Time for New Allies? The EU Should Push EU Asia Economic Relations

Rising protectionism worldwide and, more specifically, the political antics of U.S. President Donald Trump, have given strong momentum to what some observers have already called “Europe’s Asia Pivot”. The coming Brexit means that the European Union is also facing an at least partial economic disintegration. Against this backdrop it is all the more important for the EU to find new partners and to strengthen or reorient relations with old partners, like Asia.

EU Asia Trade relations: ASEM summit ahead

As the heads of the 53 ASEM members convene in Brussels from October 18-19, 2018 for the ASEM Summit, aptly titled, “Europe and Asia: Global Partners for Global Challenges”, this idea has gained momentum. With the United States’ growing unreliability as the EU’s partner in international affairs, the EU and Asia have a common interest in maintaining the international rules-based system and neither can accomplish this without the other.

Today, the four largest Asian national economies—China, Japan, India, and South Korea—already account for approximately one-fourth of global GDP. So does the United States, still the dominant global economic power. However, the Asia-Pacific region is expected to have high economic growth in the future, while the growth rates in western industrial countries are forecast to stagnate or decline. For this reason, the EU’s Trade and Investment Strategy published in 2015 also calls for the strengthening of the EU’s “presence in the Asia-Pacific region”.

The Asia-Europe Meeting (ASEM) already gives European-Asian relations an institution that lends itself to this purpose, since the promotion of economic cooperation is an important pillar in the ASEM process. In the future, Asia and Europe could make greater use of this platform to further expand the framework for EU Asia trade and investment relations.

China as Main Driver: EU Asia Trade Relations

The 18 Asian members of the ASEM already are important in so-called “extra-EU” trade, that is, the exchange of goods between the EU and the rest of the world: In 2016, they stood for approximately 31 percent. China as the region’s economic heavyweight accounts for half of this (14.7 percent). Nevertheless, the United States continues to be the EU’s most important extra-EU trading partner. In imports, however, China takes first place over the United States.

Among the top 10 extra-EU trading partners in 2016, there were three other ASEM members: Japan, South Korea, and India. It was only trade with China, however, that grew at a truly dynamic rate. Japan’s share has fallen by almost half since 2002. South Korea’s and India’s shares have stagnated. In contrast, Malaysia, Indonesia, and Vietnam, which are regularly cited as future economic centers in the region, have barely exceeded 1 percent in the past 15 years.

Free Trade Agreements: Key to Release EU-Asia Trade Potential

Free trade agreements (FTAs) are one key to releasing the potential that trade relations between the EU and its most significant ASEM trading partners could offer. Currently, the EU is negotiating bilateral FTAs with a number of Asian countries. Negotiations on bilateral FTA’s has already been concluded with Singapore and Vietnam, although the agreements have not yet entered into force. Other negotiations have gained new momentum since U.S. President Donald Trump’s accession to office. Those with Japan concluded and the agreement should enter into force in 2019. To date, however, South Korea is the only Asian member of the ASEM that has an FTA with the EU that has entered into force.

Room for Growth: European-Asian Investment Relations

• The United States accounts for 37.1 percent of the EU’s outward FDI stock and even 41.4 percent of the EU’s inward FDI stock.
• In contrast to extra-EU trade, the Asian members of the ASEM play a rather subordinate role: their share accounts for 9.5 percent and 5.3 percent, respectively.

This shows that the EU has invested significantly more in these countries than vice versa. At least part of the EU’s trade deficit with the Asian members of the ASEM is attributable to this: European companies have set up subsidiaries in Asian countries through which they import cost-efficient intermediate and final goods into the EU and from there—possibly processed further—export to other regions of the world. It is not surprising that China, as the “factory of the world,” currently is the EU’s most important FDI location in Asia.

As for the FDI stock the Asian ASEM members hold in the EU, Japan is the only country whose share in the EU’s inward FDI stock is significantly above one percent. The other countries are in some cases far below that—even though most of them have greatly expanded their shares in the last 15 years. China’s FDI stock in the EU has experienced particularly dynamic growth, increasing by a factor of nearly 60, from 605 million euros (0.05 percent of the EU’s inward FDI stock) in 2001 to approximately 35 billion euros in 2015.

In general, there is still much room for growth in investment relations between the EU and the Asian members of the ASEM. While the significance of this region is already reflected in bilateral trade, this is not yet the case with regard to reciprocal FDI to date.

EU Asia Trade: Who Will be the Next Growth Driver?

At present China still occupies a central place in economic relations between the EU and the Asian members of the ASEM. However, since 2012, China’s growth rates have slowed significantly and will continue to do so in the future. According to our projections based on Oxford Economics, China’s economic growth through 2030 could even decline to an annual rate of two percent.

The growth rates of the other Asian members of the ASEM will decrease over the long term, too;

• The focus will shift markedly in the direction of Indonesia and Vietnam, which can still expect growth rates of around 4.6 percent in 2030.
• In India as well, significantly more dynamic growth than in China is forecast, totaling roughly 4.2 percent in 2030.

Against the backdrop of uncertainty in transatlantic relations and increasing competition from China, it is crucial for the EU to create good framework conditions for the relationships not only with Asia’s future economic centers, but also with the region as a whole to foster EU Asia trade relations.

In the future, China will nevertheless remain a key economic partner for the EU.  However, it is already foreseeable at this stage that China will increasingly become more of a competitor and that complementary trade relations will decline.

Outlook: The Asia-Europe Meeting as an Opportunity for Inter-regional Cooperation

The uncertain future of the transatlantic trade bloc means that the EU should reorient its trade policy and improve EU Asia trade relations. The Asia-Pacific region with its dynamic growth prospects should be a major focus. One key element in this process will be the establishment of a solid foundation for long-term European-Asian economic relations.

In fact there is already a basis of what such a formal framework, based on the ASEM process, might look like: The Free Trade Area of Asia and Europe (FTAAE) could bring together all 53 ASEM members into a vast free-trade zone. It would represent around 62 percent of the world’s population, 57 percent of global GDP, and 66 percent of global trade. The FTA’s that already exist and are still being negotiated between the member states could be included in the process and clear the way.

As the ASEM members gather in Brussels for the “Europe and Asia: Global Partners for Global Challenges” summit, even though an FTAAE still appears to be unrealistic, it could be helpful for Europe and Asia to enhance and openly discuss these kinds of visions for shaping mutual relations. The Asia-Europe Summit could be the platform to take more concrete steps.

If you are interested in this topic you may also like our post on the shifting global economic balance of power.