9 April 2021

The avenues of growth for ASEAN and the UK

The UK’s long-awaited Integrated Review, outlining its international priorities in a post-Brexit world, has been released.

Whilst it is wide-ranging in focus, there is a clear and strong tilt towards opportunities in digital and climate change within Southeast Asia.

This should be welcome news for ASEAN member states, especially if the UK becomes a viable source of investment for the two thematics.

Consider past statistics. In 2019, the UK represented almost 13% of ASEAN’s trade with the EU and nearly half of its US$15 billion inbound investment.

Renewed fervor in technology and climate change investment will have a knock-on effect on the already high level of British investment in the region. Investment that’s well worth it.

With the fastest online adoption of any region in the world, Southeast Asia is racing to build a digitally connected economy while courting international tech investment to further build the necessary ecosystems and infrastructure including the rollout of 5G.

Southeast Asia is also looking to urgently address climate challenges. It’s one of the most vulnerable regions to climate change. And it’s estimated that there’ll be a GDP per capita loss for ASEAN members of up to 11% by 2100 if not addressed1.

But getting to the point where ASEAN and the UK can build a mutually beneficial relationship requires some issues to be addressed. Let’s turn to technology first.

Digital standards

A Kearny EDBI study found that USD1 trillion in additional GDP could flow into Southeast Asia if the region can fully embrace Artificial Intelligence (AI)2.

However, that potential is being eroded as ASEAN member countries remain splintered in their approach to regulating data flows across borders due to concerns about national security, data privacy, or to protect local businesses.

The knock-on implication is that companies need to store and keep data within each country, negating the potential of ASEAN as a trade bloc and reducing the benefits to businesses from innovative new technologies like AI and cloud. It also has cost implications for businesses which then get passed on to the consumer or even prohibits business growth.

Whilst the region has the voluntary ASEAN Framework on Digital Data Governance, which favours an opening of data flow and aims to promote the use of new technologies, the glacial pace of adoption stunts growth.

It is here where a stronger connection with the UK could be advantageous particularly as the UK already has a robust agreement to draw reference from.

For example, the UK’s agreement with Japan enables the free flow of data, maintains high standards of protection for personal data, upholds the principles of net neutrality, and introduces a ban on data localization that wipes out extra costs when setting up servers in Japan. These outcomes align with those outlined in the ASEAN Framework, but the UK-Japan FTA provides a more formal mechanism to ensure compliance.

By replicating an agreement like this, ASEAN countries could facilitate cross-border data flows that support businesses operating within ASEAN borders or across third countries like the UK.

Working with the UK on developing green definitions

There are also differences between the UK and ASEAN when it comes to transition pathways to lower carbon emissions.

For instance, the UK has pledged to be net zero by 2050, something that’s still an uncertainty for the ASEAN member states. This creates challenges when it comes to what the UK can invest in within ASEAN.

ASEAN has some structural opportunities to accelerate its transition including shifting its energy sources to lower carbon emitting ones.

Fundamental to achieving this is establishing a baseline across the region for accurately and mutually agreeing on what “green” actually is.

Work is already afoot with Singapore, for example, launching a public consultation on what a financial institution-focused green definition should include.

Similar to ASEAN, the UK does not have its own formally agreed definition, but wants one.

Here, there is the opportunity to leverage and align on existing international efforts in this space.

For example, it’s likely that the UK will draw on the already established EU Taxonomy and the International Platform on Sustainable Finance’s upcoming Common Ground taxonomy which seeks to merge different countries’ approach on this topic.

If, like the UK, ASEAN can align closely with the EU Taxonomy and the “Common Ground Taxonomy”, it can pave the way for more UK and European green-seeking investment, as well as placing Southeast Asia on track to achieve its Paris Accord commitments.

The pathway to strong connectivity

Unfortunately, digital agreements and the building of green taxonomies do not happen overnight.

So learning from the UK’s experience – or learning together in the case of green taxonomies - can ensure the ASEAN experience has less bumps along the way.

A very practical way this can be happen is if ASEAN Member States agree to the UK’s request, mentioned in its Integrated Review paper, to become an ASEAN “dialogue partner”.

This opens a formal route and pathway to ASEAN’s decision making process, including helping to get increased alignment on the setting of standards.

ASEAN should also agree support the UK’s desire to enter the CPTPP. The UK would be a heavy hitting addition given its G7 status and large economy and will further enable trade and investment flow from this northern economic powerhouse to Southeast Asia.

Closer ties make sense on both sides

Despite earlier fears, Southeast Asia has remained quite resilient to an economic fallout from COVID-19, and the region’s medium-term prospects remain intact

But to ensure sustainable growth, Southeast Asia needs to regain its traditional growth drivers of trade and infrastructure development, coupled with capturing the opportunities emerging in the green and digital space.

This will require the ASEAN markets to individually and collectively pull several policy reform levers, especially if it’s to attract overseas investment.

The region should also look to friends.

UK is a global leader in Financial Services and Fintech with wide and deep capital markets. Not only can the UK be a source of this investment, it can also be a crucial strategic ally and adviser in support of ASEAN’s reform agenda across the green and digital and tech sectors.

So that is why, given the UK has now extended the commercial hand of friendship to Southeast Asia, the region should eagerly grab it.

A contribution piece by Harish Venkatesan, Head of International Subsidiary Banking, HSBC Singapore, published in The Business Times on 6th April 2021.