02 November 2019

Financial Times: Could the UK trade more financial services with Asean after Brexit?

What are the prospects of the UK striking a trade deal with members of Asean — a deal that includes a strong financial services component? The potential is there but several barriers must be overcome, says Lutfey Siddiqi.

[...] 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 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 longstanding participants that are at least partly owned by the state. In almost all cases, there are strong vested interests in maintaining the status quo.

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’s 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 specifically for commercial banking, the UK ranks 11th, while Malaysia ranks 32nd and Indonesia 44th. At the same time, Malaysia is a strong 15th in the World Bank Ease of Doing Business rankings, which suggests that restrictiveness in finance may be a deliberate position. In the 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 is the quid pro quo?” The World Trade Organization’s General Agreement on Trade in Services 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 (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 knowhow that could foster further development in line with the national agenda of the Asean 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 influential local institutions, trade bodies, chambers of commerce and organisations such as the Asean Insurance Council.

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

Co-opt the financial services regulator

The party with the greatest 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 east and west are grappling with the best approach to regulating disruptive digital technology. The UK can join the huddle and contribute, for example, to the development of “sandbox” approaches and build bridges between sandboxes. Over time, this could result in a degree of de facto harmonisation. There are similar opportunities of co-operation 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 catch a ride on 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.

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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