Trading In Singapore - Case Study Example

TRADING IN SINGAPORE INTRODUCTION Over the last few decades, many East Asian countries have achieved rapid growth which is impressive. Singapore is one such country whose economic development is one of the success stories. According to Huff (1994), Singapore is the world’s 18th largest exporter of merchandise with exports three times higher than those of India. Singapore also ranks the 13th in world in exports of commercial services (Huff, 1994). The location of Singapore is of prime importance. Singapore is considered a hub and a port for world trade due to its geographical position. It is surrounded by China and Japan in the north while India lies in the west and in the southeast is the country of Australia. Singapore is also one of the largest and the busiest seaport in the world. Foreign shipments and consignments are processed in matter of hours while boasting as having the fastest customs clearance process globally. Many factors have contributed to the country’s economic success over the years. These include its location in the South Asia having a major shipping route with deep natural harbor as well as air trade route, a strong and stable political system along with exemplary management of the economy. Trading regime of Singapore is liberal that is it follows a free trade system. Singapore was the first country to use the free trade system concept when other nations were imposing high tariffs in trade. The key to trade success that Singapore has created to maintain a healthy relationship with other countries is the services offered by it, the price of the products and goods and finally the quality of the products and goods. These points have helped Singapore’s trade to flourish over the years. This paper will assess the trade of Singapore over the decade and how it has changed for the betterment of the country and helped it towards economic growth. The paper will also take into account the foreign direct investment inflows and outflows in the country as it is linked to the economic trade. IMPORTANCE OF TRADE AND INVESTMENT FOR SINGAPORE Trade (Imports and Exports) and Trading Partners Singapore is highly dependent on its external trade. The strategy devised by the country is to increase the exports while minimizing the barriers to import. The main imports of the country include machinery and equipment, mineral fuels, food commodities, chemical products and consumption products. Its main trading partners are Malaysia, United States, China, Japan, South Korea, Saudi Arabia and recently Indonesia. In contrast, Singapore exports electronic machinery and equipment, pharmaceutical goods, fuels and consumption products to countries such as Hong Kong, China, Australia, Japan, United States, Malaysia and lastly Indonesia. Trade in Goods The trade patterns of Singapore are a reflection of the external environment conditions. In 1999, the total trade as was high as the external conditions improved after the financial crisis of Asia. In 2000, the external trade of Singapore increased to 22.9% but reduced sharply by 9.4% during the recession of 2001 (Liang, 2005). Since 2002, the external trade has been growing positively with 9.6% annually and exceptionally high growth rate in 2004 of 22.5% (Liang, 2005). This has happened due to global increase in demand in electronics, pharmaceuticals and so on. In 2004, the top trading partners of Singapore were Malaysia, United States, Japan, China and Europe. These countries accounted for almost 59% of the total trade of Singapore. Trade in Services The total trade in services of Singapore increased in 2003 to 63% of GDP from 51% of GDP in 1998 (Liang, 2005). The important trading partners in services are developing countries as well as well-developed economies such as US, Europe and Japan. The trading partners of Singapore made up almost three-fourth of the country’s trade in services. Importance of Trade The trade policies of Singapore are established by taking into consideration the country’s dependence on the world’s economy as well as its small domestic market that has limited resources. Thus the trade policy created was driven by the need to tap in the global resources as early as possible during its trade development. For this purpose the country practiced export-driven industrialization policy by cutting trade barriers and clearing the road for foreign investments. As of today, Singapore is positioned as the fifteenth largest international trading country in the world with merchandise trade totaling to S$580 billion in 2004 (Liang, 2005). By plugging into the world network of trade and investments, Singapore began to grow with average growth of 7.3% per annum while the nominal value of its domestic exports (non-oil) has grown by annually 12% (Liang, 2005). According to Singapore Statistics (2009) the country’s trade to GDP ratio is the highest as compared to other nations. The importance of trade for the country can be exemplified by the fact that the nation’s total trade (trade in goods and services) has amounted to almost 360% of GDE (gross domestic exports). This implies that Singapore is a believer of multilateral system of trading because for its survival as an economy, free trade was vital. But recently the impact of globalization and increasing technological progress has had its toll on the trade-dependent country that is facing challenges on its trade fronts both external and domestic. The multilateral trade system adopted by Singapore in order to pursue liberalized trade, the country has entered into various treaties and international groups such as free trade agreements (FTA), regional trade agreements (RTA), ASEAN, APEC, ASEM (Asia Europe Meeting), FEALAC Forum for Asia Latin America Cooperation). Importance of Investment Flows (FDI) Foreign Direct Investment (FDI) has played a crucial role in the success of Singapore’s economy. It is said that for economic globalization, the growth of FDI is a vital element and many governments in the world compete strongly with each other in order to magnetize FDI towards themselves by means of fiscal incentives. In case of Singapore, the long-term FDI in the form of foreign capital has played a pivotal role in the country’s economic growth and development. As the country was export-oriented, the growth of its manufacturing sector that laid the groundwork for state’s transformation was fueled by the foreign