Brexit unlikely to affect trade, investment in East Asia and Pacific

Brexit unlikely to affect trade, investment in East Asia and Pacific

The impact of Britain exiting the European Union (EU) on trade and investment in East Asia and the Pacific (EAP) is not likely to be substantial due to the region's low exposure to the UK, said the World Bank in a new report.

Direct trade between EAP countries and the United Kingdom (UK) is "limited" as EAP accounts for just 2 and 5 per cent of total UK exports and imports respectively. Trade with the UK is a small share of EAP trade: 10 per cent in Fiji, 3 per cent in Vietnam and less than one per cent for the rest.

Britain's exit or "Brexit" could have a negative - if small - impact on EAP trade via the global value chain channel, as it affects value-added contributions to exports of final products to the UK through other countries. For instance, the Philippines sells electronic components to South Korea, which are then assembled and exported to the UK.

The report pointed out: "The combined impact would still, however, represent only one to 4 per cent of EAP's total exports."

Few EAP countries have free trade agreements (FTA) with the EU. South Korea has a "new-generation" FTA with the EU that was signed in October 2010, while Fiji and Papua New Guinea have a partnership agreement with the EU. FTA negotiations were concluded with Singapore (in 2014) and Vietnam (in 2015) but both agreements have not been ratified yet.

In terms of investments, the impact of Brexit on EAP countries will be muted, as the role of UK in foreign direct investment (FDI) in EAP is "not considerable". Only 10 per cent of the UK's FDI is concentrated in EAP, and mostly in China. The UK's outward FDI reportedly represents just under 5 per cent of total FDI inflows to EAP countries.

Overall, most of the impact on trade and investment in EAP will be a result of "heightened global uncertainty". This is even though financial markets seem to have regain some stability since the referendum last month.

The report added that in the baseline scenario, the risks to the global economic growth could be contained. However, in the worst-case scenario, Brexit could lead to follow-up referendums in other EU countries and undermine the union, which would produce "grossly negative" long-term impacts on Europe and the global economy.

For EAP countries, new trade agreements with the UK will need to be renegotiated when Brexit becomes effective in the next 2 1/2 years in the baseline scenario, said the World Bank. Until then, trade relations will be governed by World Trade Organisation rules, which include non-preferential tariffs.

EAP countries such as Japan and China will also need to renegotiate or start new bilateral international investment agreement (IIA) negotiations with the UK, as the UK will be excluded from the currently ongoing IIA negotiations between the EU and China and Japan, said the report.

It added that the IIAs that have been recently agreed by the EU and its relevant trading partners would have to be amended too, "to reflect Brexit".


This article was first published on July 07, 2016.
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