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International Journal of Economic Policy Studies

, Volume 13, Issue 1, pp 259–271 | Cite as

The future of free trade agreements: a Singapore perspective

  • Xiaoping ChenEmail author
Research article
  • 29 Downloads

Abstract

This paper discusses the potential shortcomings of existing free trade agreements and the desired elements of future free trade agreements in response to some new global economic structure changes. We present our discussion based on the experience of Singapore. We highlight that future free trade agreements should be more comprehensive and try to address the following key challenges: eliminating non-tariff trade barriers and limit potential new restrictions on trade; lower the trade policy uncertainty; protect intellectual property in a international setting to encourage innovation; managing immigration and FDI policies in a coordinated way across countries; improve regional and global production integration given the nature of global production networks.

Keywords

Free trade agreement Anti-globalization sentiment Non-tariff barriers Uncertainty Intellectual property rights Global value chain 

JEL Classification

F02 F13 

Introduction

Free trade agreements (FTAs) have been used by many countries to promote international trade of goods and services as well as to strengthen regional economic integration through tariff reduction and elimination of non-tariff trade barriers. Existing FTAs have done quite a good job and contribute to the dramatically increasing world trade across countries. However, recently there arises a trend of anti-globalization sentiment across the globe questioning the effect of FTAs on consumer welfare, fair trade and sustainable economic growth among other things. In this paper we discuss the potential shortcomings of existing FTAs and the desired elements of future FTAs in response to the new global economic structure.

There are different types of FTAs signed among different countries all around the world. As we are trying to provide a sketch for the future FTAs, we start from the most advanced FTAs in the current world economy and pick a country as our reference for the following discussion. Singapore serves very well as the country of interest. We will show more about the Singapore economy and its trade policies in the following section.

The paper is organized as the following. Section 2 summarizes the Singapore economy and its trade policies; Sect. 3 briefly discusses about the anti-globalization sentiment; Sect. 4 contains an elementary sketch of the future free trade agreements; And the last section concludes.

A typical small open economy

Singapore, a small island locates at one end of the Strait of Malacca, is a typical small open economy. It has been heavily dependent on international trade and external correlations since its independence. The standard trade openness measure, trade GDP ratio, for Singapore has been above 300% since 1987.1 Since its dependence in 1965 Singapore’s GDP has grown by an average of 9.5% annually. And international trade has been one of the main driving factors behind this growth miracle. When looking back at the development history of Singapore, we see a very high correlation of 0.67 between GDP growth rate and trade growth rate.2 As a result, Singapore has always put international trade among its top priorities.

The Singapore government has been actively participating in international FTAs and regional integration. The International Enterprise Singapore (IE Singapore) is a government agency promoting international trade and partnering Singapore companies in going global. According to the information provided by the IE Singapore, the economy currently has an extensive network of 20 implemented FTAs with 31 trading partners. Merchandise trade with preferential trading partners accounted for about 80% of Singapore’s imports and 74% of exports in 2014.

Singapore’s economy has been doing extraordinarily well for several decades until recently, when it also faces some new challenges and competition. The GDP growth rate has dropped to 2% for the past two years as shown in panel A of Table 1. Specifically, the GDP growth rate in the last two years has dropped to around 2% and the GDP per capita growth rate has dropped to 0.7% for both year 2015 and 2016. Among the many potential factors behind the slowdown of economic growth in Singapore, one main factor would be the poor performance of international trade. The trade openness measure, as percentage of GDP, is decreasing since 2011, especially in the past two years as shown in panel B of Table 1. The growth rate of Singapore’s total trade of goods and services has turned negative for 2015 and 2016, − 12.3% and − 3.5%, respectively. When looking into the trade performance more carefully, from 2010 to 2016 we see that the growth rate of trade in services actually surpasses the GDP growth rate, represented by the increasing trade in services as a percentage of GDP. From panel A of Table 1, we see that the industrial structure of Singapore is quite stable with around 20% manufacturing and 74% of services over the past six years. Together it suggests that the trade of manufacturing goods and the trade of services have taken separate paths over the last six years, with stronger performance in the trade of services.
Table 1

Selected macroeconomic indicators for Singapore, 2010–2016

Indicators

Year

2010

2011

2012

2013

2014

2015

2016

Panel A: macroeconomy

 GDP growth (%)

