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Brexit: What it Could Mean for Southeast Asia

JANIO

  • Understanding Brexit, the EU and why the UK voted for Brexit

  • Trying for a Soft Brexit: What’s in the Brexit Withdrawal Plan?

  • Hard Brexit’s Risks and Potential Problems to Trade and E-commerce

  • What’s Next: Opportunities for Southeast Asia

In recent years, the world has seen several major events which could cause huge global shifts in trade power, namely the US-China trade war in the Pacific and UKs impending departure from the European Union (EU), otherwise known as Brexit, in the Atlantic.

While these developments are likely to slow down trade and disrupt international supply chain activities between the countries involved, it could also possibly lead to hugely beneficial opportunities for nations and businesses in other regions. Brexit in particular has led the UK and the EU to look to increase trade with other parties. Indeed, just this year, Southeast Asia has seen increased investment activity with many multinational corporations shifting their focus to the region as a result of these happenings.

Understanding Brexit

To really understand Brexit, we first need to understand the European Union (EU). The EU is a political and economic union, whose single market, customs union and common policies all facilitate free trade between its members.

There are no internal borders or other regulatory obstacles hindering free movement of goods and services between members of the EU. For example, cars from Germany exported to France are free from tariff and non-tariff barriers.

Being part of this trading bloc requires some trade-offs. In the EU market, free movement of goods and services requires free movement of people, so countries in the single market have less control over who moves into their country. Over the years, this has led to a large wave of immigration into the UK when the EU began expanding its membership to include other East European countries, straining UK’s public services.

Increased control over its borders and more sovereignty are among some of the reasons why the UK was looking to leave the EU. On 23rd June 2016, the Brexit referendum took place to decide if the UK ultimately wanted to stay or leave the EU. The highest turnout for a referendum in two decades, 72.2% of UK residents, came to vote. The vote to leave won marginally with a 52% majority.

After more than a year of negotiations, the 27 members of the EU accepted the UK’s withdrawal plan on the 25th of November, 2018. Some of the topics the 585-page agreement covers are:

  • Future trade arrangements that the UK can have with the EU and other international trade partners

  • UK’s financial settlement to the EU, also known as the Brexit Divorce Bill

  • Fishing and Agricultural Policy

  • Citizens’ rights for both UK citizens in the EU and EU citizens in the UK

  • The legal operational backstop involving Ireland and Northern Ireland.

While Theresa May has managed to get past the EU hurdle, convincing the UK parliament to support this deal may prove to be more challenging. Many quarters in the UK parliament from both her ruling party as well as the opposition are voicing their rejection of the agreement.

Trying for a Soft Brexit: What’s in the Brexit Withdrawal Plan?

The Brexit Withdrawal Plan contains a roadmap on what conditions both the EU and the UK will adhere to during the transition period. The transition period will be used to work out UK’s longer term relationship with the EU and the rest of the world, particularly on trade and security. During a soft Brexit transition period, the UK would intend to continue trade with the EU with as little disruption or changes as possible.

This means maintaining existing trade relationships and rules with the EU during the transition period. According to the agreement, the UK must continue being party to the single customs union and accepting the rules that the EU places on these agreements.

However, continuing to be part of the EU’s single customs union does not sit well with Pro-Brexiteers. This agreement means that the UK would sacrifice the freedom to negotiate its own trade agreements during that time. For instance, the UK can’t lower tariffs on other potential trade partners to boost its trade outside the EU for that period.

Another major issue that many quarters in the UK are struggling with is the ‘Irish Backstop’. The backstop can be thought of as a backup plan in case long-term trade negotiations during the transition period fail to agree on how the border between Northern Ireland and Ireland would work. This border exists because Northern Ireland is part of the UK while Ireland itself is a nation that is also an EU member state.

If the UK and the EU is unable to reach a deal that makes a hard border between Northern Ireland and Ireland unnecessary, the backstop involves keeping the UK in a ‘single customs territory’. That means the UK still remains in the EU’s customs union in a sense. The UK would need to follow customs union rules, except that they are rule-taker and do not have a say in what rules they accept. This also puts a harder trade border between Northern Ireland and Ireland itself, which would complicate and slows down trade on the island.

