Economic Community aims to facilitate the mobility of trade in goods, skilled labor and investment. In the ASEAN-EU meeting in Manila on March 10, the two sides agreed to re-open talks about the ASEAN-EU trade agreement.

Learning from the EU template of a trade deal, it might seem to leave a huge amount of work — about which it seems rather less optimistic — for most ASEAN countries if ASEAN proceeds into an ASEAN-EU trade agreement, particularly regarding issues of intellectual property rights, investment, state-owned enterprises, competition policy, labor regulations and environment-trade related regulations.

But one thing for sure, that ASEAN-EU could start working on, regardless an ASEAN-EU trade pact will be on the table or not, that is NTMs. EU Trade Commissioner, Cecilia Malström highlighted in her speech at the ASEAN-EU Business Summit that the EU welcomes further engagement with its trading partners while the EU will still promote values of sustainable development and inclusive growth.

This implies that the EU will engage with ASEAN or any other countries if the country(ies) which could meet the EU product standards in terms of health, safety, and environment.

ASEAN-EU could start working on this linking it with Trade Facilitation by providing business counterparts in Southeast Asia, knowledge on product standards and required procedures in producing the products. At the same time, ASEAN could continue its efforts in Mutual Recognition Agreement among members.

All in all, ASEAN and the EU should aim to have good regulations managing their imports and exports, regulations that are scientifically justified, transparent and non-discriminatory.