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What is the economic impact of Brexit on Asian economies?

This economics post explains and analyses the possible economic consequences of Brexit on Asian economies and was created through synthesising a few economics essays. 

On 23 June 2016, in a historical moment that will be a discussion topic that would stand the test of time, citizens of the United Kingdom (the UK) voted in a national referendum on their continued membership in the European Union (the EU), ultimately choosing to leave. 

This huge event is called “Brexit”. 

What is the economic impact of Brexit on Asian economies? 

Brexit has negatively impacted global financial markets, causing economic volatility and huge losses of trillions of dollars in equity value. 

Meanwhile, the UK pound has seen the largest drop by any major world currency in recent history, and its largest drop since 1985.

On the surface, the UK leaving the EU would not matter that much economically to Asia’s economies. 

Although the UK is prima facie the world’s fifth-largest economy (now that is not the case any more, apparently as an immediate economic impact of  Brexit, because it has been overtaken by France), the UK is not actually one of Asia’s biggest economic customers. 

Except for Cambodia, Vietnam, and Hong Kong, most exports from most economies in Asia to the UK are relatively small as a percentage of total economic output. 

For Singapore, a small and open economy located in Southeast Asia, the UK is a relatively small customer. Singapore’s exports to the UK totalled S$7 billion in 2015, out of S$530 billion in total exports. 

Quite simply put, in the immediate or short term, the economic impact has been rapid and direct so far. In the immediate term - it's the economic impact on markets and currencies that matter currently. 

But the real and longer term impact of a “Brexit” – for Asia and the rest of the world – is much bigger than just merely market or economic volatility. 

The real economic impact of Brexit would be more subtle than any immediate effect on trade or markets. 

It would represent an economic slowdown – and maybe the first steps of a economic reversal – of the globalisation that has defined markets in recent decades. 

There are many definitions of globalisation, but in this case, globalisation refers to the increasing integration and interdependence of the world’s economies arising from increased international trade and greater international mobility of factors of production like capital, labour, and enterprise across international borders. 

Asia has a lot to lose from this rollback of international trade or decline in economic globalisation. 

Many Asian countries rely heavily on international trade. 

For instance, Singapore’s international trade stands at 351 percent of its GDP, and it amounts to 439 percent of Hong Kong’s GDP. Growth in international trade has been slowing in recent years, and Brexit could slow trade and growth down further. 

For example, the UK takes fully three-quarters of Singapore's investments in the EU with big companies like Comfort DelGro and Frasers having an international presence in that country. The UK out of EU could lead to significant fall in Singapore's exports to the EU, and Singapore international businesses could suffer write-downs in economic value on their balance sheets.

If there is a rise in protectionist sentiment in the UK, this might spread to other countries as well. 

Protectionism refers to economic policies aimed at restricting international trade between countries, designed to protect domestic businesses and workers from international competition, while free international trade refers to the exchange of goods and services across international boundaries. 

Recently, other than just the UK government, many governments (and a famous US Presidential candidate from "across the pond") have been adopting or promoting protectionist measures in the belief that this would offset the impacts on their economies from international trade and globalisation.

China would likely have some major economic concerns. The EU is an even bigger destination for Chinese goods than the United States.

The EU is China’s largest trading partner, and as China enters an era of slower economic growth, the timing of the breakup of the European Union couldn’t be worse.

For China, the UK's decision to eventually extricate itself from the European Union’s common market will be a disappointing move. Chinese Premier Li Keqiang has taken a particular economic interest in the UK, reciprocated in recent years by Chancellor of the Exchequer George Osborne. Last fall, London became the first international financial hub to issue renminbi-denominated debt after Xi Jinping’s visit there. Brexit will be an economic setback for the ongoing internationalization of renminbi as London’s international relevance as a global financial hub is diminished as a result of Brexit. 

Brexit could also challenge some of the international trade deals focused on further opening the rest of the world to ASEAN economies. The Trans Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP), for example, are aimed at cutting international tariff barriers and promoting international trade with some of the world’s largest economies. 

Brexit could also mark an economic setback for China’s long-term economic goal of a free trade agreement with the EU. London had emerged as one of the most eager advocates for a China-EU FTA. 

With the UK now exiting the economic bloc, none of the other major EU states seem keen to ink an economic deal with Beijing. An FTA with the UK alone might be politically simpler to negotiate, but will not have nearly the same economic benefits for China. 

Remember that a Free Trade Area (FTA) refers to a trade bloc where more than two countries agree to engage in free trade with one another while maintaining members’ own individual levels of external barriers against non-member nations.

In the longer term, no one really knows what the economic impact will be - but it certainly will not be a walk in the park for UK or Asia, or Singapore, and only time will tell if Brexit really was a good economic decision ... 

or if the economic experts were right in saying that this was one of the worst economic decisions of all time. 

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