23 May 2019

The European Union-Singapore Free Trade Agreement (EUSFTA) was given the green light on 13 February 2019 in Strasbourg, France after securing a majority vote from the EU Parliament.

When entered into force, the EUSFTA allows 84% of Singapore exports to enter the EU market duty-free and eliminates the remaining tariffs between the third and fifth year of the agreement. Other benefits of the agreement include improved market access to services sectors, more opportunities in government procurement and the reduction of non-tariff barriers in vital areas, such as pharmaceuticals and medical products.

Economic benefits for Singapore

As far as trade agreements are concerned, the EUSFTA is a big one for Singapore.

The EU is the world’s largest single market and represents Singapore’s third largest trading partner. On the other hand, Singapore is the EU’s biggest trading partner in ASEAN with total bilateral trade standing at € 53 billion (S$ 81 billion) in 2018. Singapore also hosts more than 10,000 EU companies, some of which function as forward bases set for regional operations.

With the EUSFTA in place, economic benefits generated by the agreement will be profound for Singapore. Indeed, a report made by the Singapore Ministry of Trade and Industry (MTI) estimates that total trade will likely grow by 1.1 per cent, which would translate into 0.27 per cent increase in total gross domestic product or GDP.

Besides, lower tariff barriers would make Singapore exports more competitive in EU markets. Singapore Business Federation chief executive officer Ho Meng Kit calls the agreement a “timely development” and posits that the successful implementation of the EUSFTA would generate new economic opportunities to local companies, especially small and medium enterprises (SMEs).

The EU, Singapore, and ASEAN

At a glance, economic figures offer much optimism for both parties. ASEAN represents the EU’s third largest trading partner after the United States and China with more than € 227.3 billion worth of trade in goods in 2017.

But the EU and ASEAN are far from fully working their economic muscles.

On one hand, the EU and ASEAN do currently enjoy substantial economic and trade exchanges. Regular region-to-region dialogue sessions and ministerial meetings, such as the biannual ASEAN-EU Trade and Investment Work Programme and ASEAN-EU Business Summits, provide essential platforms for leaders from both sides to establish good economic understanding and relations.

However, more comprehensive trade and business regimes say, for example, bilateral FTAs, that deliver tangible economic benefits to the region’s economy leave much to be desired. And as the failure of the previous EU-ASEAN FTA negotiations that began in 2007 reveals, deeper region-to-region economic partnerships continue to face significant hurdles.

More business opportunities and inter-regional cooperation for ASEAN

The successful signing of the EUSFTA, however, could prove to provide the much-needed stimulus to revitalise inter-regional ties between the EU and ASEAN.

First, the EUSFTA marks the first bilateral trade agreement concluded between the EU and an ASEAN member country. Experiences gained from the EUSFTA regime would also be able to help guide subsequent rounds of trade discussions for an EU-ASEAN FTA.

What’s more, the EUSFTA creates chances to bring both regions together economically through the agreement’s “ASEAN cumulation” factor, among others. When the deal goes into effect, materials sourced from other ASEAN member countries are accepted as originating from Singapore so long they are incorporated into final products. This allows ASEAN inputs sourced by Singapore businesses to be considered as a domestic content and therefore enjoy tariff concessions.

This cumulation process is vital for a large number of Singapore products, namely electronics and pharmaceuticals, which have components produced in other ASEAN member countries. Furthermore, the ASEAN region provides the bulk of the world’s consumer electronics and manufactured goods, continuing to dominate the region’s trade with the EU – in 2017, manufactured goods comprised over 85% of EU’s total imports from ASEAN.

Under Singapore’s zero-tariff regime with the EU, ASEAN inputs will become more price competitive and this helps to strengthen linkages and boost regional economic activity within the EUSFTA context. Furthermore, by bringing ASEAN businesses closer to the EUSFTA, a domino effect is generated: Greater trade activities between the EU and Singapore mean higher demand for ASEAN inputs which, in turn, stimulate greater regional economic activities.

Essentially, the EUSFTA finds a way to interweave the ASEAN market into the agreement’s more extensive trade network. By doing so, the EUSFTA is no longer to be seen purely as an EU-Singapore business. Instead, the agreement’s latitude means new opportunities generated for ASEAN to gain entry into the EU-Singapore economic corridor, albeit indirectly. By strengthening economic connectivity between the EU and ASEAN, the agreement also helps to anchor EU’s presence in the region.

How EUSFTA will benefit Singapore through ASEAN

At the same time, a more knitted regional network through the ASEAN cumulation process is significant for the Singapore economy, too.

Since 2015, the ASEAN has taken over the United States to become Singapore’s largest market, and trade with the region’s top five economies – Indonesia, Malaysia, Thailand, the Philippines and Vietnam – makes up more than 10 per cent of Singapore’s overall GDP. Thus, the incorporation of ASEAN businesses into the FTA regime with the EU will help to boost regional economic activity further and allow Singapore businesses to harness the potential of regional markets – e.g. lower labour costs and abundant resources.

Should an EU-ASEAN FTA be concluded in the future, Singapore’s extensive links with the regional economic network and strong trade flows with the EU would put the country in a favourable position to gain from greater region-to-region economic partnership and cooperation.

It’s About Time to Renegotiate

If critics see ASEAN's market heterogeneity and lack of economic cohesion as major roadblocks towards greater interregional cooperation with the EU, then, the EUSFTA does much to lay some of these worries to rest.

Through ASEAN cumulation, new and more opportunities are created for Singapore businesses to further harness the potential of regional supply chains and business networks for its trade with the EU. In turn, this serves as a strategy to foster regional economic integration and cohesion, which also go in line with the economic objectives spelt out under the ASEAN Economic Community (AEC) Blueprint 2025.

A more knitted ASEAN community, at least in economic terms, would reduce regional economic incongruities and boost business confidence among external partners. Subsequently, this helps to promote trade and attract investments into the region.

Essentially, the EUSFTA is a step taken in the right direction. It serves as a vehicle for furthering economic partnerships between the EU and ASEAN. The agreement also creates a favourable environment in which deeper economic engagement – including EU-ASEAN FTA negotiations – and greater interregionalism can take place.

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