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Brexit and Asia: What impact has the UK's vote to leave the EU had on the APAC region?


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Summary: The Brexit vote has been one of the biggest political and economic events for people living and working within the UK, but what has been the impact on the UK's reputation in Asia and what effect will it have on trade and investment into the UK from the ASEAN region?

The potential fallout from the Brexit vote to leave the EU remains a mixture of theories, rumours and (potential) opportunities.  For those living and working within the UK, Brexit is one of the biggest economic and political events of the past few decades and it will represent a seismic shift in our relationship with the EU and the rest of the world as the UK seeks to reposition itself internationally and rebrand itself as a global trade destination. It is also interesting to consider the fallout from the perspective of those major trading blocs that deal with both the EU and the UK such as APAC nations.  This article looks at (i) the political impact that the UK’s vote has had on its reputation among ASEAN countries; and (ii) the economic impacts of Brexit on the wider APAC region, both in terms of trade relations and investment into the UK.

The political impact and the UK’s reputation post-referendum

There are clearly significant differences in the political outlook of the EU and ASEAN countries.  In Asia, the EU ‘project’ is often viewed as having federalist ambitions with overbearing social security policy and bureaucracy.  Despite these critical observations and notwithstanding the diverse nature of east Asia, there appears to be an almost unanimous view across the ASEAN region that the UK’s vote for Brexit was both a shock and a bad decision for the country.  As one Singaporean commentator suggested, Brexit has given democracy a ‘bad name’ and represented an abdication of responsibility by the country’s elected representatives, arguing that the vote was democracy taken to its extreme and more pertinently, damaged the UK’s international reputation as a stable investment destination, at least in the short term.  Whether or not this is a fair assessment, it provides an insight into the way in which some view the referendum process and the impact that it has had on the UK’s reputation amongst some nations outside of the EU, as a trade and investment destination.

If the UK’s reputation has been damaged as a result of the vote, the question is now how it may be repaired.  The answers appear to be consistent across the board: transparency and stability in Brexit negotiations going forward will be essential to instilling confidence in the UK as both an investment destination and a reliable trading partner.  Latest news reports that Theresa May’s government has no ‘overall plan’ for Brexit will not help in these matters. As will be discussed in the next section, the feedback from the wider APAC business community is that fostering an environment where long term strategic and investment decisions can be safely made will be fundamental to the UK’s international reputation and trade relations.  This will also clearly require sensible engagement by EU institutions with the UK.

APAC trade relations and investment into the UK

The ADB notes that it expects the short-term economic impact of Brexit on developing Asia to be small. The region’s merchandise exports to the UK constituted only 2.2% of the total exports in 2015 and London’s National Institute of Economic and Social Research states that even a 25% decline in British imports worldwide in 2 years would only cause a GDP drop of 0.2% across all of Asia.  All in all, it appears that the impact of a weaker UK economy may have little bearing on Asia’s overall economic prosperity. As Daniel Martin of Capital Economics neatly sums up:

All told, we suspect that a Brexit would have only a limited impact on Emerging Asia, and that the main risks to region lie elsewhere, with the potential for a sharp slowdown in China or a messy unwinding of the debt bubbles that have built up in a number of economies at the top of the list.

Flipping the coin, however, and looking at this equation from the UK perspective, it remains critical for the UK to maintain trading relationships with such a significant trading bloc but more importantly, to retain and grow foreign direct investment in the UK economy from APAC nations.

It is therefore important to consider the perspective of countries such as Japan that have heavily invested in the UK and to understand their priorities and concerns when looking at the UK as an investment destination. It is estimated that Japanese companies employ 140,000 workers in the UK, with estimated investments of US$59bn.  Hitachi, Toyota, Honda and Nissan are huge employers in the politically sensitive manufacturing sector and the UK Government is keenly monitoring the impact of the vote on their long term plans for UK investment.  In an open message to the UK and the EU, the Japanese Ministry of Foreign Affairs set out some clear requests, some of which can be summarised as follows:

  • Transparency in ongoing Brexit negotiations is critical, providing investors with ongoing updates to ensure investors have confidence in the process;
  • Given that a number of Japanese investors have invested in the UK as a gateway to Europe (often at the invitation of the UK government) and established value chains across the continent, it is critical that the UK maintains an unfettered investment environment including maintenance of current tariff rates and customs duty-free and clearance procedures;
  • Maintenance of the freedom to provide financial services, including passporting rights and necessary transitional arrangements where these are to be modified;
  • Maintenance of freedom of cross-border investment and provision of services and free movement of capital; and
  • Unified protection of intellectual property rights and necessary harmonisation of regulations and standards between the UK and the EU.

Read the full copy of the message and detailed requests collated from the Japanese business community.

The latest reports of a potential ‘hard’ Brexit has led to increasing concern among investors in the UK market. The rumours of a secret deal being reached with Nissan in October to secure future investment in its Sunderland plant is evidence of the concerns being raised by investors and the real threat posed by an exit from a tariff-free and customs duty-free EU trade zone.  It appears that it may pay dividends if the UK government is able to be address the legitimate concerns outlined by the Japanese Government (and echoed by many other APAC investors and commentators) because, as the government is acutely aware, the UK has a great deal more to gain from strong trade and investment links with APAC nations than vice versa.

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