15.2

6.2

3.9

5.0

3.6

1.9

2.0

 GDP per capita growth (%)

13.2

4.0

1.4

3.3

2.2

0.7

0.7

 Inflation (CPI % growth)

2.8

5.3

4.5

2.4

1.0

− 0.5

− 0.5

 Unemployment (%)

3.1

2.9

2.8

2.8

2.8

1.7

1.8

 Manufacturing value added (% of GDP)

21.4

20.2

19.9

18.5

18.9

19.5

19.6

 Services, etc. value added (% of GDP)

72.3

73.6

73.6

75.2

74.3

73.8

73.8

Panel B: trade performance

 Trade (% of GDP)

373.4

379.6

371.0

366.0

362.3

329.9

318.4

 Trade growth (%)

27.1

18.5

2.5

3.2

0.8

− 12.3

− 3.5

 Trade in services (% of GDP)

85.5

86.2

89.3

94.8

101.5

102.1

102.8

Panel C: foreign direct investment

 FDI, net inflows (% of GDP)

23.3

17.8

19.4

21.4

24.0

23.8

20.7

 FDI, net outflows (% of GDP)

15.0

11.4

6.7

14.4

16.9

10.6

8.0

Data is retrieved from World Bank as well as the Singapore Department of Statistics [11]

Singapore has been a favored destination for foreign direct investment (FDI) for decades. The inflows of FDI as a share of GDP have been above 20% for most years. As the second-popular FDI destination in Asia, behind China, Singapore has accumulated 1255.5 billion of Singapore dollars stock of FDI in 2015. At the same time, the stock of Singapore’s FDI abroad also rises to 665.4 billion of Singapore dollars.

Singapore’s free trade agreements

As mentioned above, Singapore has already implemented 20 regional FTAs when trading with its partners. These preferential agreements indeed have contributed largely to promote bilateral trade and economic integration between Singapore and it trading partners.

However, there are also problems arising from these FTAs. First, as different regional FTAs have different country coverage, the complex rules of origin generate a Spaghetti effect first discussed by Bhagwati that may actually hinder international trade activities. Because every FTA sets its own geographical conditions of production for concerned goods, given the increasingly integrated global/regional production network, the rules of origins are hard to be clearly defined and often impossible to enforce. These complex rules also generate high administrative cost for both governments and firms since firms need to undergo complex administrative tasks to prove their goods’ origins and adapt to FTAs regulations. These fixed cost of trade is particularly significant for those small and median firms, reducing their willingness to trade. In the Aisa context, countries have seen a dramatic rise in FTAs since the beginning of the 21st century. In 2000, only 3 FTAs were in force, nine years later, 37 FTAs were in force and 72 under negotiations. The growing regional economic integration combined with a lack of common economic institutions has led Asian countries to adopt pro-FTAs trade policies. However, due to the high administrative costs and other complicate regulations, many firms trade without using the terms of FTAs. In a 2009 survey by [10], only 29.0% of Japanese exporting firms, 20.8% of Korean exporting firms and 20.0% Philippine exporting firms are utilizing relevant FTAs. The percentage of exporting firms using FTAs preferences in Singapore is only 17.3%, lower than other Asian countries. Among the many reasons for not using FTA preferences, the high administrative cost due to the complicated rules of origin requirements is identified as the second most important consideration. Second, for most of Singapore’s traded goods and services, the tariff rate is on average quite low, which means that the potential gains from trade liberalization through tariff reduction will be limited as more FTAs are implemented. Singapore’s economy demands new FTAs with stronger liberalization in other aspects of trade barriers, such as non-tariff barriers, institutional reforms, etc. Third, the production of goods and services are becoming more and more fragmented across country borders. This naturally results in lower value-added content in gross export for all countries. Singapore’s government is facing new challenges in directing its export towards high value-added industries. Existing FTAs have not taken this global production nature into consideration.