This lack of freedom in negotiating their own trade agreements and the backstop that could put the UK back into the customs union with even less say are among the major reasons that the UK parliament opposes this agreement. Below are some of the remarks these quarters have made:

“This is a bad deal for the country. It is the result of a miserable failure of negotiation that leaves us with the worst of all worlds. It gives us less say over our future, and puts jobs and living standards at risk.”
“What Theresa May has succeeded in doing is putting a proposition on the table which is worse than no deal and worse than staying in the EU, whatever else is on the table,”
“Unless we junk this backstop, we will find that Brussels (the EU) has got us exactly where they want us – a satellite state…. [The UK risks] economic and political humiliation.”

Theresa May’s party represents a minority government in the UK parliament and will face an uphill battle trying to gain parliamentary support for the agreement. They need the support of the Democratic Unionist Party, a Northern Irish based political party, which has said it will vote against the agreement. The opposition Labour party believes the deal is a disaster and even some hardline Pro-Brexit MPs in Theresa May’s own party are against the deal.

While it could offer more freedom, a hard Brexit would be undesirable for the UK as it doesn’t have a transition period. Having no transition period wouldn’t allow the UK any time to adapt itself to new trade arrangements and agreements with the EU. Furthermore, the UK would be treated as a ‘third country’ to the EU, where it faces stricter border controls and higher trade barriers between the two parties.

At the time of this writing, many possibilities and great uncertainty still surround the fate of the UK’s relationship with the EU. Theresa May and the EU both say that the deal the EU agreed on is the ‘only deal’, ‘the best possible deal, ‘the max’ that the UK parliament can get. But it is also likely Brexit wouldn’t happen or that the UK will walk away from negotiations, leading to a hard Brexit. From here, it helps to find out what effects a hard Brexit would have on trade, the UK, and on Southeast Asian E-commerce.

Risks and Potential Problems to Trade & E-commerce

More Complicated Tax Regulations

If the UK leaves the EU, they could face stricter border control and regulations which may slow down cross-border trade between the countries. One example is tax declarations.

Assuming a hard Brexit, tax declarations could become more time-consuming. E-commerce merchants in particular, would be affected as the UK would no longer being party to ‘distance selling’ rules. ‘Distance selling’ rules are aimed at goods that are delivered cross-border straight to the customer’s doorstep.

‘Distance selling’ rules help to simplify tax rules: if you are an EU online seller from EU country A (the origin) and export your goods to EU country B (the destination), you only need to register for value-added tax (VAT) in country A if your revenue doesn’t exceed the revenue threshold in the EU country B.

However, if your sales in country B exceeds country B’s sales threshold, you need to register your company for VAT in both the EU country A and EU country B and pay for VAT in the country B. This simplified VAT registration process encourages trade within the EU as smaller companies only need to pay the VAT taxes in the origin country as long as their sales in other EU countries don’t hit their respective countries’ sales thresholds.

For businesses outside the EU looking to trade in the region, they will first need to register as a non-resident VAT company in an EU country. Usually, this is the country where they set up their EU distribution hub. When selling, they have to be aware of each EU country’s sales threshold and monitor the sales they make in those countries. If their sales in a particular EU country goes above that country’s threshold, they need to register their company for VAT there and pay taxes in that country as well.

Leaving the EU would mean no more ‘distance selling’ rules in the UK. Businesses with existing distribution hubs in the UK would likely shift out as they would need to register with another EU country to continue trading within the region to enjoy the benefits of ‘distance selling’ – a major loss for the UK.

Higher Tariffs and Slower Cross-border Deliveries

To attract more companies to set up their EU distribution hubs in the UK, the UK introduced a business-friendly VAT flat rate scheme. Along with access to EU’s single market, this initiative made the UK a popular gateway for many businesses to enter the EU’s market.

