Thursday's decision by Great Britain to leave the European Union will reframe the global economy in many ways. And one of the regions that will be most affected might not be where you think: Asia.
At first glance, the fact that Britain is leaving the EU shouldn't matter that much to Asian economies. The U.K. has the fifth-largest economy in the world, but it's not a major trading partner with most of Asia.
Overall, Asia's exports to Britain are equivalent a relatively small 0.7% of regional GDP. Financial research firm Capital Economics looked at the impact on Asia of a 25% reduction in British imports over a two-year post-Brexit slowdown in the economy. And the result was ... not that much. Aside from Vietnam, Hong Kong and Cambodia -- countries for which exports to Britain are more important -- Britain isn't that important to Asia from a trade perspective.
Back in January -- before a date for the Brexit vote was set -- we wrote, "If the U.K. leaves the EU and strikes out on its own, direct trade ties with Singapore and other Asian countries could get stronger as they and the U.K. negotiate more bilateral trade deals separate from the EU."
That could still happen, but it will probably take a while. Among other challenges and uncertainties, Britain first has to renegotiate its economic relationship with the rest of Europe, its economy will probably slow and then recover -- and then it can get serious about making more deals with Asia.
More immediately, because of the Brexit vote markets have moved to "risk-off" mode. Money is moving from investments viewed as riskier to relatively safer ones. This will have, and is already having, an impact on many of Asia's emerging economies' stock markets because they're considered riskier. It will be temporary but unpleasant.
The long-term impact of Brexit is the real concern for Asia, however. It could mark the beginning of a slowdown in globalization, which has been a key economic driver for the past two decades. When a G7 economy votes to leave the world's largest trading block, it's making a statement that can't be ignored.
Global trade is vital to a lot of Asian economies. So, Asia has a lot to lose if globalization slows or even reverses. Trade is worth 351% of Singapore's GDP and 439% of Hong Kong's GDP. Global trade growth has already been slowing, and Brexit could only make it worse.
Brexit might also pose some challenges to the Trans Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP). Both of these would cut tariffs and promote trade between many Asian countries and some of the biggest economies in the world. But these are already being challenged by a growing fortress mentality in the U.S. The Brexit vote will only embolden the deals' opponents.
Britain's exit from the EU shouldn't have a huge immediate impact on Asia, besides some volatile markets. The real danger is if the Brexit vote leads to a more gradual -- or even a relatively quick -- slowdown in globalization. If this happens, Brexit will have a huge impact on Asia.
See full Brexit coverage here.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.