Looking out from London, the East Asian and Pacific countries may seem too remote to be much affected by Brexit or the challenges facing the European Union. Their direct political and economic exposure to Britain itself is limited, despite significant flows of trade and investment. But policymakers and economic operators in the Asia-Pacific region are concerned about the uncertainty over Britain’s future relations with the EU for several good reasons.
The UK, as the world’s fifth-largest economy and its leading financial center, remains a significant partner for many countries in Asia-Pacific. Commonwealth countries especially have historical, cultural and linguistic ties to Britain and have counted on London in the past to advocate their interests in the EU.
Lately, however, Britain’s semi-detached attitude, its apparent neglect of the Commonwealth and its reduced military presence east of Suez have led these countries to focus their diplomatic efforts on other EU states, notably Germany.
Even before the 2016 Brexit referendum and the 2017 general election, Australia, New Zealand and Singapore, as well as Hong Kong, began to discount Britain’s influence and develop other channels to the EU.
This recalibration should prevent major shock waves reaching Asia-Pacific once Britain leaves the EU at midnight on March 29/30, 2019 – two years after the British government provided notice of its intention to withdraw. Withdrawal in 2019 remains the most likely scenario, probably with a multi-year transition period. A reversal of the British referendum decision is most unlikely, although the British political scene is highly volatile.
Europe Fading in the Pacific
Brexit will diminish the EU’s weight in world affairs and especially in international trade negotiations. Yet many Asian and Pacific countries look to the EU to act as a limited counterweight to China and the United States and to support the open international economic system. The bloc is present in the region mainly through trade, investment and aid; it cannot deploy a diplomatic presence like China’s, or project military power, a domain still largely the preserve of member states, despite a revival of EU interest in security and defense.
New Caledonia and French Polynesia provide France with a substantial presence in the Pacific, while Britain’s residual presence is limited to the tiny Pitcairn Islands. Prompted by geopolitical interests and, initially, by competition with Taiwan, China has stepped up high-level visits, development assistance and investment projects, especially in small Pacific island nations. China funded well over 200 development projects over the past decade in eight small Pacific states, worth more than $1.8 billion.
The EU’s will to strengthen its own activities in Asia-Pacific is likely to subside once Britain leaves. France, with its direct economic and security interests in the Pacific, will then be the only vigorous advocate of European engagement with the region. Concerns in Asia-Pacific about Europe’s future role focus on three related areas: trade and investment; regional cooperation and development assistance; and security and defense.
Going It Alone
After Brexit, British Prime Minister Theresa May hopes to negotiate free trade agreements (FTAs) with China, India, Singapore, Australia and New Zealand, among others. At first, leaders in Australia and New Zealand reacted positively, but negotiations for such agreements can begin only after Britain leaves the EU and will then take several years. Meanwhile, they are giving priority to opening long-delayed negotiations with the EU.
Potential partners will require clarity on Britain’s future relations with the EU, its planned agricultural support policies and health and safety standards, as well as acceptance of Britain’s schedule of commitments by all World Trade Organization (WTO) members. WTO members will seek various assurances before accepting Britain’s schedule. Indian leaders, for example, expect Britain to ease up on immigration requirements, especially for students, before any bilateral FTA can be broached.
Faced with such challenges and with the anti-globalization sentiment of many who voted “leave” in 2016, it is uncertain whether Britain will succeed in negotiating FTAs with Asian and Pacific countries shortly after leaving the EU. In any event, such agreements can take the better part of a decade to conclude and bring into force.
Many countries will give priority to trade negotiations with the EU and its much larger market. Japan, Singapore and Vietnam have negotiated FTAs with the EU that are not yet in force; India is involved in lengthy negotiations; and Indonesia, Malaysia, Australia and New Zealand expect to conclude FTAs with the EU in the coming years. If Britain eventually remains within the EU’s customs union after Brexit, to avoid customs charges on complex supply chains and the need for a hard border with Ireland, this would preclude bilateral British trade agreements with Asian and Pacific countries. However, if Britain does leave the customs union and the EU becomes more protectionist, some Asia-Pacific countries may seek bilateral agreements with the UK as a fallback.
Rolling Back Trade
Brexit may shake the EU’s own commitment to free trade. Without Britain, Germany will have fewer influential allies among member states advocating freer trade. French President Emmanuel Macron has promised to be more “protective” in response to populist pressures.
