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08 Dec 2019 Updated 13 Dec 2019

Singapore's free trade agreements: Making pacts - and the making of a sound economy

The Straits Times Grace Ho

The story of Singapore's free trade agreement journey spans two decades. Insight looks at the give and take behind them, and how they stack up for Singapore

 Ng Bee Kim

Ms Ng Bee Kim, director-general of trade at the Ministry of Trade and Industry, says trade defines Singapore's chances of success. ST PHOTO: GIN TAY

In 2001, Ms Ng Bee Kim had the heavyweight task of delivering Singapore's free trade agreement (FTA) with the European Free Trade Association in a few short months.

But there was another delivery she was involved with that year - her second baby.

As she was heavily pregnant and could not travel, negotiators from the four-nation bloc - Iceland, Liechtenstein, Norway and Switzerland - came to Singapore for the talks.

But they made no concessions when it came to the trade deal, the third Singapore signed after agreements with New Zealand and Japan.

"They weren't going to go easy on me and we pulled many all-nighters," recalls Singapore's chief trade negotiator and director-general of trade at the Ministry of Trade and Industry (MTI), now in her 50s.

A few years later, the United States would drive a similarly hard bargain, insisting on a negative list approach in its FTA with Singapore - its first such pact with an Asian country. Under this approach, all service suppliers enjoy fair and non-discriminatory treatment and market access in each other's country, unless otherwise specified in the agreement text.

It was a "scary" time for Ms Ng's team, which was then small and inexperienced. "We had to do a very comprehensive and thorough assessment of each and every sector to ensure they could be opened up," she explains.

But they went out on a limb, and the risk they took paid off.

Most FTAs today adopt a negative list approach, which is seen to be more ambitious and inclusive of new products and services that are not protected under past commitments.

Singapore's exporters have tariff-free access to the US market of 330 million consumers. Bilateral trade has almost doubled from pre-FTA levels to reach nearly $150 billion in 2017.

The US is the largest foreign investor in Singapore, with 4,500 American companies having established factories or regional headquarters here.

The granting of Qualifying Full Bank (QFB) licences to American banks meant Singaporeans could bank with the likes of Citibank.

The US-Singapore FTA (USSFTA) also contained a groundbreaking intellectual property (IP) chapter, which spurred the Republic to develop a strong IP regime.

"It was challenging because it involved (new) rules-setting, and we were new to the process," Ms Ng says. "But in hindsight, it was good for Singapore as we have developed high standards in IP."

She adds that the Republic was fortunate to find another small-sized and like-minded country in New Zealand early on. It inked a trade pact with New Zealand in 2000, its first with an individual country.

Singapore's success in pulling off trade agreements over the years is all the more remarkable considering that in 1999, sweeping global pacts seemed dead in the water.

At the World Trade Organisation (WTO) Ministerial Conference in Seattle that year, tens of thousands of protesters rioted in the city's streets.

And in 2008, negotiations of the WTO's Doha Round - aimed at lowering tariffs globally - broke down.

Not unlike today, there was rising protectionism and people felt the gains from trade were not evenly distributed, says Ms Ng, who has helmed Singapore's trade negotiations for over 20 years.

Not only did governments have to contend with public unhappiness, there were also widely different levels of development among the WTO members who today number 164, making it difficult to forge consensus, she points outs.

"We needed a new strategy to strengthen our trade position. But when we first started out, we didn't try to be too adventurous or ambitious."

Today, Singapore's partners span the world, from Asean to the Asia-Pacific region, North and South America, Europe and the Middle East.

These agreements are WTO-consistent (covering substantially all trade), WTO-plus (going beyond WTO commitments) and open to countries prepared to make the same commitments - not just in trade in goods and services, but also in areas such as trade facilitation, investment, IP rights, government procurement and, more recently, e-commerce.

WHAT ARE THE PROS?

FTAs allow Singapore-based exporters and investors to enjoy tariff concessions, preferential access to certain sectors, faster entry into markets and IP protection.

On average, Singapore businesses' exports of goods to a trade agreement partner increase by about 18 per cent two years after the agreement's entry into force, and a further 16 per cent in the third year, estimates a study by the MTI.

What's more, they enjoy substantial cost savings. In 2016, FTAs collectively saved businesses about $730 million in tariffs, an increase from $450 million 10 years ago.

Associate Professor Pradumna Bickram Rana and research fellow Jason Ji at the S. Rajaratnam School of International Studies (RSIS) say FTAs give Singaporean businesses preferential market access and enhanced protection in other countries.

"During difficult times, they provide some cushion from slowing global trade," they say. "Legally binding agreements also reduce uncertainty as they serve as an 'insurance policy' against any potential tariff hikes."

Dartmouth College economics associate professor Davin Chor says the benefits of FTAs go beyond just reducing tariffs and position the Republic as an international business centre.

The USSFTA that came into force in 2004, he says, made Singapore a natural entry point for US businesses looking to gain a foothold or expand within South-east Asia or East Asia - not just due to the low tariff levels the FTA locked in, but also the familiarity with local laws and institutions that it indirectly promoted.

