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Articles: The future of EU-ASEAN trade ties and the connection to Brexit

19 May 2017

This week marked a significant development in the 40-year EU-ASEAN trading relationship. The European Court of Justice (ECJ) has issued its long-awaited opinion on the question of the European Commission’s exclusive competence over the EU-Singapore free trade agreement (EUSFTA), concluded in 2014. The Court ruled that the European Commission had exclusive competence on all aspects of the FTA with the exception of non-direct foreign investment and investor-state dispute settlement. These two points will require the consent of the EU Member States for ratification.

This opinion will have far-reaching consequences for all formal trading relationships which the EU seeks to forge in the future, including that with the United Kingdom when it leaves the EU. The general expert commentary has sided with the view that it will make ratification of any future EU-UK deal less treacherous than if it had to follow the path which the EU-Canada deal (CETA) recently followed.

However, this result also has a very specific and immediate resonance for ASEAN for two reasons. Firstly, the EUSFTA is but one of two FTAs the EU has concluded with an ASEAN member state, the other being with Vietnam. The EU-Vietnam FTA’s ratification has been hinging on the ECJ’s ruling on the EUSFTA.

Secondly, the EUSFTA is the ‘pathfinder’ for a region-to-region EU-ASEAN FTA. In addition to Singapore and Vietnam, the EU has initiated bilateral trade negotiations with Indonesia and the Philippines, with the long-term vision of using these bilateral agreements as the building blocks for a region-to-region FTA. Now that clarity has been established regarding the path to ratification and implementation of future FTAs, the EU and its trading partners have more visibility on how to move forward in negotiations.

This clarity is essential when it comes to negotiating the ambitious high-quality agreements that the EU is pursuing with its trading partners. The EUSFTA, which contains chapters on competition, sustainable development, investment protection, intellectual property and e-commerce, is a prime example of such a comprehensive, 21st century agreement. The high trading standards the EU holds itself to could have a catalytic effect on ASEAN’s own regional economic integration.

How?

Over the past two decades, 99% of tariff lines among the ASEAN member countries have been reduced to zero. While this is a major achievement, this means that the ‘low-hanging fruit’ of tariff reduction has already been harvested and the ASEAN members must now move on to the thornier challenge of eliminating non-tariff barriers or NTBs as they are known by the experts. Intra-ASEAN trade has stubbornly remained at about 25% over the past few years, when closer economic integration should, in theory, be leading to a greater share of intra-regional trade relative to trade with external partners, a telling indicator that the benefits of tariff elimination have been maximised. By contrast the comparable level of intra-EU28 trade is estimated at 60%.

ASEAN member states have acknowledged that tariff elimination alone is not enough to turn ASEAN into a ‘single market and production base’, one of the goals of the ASEAN Economic Community (AEC) Blueprint. Increased emphasis has been placed on initiatives to facilitate trade, ease supply chain bottlenecks and strengthen regional connectivity. However, as is often the case in the ASEAN process, consensus can be difficult to forge and implementation can be inconsistent.

This is where the EU comes in. In order to negotiate a bilateral trade deal with the EU, ASEAN member states know that they will have to meet high standards when it comes to issues like competition regimes, intellectual property protection and regulatory harmonisation. In a 2016 survey conducted by the EU-ASEAN Business Council, 52% of European businesses in ASEAN said that there were too many trade barriers for the efficient use of regional supply chains.[1] Concluding and implementing a trade deal with the EU may provide additional incentives to speed up the process of aligning national policies with regional goals.

This is not to say that any of this is guaranteed—far from it. Negotiations on the EUSFTA began in 2010 and concluded more than four years later, and the EU-Vietnam FTA similarly took three years to conclude. Given that Indonesia and the Philippines are far less trade-dependent than Singapore and Vietnam (Indonesia and the Philippines have trade-to-GDP ratios of 42% and 63% respectively, compared to 326% and 179% for Singapore and Vietnam respectively), EU negotiations with these two countries will likely take longer to complete, assuming they are successful at all. Negotiation challenges will be compounded when it comes to a region-to-region FTA covering 37 countries (viz. the EU28 less UK plus ASEAN 10), which would be an unprecedented accomplishment in the world of international trade. It is clear from European Commissioner for Trade, Cecilia Malstrom’s comments during her recent visit to the ASEAN region however, that the EU is increasingly galvanised to renew efforts to advance its stalled trade negotiations with ASEAN and the individual countries above. The Brexit and TTIP setbacks coupled with the apparent US retreat from free trade agreements (e.g. TPP, NAFTA etc) are also no doubt motivating factors.

There will be many hurdles along the way, including a long ratification process by 28 individual EU Member States (for now), but, with the removal of the most obvious and immediate hurdle (the uncertainty over the European Commission’s competency over the various provisions of the EUSFTA), the path to an overarching, high-quality EU-ASEAN FTA appears to be clearer than it was last week, lengthy and full of potential pitfalls though it may be. It is ironic that a region sometimes referred to as the world’s newest market and aspiring to similar economic integration as the EU, may provide a fillip for EU economic growth in this the 60th anniversary of the Treaty of Rome. The ASEAN Economic Community (AEC) came into existence on January 1st 2016 but ASEAN itself will be 50 years old later this year so a year for anniversaries (see my previous posting of 23rd January 2017, here)

Doing business in ASEAN

I recently spent several days in Singapore itself and in the Malaysian capital, Kuala Lumpur from where the extensive BDO ASEAN presence is coordinated. A cursory glance at the numbers shows how this region is fast becoming more than the sum of its parts economically and already very significant to European businesses. The EU as a bloc is ASEAN’s second largest trading partner (after China), ASEAN’s largest source of foreign direct investment (considerably more than US and Japanese FDI) and there are over 11,000 European companies active in Singapore alone. It is often overlooked on the geopolitical stage but likely to play an increasingly important role geo-economically with average annual GDP growth in excess of 5% for the region. Burgeoning growth at the BDO member firms across all ten ASEAN member countries, confirms that reality on the ground.

During my time in Singapore, it was my pleasure to meet and interview the Executive Director of the EU-ASEAN Business Council, Chris Humphrey, on the margins of the European Chamber of Commerce Europe Day lunch. A veritable mine of information on the business issues arising for European businesses active in ASEAN, you could do worse than grab a coffee and set aside 15 minutes to listen to my conversation with Chris, which was issued as a podcast here.