Most of EU businesses are ready to increase trade and investment in the Asean space over the next five years, with Malaysia and Indonesia to emerge as the most attractive markets. European manufacturers are also pushing for the conclusion of a free trade agreement between the EU and Asean to eliminate structural disadvantagesThe EU views Asean as a viable alternative to China.

The decline in investments flowing from the European Union (EU) member states to the Association of Southeast Asian Nations (Asean) should not deceive. As witnessed by a recent survey, European companies look in prospect more favorably to the Southeast Asian market than to China’s.

Apart from the persistent problem of economic recovery in the Old Continent, the breadth and depth of Europe’s involvement in the region will largely depend on how Asean’s political and economic integration plays out in the mid-term and on whether the European bloc manages to transform relevant trade and investment ties into geopolitical interconnection.

Trade and investment connections

The stream of Asean-bound foreign direct investment (FDI) from EU countries dropped 20% in 2015, on a year-to-year basis, to US$20 billion, according to the Asean Investment Report 2016, released on September 6. The fall of European FDI to the Southeast Asian bloc started back in 2008, after the global economic crisis broke out – at that time, European investments to the Asean countries topped US$32.8 billion.

That said, the EU remains Asean’s largest external investor, ahead of the United States, Japan and China, with substantial room for improvement. The 2016 EU-Asean Business Sentiment Survey, published on September 1, in fact shows that most of EU businesses are ready to increase trade and investment in the Asean space over the next five years, with Malaysia and Indonesia to emerge as the most attractive markets.

By drawing a parallel, the survey indicates that only less than half of European entrepreneurs plan to expand their activities in China in the future. EU firms are indeed finding more obstacles to operate in China, amid growing protectionism, a less-friendly investment environment and, in general, a lack of reciprocity from Beijing.

Asean is becoming an engaging consumer market for Europe, as well as a grouping with an increasingly efficient supply chain. The EU is Asean’s second-largest commercial partner, after China. Conversely, the Southeast Asian association is the EU’s third-largest trading market, after the US and the Chinese giant. Euro-Asean trade turnover in goods was at some US$226 billion in 2015, Eurostat reports.

FTA dynamics

Positive business sentiment notwithstanding, European enterprises complain that trade barriers in force undermine their expansion projects for the region. In their view, Asean countries should speed up their integration process, which is still at a low stage even after the regional organization launched an economic community at the end of 2015.

More importantly, European manufacturers are pushing for the conclusion of a free trade agreement (FTA) between the EU and Asean, so as to have structural disadvantages eliminated. Euro-Asean negotiations on a free trade arrangement have been stalled since 2009, after two years of talks. Meanwhile, the European Commission – the EU executive body – sealed a bilateral FTA with Singapore in October 2014 and with Vietnam in December 2015, which still need ratification. The European bloc is also negotiating free trade pacts with Malaysia, Thailand and Indonesia, in addition to an investment protection agreement with Myanmar.

The EU-Asean Business Council (EU-ABC) is lobbying to hasten the conclusion of an EU-Asean free trade deal, as well as the completion of the existing bilateral FTA consultations between the European institutions and single Asean member states. The EU-ABC – an independent advocacy group backed by the EU Commission and acknowledged by the Southeast Asian organization – calls for sustained progress on trade liberalization among Asean countries, too; a more advanced Asean common market would indeed favor European companies in the same way a more functioning EU single market would help Asean countries’ export to Europe.

Politicians from Asean countries hope Brexit will not negatively influence group-to-group and bilateral FTA negotiations. “Brexit or no Brexit, Europe and Asia ought to deepen their ties,” Singapore’s Prime Minister Lee Hsien Loong emphatically said at the Asia-Europe Meeting (ASEM) Summit in Mongolia last July. Malaysia’s International Trade and Industry Minister Datuk Seri Mustapa Mohamed reiterated Lee’s concept during a seminar about Brexit in Kuala Lumpur on August 23. According to him, EU-Asean FTA negotiations and Britain’s exit from the European bloc are different issues, since Asean is talking “with a group and not a region.”

An alternative to China

The EU views Asean as a viable alternative to China, which is grappling with an uncertain economic future; still, EU leaders consider the association as a key element of the European global agenda. In her opening remarks at an EU Ambassadors Conference on Europe’s common foreign policy on September 5, EU Foreign Policy High Representative Federica Mogherini reaffirmed the EU’s determination to upgrade ties with Asean, as the Asian bloc grows in global importance.

However, despite the bearing of the European economy on the Asean members, the EU struggles to exert a geopolitical influence that can actively promote a business-friendly atmosphere in Southeast Asia; let alone a more stable climate in a region marked by thorny security disputes. In this sense, Europe would do better to learn from China’s ability to leverage its trade and investment resources to project power overseas.

Emanuele Scimia is a journalist and foreign policy analyst. He is a contributing writer to the South China Morning Post and the Jamestown Foundation’s Eurasia Daily Monitor. In the past, his articles have also appeared in The National Interest, Deutsche Welle, World Politics Review, The Jerusalem Post and the EU observer, among others. He has written for Asia Times since 2011.

Emanuele Scimia is a journalist and foreign policy analyst. He has written for Asia Times since 2011. His articles have also appeared in the South China Morning Post, the Jamestown Foundation’s Eurasia Daily Monitor, The National Interest, Deutsche Welle, World Politics Review and The Jerusalem Post, among others.