SINGAPORE began talks to establish a free trade pact with the European Free Trade Area, an association of Iceland, Liechtenstein, Norway and Switzerland that enjoys nearly free access to the European market. Success will secure for Singapore virtually unlimited access to the lucrative EU market. More importantly, it indicates Singapore will eventually secure its own free trade deal with the union.

Analysis

OVER the past year, Singapore has forged free trade agreements with a wide variety of trade partners, much to the consternation of its partners in the Association of Southeast Asian Nations. Its latest endeavor, gaining access to “Fortress Europe” markets, is the most ambitious of all.

Singapore has myriad reasons to push for bilateral trade deals. Its neighbors’ chaotic economies – particularly Indonesia’s endless political morass and Malaysia’s protectionism – steer investors elsewhere, complicating Singapore’s efforts to make money in its own neighborhood. And Singapore has no regional trading peer. Its per capita gross domestic product is about 10 times that of its partners in the Association of Southeast Asian Nations. Security is also an issue; its neighbors could easily gobble up Singapore. But the importance major trading states such as Japan and the United States ascribe to its economic independence grants a high decree of security.

Luckily for Singapore, its need for trade mirrors its attractiveness as a trading partner. Its small size – only 4 million citizens – defuses fears of economic domination. Its transshipment facilities encourage potential partners to use Singapore as a jumping-off point to other states, increasing Singapore’s value to trading partners – and the amount of cash flowing into Singapore’s coffers. Singapore’s lack of an agricultural sector removes the most common obstacle to free trade agreements. These factors make Singapore an ideal friend, especially for developed economies wanting to partner with an entity experienced in both developed and developing markets.

As part of Singapore’s ongoing diversification and expansion strategy, Singapore is reaching towards the other side of the Eurasian continent. But this time its target, the European Union, lacks the willingness of many of Singapore’s current partners.

Negotiating trade agreements with Europe is a tricky business. The European Union is very efficient at keeping out unwanted economic influences using an outer wall of tariffs and quotas. EU treaty law prevents members from independently engaging in trade negotiations, thus denying Singapore a divide-and-conquer approach. The union allows others to fully access its markets only when it is the only means of gaining access to an equally large market (i.e. the United States) or when it does not feel threatened by a vastly weaker economy (i.e. Morocco). Singapore, with a per capita income of $30,000 but a population of 4 million, doesn’t fall into either category.

So Singapore is being a little sneaky.

Its European policy has two aspects. First, Prime Minister Goh Chok Tong toured Central Europe March 19-30, expanding trade in shipbuilding and electronics while setting up mechanisms for technical exchanges. All of the states he visited are first round EU applicants and all are expected to join the union somewhere between 2003 and 2005. While negotiating a free trade deal with Central Europe nearly in the union’s door would be a waste of time, Goh offered his hosts a series of tariff reductions. Those reductions will evaporate when Central Europe joins the EU – unless the union and Singapore pen a deal of their own.

Second, Singapore announced May 4 it had begun talks with the European Free Trade Area – a once powerful grouping that now consists of only Iceland, Liechtenstein, Norway and Switzerland. This seems insignificant – Singapore’s trade with the four totals only $2 billion – but these four states have nearly unfettered access to the European Union’s $8.5 trillion market. Once Singapore seals a deal with EFTA, it will be able to access four of Europe’s backdoors. “Rule of origin” restrictions may hinder some of these links, but Singapore is used to operating in some of the world’s most difficult business environments and has proven deft at juggling American transparency requirements, Australian nationalism, Indian bureaucracy and Indonesian nepotism. Singapore’s vast wealth of managerial and financial expertise should ensure its European operations flourish.

Singapore hopes that once its Central European friends join the union, the combination of their enlightened self interest and its de facto links to Europe through EFTA will incline the union to negotiate a separate agreement with Singapore. When that occurs, Singapore should have bilateral free trade agreements with over 30 countries.

Singapore has staked its future on free trade, and with the likelihood of a new WTO round diminishing, its bilateral agreements have become increasingly important. Once it clinches a deal with the EU, Singapore will have unrestricted access to over three-quarters of the world’s markets – far more than any other state. That access is sure to flood the country with additional trade as more states use Singapore as a jumping-off point for economies the world over. Singapore will reinforce its role as the world’s largest transshipment point and become a target for and source of foreign direct investment. The $10 billion the Economist Intelligence Unit estimates Singapore will attract in direct foreign investment in 2001 should be dwarfed by amounts in years to come.

This makes it the logical focal point for any sort of new cross-regional or global trade deal. Singapore appears to be well aware of this and has attempted to convince some of its bilateral free trade partners to link up with each other into mini-free trade areas. Such FTAs increase Singapore’s economic power, leverage and income. Not bad for a dot dangling at the bottom of Asia.