One of the purported prizes of Brexit is the ability of the United Kingdom to strike free trade agreements with the world outside the European Union. The presumption is that those agreements would benefit the UK’s export basket, a principal component of which is financial services. It is therefore instructive to anticipate and stress-test the feasibility of such deals with major economies and distinct geographies around the world. One such bloc is the ten-member Association of South East Asian Nations, ASEAN.

What are the prospects of the UK striking a trade deal with members of ASEAN – a deal that includes a strong financial services component? On the face of it, there are obvious gains for both sides. ASEAN’s GDP – roughly the same level as the UK’s – is growing almost four times faster. Its population of 650 million includes 90 million middle-class households, a cohort that is expected to grow by ten million every year for several years. At 29 years of age, the median ASEAN resident is ten years younger than her British counterpart.

Apart from macroeconomic fundamentals, there is a spirit of innovation and adoption of technology that is transforming the landscape for financial services. It is projected that by 2025, one in every two dollars of transactions will be conducted electronically. Financial inclusion is a top policy objective. In addition, there is an infrastructure funding gap of several hundred billion dollars.

So, in terms of what the UK wants to supply, there should be ready demand in ASEAN. The region needs financial services not just for payments and deposits but also for long-term investments, insurance, pensions and deepening of capital markets. However, it does not automatically follow that ASEAN would engage in a services-heavy free trade agreement (FTA). The political economy of trade negotiations makes it far from certain. There are at least five points for the UK to bear in mind:

Identify local interests

When it comes to services, cross-border access is generally impaired less by overt tariffs and more by the ambiguity, inconsistency and opacity with which regulations are applied. Negotiating trade deals around services is also complex because they can cut across a wider set of stakeholders and government ministries than manufacturing. The lines are blurred even further as technology drives ‘servicification’ of certain products and ‘productisation’ of certain services.

In some cases, financial services are provided by long-standing players that are at least partly owned by the state. In almost all cases, there are strong vested interests in maintaining the status quo. Now, many of the rent-seeking advantages of incumbents are being challenged by disruptive technology anyway – so the context for new entrants is better today than it was a decade ago. However, the general point remains. The UK strategy cannot be based on aggregate gains. It has to be mindful of localised interests.

Generate interest

Apart from vested interests, there may simply not be enough interest in ASEAN to pursue a services-heavy trade deal as a priority. This is a subject of asymmetric attention and urgency between the two parties. Positive interest is diffused while negative interest may be entrenched.

In the OECD Services Trade Restrictiveness Indices (STRIs) specifically for commercial banking, the UK ranks 11th whereas Malaysia ranks 32nd and Indonesia ranks 44th. At the same time, Malaysia is a strong 15th in the World Bank Ease of Doing Business rankings which suggests that restrictiveness specifically in finance may be a deliberate position. Especially in light of the asian financial crisis of 1998, it is understandable that ASEAN economies would wish to retain policy and regulatory space in the financial sector. This will not be easy to pry open.

In any negotiation, the obvious question would be “what’s the quid pro quo?”.  The General Agreement for Trade in Services (GATS) classifies four modes of trade. The UK has an obvious interest in pursuing modes one, two and three which deal with the cross border provision of services and investments.  The question for the UK is the extent to which it will make concessions on visas for professionals from ASEAN (mode four). What will be the immigration regime for Thai chefs or carers for example?

Help change the narrative from the other side

More important than a top-down official FTA is the need to help change the narrative on the other side of the table. The UK has significant know-how that can foster further development in line with the national agenda of these countries. There are real-economy benefits for their key sectors from greater trade with the UK in financial services. These need to be highlighted with support from local influential institutions, trade bodies, chambers of commerce and organisations such as the ASEAN Insurance Council. Catalyse demand for UK services from their perspective.

Japan has struck seven bilateral FTAs with ASEAN members over a seven-year period. Their experience (as documented by Dr. Minako Morita-Jaeger)  is instructive. What they learnt the hard way is that a comprehensive, all-inclusive trade deal meets with tremendous resistance. It is far better to take a more gradualist approach with several turns of the flywheel, one sub-sector at a time or in some cases, one company at a time.

Co-opt the financial services regulator

The party with the strongest power – both in terms of progressing or blocking the agenda – is the local financial services regulator. The experience of unpredictable and sometimes precipitous capital flows has understandably dented confidence in unbridled open markets. So any UK strategy for a services deal must keep the central bank well on side.

There is perhaps a window of opportunity right now. Regulators in both the East and West are grappling with the best approach to regulating disrupting digital technology. The UK can join the huddle and contribute, for example, to the development of ‘sandbox’ approaches and also build bridges between sandboxes. Over time, this could result in a degree of de facto harmonisation. There are similar opportunities of cooperation in developing capital markets for new asset classes.

Dovetail the ASEAN economic integration process

Finally, it is important to appreciate that ASEAN is a highly diverse grouping with each country at a different stage of development. ASEAN is in the process of effecting its own economic integration in which services are lagging behind the progress made in goods. The UK may wish to bolt onto that process of integration possibly by harnessing Singapore’s role as a regional hub. In addition, the UK could promote ancillary services such as specialist education or health-tech that enrich the basket of services exports.

The overarching approach must be one of collaboration and complementarity, not just one-way export. Companies such as Grab (including GrabPay) and DBS (recently named the World’s Best Digital Bank) are just two examples of the power of local and regional players.

To sum up, there is tremendous potential for mutually beneficial growth in financial services trade between the UK and ASEAN. What is required is a multi-pronged, multi-stakeholder, hearts-and-minds approach beyond the official pursuit of a services FTA, and beyond just the arguments of economic aggregates.



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Lutfey Siddiqi, CFA, is a visiting professor-in-practice at LSE and an adjunct professor at the National University of Singapore. A member of the World Economic Forum Global Future Council on the New Economic Agenda, he was previously global head of emerging markets for foreign exchange, rates and credit at UBS investment bank.