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Examining Singapore’s Trade Links with the rest of the World

+65: Free Trade Country

Singapore’s rapid development from an “accidental nation” in 1965 to cosmopolitan city-state with a first-world economy is in large part due to its extensive network of trade links that complements domestic factors such as effective governance, geographical attributes, and a skilled and educated workforce. This article takes a closer look at the role that free trade strategy, including FTAs (Free Trade Agreements), has played in Singapore’s economic and foreign policy successes.

Trade had been the lifeblood of Singapore even before independence when it was a colonial port city. Post-independence, free trade formed an integral part of the economic worldview of Singapore’s political and business leaders who were acutely aware of its necessity for a ‘little red dot’ with no natural resources and hinterland. Underscoring its continued relevance, in a recent state visit to Japan, President Tony Tan spoke on the similar views that Singapore and Japan share on free trade: “The more we can see growth in our own country and in other countries, the better it is for everyone. So it’s not a zero-sum game. It is a plus-sum game.”

Trade statistics provide a compelling view of international trade’s importance to Singapore’s economy. Singapore has the highest trade to GDP (Gross Domestic Product) ratio in the world. From 2008 to 2011, the total value of imports, exports and transhipments were four times as much as the GDP. Such a high ratio reflects the extent to which Singapore is open to the global economy. Singapore also ranks among the world’s top trading nations. According to the WTO (World Trade Organisation), in 2015, Singapore was the 14th and 16th largest exporter and importer respectively of merchandise.

Free trade has been enabled by world-class infrastructure and connectivity for the movement of goods, services, capital and talent. As a maritime port, Singapore has consistently ranked as the 2nd busiest container port in the world (by total number of TEUs) in the last five years, only behind China’s Shanghai. For the fourth consecutive year, Changi Airport was named the World’s Best Airport by travellers at the 2016 World Airport Awards. As a financial hub, Singapore was ranked in 2016 as Asia’s top financial center and number three in the world according to the Global Financial Centres Index.

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(Photo: Chuck Hughes Online)

Trade Strategy: More than Meets the Eye

Singapore’s trade strategy is not just about economics and trade. Rather, it is an extension of Singapore’s foreign policy, one that allows it to stake a claim in the international order and, thus far, to punch above its weight. The Lion City’s extensive trade links are part of a complex international strategic architecture purposefully built to promote and protect Singapore’s national interests – economic growth, security, and improving quality of life for continued peace, prosperity and stability. This strategic architecture facilitates the growth of Singapore’s economic, political and diplomatic space so it remains relevant to bigger neighbours and global powers which possess more capabilities and capacities than Singapore. FTAs have been a crucial component of Singapore’s trade strategy in the past two decades.

Free Trade Agreements: A Game Changer

The possible benefits of FTAs are well-known. The lowering or removal of market barriers and improved access to markets, capital, services and talent between trading partners leads to cost savings and boosts business. Reality, however, is not as smooth-sailing as completing an FTA requires economic negotiation and political manoeuvring.

Singapore’s FTA strategy took shape in the late-1990s, a time marked by the Asian Financial Crisis of 1998-1999, and a lack of progress in international trade liberalization by the multilateral WTO Doha Round of negotiations. In a challenging economic climate, Singapore adopted bilateral and multilateral FTAs as an alternative strategy to boost trade and investments. Singapore completed its first multilateral FTA, the AFTA (ASEAN Free Trade Area (AFTA) in 1993 with ASEAN (Association of Southeast Asian Nations) member states. The AFTA was the result of the pioneering efforts of then-Singapore PM Goh Chok Tong and his Thai counterpart Anand Panyarachun. However, Singapore’s first bilateral FTA with New Zealand in 2001 proved to be a game changer, allowing Singapore to transcend the limitations of its small size to link up with larger and more advanced economies globally.

Singapore’s strategy of doing trade deals with countries outside ASEAN was unprecedented in Southeast Asia at the time. Predictably, Singapore’s FTA with New Zealand was met with initial criticism from ASEAN members who saw Singapore’s solo manoeuvre as contradicting the ASEAN spirit and regional solidarity. There were concerns that Singapore’s bilateral FTA(s) would undermine the AFTA by allowing third-party goods to enter the ASEAN market via a “backdoor”. ASEAN members were also unable to match Singapore’s ability to negotiate their own respective trade deals as they were often unable, at the time, to meet requirements such as labour and environmental standards. Singapore’s bilateral FTAs were thus perceived to have limited utility as building blocks for ASEAN to collectively negotiate trade deals with external partners. However, the positive results of Singapore’s FTAs saw initial resistance subside and other ASEAN members also pursuing FTAs of their own.

