On 23 June, the UK voted by a narrow margin to leave the European Union after 43 years. The result’s implications span the world. Control Risks senior partner Steve Wilford explores what it means for the Asia-Pacific region specifically
01 The Brexit vote provides very little ‘upside’ for Asia. This continent has undoubtedly benefited most from the past 30 years of expanding trade flows. Asian exporters and investors had in the UK a vocal advocate for greater free trade between the EU and the rest of the world. That influence will now go, and more protectionist voices among the EU’s remaining major economies will come to the fore. However, there is no Brexit hysteria in Asia – it is far down the list of concerns facing most of the region’s economies.
02 The prospect of Brexit will force major Asian investors in the UK, such as China and India, to slow or reverse their expansion plans. The UK’s attraction as a regional platform for many of these investors was based on its openness to non-EU investment, its physical and financial infrastructure, but also its unimpeded access to the wider EU market. The form of future UK access to the EU market is unclear, but it will not be as favourable as before. While a weak pound boosts short-term attractiveness, uncertain EU market access will hurt the UK as it increasingly competes with European neighbours to lure Asian investment.
03 Asia, as a zone of major emerging markets is feeling significant short-term currency pressure in the wake of the Brexit vote as investors seek safety in devices such as Japanese government bonds. Particularly vulnerable are Asian economies facing their own problems with political stability, such as Malaysia, coupled with a reliance on oil and commodity prices which may slide once again, such as Indonesia. Economies such as Vietnam that manufacture components for UK goods exported predominantly into the EU are also exposed. The UK’s individual influence in Asia is marginal and Brexit is unlikely to have significant diplomatic ramifications in the region beyond the possibility of a resurrected republican debate in Australia.
04 The Cameron administration’s talk of a “golden era” in Sino-UK relations always exaggerated the importance of the UK to China and looks even more optimistic now. Brexit has lost China a keen advocate inside the EU – its largest single trading partner – and the utility of the UK to China in improving relations with the EU has been diminished. China will have huge leverage in any trade talks with the UK. Views in China are split on the geopolitical impact of Brexit, but it is not a major concern. The most pressing implications are probably for China’s currency, which is at its weakest against the dollar since 2010. London is a key hub for offshore renminbi trading.
05 The roughly 1,000 Japanese companies doing business in the UK will take a wait-and-see approach. That uncertainty is likely to slow down Japanese direct investment into the UK at least for the next few months. Automakers like Nissan and Toyota – estimated to employ as many as 140,000 people directly or indirectly in the UK – are likely to be particularly affected. If companies decide to divest from the UK, this would be gradual, certainly in manufacturing and heavy industry, and would also depend on new incentives from Westminster. The impact of Brexit uncertainty on global markets could harm Japan’s already shaky growth prospects in the next two years, for instance by discouraging consumption.