The European Parliament in a voting session on a resolution about Brexit priorities and talks in Strasbourg, France, earlier this month. A slowdown in the EU would negatively affect the demand for Asean’s exports much more than a consequent economic downturn limited to only the United Kingdom.REUTERS PIC

AS the United Kingdom formally starts its exit from the European Union, a clearer picture is emerging of how Brexit might unfold.

The British economy has largely done better than expected since last June’s referendum, with growth accelerating at the end of last year and growing by 1.8 per cent overall in 2016. The fall in the pound sterling has given a boost to exporters while raising costs for the many products imported, pushing up inflation quickly.

Nonetheless, most economic actors are considering their options before they commit to the UK economy; they are either hesitant to invest or are looking to potentially move their operations out of the country. As the UK is a significant member of the world economy, all eyes are on the fate of Britain, as well as the rest of Europe, while assessing the potential impact of Brexit on other regions of the world.

Asean, for one, is not immune to the Brexit fallout, given its economic exposure to both the EU and the UK economies. The common method to assess the degree of exposure is to measure the volume and flow of exports going to the EU from Asean and the foreign direct investment (FDI) heading in the opposite direction.

According to the Asian Development Bank and International Trade Centre, Vietnam and Thailand were the largest exporters from Asean to the UK, which amounted to US$4.8 billion (RM21.1 billion) and US$3.6 billion, respectively in 2014. Overall, however, the Economic Research Institute for Asean and East Asia estimated that the UK only accounted for 1.5 per cent of Asean exports in 2015.

Asean is significantly more exposed to the EU as a whole, particularly via trade channels, compared to the UK. The EU is Asean’s second largest trading partner, which accounted for around 13 per cent of Asean trade in 2014.

The European Commission states that the largest exporters to the EU in Asean were Vietnam, which amounted to more than €33 billion (RM154.2 billion), and Malaysia (€22.2 billion). With regards to foreign direct investment going into Asean, 16.7 per cent of FDI comes from the EU, totalling more than US$19 billion, with one-third of that coming from the UK.

Analysing exports and FDI alone, however, provides an inadequate picture of Asean’s exposure to Brexit. While it’s true that Asean is an export-oriented region and will continue to be for the foreseeable future, there is an increasing reliance on “importing to export” with imports making up a portion of the final export product. Production has become more fragmented in the age of globalisation, with products less and less likely to be manufactured wholly in one country, by one firm alone.

The result is that much more of global trade is not in finished products, but also in components and parts (intermediate goods). The World Bank estimated that 20 per cent of global trade was in intermediate goods in 2015. Asean is no exception to the growing level of production networks that span multiple nations with high levels of trade of unfinished products coming in and out of the region.

The Global Value Chain participation rate was at 56 per cent for East and Southeast Asia in 2010 according to the United Nations Conference on Trade and Development. This illustrates the degree of fragmentation within the region.

In the case of Asean, 28.4 per cent of its total exports’ value was produced from outside the region in 2011 according to statistics collected by the Organisation for Economic Co-operation and Development and the World Trade Organisation (WTO), with the EU being a major contributor to the region’s “foreign value added” content of exports. In fact, a total of 16.3 per cent of foreign value added embodied in Asean exports originated from the EU.

The share of EU value added within exports is particularly high in Malaysia, Singapore, and Brunei. Digging further into the trade data of Asean member states, highlights how crucial the share of EU value added in Asean exports is to some key industries. Malaysia’s most important export industry — electronics — owes almost 10 per cent of its total gross export value to the EU. Elsewhere, Asean’s largest automobile exporter, Thailand, has the EU contributing 6.4 per cent to the industry’s total exports, while 4.4 per cent of Vietnam’s important textile export industry originates from the bloc.

There are two main takeaways from this analysis of Asean’s exposure to Brexit.

First, and as already widely known, Asean has most to worry from an economic slump spreading from Britain and causing significant damage to the rest of the EU. A slowdown in the EU would negatively affect the demand for Asean’s exports much more than a consequent economic downturn limited to only the UK.

The data also brings to light an aspect of vulnerability that has not been considered, which is the potential disruption in the production networks that Asean export industries rely on. The complex fragmented nature of global trade and Asean’s movement up the value chain means assessing the region’s exposure to external shocks is becoming an increasingly inter-connected and comprehensive exercise.

It is, therefore, necessary to go beyond the standard examination of gross exports and FDI when assessing the potential fallout from Brexit on Asean. It is equally crucial to consider the importance of foreign value added content when analysing Asean’s exposure to the impending impact of Brexit.

Aédán Mordecai and Phidel Vineles are Senior Analysts with the Centre for Multilateralism Studies (CMS) at the S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University, Singapore. This article first appeared in the RSIS Commentary.

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