Author: Editors, East Asia Forum
The shock of Britain’s vote to exit the European Union (EU) will reverberate around the world for decades to come. And Asia isn’t immune. The direct effect on stock markets and exchange rates around the region is a modest harbinger, but that’s only the beginning. Brexit puts the future of the European enterprise and of the United Kingdom itself in doubt. This black swan event — which should have been in everyone’s contingency planning kitbag — must change strategic thinking everywhere and propel Asia’s response to centre stage in containing the knock-on effects on the international economic system.
David Cameron now joins Neville Chamberlain and Anthony Eden as British prime ministers who are remembered for one single, massive miscalculation. The portent for Donald Trump’s mobilisation of the angry middle classes in the United States is ominous. And populist movements are now a looming threat to international engagement in all democracies everywhere, though more containable outside of Europe and the United States. As Larry Summers suggests: ‘The political challenge in many countries going forward is to develop a “responsible nationalism”. It is clear that there is a hunger on the part of electorates, if not the Davos set within countries, for approaches to policy that privilege local interests and local people over more cosmopolitan concerns. Channelling this hunger constructively rather than destructively is the challenge for the next decade’.
Britain has made a choice for shrinking itself economically and strategically. The confidence and productivity effects on its own growth ensure that. As a steadying force in Europe it’s lost all legitimacy, deeply wounding and disaffecting European elites and the overwhelming majority of its hopeful youth with one fell swoop. Boris Johnson’s appeal to re-boot Commonwealth economic ties with Australia to compensate for Europe’s loss beggars belief among thinking Australians. The world has changed in the past three-quarters of a century: it’s economic geography 101, stupid. A mere 1.2 per cent of UK exports of goods and services go to Australia and 0.5 per cent of imports are sourced there. Like the United States, Australia has special ties of kinship and history to the United Kingdom, though less and less important as the overseas born and descended in Australia are predominantly from Asia, other European countries, the Middle East and elsewhere. India, Malaysia, Singapore and New Zealand also have important ties to the United Kingdom. But like the United States and Australia for decades these countries have primarily seen their UK links as a useful conduit to Europe. That’s now been blown away.
The risks of a dip in the UK economy within the next 12 months are high, and the knock-on risk to US recovery not insignificant. The short-run impact of Brexit became immediately clear as the sterling plunged to a 31-year low. In the near term, and certainly in the long term, London’s financial heartland confronts major uncertainties. In the longer term, it’s difficult not to see a major shift of business to the continent. Job losses, premium incomes and cooling London property values will all come sooner. The political domino effects in Europe — including renewed demands for Scottish independence and regional breakaways on the continent; complicating the peace in Ireland; accelerating retreat from the free movement of people in Europe; and surging anti-immigrant politics in Europe and elsewhere — will be huge and long-lasting. This all undoubtedly boosts Trump’s chances in the United States and Marine Le Pen’s stocks in France. The political pressure for choice to exit in other countries, if not unstoppable, will be immensely damaging to confidence in the EU.
On top of that there is the immensely complex problem of unwinding Britain’s EU membership and defining its new status with the rest of Europe — negotiations with all the EU member states and partners outside on trade and investment arrangements; almost 7000 regulations to be changed; taxation and subsidy arrangements to be unwound. It will be a long and messy affair that extends over 10 years not just a few months — a downer for everyone involved, akin to attending a close family friend’s funeral every day for months and years on end.
Asia’s direct exposure to a weakened UK economy and currency is limited but more significant for some regional economies than others. Trade shares are small, though higher with Vietnam and India and lower with South Korea, which is the least exposed Asian economy. Japan, India and Australia all have substantial investments in the United Kingdom, largely predicated on the European market. These direct channels for the transmission of negative income, trade and investment shocks from Britain are not the principal worry. A far bigger problem is how Britain’s Brexit choice plays into the forces against open economic policies in Europe and across the world and what political defences are left in the global system against all that.
On some measures, the Asian economy is more integrated than that in Europe, but without the stifling load of supra-national authorities and an unworkable common currency. The dense trans-regional trade and production networks that have fuelled the region’s remarkable growth, with China at the heart of it, over the past three decades match those in Europe.
As Peter Drysdale says: ‘The global economic outlook may be grim but it would be grimmer still but for Asian economic growth. There’s no dynamic growth pole anywhere else in the world and global uncertainties have increased around the rise of Trump in North America and Brexit in Europe’.
Brexit is another hit to the global growth outlook as industrial economies struggle to resume healthy growth after the global financial crisis. The stagnation mentality that infects much of the developed world and the waning growth outlook for emerging economies leaves China and emerging Asia — still by far the largest engine of growth in the world economy — as the last defence against Europe’s self-inflicted woes.
Realising Asia’s growth potential in the face of these new global headwinds will certainly require ambition, the will within Asian polities to undertake the next round of reforms essential to lifting productivity and accelerating structural change, and effective collective articulation of the strategies that can stake out Asia’s role in the global defence against the virus on anti-globalisation that is spreading from the industrial world. A strong, mutually reinforcing Asian growth environment will vastly increase the chance of success.
Are Chinese and other Asian leaders up to the challenge?
One would have to say that this is a challenge for emerging Asia that’s come too soon. But with close cooperation among the plurality, including Japan and Australia which are deeply invested in the Asian enterprise, there’s just a chance.
There are weeks not months in which to get the measure of this task squarely on the China-hosted G20 agenda. But that is what must be done, diplomatically, with Angela Merkel’s clear-eyed help. This is not the time, as she says, for recrimination, but it is the time for bold, decisive immunisation of Asia and therefore the world against the rot.
And China, often cast as the biggest engine of global growth, could again as it did in the 1990s, become a critical player in shielding the world against international instability.
The EAF Editorial Group is comprised of Peter Drysdale, Shiro Armstrong, Ben Ascione, Ryan Manuel and Jillian Mowbray-Tsutsumi and is located in the Crawford School of Public Policy in the ANU College of Asia and the Pacific.