We know that the Brexit is happening. We also know that the European Union can’t wait to push the UK out of the door—to avoid uncertainty and its economic consequences.
In reality, triggering Article 50 of the Lisbon Treaty, which allows an EU member state to leave the union, is just the beginning of a two-year process of exit negotiations between the UK and the EU.
Meanwhile, the UK remains part of the EU until the withdrawal process is complete. All the EU laws that apply to the UK are still in force.
Market reaction to the Brexit has been as expected. Some currencies are also down in anticipation of the new arrangement.
Further away from Europe, many other economies are assessing the impact of the Brexit. This puts things into perspective for many countries across Asia.
Brexit and Asia
The Brexit has triggered a lot of debate in Asia. The general feeling (but not the consensus) is that the Brexit has but a limited impact on Asian economies.
While EU is the largest trading partner of a handful of Asian economies, the UK is hardly a significant partner for economies in Asia.
Herein lie the opportunities for Asia—the UK will soon be a potential new trading partner, ready for negotiation, and freed from the ‘shackles’ of a group of 27 other states.
It may be easier for the UK to strike up new agreements with individual Asian economies, as negotiations with a group of countries present greater challenges.
The Pound has depreciated by more than 11%, swiftly resulting in an increase in the purchasing of products, services and assets in the UK. Asian investors, businesses, and even shoppers are pouncing on this immediate opportunity.
ASEAN nations will learn a lesson or two from the Brexit about the multilateral integration of economies. As such, the advocates of the new ASEAN Economic Community (AEC) will likely see some delays in moving towards integration.
As for the EU, the immediate effect is unknown but there will surely be a few bumps ahead as it seeks to organise itself quickly.
The Brexit does not mean that the EU is no longer an attractive option. It means only that it no longer serves a purpose for the UK. Other member states may still find that being part of a larger group helps to boost their profiles and provide better leverage in negotiations.
Brexit and China
Trade between the EU and China amounted to US$592 billion in 2015. China’s share of total EU trade has more than doubled from 7% in 2002 to 15% in 2015.
The UK is China’s second largest EU trading partner. It is also a major supporter of China’s bid for market economy status, which will allow the East Asian country to engage with the EU without having to pay anti-dumping fees.
So China may be the Asian nation most affected by the Brexit, as it loses an ally in the EU.
Yet, as the EU single market is called into question, there are also some indications that China might benefit in the medium to long term, as the EU will lose some of its competitive edge.
The immediate effect of the UK ‘shopping’ boom detailed above, will also see China capitalising on the weakening of the Pound. Since the Brexit result, the Chinese Yuan has dropped just 1% in comparison to 11% for the Pound and 3% for the Euro.
Nonetheless, as the Brexit goes through the transitions, it is hard to assess which of these effects might turn out to be more pivotal.
And although we have all added the Brexit to our watch lists, it is fair to say that we will also be keenly watching its effect on growth in China and in Asia.
*Professor Siah Hwee Ang holds the BNZ Chair in Business in Asia at Victoria University. He writes a regular column here focused on understanding the challenges and opportunities for New Zealand in our trade with Asia. You can contact him here.