Free trade agreements (FTA) are as crucial to Singapore as water. If you want to know the value of water, try not drinking water for one day. The thirst will make you appreciate water more. In the same token, Singapore needs FTAs as much as it needs water and we require new FTAs regularly in order to maintain our growth.
Hence despite the existence of 21 FTAs with 32 countries around the world, Singapore still has to pursue more FTAs. The most recent and important FTA would be the Trans-Pacific Partnership (TPP) that ties Singapore with 11 other countries that include Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, United States and Vietnam. Of these, Mexico and Canada are new free trade partners for Singapore.
TPP is of vital importance as it widens the market for Singapore by removing more trade barriers. TPP covers a global population of 800 million people which generates a combined total of US$30 trillion in GDP. This is a massive 40% of global GDP. In 2013, Singapore secured S$300 billion worth of trade between these countries. These countries also invested S$240 billion in Singapore or 30% of our total foreign direct investment.
Singapore started as a free trade port in 1819 under Sir Stamford Raffles and today free trade still anchors our economy. We have no real natural resource except our 5 million population and without free trade, there is no reason for Singapore’s existence as a sovereign nation in the world.
Singapore actively promoted the TPP which has its roots in the 2003 US-Singapore FTA and later the P4 Trade Agreement between Singapore, Brunei, Chile and New Zealand in 2006. The US joined later in 2008 and today this TPP is billed as a US-led initiative in the media. Singapore effectively gave the US credit for the success for this mega FTA that was sealed on 5 October 2015 between the 12 nations.
Overview of TPP
After five and a half years of intense negotiation, the TPP now yields 30 chapters of agreement. You can read the summary from Singapore’s Ministry of Trade and Industry. As a warning, even the summarized version of this agreement is 16 pages long. This gives us a clue of the complexity and scope of the deal which required seven years to come to fruition.
The TPP has two general approach to free trade which can be categorized under the traditional and modern approaches.
By traditional, I mean that like other FTAs, the TPP cuts trade barriers for goods and services in terms of custom duties and scope of goods. This is important as it improves the competitiveness of Singapore and especially after new barriers appeared over the years even with existing trading partners. This is highly complicated and technical so I won’t bore you with the details.
The modern approach makes the TPP more than just an FTA. It obliges these 12 countries to new rules of engagement as the advancement and mass adoption of technology has changed the way which we live and work. For example, there are new rules on e-commerce, copyright infringement, and intellectual property. Besides the technological aspect, there are also new rules on environment protection, opening up of government procurement, anti-corruption measures and dispute resolution. In other words, the TPP will change the way business work and operate even as it opens up new markets for us.
It is beyond the scope of this article to cover every aspect of the TPP. Hence I will focus on two main areas which I think the TPP would benefit Singapore:
#1 Boost for SMEs
The TPP was negotiated in part to help small and medium enterprises (SMEs) gain wider access to the TPP nations’ local markets. Unlike multinational corporations who have the expertise and contacts to navigate the complicated business terrains of new nations, SMEs need more support in order for their goods and services to reach new markets. The TPP helps SMEs with the following measures:
- Each TPP nation will provide an online resource for SMEs to find all the relevant information needed to do business in that country easily
- Regular reviews by the Small and Medium-Sized Enterprise Committee to review the benefits for SMEs under TPP
- The committee will also help SMEs penetrate markets by providing counselling, assistance, training programs, information sharing, trade financing and other activities
- The Committee on Competitiveness and Business Facilitation will encourage and guide SMEs how to enter the regional supply chain
The reason that SMEs have so much advantage is due to their political capital involved: SMEs provide the bulk of employment for all 12 countries. As these countries help SMEs reach their full potential, this will increase the growth and resilience of their respective economies. In turn, this will help politicians sell the benefits of the TPP back home especially when free trade might cause disruption in local economies with protected industries. (This does not apply much to Singapore as we are already an open economy.)
Singapore’s Association of Small Medium Enterprise (ASME) has openly called for Singaporean SMEs to penetrate foreign markets that are opened due to TPP.
The ASME president made the following remarks:
“We are not sure about the speed at which it will be implemented, but I would say that SMEs should not look at it as just a trade plan … Go in and muscle into other markets and compete for a piece of domestic share of overseas markets.”
According to IE Singapore, 50% of Singapore SMEs earn overseas revenue in 2015. This is significant because SMEs comprise of 99% of local businesses in Singapore and the Singapore government is pushing them to internationalize further because our local market is just too limited for further growth. If you are excited because you have a good product or service to sell, start your own company with the various incentives provided by the Singapore government.
#2 Canada & Mexico as Our New Free-trade Partners
Canada has just agreed to open up its US$1.7 trillion economy to Singapore and its US$462 billion import market. Machines, oil electronic equipment, and plastics comprise 37.8% of Canada’s imports — areas Singapore excels in and this opens up a large market that was previously protected by import tariffs. Currently Singapore only sells $1 billion (or 0.2%) worth of imports to Canada, so clearly there is wide room to grow with the opportunities afforded by the TPP.
Mexico is slightly smaller than Canada but it is still highly significant that it is opening up its US$1.2 trillion economy. Mexico has an import market worth US$400 billion and once again Singapore only has a small 0.3% share due to the lack of a free trade agreement among other factors. Mexico requires electronic equipment, machines, vehicles, oil, and plastics in ascending order that are worth a total $241.9 billion. Once again, these products fall within our competency with the exception of vehicles.
The TPP is not without its fair share of controversies. Critic points out that the dispute mechanism might allow MNCs to prevent governments from setting regulations that would benefit the country overall. The TPP allows corporates (mostly referring to MNCs who have the financial muscle to go toe-to-toe with governments) to sue governments outside their home country.
Another controversy would be that the TPP is seen as a tool used by the U.S. to contain China economically. As you have observed, China is not one of the TPP countries and this is due to the U.S.’s exclusion of China. China returned the favour by excluding the U.S. in its Asian Infrastructure Investment Bank. It is a tough job for Singapore to remains friends with both countries and not offend either one and that is something for our elected politicians to keep the balancing act upright.
What TPP Means for Investors
Despite its controversies and drawbacks, it is clear that the benefits are overwhelmingly positive for Singapore as an open economy. We have always embraced foreign competition and our companies are in still in tip-top shape. The TPP allows us to increase trade with our partner nations, especially in the new markets of Mexico and Canada, and grow our economy further. The stronger our economy, the better successful Singapore companies will do — which will be reflected in growing share prices.
As I’ve mentioned before, if you buy into the Singapore growth story, the STI ETF is a great way to invest in a basket of the top 30 Singapore companies and ride the growth of the overall market for the long term.
Of course, the markets are a little bit shaky now and I’m waiting on the sidelines before I have another look at the STI ETF, but in the long term the TPP will be a boon for the Singapore economy.
Now the only challenge would be the ratification of the final agreement before the respective parliaments to amend the necessary laws. This could take months but the TPP is a major victory for Singapore and further enhance our free trade reputation in the world.