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How Brexit Will Affect EU-ASEAN Free-Trade Deals
By Tsering Namgyal

As the dust of the Brexit whirlwind gradually settles, countries in Asia are tallying the damage to their fortunes. The UK’s decision in June to leave the European Union will have a wide-ranging impact in Asia, most significantly in the area of trade and investment, partly because it will lead to the reconfiguration of trading arrangements between the EU and Asia, especially with the Association of Southeast Asian Nations (ASEAN).

 

Brexit will unsettle two dimensions of this equation. First, it will have an impact on how the EU goes about negotiating its bilateral free-trade agreements (FTAs) — many of which are ongoing — with ASEAN member states. Second, it will impinge upon how the UK, which will be outside of any EU FTAs post-Brexit, will be forced to seek its own free-trade deals with ASEAN member states, even though no formal negotiations can begin until it officially exits the EU.

 

So far, Australia, which is not a member of ASEAN, has been the most aggressive, with its formal establishment of the Australia-UK trade working group, entrusted with exploring a future FTA with the post-Brexit UK. Within ASEAN, Singapore, given its strong trade links with the UK, is likely to feature high on Britain’s priority list for a trade deal, as would ASEAN’s most populous nation, Indonesia.

 

Wake-up Call

 

Despite concerns that Brexit might scuttle the EU’s FTA talks with ASEAN members, it seems that the UK referendum has so far had little impact in this regard. On the contrary, if there was one blessing in disguise, it is that Brexit seems to have stirred officials in Brussels to try to quickly conclude and ratify pending trade deals. Barely weeks after the vote, Brussels opened talks for a comprehensive FTA with Indonesia. EU Trade Commissioner Cecilia Malmstrom has said the EU will “roll up sleeves” and complete remaining trade talks with its trading partners.

 

Analysts believe that the EU has reasons to push for FTAs, because they have proven effective in boosting trade, as can be seen from Europe’s trade deal with South Korea. According to figures released by the European Commission, the EU’s exports to South Korea have jumped 55 percent in the five years since the EU-South Korea FTA went into force in 2011.

 

Yet, despite the promise, the road toward the EU’s free-trade deals with ASEAN countries has been rocky. Negotiations for a bloc-to-bloc trade deal began in 2007, but that plan was soon dropped after some EU members expressed concerns about human rights violations in Myanmar. This led Brussels to seek bilateral FTAs with “individual” ASEAN member states as a “building block” toward a future EU-ASEAN FTA.

 

As its third-largest trading partner outside Europe after the US and China, the ASEAN bloc is an important market for the EU. And the EU is ASEAN’s second-largest trading partner, accounting for roughly 13 percent of total ASEAN trade. EU member nations as a group are by far the largest investors in ASEAN countries, accounting for nearly one-third of total foreign direct investment into the region — EU companies invested an average €19 billion (US$21 billion) annually between 2012 and 2014.

 

While the EU has so far conducted free-trade negotiations with Singapore, Thailand, Malaysia, the Philippines, Indonesia and Vietnam, no FTA is currently in place. As if to highlight the perennial challenges of regulatory harmonization in the EU, the two trade deals that have so far been completed — the EU-Singapore FTA of 2014 and the EU-Vietnam FTA of 2015 — have yet to be ratified by the EU parliament, owing to debates surrounding investment protection.

 

Some EU members question Brussels’ right to negotiate agreements on their behalf, especially the parts dealing with investment protection, which they contend must be approved by the parliaments of individual member countries, because this belongs to their sovereign powers.

 

Investment protection was not originally part of free-trade agreements, because it was negotiated independently under bilateral investment treaties until the EU’s Lisbon Treaty of 2009 made them an integral part of comprehensive free-trade pacts. To resolve this dilemma, the European Commission asked the European Court of Justice in 2015 if the EU has the power to conclude such deals or whether they should also be subject to approval by member states. Most analysts expect the court to lean in favor of requiring approval by individual member states.

 

While the process of going through the parliaments of EU member states could take at least four or five years, the bulk of an FTA — nearly 95 percent of one — could still be ratified without the investment protection piece once the EU court comes out with its decision, which is expected before the end of this year. Most analysts expect the FTAs with Singapore and Vietnam will go into effect next year, facilitating increased trade flows with these two states.

