September 2013 The economic impact ... - European …Trade The economic impact of the EU - Singapore Free Trade Agreement An analysis prepared by the European Commission’s Directorate-General

Trade

The economic impactof the EU - SingaporeFree Trade Agreement

An analysis prepared by the European Commission’s Directorate-General for Trade

September 2013

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The economic impactof the EU - SingaporeFree Trade Agreement

An analysis prepared by the European Commission’s Directorate-General for Trade

1

European Commission's Directorate-General 2013

ACKNOWLEDGMENTS

This report is part of the Chief Economist Notes working

paper series produced by the Directorate-General for

TRADE and was prepared under the overall coordination of

Lucian Cernat, Chief Economist in DG TRADE, and Rupert

Schlegelmilch, Director for Services and Investment,

Intellectual Property and Public Procurement in DG

TRADE.

The main contributors were Henrik Isakson, Georg

Roebling (section 2, 3 and 4) and Stephan Nolte (section

5.1). The economic modelling was carried out by Zornitsa

Kutlina-Dimitrova and Csilla Lakatos, who also drafted

sections 5.2 and 5.3.

The overall report benefited from valuable comments,

inputs and suggestions by colleagues in the European

Union's Delegation in Singapore, the Chief Economist's

statistics team and other units in the DG TRADE.

Chief Economist Note - Special Report

THE ECONOMIC IMPACT OF THE EU – SINGAPORE FREE TRADE AGREEMENT

An analysis prepared by the European Commission's Directorate-General for Trade

Executive Summary

About 90% of future world economic growth is predicted to be generated outside Europe for the foreseeable future. At a time of weak economic growth and essential fiscal consolidation in Europe, it is imperative that the EU actively tap into external sources of growth, i.e. find external demand when internal demand is weak.

The economies of Southeast Asia are expected to grow at between 5.5% and 6% over the coming years and are priority markets for EU exporters. Demand in the region for products 'made in Europe' is underpinned by the increasing purchasing power of a rapidly growing middle class.

With €191 billion of trade in goods in 2012 and €51 billion services in 2011, the Association of South East Asian Nations (ASEAN) is today the EU's third largest trading partner outside Europe, after the US and China, but well ahead of other trade partners like the Mercosur group (€123 billion), India (€98 billion), Canada and South Korea (€89 billion each).

On 16 December 2012, the EU and Singapore announced the conclusion of negotiations on an EU-Singapore Free Trade Agreement (EUSFTA). It is the EU’s first FTA with an ASEAN member. Trade in goods between the EU and Singapore was €52 billion in 2012 and services trade was €28 billion in 2011, making Singapore by far the EU's most important trade and investment partner in Southeast Asia.

The rationale for an EU-Singapore FTA

For Singapore, a deal with the world's largest trading bloc is naturally attractive. Singaporean firms will be given secure access to 500 million consumers in 28 EU Member States. As a result, EU importers and consumers will get better access to goods and services from Singapore, including those produced by European firms established there. In 2012 the EU was Singapore's second largest trading partner (after Malaysia), although latest figures from Singapore suggest that Singapore's trade with China overtook the volume of trade with the EU in the first semester of 2013.

As for the EU, Singapore is by far its largest trading partner in the region, accounting for about a third of EU-ASEAN trade in goods and services, and for more than three-fifths of investment stocks between the two regions. Over 9000 EU companies have set up their regional hub in Singapore. In this sense, the EU, by starting its bilateral ASEAN FTAs with Singapore, supports

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many European exporters.

Singapore already has a track record of negotiating ambitious FTAs. In particular, the 2004 US-Singapore FTA addresses many issues that are also on the EU’s trade agenda. It was reasonable to expect, therefore, that a valuable point of reference for other FTAs could be negotiated with Singapore.

The EUSFTA thus paves the way for comprehensive FTAs with other ASEAN countries, and ultimately an agreement with the entire region. Those projects would be less likely to materialise had the EU failed to secure a good deal with Singapore as the regional trendsetter – just like a bilateral FTA with Singapore preceded ASEAN FTAs for Japan, Australia, China, and Korea. This regional dimension is an important element to bear in mind when assessing the overall outcome of negotiations with Singapore.

The content of the EU-Singapore FTA

At the end of the negotiating process, both sides have offered each other the best treatment made available to other comparable trading partners and have gone beyond that in a number of respects. In particular, under the EUSFTA both sides:

have offered each other much better commitments on services and government procurement than is available under their respective WTO commitments;

have agreed on an advanced regulatory framework for many services sectors; will foster and protect foreign direct investment; will remove many technical barriers to trade, such as duplicative testing requirements for

motor vehicles, electronics or certain green technologies; will eliminate virtually all tariffs – in the case of the EU after a 5-year transition period;

Singapore has bound its zero tariffs already applied on EU imports; will facilitate meat exports based on modern audits of national systems; and have agreed on a high level of protection and enforcement of intellectual property rights

as well as, based on a register of geographical indications (GI), a higher level of GI protection than foreseen in the WTO TRIPs Agreement.

