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What Asia can learn from Brexit

Three perils to avoid in Britain's messy EU divorce

| Southeast Asia

Viewed from Asia, Brexit invites puzzlement bordering on incomprehension. Britain's colonial heritage left a mixed legacy in this part of the world, but until recently the country was still admired for its competent government and economic prowess. Little of that will survive next month's Brexit deadline, even if Prime Minister Theresa May does manage to avoid the catastrophe of "no deal" -- leaving the EU without an agreement governing Britain's departure or its future relations with the bloc.

Brexit provides obvious warnings beyond the spectacle of a once-respected power unable to govern itself. The folly of allowing referendums is one, an observation made privately by nonplused Singaporean diplomats in the aftermath of the original vote. For more doctrinaire critics of the west, Brexit also serves to illustrates the weakness of liberal systems of government. If Britain does indeed crash out on March 29 without a deal, those critics will have a point.

The irony, though, is that Brexit is the consequence of something many Asian leaders say they want more of -- namely closer integration within their own region. And here Britain's checkered European journey, both in its early successes and ultimate failure, offer useful lessons for Asia's long-term future.

Reasonable people can disagree as to whether Britain's EU referendum result was driven more by economic or cultural anger. On the one hand, the spoils from decades of globalization were shared unevenly. On the other, rising migration prompted a fierce public backlash. Yet both factors were the result of Britain's decision to tie itself closely to Europe. As much as the ongoing U.S.-China trade war, Brexit is what deglobalization looks like -- namely the messy unpicking of decades of economic coming together in the face of popular anger.

Asia starts from a different position. As a region, it is more integrated than many believe. In 2017, a record 58 percent of Asian trade took place between its own countries, according to the Asian Development Bank. This placed Asia ahead of North America, and not far behind Europe's 64 percent.

That picture remains uneven, however. South and Central Asia are less interconnected than the prosperous east. Investment and people are more restricted than goods. Fiddly business regulations, non-tariff barriers and creaky infrastructure inhibit regional links. As the trade war shows, Asia's vibrant exporting nations are often more closely connected to distant nations in the west than they are to one another.

For this reason closer integration has long been a goal of Asia's elites, just as it was in Europe before the launch of the single market in 1993. And greater integration could indeed produce sizable benefits. Both the recently completed Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and ongoing Regional Comprehensive Economic Partnership (RCEP) trade deals aim to boost this process. In its own way, China's Belt and Road Initiative (BRI) does as well.

These dreams of closer ties can often seem distant, not least as talks over deals like RCEP drag on. The same is true for the grand-sounding ASEAN Economic Community, which has amounted to little since its 2015 launch. Whichever way you look at it, Asia is unlikely to develop EU-style free movement in goods or people any time soon.

Still, it is a fair bet that growth over the next few decades will lead to closer regional ties, especially as more Asian nations become consumer economies rather than exporting powerhouses. And here Brexit shows three perils that must be overcome -- the first being that integration must be politically balanced. Much of the anger in the run-up to Britain's referendum focused on the power of Brussels, as voters were exhorted to "take back control." Backers of closer Asian integration will face a different challenge: managing the influence of Beijing.

Recent increases in Asian regional trade have stemmed largely from the growing weight of China, now the largest trading partner of most Asian economies. Future integration will be driven by Chinese infrastructure investment, and facilitated by deals like RCEP, in which China is a dominant player. The recent backlash against BRI in countries such as Malaysia and Myanmar provides just a small taste of the kind of politics that integration could bring, if China throws its weight around.

Second, Brexit shows how difficult it is to manage integration within countries, as well as between them. The benefits of integration, while sizable, have frequently been oversold in the past. They are rarely fairly divided either. Asian countries therefore need to think carefully about how to avoid the kind of populist backlash against integration that now cripples politics in both Britain and the United States.

Third, and most pressingly, Brexit illustrates how hard it is to undo integration once it has begun. Whether or not it succeeds, May's proposed deal is an attempt to manage this awkward process of decoupling by mitigating disruption to valuable regional supply chains in areas like automotive manufacturing. Even this is unlikely to succeed, as shown by both Nissan Motor's recent decision to cancel plans to build its X-Trail model in the UK, and this week's news that Honda Motor is planning to close one of its factories in the UK.

Honda Motor is planning to close its factory in Swindon, Britain.   © Reuters

U.S. President Donald Trump's attempts last year to redraw the North American Free Trade Agreement showed a similar pattern. Trump realized eventually that big changes to NAFTA would disrupt U.S. manufacturing industries, and settled for trivial amendments instead.

Facing this trio of challenges, Asia's typically gradual and haphazard approach to integration could prove to be an advantage, avoiding some of the problems that have bedeviled Europe's approach of building new common institutions and pushing grand political visions.

Still, if Asia is to enjoy the benefits of closer ties, it must eventually build new forms of political cooperation to manage that process. While the financial benefits of that integration are real enough, Brexit ultimately shows the importance of understanding that politics will trump economics in the end. And of building structures with decent exit mechanisms, just in case.

James Crabtree is an associate professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is author of "The Billionaire Raj."

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