He thinks the European Union-Singapore FTA has similar potential to do the same, by increasing Singapore's attractiveness as a regional base for EU multinational firms.

Singapore University of Social Sciences business lecturer Pan Zhengqi highlights the signalling effect of FTAs, which create networks of cooperation and enable Singapore to embed more deeply in the international system.

"The joint economic and diplomatic gains arising from FTAs inject greater vitality in the global economy and help to counter the tide of protectionism," he says.

WHAT ARE THE CONS, LOCALLY?

FTAs such as the India-Singapore Comprehensive Economic Cooperation Agreement (Ceca) have come under fire from locals, who believe an influx of Indian IT companies and professionals has cost them their jobs.

The official counter-arguments - a 26-fold increase in bilateral investments, growing bilateral trade and a rising share of professionals, managers, executives and technicians among employed locals since the pact was inked in 2005 - have been extensively flagged.

But how much of these benefits are really due to FTAs?

In a paper published last year, Harvard University economist Dani Rodrik wrote that FTAs have gone beyond import tariffs and quotas into areas like regulatory rules and labour standards, where their welfare and efficiency impacts are fundamentally uncertain.

He says they could even produce welfare-reducing or purely redistributive outcomes, benefiting special interests like international banks and multinational corporations.

Mr Frank Debets, managing partner of PwC's Asian Worldtrade Management Services practice, says that when taken in isolation, public statistics can appear "unduly positive", and calls for companies to be realistic.

"When they look at the detailed requirements (of the FTAs), they sometimes end up being disappointed because they see that the opportunity is not quite as large, or find the conditions harder to meet than they thought," he adds.

"If they were more aware of the homework they have to do, they would evaluate an FTA with more reasonable expectations."

A clear benefit is duty-free access to overseas markets. While the ensuing growth in export trade cannot all be directly attributed to FTAs, it at least helps companies evaluate overseas markets for their economic potential, he says.

MTI's Ms Ng agrees that tariff savings are the most easily understood and quantifiable perks of FTAs.

But it is harder to draw a direct causal link between them and job creation, she says. In general, FTAs lead to heightened business activity, and jobs are created when companies invest, trade and hire in Singapore.

If Singaporeans are not crowded out of the job market, then why do some believe FTAs are harmful?

The lack of awareness is an issue, she says, acknowledging that government agencies could have done more trade outreach in the past.

But efforts to increase awareness of Singapore's FTA network and the opportunities available have stepped up significantly in recent years, through the Singapore Business Federation (SBF), Enterprise Singapore (ESG) and trade associations and business chambers. The authorities are also looking to tap professional service providers like law firms to provide FTA advice.

As many Singapore-based firms export to South-east and East Asia, it is not surprising that the Asean-China pact is one of the most used FTAs, she adds.

But small and medium-sized enterprises find it hard to get up to speed, given their lack of competency and resources. This is why initiatives like the SBF's and ESG's one-on-one FTA consultation clinics, and online tariff finder are a means to close the gap.

HOW'S THE BIG PICTURE?

The spread of FTAs across the world has sparked concerns of multiple, overlapping FTAs, or what economist Jagdish Bhagwati calls a "spaghetti bowl" of trade deals.

This leads to a set of issues that cannot be eliminated by outreach alone, says PwC's Mr Debets, pointing out that the sheer complexity of rules and amount of paperwork involved remain a barrier.

Companies exporting to several countries deal with multiple rules of origin (ROOs), which are used to determine the national source of a product, and are subject to varying restrictions.

These can be wielded as a form of shadow protectionism. If a government wishes to skimp on a trade commitment, it can agree to lowering tariffs for a product, but then insist on an ROO method where few products qualify.

Harmonising these rules between different agreements is a "big-ticket item" that makes a real difference, says Mr Debets, which is why pacts like the Regional Comprehensive Economic Partnership (RCEP) are significant.

"If a product qualifies for preferential origin when it is shipped to China, you know it also qualifies for shipment to the other 13 possible destination markets that are part of the RCEP."

RCEP is slated to be the world's largest trade pact involving Asean's 10 member states, plus China, Japan, South Korea, Australia and New Zealand - which altogether contribute one-third of the world's gross domestic product.

Another concern is increased competition from opening up sectors like services and government procurement, in newer pacts such as the EUSFTA.

Even as overseas companies have more opportunities to access the Singapore market and vice versa, local firms, too, must be equipped to survive the competition, he says.

Understanding and tapping trade pacts have become a necessity despite the sometimes onerous compliance requirements, he adds.

"Fifteen, 20 years ago, using FTAs would give companies a competitive advantage. These days, they have no choice - if they do not use the best of the FTAs, their competitors will."

RSIS' Prof Rana and Dr Ji say that the potential downsides can be mitigated if countries pick the right partners and provide capacity building to companies on using FTAs.

The workforce must also stay nimble and move into high-end manufacturing or service sectors where job opportunities are, says Dartmouth College's Prof Chor.