investors such as multinational corporations. The economy of Singapore bears itself as the proof of globalization benefits as well as the recipient of the benefits that came from FDI. It is assumed that the Singapore has relied on the foreign investors (MNCs) to help increase its industrialization and growth more than any other country in the world. It is undoubtedly the ability of Singapore’s unique policies that has allowed attracting and preserving FDI for its economic success. Ever since the independence in 1965, massive quantity of FDI brought in by the foreign investors has been the engine of growth for Singapore. In order to stay ahead of the competing developing countries and developed countries for FDI, Singapore had adopted the free open door policy towards the investors even before this concept came into existence. The reason that Singapore remains to this date an attractable and favorable country to invest is a combination of pro-FDI government thinking and encouraging economic environment conditions. The per capita FDI inflows in the country were over US$ 3,700 in 2004 when the population of the country was 4.3 million including the foreign residents and the per capita FDI inflows in the country were US$ 4,600 excluding foreign residents (Park, nd). Singapore is the only country that has the highest per capita inflow of FDI for the past two decades. This can be seen from the table that compares Singapore’s FDI with that of other countries over the past two decades. (Source: Park, nd) As compared to the rest of the world, the FDI has played a more important and crucial role in the investment of Singapore. It is due to this FDI that the development of export-oriented manufacturing sector has hastened that has served as the nation’s engine of growth before the country diversified its economy into financial and other services. The major contributions that FDI has made is to exports, skill creation, establishment of local and regional industries, employment, business growth opportunities and most important the economic growth of Singapore. CHANGES IN LEVEL OF TRADE AND INVESTMENT FLOWS Level of Trade over the Past 10 Years Over the decade, the trades between Singapore and the major trading partners such as Malaysia and Europe have grown rapidly. As seen from the graph for Major Export Markets, 2008, trade with Malaysia has increased over the years. Singapore’s trade with China has also expanded during the decade. (Source: Singapore in Figure, 2009) The graph on the left shows the total trade, exports and imports for the country over the past 10 years. The exports have been gradually increasing over the imports but in the last year that is 2008, imports and exports have almost reached the same level. Although the total trade for the country has continued to increase. Level of Investment over the Past 10 Years The economy of Singapore is one of the largest beneficiaries of foreign direct investment (FDI) in its region. The largest foreign investors in the country were United States, Europe and Japan. This shows the close relationship between both the countries not just in FDI but in trade in goods and services as well. By the end of 2002, Europe had accounted for almost two-fifth of Singapore’s total FDI (Liang, 2005). (Source: Singapore in Figure, 2009) The investment from Asian countries accounted for 23.6% of the FDI while foreign investment from North America was 15.6% and from the Latin America it was 19% (Department of Statistics, 2004). The structure of FDI over the decade has remained relatively unchanged as foreign investors were attracted most to the financial sectors, manufacturing sector and commerce sector. According to the Department of Statistics (2004), the inward FDI was of about S$239 billion in 2002. In regards to the outward foreign investments, the country has made tremendous progress after it launched the regionalization program in 1993. During the decade, the investments of Singapore in the region have increased fourfold from S$6 billion to S$25 billion. Over the years, Singaporean companies operating in the region has spread its wings to other regions and invested in countries such as Middle East, South Asia, Europe and United States. It is expected that by the year 2015, the outward FDI of the country will reach to the level of S$300 billion with S$23 billion as annual returns. The country’s FDI abroad is mostly in the financial and manufacturing sectors in countries such as ASEAN, China, Australia (Department of Statistics, 2004). FACTORS INFLUENCING THE TRADE AND INVESTMENT FLOWS Factors Influencing Trade Patterns Like all the countries in the world, the recent financial crisis also affected the economy of Singapore and thus impacting its trade due to large openness of barriers between trade and international trade dependence. According to an article ‘Country Trading Profile’ (2009), the GDP growth was 7.5% during 2004 to 2007. During 2008 this rate was reduced to 1% which lowered even more in 2009 due to the recession in the world. For the past two decades before the Asian financial crisis, Singapore had shown a consistent steady growth rate. However after the recent economic decline globally, the double-digit growth is over. The country now has to respond to the threats posed by the external and domestic trade factors such as technological progress, emergence of China and India as the strongest economies, political and economical uncertainties and accelerating economic restructuring (Liang, 2005). Factors Influencing Investment Flows Singapore’s required resources were harmonized and promoted by the high growth industries under the activist industrial policy. In accordance with this policy, various policies and instruments were implemented by the country in order to encourage diversified foreign investment. Tax incentives is one the adopted strategies that has been employed by the government over the decades. The corporate tax rate has been reduced to 18% in 2008 as compared to the rate of 40% since 1980s which has been gradually declining. Singapore’s corporate tax rate was considered to be the lowest as compared to other East-Asian countries in 2008. The tax-incentive offered by the government is a comprehensive one that covers almost all areas such as manufacturing, services, trade, regional and international investments and so on. These incentives were introduced as double tax deduction