Friday, March 18, 2016

Brexit's Direct and Indirect Impacts on ASEAN

This week I was asked by a client about the potential effect on ASEAN of the United Kingdom’s (UK) referendum on whether the country should stay in the European Union (EU), e.g,. what would happen if “Brexit” were to become reality.  I had a twofold reaction: first on the practical effects on British companies operating in ASEAN and second on how ASEAN would handle a member which wished even to consider pursuing a course similar to what the UK is contemplating.

First, if the UK were to leave the EU, it would have to renegotiate how it would deal with the EU.   Some anti-EU proponents contend that a newly departed UK could negotiate a free trade agreement (FTA) with the EU, whether as part of the European Free Trade Association, or separately, as Switzerland has done.  However, the EU would not be likely to be generous or sympathetic to a UK that had just left. 

Just as important in the ASEAN context, however, is the fact that the EU is a party to recently concluded FTAs with Singapore and Vietnam, and is negotiating FTAs with Indonesia, Malaysia, and the Philippines and even considering an overall FTA with ASEAN.  Such FTAs provide for preferential tariffs for EU goods and investment protections for EU investments, benefits which a newly departed UK would not enjoy.   Furthermore, the UK's bilateral investment treaties (BITs) will no longer provide investment protections, as ASEAN members such as Indonesia are withdrawing from these BITs.   A non-EU UK thus would have to attempt FTA negotiations on its own with these ASEAN members; the terms of the EU FTAs with Singapore and Vietnam require these ASEAN members to enter into FTA negotiations with those countries that have customs unions with the EU, but whether (1) the UK could conclude such a customs agreement with the EU and (2) the UK could reach agreement on FTAs with the ASEAN members is not certain at all.

In such an eventuality, Scotland, which had only just voted to stay in the UK, would be motivated to leave the UK and join the EU.  If Scotland were to join the EU, Scottish exports would qualify for tariff privileges under the EU FTAs with Singapore, Vietnam and other ASEAN members and Scottish investment would be protected by these EU FTAs. 

Thus, although the EU FTAs with ASEAN members are probably not primary considerations for British voters, increasing the likelihood for Scotland to leave the UK and join the EU after a Brexit should be a major consideration.

Second, if an ASEAN member were to consider leaving the regional grouping, could it?  Unlike the EU treaty, ASEAN’s foundational document, the ASEAN Charter, does not provide for the departure of a member (or the expulsion of a member, for that matter).  

Also unlike the EU, ASEAN’s economic agreements do allow for a couple of halfway measures for any ASEAN member inclined to retreat from its commitments under the ASEAN Economic Community.  The ASEAN Trade in Goods Agreement (ATIGA), for example, contains a reciprocity clause that provides that an ASEAN member can enjoy tariff privileges only to the extent that it provides them to other ASEAN members.  Hence an ASEAN member could elect to withdraw from its ATIGA commitments, on condition that the other ASEAN members would do the same. Similarly, the “ASEAN-X” formula in the ASEAN Charter, which allows a sub-grouping of ASEAN members to progress faster with economic integration, could be interpreted to allow a sub-grouping of ASEAN members to go slower or withdraw from economic integration.  Either way, the wayward ASEAN member(s) would still remain part of ASEAN.

Hopefully we never have to see such an eventuality, as the regional dynamics of ASEAN differ greatly from that of the EU.  At least the availability of these halfway stations would allow the wayward member to bring itself back into the ASEAN fold, something that is not readily conceivable for a UK that votes to leave the EU.