No-deal Brexit could sink much of Asia

As the United Kingdom (UK) heads towards a possible “no deal” Brexit, the uncertainty surrounding the terms of the UK’s imminent departure from the European Union (EU) is making waves as far away as Southeast Asia.

The German Development Institute, a think tank, recently estimated in a report that Cambodia could be one of the world’s biggest losers in the event of a “no-deal” Brexit. As many as 1.7 million people living in developing nations could descend into “extreme poverty” in the event, the think tank claimed.

The UK is the second or third largest export market for many Southeast Asian nations and a key investor in their fast-growing, export-geared economies. Britain invests more than three times as much as Germany, Europe’s largest economy, in the region.

If British Prime Minister Theresa May’s embattled “Withdrawal Agreement” is again rejected by parliament after its historic defeat in early January, the first time legislation produced by the government lost by such a large margin since the 1920s, much of the UK’s global trade could be thrown into chaos. It is expected to be voted on later this month and there are indications that it will be a more closely drawn battle.

But if rejected again, Britain could leave the EU without a deal, meaning most of its trade deals with the EU will be torn up on the evening of March 29. In that scenario, the UK would trade with its European partners under less only World Trade Organization (WTO) rules.

It also means that Britain will vacate the EU’s preferential trade schemes with developing and middle-income nations. This includes leaving the Everything But Arms (EBA) scheme, which grants 99% of exports from 49 developing nations duty-free and quota-free access to European markets. In such a scenario, goods that take as long as six weeks to reach destinations in Asia could end up stuck in quarantine or face disputes over who pays any new customs duties.

The German Development Institute report asserted that if Britain crashes out of the EU without a deal and its parliament fails to pass replacement legislation on non-tariff barriers (NTBs) with poorer nations in fast time, then Brexit could severely hit several developing Asian economies. Using figures from 2013-2015, which no doubt underestimate the potential scale of the impact, the German think tank report estimates that EBA scheme countries could see their GDPs decline by between 0.01% to 1.08% in the event of a “no-deal Brexit.”

The nation hardest hit, according to the report, would be Cambodia, which exports more goods to the UK as a percentage of its overall output than any other country in the scheme. In 2016, the UK was Cambodia’s third largest export market, trailing only Germany and the United States. That year, Britain imported some US$1.45 billion worth of goods from Cambodia, chiefly garments and footwear. The sector is Cambodia’s largest employer and main contributor to GDP.

If Britain crashes rather than soft lands out of the EU and its EBA scheme, it could lead to household consumption in Cambodia falling by 1.4% and household incomes contracting by 0.8%, the report asserts. Cambodia’s GDP is likely to shrink by at least 1%, the report claims. “These are conservative estimates of Brexit’s negative impacts,” the report stresses, since they “do not take into account the additional implications of uncertainty, depreciation of the pound sterling, reduced aid spending, remittances and investments.”

These projections only account for one scenario. It is possible that before the March 29 deadline Prime Minister May could push her 585-page “Withdrawal Agreement,” which she has negotiated for more than two years, through parliament. If it is accepted, Britain will remain party to most of the EU’s trade rules, including the EBA scheme, until the end of 2020, proving a period for future trade rules between the UK and EU to be negotiated.

Adding to the confusion, the British parliament can vote to urge, though not force, the government to delay Brexit for a few months to give more time for negotiations. This would keep Britain within the EBA and the EU’s other preferential trade schemes for a little longer.

Yet another scenario, though one that now looks increasingly unlikely, is that parliament decides to hold yet another referendum, putting the question of leaving the EU yet again to the British public. Most analysts, however, reckon the odds of a “no-deal” Brexit have risen considerably in recent weeks. If so, as of March 29, Southeast Asia’s exporters could face a very different set of import and export rules with the UK.

According to a recent report by the Centre for Global Development (CGD), a think tank, the “best-case scenario” for developing nations is that the UK quickly amends its existing cross-border legislation before March 29 so that its tariffs and duties for poorer nations simply replicate those of the EU’s preferential trade deals, like the EBA scheme.