A hard Brexit would result in stricter border controls, higher tariffs, and the end of UK’s access to the EU single market leading to increased shipping costs between the UK and the EU. This may adversely affect businesses who rely heavily on the frictionless supply chains between these 2 areas.

More regulations and increased risk of shipments getting delayed at the border could lead to higher operating costs. Businesses using the UK as a distribution hub to the EU may be forced to relocate their operations elsewhere to avoid this added cost.

Currency Devaluation

Brexit’s referendum outcome in 2016 casts the future of trade between the UK and the EU into doubt. This led to the most severe devaluation of the Pound Sterling in three decades in 2016. The Sterling devaluation makes UK imports more expensive, discouraging British consumers from buying foreign goods. In addition to that, the cheaper Sterling makes British exports cheaper, stimulating demand for exports.

With more costly imports, British consumers are more likely to purchase local products which may negatively affect foreign e-commerce merchants who currently sell to the UK. However, with the UK and the EU needing to find new long-term trading partners for supplies and exports, both parties will have to settle with trading more with everyone else.

In summary, a hard Brexit would mean slower and more costly UK-EU trade due to increased trade barriers and higher tariffs. This leads to more costly and possibly disrupted supply chains from the UK to the EU. On the other hand, the need for the UK to find trade partners beyond the EU could lead to higher UK trade with the rest of the world, such as Southeast Asia.

What’s Next: Opportunities for Southeast Asia

“A Pro-business Britain”

No matter the outcome of the Brexit negotiations, the UK and the EU may be likely to trade less with each other in the future and both are looking to expand their horizons. To do this, both the UK and the EU looking to increase trade with other markets to ease trade tensions and find investments for long-term economic development.

To reduce its reliance on the EU, the UK developed a more business-friendly economic plan. UK Prime Minister Theresa May insists that the UK will be more welcoming to global businesses. She plans to do this by creating a friendly business environment to welcome global business, including lower corporate tax rates. This plan aims to boost exports to 35% of GDP with measures such as increasing finance and insurance support for exporting businesses. The UK is also planning on doubling its GDP and connecting with businesses overseas.

For the time being, this plan will take some time to be implemented as the UK and EU are still highly dependent on each other in the short term. Nearly half of the UK’s exports and imports are with the EU and the UK is the biggest trade partner for most EU countries. The UK’s plan still sends a strong signal that it wants to trade more with markets other than EU in the long term.

ASEAN is seen as one of the next up-and-coming regional economies, with both the EU and the UK looking to boost trade with it. ASEAN’s economy is predicted to be the fourth biggest around 2030 globally, and proved itself a wealthy trading area with $44 billion worth of goods and services in 2016. With its location among major trade routes near the South China Sea, it is considered a hub in the movement of international goods.

The UK eyes ASEAN as a priority for increases in trade and investment. In the ASEAN@50 Business Forum, Jusuf Kalla, Indonesia’s Vice president and Mark Field, UK Minister for Asia both called for the strengthening of the UK-ASEAN relationship to further increase trade and investment.

The UK has long been the second biggest investor in ASEAN and also a major exporter to the region. As of now, more than 25,000 UK companies exporting to ASEAN, making this region the second-largest UK export destination after the US.

With UK’s increasing commitment to growing UK-ASEAN trade ties, Tory MP Ed Vaizey was recently appointed as a trade envoy to the region. He is engaging with ASEAN’s emerging markets, in particular, Vietnam, Cambodia, and Laos where substantial trade and investment opportunities have been identified by the UK government. The UK has also planned to continue with the EU’s free trade agreement with Singapore and Vietnam as one of their first trade steps post-Brexit.

As for the EU, it has shown its willingness to cooperate with ASEAN by beginning bilateral negotiations with individual members of ASEAN. The EU is planning steps towards building region-to-region agreements as well. The EU is an important trade partner for ASEAN accounting for 13% of ASEAN’s exports from 2005 to 2015, of which the UK only took in 1.5% of ASEAN exports in 2015. EU and ASEAN have also attempted to negotiate an EU-ASEAN free trade agreement since 2007.