Some Asian companies have delayed investment decisions until these questions are answered, and some will shift their operations from Britain to other European countries. Singapore is already diversifying foreign direct investment (FDI) away from Britain. Lower purchasing power, following the Brexit-induced decline in sterling, makes the UK market less attractive. Restrictions on labor mobility following Brexit could pose problems for foreign-owned companies in the UK that depend on workers from other EU countries.
The overall exposure of Asian exporters and investors to Britain is limited, despite possible problems in sectors such as financial services, automobiles and agriculture. Asian observers expect London to maintain its role as Europe’s leading financial center, despite uncertainties about the euro clearing market after Brexit. Asian business leaders are mainly concerned about the impact of a disruptive “hard Brexit” on global markets.
The Populist Tide
The EU has sometimes been taken as a model for regional integration, especially in Southeast Asia. But the EU’s persistent crises, now exacerbated by Brexit, raise further doubts about whether it can provide a useful model for groups like the Association of South East Asian Nations (ASEAN). Without British pressure, the EU will be less inclined to engage with ASEAN and other regional bodies. ASEAN, like the EU, could suffer from a recurrence of nationalism and from the failure of politicians to explain to populations the advantages of regional cooperation.
On a more positive note, the withdrawal of the United States from the Trans-Pacific Partnership (TPP) may present the EU and the UK with new opportunities. TPP countries, led by Japan, buoyed by its new FTA with the EU, are seeking a replacement for the U.S. This could create a pathway for UK membership in TPP after Brexit and, in turn, might prompt the EU to engage with the TPP. Japan and others are keen on European involvement, given the American withdrawal and China’s increasingly assertive posture.
The EU-African, Caribbean and Pacific (EU-ACP) Partnership Agreement, first signed in Togo in 1975, resulted from British accession to the EEC, and many partner countries are former British colonies. Britain has supported successor agreements over the past four decades and is a major source of development assistance. The EU-ACP agreement is backed by the European Development Fund (EDF), to which EU member states contribute outside the EU’s own budget framework.
The EU-ACP agreement is due for renewal in 2020, a year after the likely Brexit date. As long as austerity policies persist, it is questionable whether the EU-27 will be motivated to step up their own multilateral aid efforts to compensate for Britain’s departure from the EU. If Brexit negotiations turn out well, Britain may seek a way to be associated with the EU-ACP partnership in the future.
Security and Defense
In light of the wavering support from U.S. President Donald Trump for the NATO commitment to mutual defense, security has been proclaimed an EU priority. Britain generally opposes the notion of Europe’s “strategic autonomy” and calls for increased defense spending by NATO allies. After Brexit, the EU will try to increase coordination and cooperation on armaments production and, to a limited extent, defense. But primary defense will remain the responsibility of individual member states. When Britain leaves, France will be the only EU member state with a significant capacity to project power beyond Europe’s immediate periphery.
Mr. Macron’s government has reaffirmed France’s role in maintaining stability in Asia-Pacific, as it is the only European power with a substantial presence in the region. There are some 500,000 French citizens and 1,500 military personnel in New Caledonia and French Polynesia. Security cooperation between France and New Zealand, India, Japan and Malaysia have been stepped up, especially because of emerging threats like terrorism and cyber warfare. France’s naval vessels in the Pacific rely on New Zealand for refits and servicing, and France is a major arms supplier to Australia.
Britain’s intelligence-sharing with like-minded countries, notably Australia and New Zealand, will continue after Brexit.
Brexit will further reduce the salience of the Asia-Pacific region in the EU’s aspirations for a security and defense identity. Britain’s departure will make it harder for remaining member states with an interest in the Pacific, notably France, to maintain the EU’s interest in this part of the world. Countries in the region will continue to reorient their diplomatic efforts and lobbying from Britain toward other major European member states and the EU institutions in Brussels. If it can be achieved, a smooth Brexit, eased by a transition period leading to an ambitious long-term agreement, could provide the basis for continued cooperation between Britain and the EU in Asia-Pacific.
Sir Michael Leigh is a Senior Fellow at the German Marshall Fund (GMF) of the United States and Visiting Scholar at the Paul H. Nitze School of Advanced International Studies (SAIS) of Johns Hopkins University.
The AEC’s fundamental goal is to promote a free, responsible and prosperous society. Through education and improving public understanding of key economic questions, the AEC promotes the idea of a free market economy and the ideal of a free society.