The trans-pacific partnership

In this subsection, we focus our discussion on the Trans-Pacific Partnership Agreement (TPP), one of the most comprehensive and advanced multilateral trade agreement Singapore is involved in. The TPP was grown from a previous regional agreement that Singapore is part of, the Trans-Pacific Strategic Economic Partnership Agreement (TPSEP), a trade agreement between four Pacific Rim countries concerning a variety of matters of economic policy. The agreement was signed by Brunei, Chile, Singapore and New Zealand in 2005 and entered into force in 2006. It is a comprehensive trade agreement, affecting trade in goods and services, rules of origins, technical barriers to trade, intellectual property, government procurement and competition policy. Among other things, it called for reduction by 90 percent of all tariffs between member countries by 1 January 2006, and reduction of all trade tariffs to zero by the year 2015. The aim was to create a comprehensive, forward-looking trade agreement that set high-quality benchmarks on trade rules, and would help to promote trade liberalization and facilitate trade within the APEC region. The TPP is an enhanced agreement based on TPSEP including more countries from the Pacific rim including 12 members: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, United States, Vietnam, and Singapore. The TPP was considered to be a pathfinder for the proposed Free Trade Area of the Asia Pacific (FTAAP), an APEC initiative.

The TPP was concluded on 5 October 2015 after five and a half years of negotiation. Following a legal verification exercise by the parties, the text of the agreement was released to the public in English on 26 January 2016. The TPP was signed by all parties on 4 February 2016. The TPP consists of 30 chapters, as well as numerous annexes and side letters on bilateral matters. The contents of the TPP go far beyond the standards drafted by the WTO. It includes agreements on trade in goods and services, customs and trade facilitation, technical barriers to trade, government procurement, new regulation for online commerce, treatment of foreign investors, far more comprehensive protection for intellectual property and environment, labor codes, an agreement for neutrality regarding state-owned enterprises, regulatory coherence; transparency and anti-corruption; dispute settlement; and institutional provisions. Given the comprehensiveness of TPP, many researchers and think tanks believed that the TPP was going to help the macroeconomic performance of member countries and may reshape the future trade cooperation and agreements.

However, in 2017 the current president of the United States had removed the US from the TPP and declared an end to the era of multinational trade agreements for the US. With nearly a quarter of the world GDP, the United States was a big player in TPP. Without the US, the remaining countries only account for about 13.5% of the world economy. Then the actually benefit countries can get from TPP will be much limited. Nevertheless, the other 11 TPP countries agreed in May 2017 to revive the deal without US participation, as a TPP-11 is still better than no agreement.

As one of the founding member and main supporter of TPP, Singapore has tight connection with TPP member countries. The TPP partners accounted for 22.0% of Singapore’s total imports and 25.0% of its total exports in 2016.3 Given its high dependency on international trade, it is important for Singapore’s economic development that a more comprehensive and deeper FTA such as TPP can be finally implemented. And we believe that the Singapore government as well as other remaining member countries in the TPP should push hard for the implementation of this comprehensive agreement, setting a successful example for deeper integration.

Additionally, the TPP is designed in a way that will allow interested parties to join the agreement along the way. In order to increase the influence of TPP and to exert its positive spillover to other agreements or other neighboring economies, it eventually should bring in more players in the Pacific Rim conditional on that they meet the sets of necessary bars. Within this region, China arises as a potential alternative after the US withdrawal. China, with nearly 15% of the world GDP in 2016, accounts for 13.1% of Singapore’s total exports and 13.9% of its total imports in 2016. Compared with the US, China is a larger import source country for Singapore and a more than twice larger export destination.

The anti-globalization sentiment

Recently there seems to be an anti-globalization trend of sentiment around the world, especially in some developed economies including the US and UK. Globalization is blamed for the domestic unemployment and increasing wage inequality. Immigration is also blamed for the competition it causes to the local labor market. Some others are accusing globalization for its negative impact on the environment.

When looking at these anti-globalization sentiments, it should first be clear that even the most extreme anti-globalization activists would welcome those forms of global integration that better provide democratic representation, advancement of human rights, fair trade and sustainable development. As a result, we should be careful when we refer to this anti-globalization term. That being said, the economic foundation for this anti-globalization sentiment is not well grounded. Instead of opposing globalization, there are better options. For instance, when there is aggregate gains from globalization, then the problem that some parties are losing from it should be accused for the lack of a redistribution system or direct trade assistance program that can help those who are negatively affected instead of globalization itself. For the shrinking of middle-class employment, i.e. job polarization, it is mainly due to the technology change according to the study by Acemoglu and Autor [1] instead of trade. Though David Autor has many other studies arguing the negative impact of exposure to trade on the local manufacturing and low-skill jobs, the welfare implication for increasing import from developing countries is likely to be positive when taking into account of the deceasing consumption price index in the US according to the study by Robert Feenstra and others.