Further cooperation between the two regions has been strengthened by a successfully negotiated EU-Singapore FTA. This cooperation could help eventually help the rest of ASEAN improve market access across many sectors, increase government procurement opportunities and progressively eliminate tariffs on trade between ASEAN and the EU.

Both the EU and the UK see ASEAN as a major trading partner amidst the uncertainty brought about by the Brexit negotiations. ASEAN countries have shown their willingness to deepen these cross-border relationships by prioritising the removal of non-trade barriers.

Online Sales Boom

E-commerce is becoming more popular in the EU and the UK. Digital trade may be able to help ease the trade tensions that arose from Brexit and even create more opportunities.

The B2C e-commerce economy in the EU is expected to rise. Today, about 83.1% of all Europeans have internet access, with internet penetration expected to rise further as the less developed EU member countries catch up to the rest of Europe. Most of the stronger EU countries frequently engage in online shopping with many of them having at least 67% of their population making online purchases in the last 12 months.

E-commerce Europe also forecasts that the UK will have the strongest e-commerce market in Europe in the next few years. Internet penetration in the UK stands at 96% today with around 80% of the populace making an online purchase in the last 12 months. The UK’s top performing e-commerce products are clothes and sports goods, information technology goods, household goods, and electronics in 2017. People in the UK now prefer to purchase online more compared to buying goods from physical stores. Online sales in the UK grew in the first half of 2017 while brick-and-mortar sales dropped. This resulted in the closure of many brick-and-mortar stores in the past few years.

E-commerce trade between the EU and the UK could become slower post-Brexit due to increases in trade barriers, leading to e-commerce merchants looking for new markets to expand to. With ASEAN being identified as the ‘next frontier’ for an e-commerce boom, along with the EU and the UK’s upcoming trade agreements with the region, ASEAN seems like a likely market to expand to.

ASEAN countries have seen large increases in internet penetration and this is expected to grow further. ASEAN country governments are looking to develop internet infrastructure in their countries and are pushing their companies to digitalise. Rising internet penetration coupled with a rising middle class in the region points to large e-commerce market potential in this region.

These internet developments in ASEAN correspond well with the European Commission’s (EC) Digital Single Market (DSM) initiative. As one of the ten priorities of the EC, the DSM aims to digitalise EU’s single market and improve consumer and business access to online goods. Among their initiatives are removing the differences between online and offline stores, ensuring high-speed and secure online service and increase regional innovation. All this will lead to more citizens in the EU having better access to digital goods and services and a better connected, larger e-commerce market in the EU.

ASEAN also has initiatives with similar objectives to DSM currently being discussed such as the ASEAN e-Commerce agreement. The ASEAN e-commerce agreement aims to encourage businesses to tap into e-commerce trade and streamline border processes through automation.

With this agreement, businesses would have lower e-commerce barriers to entry, such as streamlining e-commerce rule differences between ASEAN countries when selling to multiple countries in the region. This is in addition to ASEAN launching an E-ASEAN framework to develop a digital economy and other national strategies and action plans.

The combination of the UK’s and the EU’s intention to trade more with ASEAN and the development of EU’s and ASEAN’s e-commerce capabilities could point to greater potential e-commerce trade between these parties. Building on the success of the EU-Singapore FTA, more free trade deals between individual ASEAN nations and the EU would also be on the way. When this happens, ASEAN companies could find it easier to realise their e-commerce ambitions by accessing the EU’s e-commerce market through future trade agreements.

Conclusion

Brexit brings with it a lot of drawbacks and uncertainty around trade between the UK and the EU. Supply chains from the UK to the EU could face more challenges and become more expensive to manage while the UK faces the largest currency devaluation seen in thirty years.

However, Brexit could spell great opportunities for ASEAN. Separation of the EU and the UK would force them to look to other markets like ASEAN for more trade. With e-commerce being a leading engine of economic development in both the EU and in ASEAN, it’s likely that these regions will have more opportunities to grow and develop together.

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Co-authored by: Alice Wu Si Yu and Benedict Leong

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