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Trade agreements key strategy for Singapore

Asia Times, Feb 14, 2006

Trade agreements key strategy for Singapore

By Jaya Prakash

SINGAPORE - Singapore’s attitude toward free-trade agreements makes a sharp contrast with other countries in the region, such as Thailand: where Thailand has seen controversy over its proposed FTA with the United States, Singapore only seems to become more eager with time when it comes to inking FTAs with the rest of the world.

The city-state already has agreements with a host of nations, including the US, Chile, Japan, South Korea and New Zealand. Negotiations are under way with Jordan and the United Arab Emirates, and even with powerhouses India and China.

That ebullient mood surrounding the agreements was sufficient for Singaporean Prime Minister Lee Hsien Loong to use the very auspicious and customary occasion of the Lunar New Year to ring in their benefits. According to Lee, FTAs had contributed handsomely to Singapore’s economic growth over the past year. The trade initiatives had succeeded in their main intention, giving the republic a resounding 14% increase in external trade volume. When the multiplier effect - the phenomenon that always accompanies an investment-yielding enterprise - is applied, it would almost certainly have created jobs equaling or surpassing the percentage spike in those mentioned trade figures.

Such has been the dazzling performance of FTA agreements that the Singaporean media, since Lee’s announcement, have missed few opportunities to trumpet news of the city-state’s economic recovery and the creation of record numbers of jobs.

Apart from the proud boast that its macroeconomic policies have always worked, the announcement of the results and achievements of Singapore’s FTA strategy also constitutes a message that what’s needed for survival in the hurly-burly world of changing economic fortunes is nothing more than a heavy dose of hard-nosed pragmatism, along with a reliance on wits, brinkmanship and resourcefulness to stay and get ahead in life.

The move to FTAs arose because of the sheer necessity to retain the republic’s enviable position as the world’s 15th-largest producer of goods and services after the collapse of the Uruguay Round of trade talks in the 1980s, which Singapore had a personal stake in the success of. Another possible motive was to meet challenges from India and China, whose cheap goods and services can possibly threaten Singaporean enterprises, as has already been the case with garments and many other manufacturing industries.

In addition, FTAs have the potential to augment Singapore’s minuscule negotiating power in the world by associating the country with powerful trade partners. And if pacts negotiated under the auspices of the Association of Southeast Asian Nations (ASEAN) grouping with major trading partners do indeed take off, Singapore will reap collateral benefits.

In theory, under free-trade agreements, contracting parties receive preferential treatment and exclusive exemption from tariffs and other import duties. This not only makes the free-trade partners’ economic services more competitive relative to other nations, it creates an ancillary increase in demand for goods and services due to the economic boost provided by the new trade.

Given Singapore’s reliance on manufacturing, coupled with the comparative lead it has in financial services, FTAs, which offer advantages in quotas, tariffs and other exemptions, are just the breathing space it needs when confronting the big boys of business. Given the win-win situation that free trade has thus far created for Singapore, is it any wonder that FTAs are becoming a buzzword in ASEAN, of which Thailand is also a member?

An insurance policy

Even if a sound, rational case can be made for FTAs, there is hardly a guarantee that the actual implementation will go smoothly.

Even after having championed free trade for virtually its entire geopolitical life, Singapore may be wondering whether, in an era of porous borders when enterprises relocate at such breakneck speed, the ease with which companies switch to low-cost nations could not prove to be a liability. Coming of age in an often-hostile global environment can sometimes present nasty surprises.

One such surprise was the deal with the US, when Singapore’s decade-long ban on chewing gum had to be relaxed to allow the sale of therapeutic gums such as nicotine gum, intended to help smokers break their addiction. Another example was a wave of restrictions in manpower and expertise exchanges due to heightened security consciousness following the terror attacks of September 11, 2001.

Equally surprising was the rebuke, instead of commendation, the FTA strategy received from the secretary general of the World Trade Organization, Michael Moore, who has described the trend toward bilateral trade deals among bigger nations as "worrying". The WTO opposes bilateral arrangements on the grounds that they weaken the organization’s multilateral process.

Overall, for Singapore, the strategy of having FTAs is something like insurance with a minimal, or even non-existent, premium. With agreements granting reciprocal obligations, Singaporean companies can immediately relocate their businesses to low-cost nations, improving their competitiveness and allowing the city-state to retain its comparative advantages.

It has been argued that FTAs cannot further a strategy to develop Singaporean multinational corporations (MNCs), since FTAs with larger nations will simply expose such local firms to overseas MNCs with more resources. However, the opening of new markets by FTAs has opened new horizons for small and medium-size firms, and particularly can spur the growth of pharmaceutical and biotechnology firms, which are seen by the Singaporean government as key to retaining its comparative advantage in the coming years.

Jaya Prakash lectures in journalism at the Beacon School of Technology in Singapore. He can be reached at [email protected]

 source: Asia Times