We tend to believe that to a large extent this anti-globalization sentiment is a political issue instead of an economic one. We cannot refuse to eat for fear of choking. Globalization provides each country more options compared with its autarky, so each country can do at least as well as before. This means that globalization provides non-negative aggregate welfare gains, either through resource reallocation (according to one’s comparative advantage) or through the pro-competitive effect. Then the problem is only about the distributional effect of globalization, which should be addressed by each country and likely also by multilateral agreements such as FTAs.

A sketch of future free trade agreements

In this section, we discuss about the desired elements for the future trade agreements from a Singapore perspective. Some of the aspects are already included in existing FTAs. One side note we want to highlight is that, any agreement is not just about what is being discussed and agreed with on the paper, it is all about implementation and enforcement in the real world.

Non-tariff barriers

The world has seen a much stronger global integration than it has ever experienced in history. After the WWII, countries agreed to move towards less protectionism and more open border economy after signing the General Agreement on Tariffs and Trade. The process of trade liberalization and global integration accelerated after 1995 under the WTO framework. Today, for most countries and most traded goods and services, the applied tariff rates in trade are on average quite low already. So, there is not much potential for further reduction in tariff rates. However, tariff is just one small part of all the trade costs. There are still many other kinds of non-tariff trade barriers that are impeding trade across countries. These non-tariff barriers include specific limitations on trade; customs and administrative entry procedures; government procurement policies; technical standards and norms; health, sanitary and veterinary standards; requirements for labeling, packaging and bottling; etc.

Non-tariff barriers are usually hard to measure and quantify. And often it is also hard to observe. However, it can be as costly as, if not costlier than, tariff on the trade of goods and services. Some of these non-tariff barriers are one-time fixed trade cost, such as quality certification or environment certification. These fixed costs of trade are particularly substantial for small firms entering the foreign market. As in the Singapore economy, more than 90% of registered firms are small and medium enterprises (SMEs). This type of trade cost is costlier for Singapore. As a result, Singapore government has put a lot effort into simplifying the custom procedures and providing trade facilitation programs to help SMEs going global.

Future FTAs should be able to eliminate all these different kinds of non-tariff barriers and countries should agree not to impose any other kinds of non-tariff barriers to trade.

Trade policy uncertainty

In Singapore almost all products enter duty-free under the applied MFN tariff regime, except for six tariff lines (beer and some other spirits), which are subject to specific duties. On the other hand, only about 70% of Singapore’s tariffs are covered by tariff bindings, with a simple average bound rate of 6.9%. Excise duties were increased in 2013–2015 on tobacco products, alcoholic beverages, and some petroleum products.

One of the main concerns raised about Singapore’s trade policy is about its uncertainty. Firstly, nearly 30% of Singapore’s tariff lines are unbounded. This creates huge uncertainty about the actual implemented tariff rate in practice. As shown by many researchers, policy uncertainly can have significantly negative effect on economic activities. For instance, the recent work by Handley and Limao [6] has shown that for the case of China and the U.S. the reduced trade policy uncertainty lowered U.S. prices and increased its consumers’ income by the equivalent of a 13% points permanent tariff reduction. Similarly, the trade policy uncertainty arising from the unbounded tariff lines in Singapore may also have significant negative effect on its trade. Secondly, Singapore government does provide, though not many, an array of tax and non-tax incentive schemes. These policies can be very subtle sometimes. Information regarding budgetary expenditures, as well as revenue foregone (tax expenditures) related to Singapore’s incentive schemes, is not readily available. This also creates some degree of uncertainty in Singapore’s trade policies. This kind of uncertainty may also negatively affect Singapore’s economic interactions with other countries.

As a result, future FTAs should try to limit all kinds of policy uncertainty on international issues. One benefit of having an external agreement is to shield government policy from domestic lobbying activities when government is uncertain about the optimal policy to adopt.