scheme, financial sector incentive scheme, research scheme, integrated industrial capital allowance and so on. Through these schemes, Singapore has been able to attract FDI inflows as well as outflows for the past decade. Tax incentive schemes are not the only factors that have been affecting the huge FDI investment. The other policies included reduction in tariffs; reduce unemployment and other development strategies that led to the attraction of FDI inflows as well as outflows. RECENT ECONOMIC DOWNTURN AND SINGAPORE The global recession has affected the country with full force in the 2008-2009. The GDP growth in the 2003-2007 was 7.3% which greatly reduced to 1.1% in 2008 (Asian Development Outlook, 2009). The net export fall caused the by the recession to be a drag on the country’s GDP growth. The construction investment in the public sector was vital in increasing the domestic demand. Given the fact that Singapore acts as a hub for international trade, the consequences of the economic slowdown has impacted it “far beyond the export-oriented manufacturing sector” (Asian Development Outlook, 2009).The evidence of economic turndown was more visible in the country’s international trade that fell to 11.6% in terms of nominal US dollars. In contrast, the private and public investment grew by 14% and 13% respectively due to rise in construction. Singapore has a greater trade dependence on external demand as compared to other Asian countries over the years. This is evident from the following graph. Even cause of that, the dependence of the country on structure and strategy through external demand has served it well over the decades by transforming Singapore in one of the richest economies in South Asia. (Source: Asian Development Outlook, 2009) GOVERNMENT POLICIES Despite the economic recession globally, the trade and FDI investment of the country has not been badly affected. For this reason, the government is still following its previous policies as they have been successful in upholding economic growth for the country with low inflation and a stable foreign exchange for over 4 decades. The policies that are still continued for the trade and FDI are: Practical and rational macro-economic policies Liberal foreign investment strategies and low trade barriers Price-distorting policies Maintaining close relationships with unions, employers and other governments for industrial progress. As it a small country, Singapore’s trade and economic plans are closely interlinked. It believes that if it pursues the maximum limit of liberalization in multilateral and bilateral facades, a successful global trade system can be achieved. It is actively negotiating on non-agricultural market access and anti-dumping matters with other countries as well as negotiating about trade facilitation. In addition to this, the country is also working with like-minded government members to support the liberalization of trade in different service sectors such as air transport, logistics, computer, telecommunication and maritime transport. FUTURE DEVELOPMENTS In the coming future, Singapore must ensure that its multilateral system is integrated with the rest of the world’s trade system by means of stronger regional and bilateral treaties and links. Keeping in view the present conditions of the global economic system and country’s internal challenges, it is perceived that Singapore will continue to promote the integration of its multilateral trading system with the global grid. Singapore will further negotiations with the regional associations and FTA. The role of Singapore in WTO will continue to be a proactive one in order to keep supporting the free trade regime. The WTO and Doha Round negotiations are on the top priority for the country in international trade regime. Singapore will conclude FTA with countries such as New Zealand, European Free Trade Association, and Australia while discussions are going-on with India, Canada, Jordan, Sri Lanka, Mexico and Panama. CONCLUSION The trade regime of Singapore has so far led the country to enormous success economically which is also linked with the inflows and outflows of foreign investment. The openness of the economy combined with a positive export-oriented strategy, the country is seen to be progressing its way to the top in the South Asia even after the global turndown. Singapore is the regional entrepot trading hub and due to this it has always played an important role in the merchandise trade globally and is now ranked as the top 15 exporters in the world. The trading partners have played a significant role in Singapore’s economy as the country has made itself from the investments and trade with foreign partners. The country is expanding its trade relations to other parts of Asia particularly the Middle East and some other countries of European Union in order to gain advantage of the low trade barriers that have been setup to foster trade in the economic downturn. It is expected that the country’s growth rate will rise to 3.5% in 2010 (Asian Development Outlook, 2009). Singapore acknowledges the importance of the increasing competitive global conditions and in response is adapting policies that can help the country to create globalize, diversified and entrepreneurial economy for itself. These policies are related to the trade regime such as lowering more barriers, taxes and giving more incentives to trading partners. This can be achieved if Singapore can preserve the restructuring and provide a lucrative environment for local and foreign investment and talent to grow and flourish in the country. The rising economic conditions can provide the platform to Singapore to transform itself into a leading global hub for enterprise and trade. Word Count: 2952 REFERENCES Asian Development Outlook, (2009). Retrieved from http://www.adb.org/documents/books/ado/2009/SIN.pdf Country Trading Profiles. Emporiki Bank. (2009). Retrieved from http://www.emporikitrade.com/uk/countries-trading-profiles/singapore/presentation Department of Statistics, Singapore.Yearbook of Statistics 2004. Singapore: Department of Statistics, (2004). Ellingsen, G., Likumahuwa, W. & Nunnenkamp, P. “Outward FDI by Singapore: a different animal.” Transnational Corporations, Vol. 15, No. 2. (2006) Huff, W. The Economic Growth of Singapore: Trade and Development in Twentieth Century. Cambridge University Press. 1994. 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