"This is never easy in the interim," he says. "But Singapore is as well placed as any economy to navigate such transitions, given the strong track record in education and worker training that we have built up."

HOW ARE ISSUES HAMMERED OUT?

But with experience drawn from earlier FTAs like the USSFTA and Ceca, surely certain concessions have not been repeated, or were modified across agreements?

For example, Ceca allows accompanying spouses or dependants of foreign professionals with the right to long-term entry, to work in certain positions, subject to the relevant requirements - something worded differently in some other FTAs.

Given Singapore's small size, one would also imagine that there are constraints on the number of QFBs allowed to operate more local branches and ATMs here.

MTI's Ms Ng stresses that while the anatomy of FTAs is broadly similar, the approach, content and outcome for each one is unique. It depends on the needs and ambitions of each country, as well as the negotiation dynamics.

"As with all agreements, it will have to incorporate the interests of both sides," she says.

"The fact that there's an agreement means both sides think it's better to have an FTA than none at all, notwithstanding the fact that we have to make some concessions, like allowing medicinal chewing gum into Singapore."

She is referring to Singapore's creation of a special category of medicinal chewing gum as a result of the USSFTA.

FTAs are creatures of both economics and politics, and negotiations take both sides of the ledger into account.

"Some countries deal with us because we are small and non-threatening, and they see partnership with us as a good way to ease into FTAs," she says, citing the Japan-Singapore Economic Partnership Agreement (JSEPA), inked in 2002, as an example.

Japan, she points out, was embarking on domestic reforms and saw FTAs as a vehicle to do so. It did not hurt that Singapore did not practise agriculture, a key defensive sector for Japan.

Over and above the typical FTA, JSEPA also included a section on cooperation, such as the twinning of the Orchard Road and Ginza districts in both countries.

Meanwhile at home, there is typically a flurry of consultations with trade associations, business chambers, companies and regulators, with some laying down non-negotiable "red lines" for domestic sectors.

Financial services, she says, is a sector that the Government watches closely, and needs careful deliberation whenever the issue of liberalisation is raised.

The negotiations are a whole-of-nation effort, she explains, adding that FTAs have never been detached from broader national considerations.

"If we can make some adjustments without compromising on core interests, resulting in a deal that still benefits Singapore, then securing a partnership should be our focus."

Ultimately, says Ms Ng, each FTA bears the unique imprint of the partner Singapore works with.

The breadth and ambition of the USSFTA, for example, were unprecedented as the US saw the Republic as a country it could partner with to set rules and standards.

The vintage of the FTA also shows how far the process has moved on, she adds.

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership signed last year has a chapter on e-commerce that brings in newer elements like digital trade and data localisation.

"Stakeholders we spoke to felt the rules in past FTAs and the WTO had not kept up, so new chapters were added to keep up with new business realities," she adds.

And with the digital economy in Asean expected to grow to US$300 billion by 2025, Singapore has taken this one step ahead, by seeking to shape a new digital trade architecture with Digital Economy Agreements.

It is also a co-convenor of the WTO Joint Statement Initiative on E-Commerce with Japan and Australia, which will develop multilateral rules for e-commerce.

LEARNING ALONG THE WAY

Spanning two decades, the story of Singapore's FTA journey is one that mirrors the young age of the country - an initial grasping in the dark, learning along the way, and an unflinching adherence to the principle of openness to keep the economy afloat.

Ms Ng had done "a bit of trade" at the then Trade Development Board before joining MTI, but she admits the pioneering trade team had very limited experience in negotiating FTAs.

"I was - horrors - known to be the expert. But my understanding of FTAs then was not of the same depth as what it is today.

"What we had going for us was this national strategy, a whole-of-government effort which enabled us to constitute an inter-agency team."

As any seasoned negotiator would say, the process of give and take can be brutal and protracted.

"When we started to negotiate with other partners after the USSFTA, which was very ambitious, they started to ask for similar concessions. We had to firmly but politely remind them that the FTAs are different," she says.

A balance of benefits is key. "The concessions we give are very hard fought, and we give them very carefully. There's no cookie-cutter template - what goes into the FTA has to be adjusted for the particular country and for that period in time."

An example is the inclusion of areas that many could not have foreseen 20 years ago, like e-commerce and an expanded IP chapter.

Ms Ng demurs that she is only a civil servant. But having witnessed the collapse of the Seattle trade round exactly 20 years ago, she knows just as well as any politician that history often repeats itself.

The latest pushback against globalisation makes the signalling effect of trade pacts all the more important, she observes.

"Just as there is a strong backlash against global trade, there must be a strong counter-force, a show of commitment towards greater trade liberalisation. Fortunately for us, there are still countries out there that are like-minded," she says.

"Trade defines Singapore's chances of success. If we continue to trade and invest, we can be a hub where business activity takes place.

"We were clear then, as we are now, that we will continue to open markets and uphold the rules-based multilateral trading system. Singapore's survival and prosperity depend on being plugged into a thriving global economy."


Source: The Straits Times © Singapore Press Holdings Limited. Reproduced with permission.