UK Prime Minister Cameron’s ASEAN Trip Reflects Growing Trade Links and Opportunities

On Monday July 27, 2015, David Cameron, Prime Minister of the United Kingdom, capped off a five day long tour of South East Asia to discuss blossoming trade relations between the fast growing region and the UK. Surrounded by a phalanx of government ministers and business leaders that comprised a 30-member strong delegation, the Prime Minister visited four out of the six largest economies in the Association of South East Asian Nations (ASEAN) –Indonesia, Singapore, Vietnam, and Malaysia – for top level diplomatic talks.

Foremost on the Prime Minister’s agenda was boosting the UK’s trade relations with the dynamic ASEAN market. As China faces stock market uncertainty and sees its prior breakneck economic growth cool off, boosting trade with the ASEAN bloc has become an economic imperative for Britain, which sends only 20 percent of its exports to emerging markets, compared with 29 percent and 31 percent for Germany and Italy, respectively.  The region, which has outpaced global growth by over two percent throughout the past two decades and seen its share of global foreign direct investment double in half that time to nine percent, is especially attractive to UK businesses seeking markets beyond the crisis-prone EU.

To this end, Prime Minister Cameron sealed trade pacts worth over US$ 1 billion over the course of his trip, with notable investments in Jakarta’s public transport system and additional billions in regional infrastructure funding being made available through export guarantees. While Britain’s overall trade with ASEAN still makes up only a small percentage of the EU’s US$ 246 billion 2013 annual trade flow with ASEAN (9.8 percent of ASEAN’s internal and external trade as a whole), it is estimated that the UK economy would gain over four billion USD in yearly output from an EU-ASEAN Free Trade Agreement currently under consideration. As seen in the Prime Minister’s warm reception in the region, UK-ASEAN trade ties are robust and growing.

UK – Indonesia Trade at a Glance

Though the largest economy in the ASEAN bloc measured by GDP (accounting for two fifths of total output of the regional grouping), the United Kingdom’s annual trade flows with Indonesia are still relatively small. Nevertheless, although Britain’s two-way 2013 trade with Indonesia only amounted to $3.3 billion, its eight percent year-on-year growth compared with 2012 reflects the growing importance of UK-Indonesian trade relations.

Key British exports to Indonesia include paper pulp, diversified machinery, power generation equipment, and chemicals. In regards to UK investment in Indonesia, natural resources still remain the dominant allure for British companies, with globally renowned firms such as Shell and Rio Tinto holding major investments in Indonesia’s mineral resources. However, as the Indonesian middle class has grown and domestic consumption has played an ever larger role in economic activity, the UK’s national retail champions such as Marks & Spencer and Top Shop have also expanded their operations in Indonesia in search of new growth opportunities.

While the two countries’ trade relations do not yet benefit from an FTA, the EU-ASEAN FTA currently under discussion has the potential to significantly boost Britain’s economic ties with Indonesia, and thereby revive Indonesia’s flagging exports as of late. The UK and Indonesia have had a Double Taxation Avoidance (DTA) agreement in place since 1995, making Indonesia a more attractive location for British companies to invest.
UK – Singapore Trade at a Glance

A former British colony, Singapore has maintained close economic ties with the UK as it has developed into a regional financial hub. In 2013, total two-way trade flows amounted to US$10.3 billion, making Singapore the UK’s most important trading partner in ASEAN. Moreover, the UK is the third largest source of FDI into the Singaporean economy after the U.S. and the Netherlands, surpassing US$37 billion in 2012 alone.

However, while the UK largely trades in finished goods and commodities with other ASEAN states, British-Singaporean trade is weighted more heavily in favor of professional services – a mainstay of the UK’s economy. Foremost among these are financial services, followed by other business services such as accounting and legal advice, as well as logistical services. Other top exports include power-generation machinery, food and beverage services, and transportation vehicles.

As with Indonesia, the UK must await the completion of the EU-ASEAN FTA to reap the trade promoting benefits of decreased tariffs with Singapore. Nevertheless, Singapore, with its strong common law system and relatively low GST and corporate tax rate, presents an attractive market for UK based investors. Furthermore, a DTA in place since 1997 adds an extra incentive for British companies to invest in the city-state.

UK – Vietnam Trade at a Glance

Since Vietnam’s economy undertook its Doi Moi policy – a set of liberalizing reforms in the mid-1980s – UK-Vietnamese trade has increased steadily. With total two-way trade between the two countries reaching $4.5 billion in 2013, Vietnam ranks as Britain’s fourth most important trading partner in ASEAN. Britain, moreover, serves as a substantial source of incoming FDI for Vietnam, with 2013’s total standing at almost three billion USD.

Key industries for UK exports to Vietnam include diversified machinery, power-generation machinery, professional and scientific tool, medical devices, and pharmaceuticals. Although the flow of trade between the UK and Vietnam is highly skewed towards Vietnamese exports to Britain, British exports to Vietnam saw a 12 percent increase in 2014 on a year-on-year basis, indicating their increasing importance in the two countries’ economic relationship.
Indeed, as laid out by the 2010 UK-Vietnam Strategic Partnership Declaration, the UK and Vietnam both strive to strengthen trade and economic ties. Upon completion, both the EU-ASEAN and EU-Vietnam FTAs both stand to further boost trade between the two partners in line with their joint declaration. Additionally, the UK and Vietnam implemented a DTA in 1994, adding further enticement for UK originated FDI.

UK – Malaysia Trade at a Glance

Malaysia has retained close economic links with the UK since gaining independence – overall bilateral trade in 2013 exceeded US$7.2 billion, making Malaysia the UK’s second largest trading partner within the ASEAN bloc. As with other ASEAN members, the UK’s year-on-year trade with Malaysia has increased rapidly in recent years, clocking in an eight percent increase in 2013 over its 2012 levels. Furthermore, UK based FDI into Malaysia surpassed US$3.3 billion in 2013, putting it just behind UK FDI into Vietnam’s economy.

Like the other large ASEAN economies, British exports to Malaysia are dominated by machinery, namely power-generation and infrastructure/transport equipment. Other top export sectors include food and beverage services, tobacco, refined fuel, and chemical products. Both countries aim to boost the prominence of professional services in the make-up of overall trade flows, with areas such as Islamic finance presenting a unique opportunity for UK based investment.

Much the same as its neighbors, Malaysia is a party to the mooted EU-ASEAN FTA which, when ratified, is predicted to significantly boost UK-Malaysian bilateral trade. Though lacking a corporate tax rate as competitive as Singapore’s, the 25 percent rate Malaysia levies on corporate profits still ranks it among the more attractive destinations for British capital in ASEAN. A bilateral DTA reducing the double taxation risk faced by British investors has been in force for the two partners since 1998.

Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India and emerging ASEAN, we are your reliable partner for business expansion in this region and beyond.

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