Innovation and intellectual property rights

Sustainable economic growth should be based on innovation. This is particularly true for countries that have already accumulated a high level of physical and human capital. Singapore is such a country and the Singapore government has been shaping its policies to orient its economy towards an innovate-lead sustainable growth. When looking back at Singapore’s R&D expenditures record in the past, the total R&D expenditures of Singapore are growing at a high rate of 8.0% annually from 2000 to 2015. As a share of total GDP, the annual R&D expenditure is quite stable around 2.1% since 2000. This rate is higher than that of the U.K.’s 1.7% and lower than that of the U.S.’s over 2.6% for the same period. With these R&D expenditures, Singapore has accumulated patents (as the R&D output) at an annual growth rate of 13.6% from 2000 to 2015.

More than 60% of Singapore’s R&D activities are carried out by the private sector. And of all R&D expenditures, the share that is spent in the manufacturing sector drops from 72.4% in 2002 to 53.6% in 2014. Whereas the R&D expenditure spent in the services sector increases from 22.5% in 2002 to 45.9% in 2014. Singapore’s sector output structure has been quite stable over the past decade with manufacturing sector accounting for around 20% of the GDP. It seems that R&D activities in Singapore have biased towards the service sector which contributes to its growing export in services.

Chen and Shao [3] has shown that given countries’ endowment of research resources, mainly research manpower and research facilities, their comparative advantage in doing R&D across industries depends on the product cycle lengths of different industries. Countries with more research resources will have comparative advantage in those industries with shorter length of product cycles. As countries develop and accumulate their knowledge cap ital and research resources, countries’ comparative advantage in doing R&D and innovation shifts from industries with longer product cycles to those with shorter product cycles. Given Singapore’s relatively high position in research resource endowment, its comparative advantage of R&D lies in those industries with short product cycles such as chips, electronics and other high-end manufacturing.4 Though their empirical work is mainly about manufacturing industries, Singapore can explore more in its large services sector for its R&D comparative advantage. It may help to strengthen Singapore’s comparative advantage in services exporting.

Recently Singapore has modified its patent regime from self-assessment to a positive patent grant system, whereby patent applications have to meet the patentability criteria of novelty, inventiveness and industrial applicability before a request can be made. This effort may help to maintain a high-level standard for new patent applications. Other policies like removing restrictions, providing more research credit for small firms, providing training and help for new-tech start-ups have also been adopted by the Singapore government to promote innovation in its economy.

When more goods are being traded across countries, or even the production of goods is fragmented between countries, the intellectual property rights (IPR) protection becomes an international issue. We have heard so many stories about the risk of imitation and expropriation when it comes to FDI and export decisions. Developed countries with superior technology are reluctant to do FDI in developing countries with low IPR protection. This is one key issue that future FTAs should try to address because this risk about one’s IPR will largely affect its decision on export and FDI.

In the Singapore case, it has the highest standard for IPR protection within the South-east Asia region. This helps Singapore to become the innovation center and hub for FDI in this region. It may seem that Singapore then has no incentive to push up the IPR protection in nearby countries within this region. This relative institutional advantage in Singapore is not sustainable. Better IPR protection in the region will benefit all the innovation activities in Singapore. In the end Singapore is just a small market. And active and sustainable innovation activities require certain size of market, due to the large fixed cost of innovation and positive externality. The high level of fixed investments for many innovation and R&D activities require a large enough market size to generate high degree of increasing returns to scale to justify the high fixed cost. Many recent innovations have been depending on interactions through social networks, which needs large enough customer base to work more efficiently. As a result, Singapore should push for measures to better connect the local market to other near-by regional markets such as Malaysia and Indonesia. This may require market integration in the sense of R&D sharing and more research collaboration across country borders, as well as a multilateral or global IPR protection system.

Immigration and FDI

Singapore has been one of the countries (regions) with the lowest fertility rate for years. In 2015, its fertility rate ranked at the bottom only above Hong Kong, Portugal and South Korea among the world. The low fertility rate together with increasing life expectancy result in an aging population in Singapore. As shown in the panel A of Table 2, the percentage of elderly residents in total residents as well as in total employment has been increasing over time. As a result, the old-age support ratio has been decreasing and the old-age dependency ratio has been increasing over time. To achieve a sustainable system of social services, Singapore government has recently been strengthened their social safety nets, e.g. retirement benefits through the Central Provident Fund (CPF) which is a mandatory savings scheme financed by contributions from employers and employees covering around 90% of the resident population and is the centerpiece of Singapore’s “self-reliance” system for the provision of social services. This included a more progressive interest rate structure where Singaporeans with lower balances enjoy higher government-provided interest rates on their CPF savings. In addition, to better support the elderly with lesser means in their retirement years, the Silver Support Scheme provides a quarterly income supplement to the bottom 20% of elderly Singaporeans aged 65 and above.
Table 2