 

Remaining Bottlenecks

 

Concluding the EU’s ongoing trade deals with other ASEAN members such as Indonesia could take longer than expected, with several investment and trade bottlenecks remaining to be addressed.

 

Leading trade specialists such as Julien Chaisse, a professor of trade law at the Chinese University of Hong Kong, say that among the critical issues are those governing non-tariff barriers (NTBs) and geographical indication (GI) protection, which ensures the authenticity of products named for a specific geographical origin and that possess qualities or a reputation due to that origin.

 

ASEAN members such as Indonesia and Thailand are aware of this, and have recently engaged in discussions on these issues. Also, ASEAN members expect that as part of the final deal, the EU will allow certain flexibilities on rules of origin due to ASEAN’s special sourcing requirements. In many cases, such leeway can be granted through some form of “regional cumulation” that allows products made with inputs from other ASEAN countries, analysts say.

 

After consultations with EU member states, the European Commission recently presented a proposal to Indonesia and other countries on how the legal framework governing regional cumulation could be envisioned, especially for goods and materials coming into, say Indonesia, from those ASEAN countries with which the EU has yet to sign an FTA. Once these issues are resolved, the EU should be able to conclude its trade deals, says Chaisse, who is also chief legal counsel for World Trade Advisors, a consulting firm.

 

The Singapore-EU FTA and Post-Brexit UK

 

Since Singapore’s trading dynamics with the EU are quite unlike other ASEAN nations, it’s hard to compare it lock, stock and barrel with the EU’s bilateral FTAs with other ASEAN members. Still, along with Singapore’s trade deal with the US, which was signed in 2003, the Singapore-EU FTA could serve as something of a template for similar trade deals in the region, and also for the UK when it seeks its own free-trade pacts, post-Brexit.

 

Furthermore, experts point to aspects within the Singapore-EU FTA that might provide a reminder, if not a lesson, for future trade negotiators.

 

In the insurance sector, for instance, Singapore’s existing approval requirements limit the access of foreign equity. Similar restrictions also involve the banking industry, even though the Singapore FTA with the EU suggests that a level playing field for offshore and wholesale banking — which was part of Singapore’s trade deal with the US — will ultimately be offered to EU firms.

 

In addition, Singapore’s telecoms sector has a number of restrictions, including caps on foreign equity and restrictions on licensing. In the area of transportation, while Singapore offered satisfactory concessions on freight and passenger travel to the EU, it did not offer much in terms of air transport. Then there is the area of legal services, where the city-state is relatively protectionist, with most European law firms finding it quite hard to meet the requirements attached to foreign lawyers. However, Singapore has now offered concessions to the EU on a par with what the US obtained.

 

And when the UK does open negotiations for an FTA with Singapore, it will likely have two key objectives in mind. First, the UK is obliged to secure a deal that is as good as Singapore’s deal with the EU, because not doing so would leave UK traders and investors with the short end of the stick compared to their EU counterparts. The good news is that if the UK decides to start its own FTA negotiations with Singapore, it will likely be completed within a relatively short span of time, thanks to the city-state’s experience with bilateral FTA negotiations, and also due to its minimal agricultural sector.

 

Yet, despite interest from countries for FTA deals with a post-Brexit UK, analysts still caution against putting the cart before the horse. For London to be able to formally open such negotiations, it will have to be officially out of the EU. And even if it wants to start talking on an informal level, there is some doubt whether Britain has the adequate manpower in terms of experienced trade negotiators of its own.

 

While it is too early to say whether Brexit will cause a tectonic shift in the EU’s trade relations with Southeast Asia or not, it has certainly reshuffled the traditional framework governing business ties between the two regions. It has also set in motion forces that could have far-reaching implications on how companies on both sides will deal with each other in the coming years.

 

Tsering Namgyal is a Hong Kong-based journalist specializing in international finance, trade, legal services and regulatory risk.

Back to Issue
    The EU and ASEAN have historically had a common ambition to break down trade barriers among their respective member countries. While efforts to forge an EU-ASEAN free-trade agreement have so far failed, the EU is seeking to secure FTAs with individual ASEAN countries.
    The UK’s vote to leave the EU throws a fresh challenge at negotiators on all sides, including those who must now look to forging FTAs between a post-Brexit UK and ASEAN member countries, writes Tsering Namgyal.

    Published: Sep 30, 2016
    About the author

    Tsering Namgyal is a journalist based in India who writes on financial services and regulatory issues.

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