This article first appeared in Forum, The Edge Malaysia Weekly, on July 25 - 31, 2016.
Malaysian analysts have generally been relaxed about Brexit. The feeling has been that Malaysia is not overly dependent on the UK for trade, and so the fallout will not be of much consequence to it.
It is true that Malaysia does not do too much trade with the UK. It does not export too much to the UK — the electrical and electronics sector, for instance, does not rely on the UK for its demand.
Although the UK is the financial centre for Europe, the reshuffling of the financial nodal points will not affect Malaysian financial markets too much.
The direct and short-term impact of Brexit will hardly matter to Malaysia. If anything, in the short term, the UK will be a favourable destination for our students, and it might be a good time to pick up property there.
The longer-term prospects are more momentous. Brexit spells the imminent collapse of the European Union. This could happen in two ways. As a political entity, the EU will not have the force that it once had. Many countries — China being one of them — saw the UK as a gateway to Europe. Europe cannot negotiate as one bloc. China may see this as a sign of weakness and as an opportunity to assert its influence in that part of the world. The US, too, will have as its ally a fragmented region.
Equally troubling is the shake-up to received wisdom on the usefulness of economic integration. No longer will people take it for granted that big is good, simply because the cost of holding on to an integrated region is high. Besides, regional integration can fail, and countries can decide to break lose.
Closer to home, these issues will raise questions on Asean and the validity of seriously pursuing any agenda for greater integration. As it is, member states have widely differing backgrounds, views and areas of concern. Different countries have dissimilar views on government procurement, trade facilitation and the harmonisation of standards, the last being an obstacle to the movement of natural persons, particularly those who are skilled.
The Brexit experience is hardly going to convince Asean countries to work harder to achieve common goals. They are likely to take a cynical view and drag their feet in achieving the goals of the Asean Economic Community. This will be a stumbling block for the signing of the Regional Comprehensive Economic Partnership (RCEP).
Singapore has not placed too many of its eggs in the Asean basket. It has always chosen to strike its own path, while paying due respect to the existence of Asean as a community. Singapore might see its position vindicated.
Italy, France, Holland and Denmark could follow in the lead of Brexit. If other European nations choose to exit from the EU, that will send stronger signals to Asean of the unsustainability of any grand grouping of nations.
What of financial services? It is unlikely that Britain’s post-Brexit situation would deprive it of access to European financial markets. Companies in the UK would shift to suitable European locations, thus gaining from the advantages of being in the EU. It is unlikely that there will be a financial cataclysm. The UK will lose out from the dislocation of its financial companies, though the companies themselves will adapt to the new scenario.
With respect to financial services, there is a crucial difference between the EU and Asean. The EU has well-developed services and markets, which is not the case for Asean. If Asean is to procrastinate on the liberalisation of financial services, citing Brexit for doing so, it will be to the grouping’s disadvantage. The relocation of services works out more smoothly when the necessary mechanisms have been put in place. In the case of Asean, this has yet to be accomplished.
Brexit matters to Malaysia because Asean matters to Malaysia. The Malaysian aspiration to be the hub of Asean will be throttled if Asean does not take off. And there is a good chance of that happening if Asean learns all the wrong lessons from Brexit. That is why it is misguided for Malaysian analysts to be calm and comfortable about Brexit.
Shankaran Nambiar is Senior Research Fellow at the Malaysian Institute of Economic Research. He is working on his next book on the Malaysian economy.