Aging population and immigration in Singapore, 2010–2016

Indicators

Year

2010

2011

2012

2013

2014

2015

2016

Panel A: population

 Fertility rate

1.15

1.2

1.29

1.19

1.25

1.24

1.2

 Elderly residents (65 years and over) (%)

9

9.3

9.9

10.5

11.2

11.8

12.4

 Elderly residents in employment (%)

3

3.7

4.1

4.7

5.5

5.4

5.9

 Old-age support ratio

7.4

7.2

6.7

6.4

6

5.7

5.4

 Old-age dependency ratio

13.5

13.9

14.8

15.7

16.7

17.7

18.7

Panel B: immigration

 Non-resident population (%)

25.7

26.9

28.1

28.8

29.2

29.5

29.8

 Non-resident population growth

4.1

6.9

7.2

4.0

2.9

2.1

2.5

 Population growth

1.8

2.1

2.5

1.6

1.3

1.2

1.3

Data is retrieved from World Bank as well as the Singapore Department of Statistics. Old-age support ratio is the number of residents aged 20–64 years per resident aged 65 years and over. Old-age dependency ratio is the number of residents aged 65 years and over per hundred residents aged 20–64 years. Gini coefficient and ratio of income for the 90th and 10th percentile is calculated using the household income from work (including employer CPF contributions) per household member after accounting for government transfers and taxes

Meanwhile the immigration policy in Singapore has been revised frequently to address different issues. Over a long period of time, Singapore government has been adopting an open-door immigration policy. As shown in panel B of Table 2 the non-resident population has been increasing over time, though at a decreasing rate. The inflow of immigrants and foreign workers have helped to alleviate the manpower shortage and population aging. Meanwhile, it has also resulted in strong sentiment by the locals against foreign workers in Singapore. The immigrants are blamed for the country’s overcrowding and falling reliability of its public transportation system, increasing property prices for housing, suppressed wage level, increased competition for jobs and education, increasing income inequality and other social problems. In the future, immigration policies need to be carefully crafted in order to balance the benefit from targeted immigrants and potential cost to the local community. To raise the quality of its foreign workforce and encourage businesses to reduce their reliance on manpower and increase their productivity, and to keep a level playing field for Singaporeans of different ages, the Government has raised the qualifying salary for new Employment Pass (EP) applications from S$3,000 to S$3,300 in 2014 and to S$3,600 in 2017.

As mentioned in the previous section, immigration policy can be very controversial. From basic economic principle we see that there can be aggregate gains from more liberal immigration policy, especially for countries with manpower shortage. Then the question is not about allowing immigration or not. Instead, countries should design policies to select the composition of immigrants and direct them into the right industries. And at the same time, assistance and redistribution are required to compensate those who are losing from directly competing with immigrant workers. We believe immigration policy agreement should be included as one of the main chapters in future FTAs.

Another important issue closely related with immigration is FDI. Existing FTAs are already trying to eliminate barriers to FDI across countries. At the current stage, still many countries have regulations on FDI across industries. In Singapore, FDI is restricted in some selective industries. The restrictions of foreign investments are mainly in the retail banking, legal services, broadcasting services, and some government-linked companies. In the TPP agreement, countries agree to gradually eliminate all restrictions on FDI flows. And also, countries should not give privilege to state-owned enterprises when competing with foreign firms. Future FTAs should emphasize the FDI liberalization and remove all entry barriers for foreign firms in any industry.

Global value chain and regional production network

In recent years global sourcing and multinational production are more and more prevailing. Multinational firms and production fragmentation are becoming common practices for many goods in manufacturing as well as services. As intermediate inputs and final goods enter and exit the country borders for multiple times, production becomes globally organized. Now researchers and policy makers are emphasizing the value-added content of trade.5

Countries should care more about their value-added content of trade, instead of just gross trade volumes. Recently the global value chain has been a super-hot topic among trade economists. Under this new and changing context of global production network, how should a country’s trade policies cope with the new organization of production becomes crucially important. As shown in Blanchard et al. [2] that the optimal tariff for final goods should be decreasing in the domestic content of foreign-produced final goods. They also provide strong empirical evidence for this prediction, showing that global value chain is already playing an important role in shaping the trade policy.

