Will ASEAN and Britain Ink a New Trade Pact?

One of the headlines that emerged from the visit of the United Kingdom’s International Trade Secretary Liam Fox’s visit to the Philippines in April was the suggestion that the U.K. may pursue a region-wide free trade agreement with the Association of Southeast Asian Nations following its exit from the European Union (EU), popularly known as Brexit. Though a U.K.-ASEAN FTA has been a subject of speculation for a while now and certainly remains a distant possibility, a deeper look suggests it may be less probable than initially meets the eye.

The U.K.’s interest in improving economic ties with ASEAN states is nothing new. Over the past few years, the British government has seen boosting trade and investment with Southeast Asian states as a way to diversify its economic ties in emerging markets. The choice of ASEAN is not surprising viewed from this perspective: it is collectively the world’s seventh largest economy and boasts an increasingly youthful and affluent population of more than 600 million. For some Southeast Asian states, Britain is also a major export destination and foreign investor.

Little coincidence, then, that we have seen the economic dimension of the U.K.’s ties with Southeast Asia periodically come into focus. In July 2015, for instance, former British Prime Minister David Cameron embarked on a tour of four of the six largest ASEAN economies – Indonesia, Singapore, Vietnam, and Malaysia – with an impressive delegation of government ministers and business leaders in talks where economics tended to dominate. As the U.K., now under Prime Minister Theresa May, undergoes Brexit, close observers of Southeast Asia had already predicted that the region would be one of the prime targets of a post-Brexit British trade offensive.

That was the backdrop for Fox’s April 3-4 visit to the Philippines, the first ASEAN country that he visited following Britain’s formal notification to the EU of its intention to leave the bloc. When Philippine Trade and Industry Secretary Ramon M. Lopez told local media that Fox had said that the U.K. could “explore with ASEAN [an] FTA as they Brexit,” his remarks predictably made headlines given the prospects of a region-wide FTA with the U.K.’s current government.

It is certainly true that a regionwide FTA between the U.K. and ASEAN would be more efficient to pursue, as Lopez noted, compared to individual pacts with Southeast Asian states. Negotiations would take place with ten countries at once rather than one at a time. The U.K. would certainly be more invested because there would be greater gains to be had as a result, and hopefully other ASEAN states will be motivated to enter the pact since they would not want to be left out if their neighbors are going to be part of it.

But these same dynamics inherent in a regionwide agreement also make it more difficult for talks to actually progress. Most notably, laggards among a grouping tend to frustrate the process and bring down the standards, and hence the gains, that are being struck for the deal. We have seen this dynamic at work in negotiations between ASEAN and its individual dialogue partners, such as India, on a regionwide FTA, as well as in talks to conclude the broader Regional Comprehensive Economic Partnership (RCEP) with ASEAN and all its major dialogue partners collectively. And it is not clear why this would not also occur with a U.K.-ASEAN pact.

Fox himself seemed to indicate this in his own comments in Manila, which were more lukewarm. Though he did emphasize that Southeast Asia offered “enormous economic opportunities” for the U.K., he also said that ASEAN would need to be more “homogenous” for a regional agreement to be workable.

Furthermore, on the Southeast Asian side, it is not clear if the U.K. is a big enough draw for all ASEAN states to want to pursue a U.K.-ASEAN pact amid other priorities. Though the U.K. on its own is a leading economic player in some individual Southeast Asian states, the reality is that the European Union collectively is a much bigger force, with recent data showing that the EU is ASEAN’s third largest trading partner and largest foreign investor.

And although an EU-ASEAN and a U.K.-ASEAN pact are not necessarily mutually exclusive, there have been signs that ASEAN may be more interested in pursuing an EU-ASEAN FTA ahead of any U.K.-ASEAN pact. In March, EU and ASEAN officials said that the two blocs would try to revive plans for a regionwide FTA, which had faltered about a decade ago before the EU began pursuing bilateral pacts with more forward-leaning countries like Singapore and Vietnam.

That does not mean, however, that U.K.-ASEAN economic ties are necessarily doomed. Agreements could proceed between the U.K. as well as major Southeast Asian states that are the most willing first, as British diplomats have suggested before. Though the gains would be less than a regionwide deal, the advantage of a bilateral approach would be that securing pacts with more forward-leaning actors could then build up sufficient momentum for a regionwide approach later, in the same way that the Trans-Pacific Partnership (TPP) started with just the so-called P5 – Singapore, the United States, New Zealand, Chile, and Brunei – and then enlarged to become the mammoth agreement that it was.

In the meantime, the U.K. could also demonstrate that its future economic prospects remain bright despite Brexit, thereby assuaging more Southeast Asian states and enticing them to join a regionwide pact. As it is, for all the brouhaha, for now the British economy has actually done better than expected since the shock referendum last June. If this can be sustained, that will definitely play into ASEAN calculations.

That gets to a final point which is often overlooked amid all the speculation: that it is still early days. Though some tend to talk about Brexit as if it has already occurred, the process itself in fact may actually take around two years and perhaps even more (if an extension is granted) to materialize, which is a lot of time for things to evolve with respect to the prospects for a deal. All the while, ASEAN governments will also be weighing other possibilities and also closely watching how Britain survives post-Brexit. All the more reason, then, to be a bit more cautious about a U.K.-ASEAN FTA so early in the game. As Brexit itself proved, even one incident can change the big picture quite dramatically and quickly.