Commentary: COVID-19 emphasises the importance of Singapore’s free trade agreements
It will help Singapore diversify source markets ensuring we have a smooth supply chain, says Professor Locknie Hsu.
SINGAPORE: During the Ministry of Trade and Industry’s (MTI) Committee of Supply debate, Minister Chan Chun Sing said that Singapore will expand its network of free trade agreements (FTAs), so as to not “overly rely on any one particular market”.
Meanwhile, the COVID-19 outbreak is making headlines, and has had knock-on effects on economies worldwide. In response to concerns about the outbreak, the MTI cut its growth forecast range for 2020 to -0.5 per cent and 1.5 percent, down from an earlier forecast of 0.5 per cent to 2.5 per cent.
Companies, big and small, have been affected as normal economic activities are displaced or delayed. To help tide companies through these uncertain times, the Government has pledged a slew of measures, including a S$4 billion Stabilisation and Support package to help workers remain employed and companies maintain cash flow.
How, then, would more free trade agreements (FTAs) help buffer our economy – considering that Singapore already has 25 FTAs with economies that represent more than 85 per cent of global GDP?
COVID-19 HIGHLIGHTS NEED FOR DIVERSIFICATION
The impact of COVID-19 on business activities has thrown the importance of diversification and the need for back-up plans into sharp focus for both businesses and individuals.
For businesses which have established supply chains of ingredients, raw materials or intermediate goods for its operations, the combination of city lockdowns, factory shutdowns, travel restrictions, logistics delays and drastic changes in demand for certain items such as electronic and automobile parts, building materials and consumer items purchased on e-commerce platforms have led to disruption of many such chains.
If an affected business is unable to quickly switch to alternative suppliers, its operations may be imperilled.
From another perspective, a business which is located within such a supply chain may find that its goods are stuck at borders or in warehouses, if it has no alternative fulfilment avenues.
At the consumer level, a visit to the neighbourhood store may lead to disappointment and panic for some when an item is not in stock due to unusually high demand. Indeed, consumers, too, have realised that they may need to diversify their sources, by resorting to other stores or online purchases.
FTAs HAVE HELPED SINGAPORE DIVERSIFY
Although COVID-19 drives home the need for diversification, this need has always existed. Singapore’s food supply, for example, is largely imported and is a good example of the need for all-weather diversification of supply.
Ensuring continual availability of staple food items, for example, can be facilitated by diversified trade networks, and FTAs which promote faster and lower-cost movement of goods across borders.
READ: Commentary: COVID-19 just one of a few 'white swans' that could trigger next global economic crisis
The FTAs which Singapore has with other trading nations provides for a smoother flow of goods, services and investments between our businesses and those in other countries, and more open access to foreign markets which may otherwise be blocked or hampered by national import rules and procedures.
Such access represents “outbound” trade opportunities, as FTA legal rules can help to reduce tariff and other barriers such as “red tape”, to give Singapore businesses preferential market access overseas.
Such diversification allows Singapore businesses to tap different overseas markets when their usual markets are adversely affected.
READ: Commentary: Singaporeans queued for toilet paper and instant noodles – there is no shame in that
While Singapore’s FTAs have already paved the way to a large number of markets, such as ASEAN, Australia, New Zealand, China, India, South Korea, Japan, the US, and through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Mexico and Canada - and soon, the European Union (EU), when the EU-Singapore FTA comes into force - there remain relatively new markets in the Southern hemisphere and Central Asia which beckon.
RESPONDING TO THE TRADE WAR
A further dimension is the ongoing decoupling of supply chains of the US and China. While Singapore’s FTAs may be with countries which cover 85 per cent of global GDP, business activities do not always align exactly with FTA geography, as commercial decisions are dependent on many factors such as costs, quality, risks and availability.
A business may find that it needs to include in its supply chains, suppliers found in more than one set of FTA countries. As each FTA carries its own set of controlling “rules of origin” to determine what goods can benefit from its terms, such a business may find that it has to navigate a number of FTAs - each with its own “rules of origin” - to realise the benefits.
For example, a Singapore company may need to source for parts from a number of countries to manufacture its final product. The company may then wish to export the product to separate markets, such as those of the EU and ASEAN, where preferential access would be controlled by different FTAs.
READ: The Big Read: A month into COVID-19 outbreak, retailers, eateries are reeling from near-empty malls and streets
In an ideal world, multilateral rules would facilitate trade more broadly around the globe, but with WTO trade negotiations sputtering in recent years, FTAs have had to serve the role of paving the way for businesses in a nimbler way.
The US-China decoupling requires quick responses by businesses, and a wide network of trade agreements can help facilitate flows through new goods supply chains.
FTAs also promote the flow of services. Digital services, for example, flow particularly well across borders to buyers far away, and Singapore businesses offering such services can look to exploit opportunities, unhampered by geography or time zones, in new markets opened up by FTAs.
DIVERSIFYING WHERE WE GET OUR SUPPLIES FROM
Apart from export markets, FTAs can also facilitate inbound trade opportunities, allowing Singapore businesses to locate alternative suppliers for their customers or supply chains. They may also provide for improved legal protection for investments made in each other’s countries. This last point may not seem to be related to diversification, but an example allows us to see its relevance.
Rice is a staple food in Singapore, and its availability is ensured through various means, including a national stockpile and purchases from a variety of countries. Having FTAs with various countries can smoothen the way to such diversified purchasing by creating new sourcing channels and by reducing the time taken for their rice exports to reach Singapore.
Singapore businesses may also choose to invest in production facilities overseas to ensure both the availability and quality of rice for Singapore consumers. Such investments can be protected through an FTA with the country in which the investment is made. This can also apply to Singaporean investments in the overseas production of goods in non-food sectors.
For the consumer, enhanced trade opportunities with newer markets mean opportunities to enjoy imported goods from a variety of sources, if, for example, climatic or other conditions in a familiar source country turn problematic. In practical terms, it means that one can still enjoy rice, meat, eggs, vegetables, bananas and avocados, even if one of Singapore’s usual supplying sources is unable to deliver such items for any reason.
Diversified trade can therefore bring two-way gains.
FTAs can promote trade diversification through export and investment opportunities in overseas markets, new supply chain networks, and greater import flexibility, security and peace of mind for businesses and consumers.
As regional or global events cause significant dislocations and adjustments in supply chains, Singapore will be no doubt be planning the most effective ways to remain a leader of global trade connectivity, through its FTAs and other arrangements.
Locknie Hsu is Professor of Law at the School of Law at the Singapore Management University.