Singapore, as a hub for international shipping and trading, it also plays a key role in the regional and global manufacturing production network. Based on the input-output table from the Organization for Economic Co-operation and Development (OECD), the domestic value-added share in Singapore’s total gross export is around 40% on average over the period of 1995–2011.6 This level is quite low compared with other countries. One of the reasons is the high share of re-export in Singapore as an intermediate trade platform within the South-East Asia region. The Singapore government has biased their industrial policy towards high value-added and capital-intensive industries. This certainly can help to increase the value-added content of its export. However, given that global production chain happens more in the manufacturing sector and Singapore only has a small manufacturing base which is around 20% of the GDP, these policies may not turn out to be efficient. This limitation of domestic manufacturing sector base can be relaxed if Singapore integrates more into the regional manufacturing production network in South-East Asia.

When looking at the Singapore’s participation in the South-East Asia production network,7 we see that the value-added contribution from Singapore is not high and over time not increasing (or even decreasing) despite the high growth of total exports from this region.8

On the other hand, we can also look at the share of value-added contribution by other South-East Asia countries in Singapore’s production. This share is also decreasing over the sample period, meaning that Singapore’s value-added sourcing from South-East Asia countries is also decreasing over time. Both facts seem to suggest that there is still a lot of potential in the regional value-added production network within the South-East Asia region. Singapore and other ASEAN countries should work together in this direction to improve the regional production integration and in turn the aggregate efficiency of this regional production network in supplying the world economy.

Lastly, Heise et al. [7] finds evidence that lower trade policy uncertainty can lead to more frequent and long-term production linkages between suppliers and buyers across countries. As a result, to reinforce the global production connections across countries, government authorities should try to be as transparent and clear as possible when it comes to policies regarding global production organizations or global sourcing and off-shoring.

Future FTAs should take into consideration the new structure of global production network when designing their policy agreements. The objective should be improving the aggregate efficiency of the regional or global production network while making each member country better off from this increasing production integration.

Concluding remarks

In this paper we try to provide an elementary sketch of future trade agreements using Singapore as a starting example. Singapore is a typical small open economy and its trade policies are known to be free and liberal. Thus, it serves as a good start to discuss about future free trade agreements. Despite the anti-globalization sentiment in some countries around the world, we believe trade integration and globalization still should be the direction future international agreements move towards. However, future free trade agreements should be more comprehensive and try to address the following key challenges: eliminating non-tariff trade barriers and limit potential new restrictions on trade; lower the trade policy uncertainty through tariff binding and other specific agreements; protect intellectual property in a international setting to encourage innovation; managing immigration and FDI policies to select and direct labor and capital flows across countries and industries; improve regional and global production integration given the nature of global production networks. The current discussion in this paper about future trade agreements is still quite limited due to the author’s limitation in his knowledge. But it can serve as a start of further investigations into the future trade agreements by other trade economists and policy makers.

Footnotes

  1. 1.

    Data source is World Bank Open Data.

  2. 2.

    See Ref. [5] for a discussion on the relationship between trade and economic growth.

  3. 3.

    Numbers are calculated using data from the Statistics of Singapore and including the US as a member.

  4. 4.

    See Chen and Shao [4] for more details about the measure for product cycle length across industries.

  5. 5.

    See some pioneering work on value-added trade by Johnson and Noguera [8, 9].

  6. 6.

    The time period is chosen according to data availability.

  7. 7.

    Due to data limitation, we only observe the input output tables for Brunei, Cambodia, Indonesia, Malaysia, Philippine, Thailand and Vietnam besides Singapore in South-East Asia region.

  8. 8.

    The total growth of exports in goods and services by these South-East Asia countries have increased on average at an annual rate of 8.9% over the period of 1995–2011.

References

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Copyright information

© Japan Economic Policy Association (JEPA) 2018

Authors and Affiliations

  1. 1.School of Social SciencesNanyang Technological UniversitySingaporeSingapore

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