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Free Trade Agreements: Making Powerful Friends

Following the momentum of the Singapore-New Zealand FTA, Singapore pursued FTAs with major powers to boost its economic prospects and build relationships that would serve Singapore’s strategic interests in the international space. The US-Singapore FTA (USSFTA) was an important one, born of the now-famous midnight golf game PM Goh and President Bill Clinton played while attending a multilateral summit in Brunei in 2000. As much as the economic benefits of an FTA with the world’s largest economy were clear, it took PM Goh’s personal rapport with President Clinton and powers of persuasion to build the political momentum for what eventually became the USSFTA. To illustrate the USSFTA’s economic benefits, in 2015, the US was Singapore’s 3rd largest trading partner in goods (US$47 billion). The US remains the largest foreign direct investor in Singapore, with US investments reaching US$288 billion in 2015. Geopolitically, the USSFTA signalled the US’ strategic interest in Asia and anchored the superpower as a stabilising force in Asia, laying the groundwork for other US FTAs with Australia and South Korea. To quote PM Goh, seen as the “architect” of Singapore’s FTA strategy: “Ultimately, trade is strategy. The FTA was for geopolitical reasons, not just about lowering tariffs and more trade.”

The China-Singapore FTA (CSFTA) is yet another important agreement, one with a rising Asian and global power. Singapore was the first Asian country to conclude an FTA with China in 2009. Today, China is Singapore’s largest trading partner; bilateral trade in goods was US$121.5 billion in 2014, a 23-fold increase from US$5.2 billion in 1990. Singapore was also China’s largest foreign investor from 2013 to 2015, a reflection of the weight Singapore attaches to its relationship with China.

An All-Round Cooperative Partnership Progressing with the Times was established in 2015 to mark 25 years of formal diplomatic relations established in 1990. The foundation of Singapore-China ties were laid prior to that through landmark visits to each other’s countries by then-PM Lee Kuan Yew in 1976 and China’s Deng Xiaoping in 1978. Singapore’s political leaders have since nurtured and maintained a close relationship with China that continually evolves in range and depth. As a case in point, in November 2015, Singapore PM Lee Hsien Loong and China’s President Xi Jinping witnessed the launch of negotiations to upgrade the CSFTA for enhanced trade and investment flows and updates to address emerging issues in the global economy.

Much like US-South East Asia ties, Lee Kuan Yew believed in positively engaging Beijing via bilateral and multilateral approaches to cultivate peaceful and mutually beneficial relations between a rising China and Southeast Asia. This was discussed at a recent international affairs conference organized by Lee Kuan Yew School of Public Policy entitled “Has The Game Changed?’, with panels of experts from around the world discussing on global power shifts and issues the development of free trade agreements in the wake of Brexit and expectations for the continued development of free trade; and managing the rise of Asia.

Offering his views on the impact of this approach towards China, Assistant Professor Woo Jun Jie from the School of Humanities and Social Sciences, NTU and Rajawali Fellow, Harvard Kennedy School, pointed out that “the success of the CSFTA has been followed by the implementation of the ASEAN-China FTA as well as a slew of other ASEAN-centred institutions such as ASEAN Plus Three, East Asia Summit and more recently, the RCEP (Regional Comprehensive Economic Partnership).”

Rules of the Road

To complement its FTA strategy, Singapore’s free trade strategy entails advocating for an open and rules-based international trade order. To that end, Singapore committed in June 2014 to the WTO’s ATF (Agreement on Trade Facilitation) that aims to reduce red-tape in cross-border trade by simplifying customs and border procedures. Based on OECD estimates, the implementation of the ATF could see trade costs to businesses decrease by 10 to 15% and according to the Peterson Institute for International Economics, a boost to the world economy by more than US$1 trillion. True to its pro free-trade strategy, Singapore was one of the first countries to formally commit to the ATF, signalling a continued push to increase cross-border trade just as it did signing its first bilateral FTA with New Zealand in 2001.

In the next article, we look at the current challenges in the global economic landscape and finding a way forward for Singapore.

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