This is not too difficult, the report states, but as “Brexit congests the parliamentary business schedule severely” politicians might not find the necessary time to make these changes. “Under this worst-case scenario, following no-deal, developing countries would lose all preferential access to the UK and face much higher…tariff rates,” it added.

Yet the stark question is whether trade with the world’s poorest nations, including Cambodia, is actually high on the list of the UK government’s priories right now – or even on that list. In 2016, the UK’s bilateral trade with Southeast Asia was worth around $41.8 billion. Around 68% of that trade was done with just three countries: Singapore (36.1%), Thailand (17.1%) and Vietnam (14.9%). Trade with Cambodia might be important for Phnom Penh, but its negligible for London.

The implication is that if Britain rushes to push through new trade deals post-Brexit, its attention will certainly turn first to securing agreements with its main partners, who are among the region’s wealthiest nations. The likes of Cambodia might get a reprieve if the Withdrawal Agreement extends Britain’s membership of the EBA scheme until late 2020, but even this best-case scenario means trade deals will have to be negotiated by that time.

Since the British public decided by only a slim majority to vacate the EU in June 2016, its Conservative-led government has spoken repeatedly of a new “global Britain” with an “All of Asia” policy that will extend trading ties to the continent.

London has even spoke openly about building a new military base in Southeast Asia, likely in Brunei, and playing a more active role in the region’s security affairs, including in the South China Sea, after having been largely absent geopolitically for decades. Cabinet members like Foreign Secretary Jeremy Hunt have repeatedly toured Southeast Asia in recent years to drum up enthusiasm for post-Brexit free trade agreements (FTAs).

Britain’s new role in the region would be “as an invisible chain linking together the democracies of the world, those countries which share our values and support our belief in free trade, the rule of law and open societies,” Hunt said when visiting Singapore and Malaysia last month.

But much remains up in the air over the proposed FTAs, even in the event of an orderly Brexit. The British government has expressed interest in joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a 11-member free trade bloc that was formally initiated this year. Brunei, Malaysia, Singapore and Vietnam are party to the scheme.

Some analysts think that Britain could also simply try to replicate the terms of the EU’s negotiated but not yet ratified FTAs with Vietnam and the whole of the Association of Southeast Asian Nations (ASEAN) 10-member bloc.

This would make forging new FTAs with Southeast Asian countries easier, though critics say that regional governments will certainly want to renegotiate. They have offered far more concessions to the EU on issues like human rights and foreign ownership than they would want to offer a solitary Britain.

One fundamental problem is that as long as the UK remains in the EU, it cannot formally start negotiations on bilateral FTAs with other nations. But even this could make months, if not years, when the process actually begins. All the while, trade between the UK and the region will be affected by new tariffs and duties.

For starters, the possibility of the UK-ASEAN FTA is “likely to be dependent on the UK being recognized as a dialogue partner” of the regional bloc, wrote Jürgen Haacke and John Harley Breen, of the London School of Economics and Political Science, in a briefing paper published last year.

Indeed, once Britain leaves the EU, it also leaves the diplomatic mechanisms that the EU has established with ASEAN. In 1999, ASEAN put a halt on forming new dialogue partnerships with other nations, though Norway and Switzerland, which aren’t part of the EU, were made “sectoral partners” in 2015, while Germany was named a “development partner” in 2016.

It’s unclear if ASEAN will grant the UK dialogue partnership or whether talk of a new “bespoke partnership” will come to fruition. Certainly, however, either one of these will take considerable time to negotiate and enact.

Britain could try to rush through bilateral FTAs with individual Southeast Asian nations in the meantime, but again these would unlikely appear overnight and might even stall progress on a larger UK-ASEAN FTA. It is more than likely that an FTA with Singapore, its old colony and probably its closest partner in Southeast Asia, would come first.

But, as Haacke and Breen noted last year, “ASEAN has not indicated a perspective on how it sees its future relationship with the UK… the initiative for such ties will most likely need to come from the UK.” In the event of a “no-deal Brexit”, this would exert additional pressure on British negotiators at a time when their attention will be flitting in various directions as the country suffers one of its most troubling constitutional crises in centuries.