U.S.–Singapore Free Trade Agreement:: Implications for ASEAN

Abstract

The signing of the U.S.-Singapore Free Trade Agreement (USSFTA) by the President of the United States and the Prime Minister of Singapore on 8 May 2003 is one of the culminations of Singapore's overall trade initiatives and economic strategy, which involves forging free trade agreements (FTAs) with other countries outside the ASEAN region. The first one was with New Zealand, which was later followed with Australia, while other FTAs are still under negotiations. This particular FTA, however, has caught much attention and has been hailed in the Singapore press as a historic and momentous event because it is the first FTA for the United States with an Asian country. On the other hand, for Singapore FTA means, apart from political considerations, much more in economic terms because of the huge market potential the United States can offer. With a population of 287.7 million and a per capita income of US$36,273, the United States can provide a strong economic stimulus which is badly needed during these times of sluggish regional growth and uncertainties. In fact, the United States has already been the largest export market and the largest source of foreign direct investments for Singapore. However, from the U.S. perspective, Singapore is not as important, as the bulk of U.S. trade is with its neighbouring developed countries such as Canada and Western Europe. This means, however, that there is a large scope for greater flow of exports from Singapore to the U.S. market. The recent FTA can certainly offer economic opportunities for trade-dependent Singapore, but what this means for the ASEAN countries as well as for ASEAN economic integration is not quite straightforward and more difficult to settle. Singapore's pursuit of extra-ASEAN FTAs has long been criticized by some fellow ASEAN members since the start of Singapore's bilateral free trade negotiations. Apart from the criticism that the other ASEAN countries were not adequately consulted by Singapore, these arrangements were seen by some as undermining ASEAN as a preferential trading arrangement. Specifically, it is claimed that these free trade arrangements could be providing Singapore's FTA partners with a back-door entry into the ASEAN Free Trade Area (AFTA). Before addressing these concerns raised by other ASEAN countries, there is a need to explore whether there are direct and indirect benefits that can be derived by other ASEAN countries from the newly signed USSFTA. It has been argued that there could be beneficial spillover effects of Singapore's extra-ASEAN FTAs in terms of local and foreign investments for the ASEAN region. This argument is quite convincing if we recognize that Singapore does not have an unlimited capacity to absorb all of the investments that can result from the USSFTA. It is logical to infer that U.S. investors in Singapore tend to engage in third country investment projects, using Singapore as a springboard for further investments in neighbouring countries. It has to be qualified, however, that the spillover effects can only be realized if conditions in the ASEAN countries are conducive for the investors. Further, under the Integrated Sourcing Initiative (ISI) of the Agreement, which allows Singapore to source out some of its information and communications technology (ICT) and medical components from outside Singapore and still qualifies Singapore for the preferential entry into the U.S. market, there is an incentive for local and foreign firms to locate some of their production facilities in the neighbouring ASEAN countries. The USSFTA will certainly provide greater access for Singapore's exports to the U.S. market as goods originating from Singapore are guaranteed duty-free access with no quantitative restrictions or prohibitions, provided the rules of origin are met. It has been estimated that there would be a tariff saving of US$200 million a year from this agreement, which only accounts for less than 1 per cent of Singapore's GDP and a processing fee saving of S$51 million annually. …