Both sides have also made a special effort to use the EUSFTA as a means to stimulate green growth in Europe and Singapore. To this effect, in addition to the provisions to remove obstacles to trade and investment in certain green technologies, there has been a particular focus on the liberalisation of environmental services as well as on green public tendering. Duties on many environmental goods will also be immediately eliminated.

Moreover, the EUSFTA contains a comprehensive chapter on trade and sustainable development. This chapter aims at ensuring that trade supports environmental protection and social development, in accordance with key international instruments, is not promoted at the expense of the environment or labour rights, and promotes corporate social responsibility ("CSR") and the sustainable management of forests and fisheries. The chapter also sets out how civil society will be involved in its implementation and monitoring.

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The estimated economic effects of the EU-Singapore FTA

Two sets of economic estimates have been produced using a dynamic general equilibrium model tailor-made for trade policy analysis.

The first concerns the direct economic effects of creating an FTA with Singapore. It reflects the removal of all tariffs on goods imports from Singapore in the EU, as well as the removal of the few Singaporean tariff lines left. In addition a symmetric reduction of services non-tariff barriers of 3% is applied in the model.

The second set of results simulates the economic effects of a stable and predictable trade regime stemming from the new FTA compared to the MFN context if Singapore were to raise its tariffs to bound levels (which would have been possible had the FTA not been concluded).

For the direct economic benefits scenario, the modelling predicts that over a 10-year period EU exports to Singapore would rise by some €1.4 billion and Singapore's exports to the EU by some €3.5 billion. The latter figure includes the exports to Europe from the large number of European companies established in Singapore.

Reflecting the large differences in the sizes of the two economies, EU real GDP would grow only negligibly in percentage terms. In absolute terms, there would, however, be a gain of around €550 million. The Singaporean economy on the other hand would exhibit a significantly higher real growth rate of 0.94% corresponding to an increase of €2.7 billion.

The alternative simulations revealed the value of the "insurance effect" offered by the EUSFTA against a hypothetical tariff rise by Singapore to its levels bound in the WTO. In such a hypothetical "worst case" scenario, the EUSFTA would protect EU GDP from a decrease by some €350 million and prevents a loss of €3.7 billion in EU exports to Singapore.

These estimates depend, of course, on several assumptions. Estimating the effects of trade agreements is not an exact science. Trade flows are influenced by many other parameters, besides trade policy. It is, however, encouraging to see that one year after the entry into force of the EU-Korea FTA, EU exports to Korea had increased by 54 %, for goods where tariffs had been eliminated, whereas for goods not liberalised growth was only 20%.

The wider context

Beyond the bilateral economic effects, the EUSFTA also has to be evaluated in light of its importance for EU trade policy in Asia. The EU is currently pursuing an ambitious trade agenda in the region: the EU-Korea FTA has been in operation since 1 July 2011; negotiations for an EU-India FTA are on-going; FTA negotiations with ASEAN members Malaysia, Vietnam and Thailand are under way with the perspective of an FTA with the entire region in the long run; and negotiations on an ambitious FTA with Japan were launched in March 2013. An ambitious FTA with Singapore strengthens the credibility of the EU's trade agenda in Asia by building on the

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positive momentum created by the EU-Korea FTA.

Moreover, the EU's competitors are currently negotiating preferences for their own companies in the contexts of the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership. The EU, by negotiating preferential market access of its own, can protect EU exporters against a loss of competitiveness in many Asian markets resulting from the FTAs concluded by others. The EU also seeks additional commitments from its FTA partners, reflecting specific EU interests.

At a more political level, many voices in Asia welcome and support a growing role for the EU in East Asia. Strengthening ties with the EU is a means for many countries to diversify their commercial and political ties. It is thus a good moment for the EU to strengthen its presence in the region.

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CONTENTS

Executive Summary

Overview of Illustrations

1. Introduction

2. The rationale for an EU-Singapore FTA

3. Overview of EU-Singapore economic and trade relations

3.1 Singapore's economy and trade

3.2 Singapore as a hub for trade and investment between the EU and Southeast Asia

3.2.1 Trade relations

3.2.2 FDI

4. The content of the EU-Singapore FTA

4.1 Trade in Services

4.2 Trade in Goods

4.2.1 Tariffs and rules of origin

4.2.2 Non-tariff barriers

4.2.3 Customs

4.2.4 Barriers to trade for products of animal or plant origin

4.3 Public Procurement

4.4 Protection of Intellectual Property Rights, incl. Geographical Indications

4.5 General trade rules

4.6 Trade and sustainable development

5. The potential economic effects of the EU-Singapore FTA

5.1 Trade and FDI flows and Singapore's earlier FTAs

5.2 Estimated economic effects of the EU-Singapore FTA

5.2.1 Economic modelling

5.2.2 Selected scenarios

5.3 Results

5.3.1 Scenario 1: creating an FTA between the EU and Singapore

5.3.2 Scenario 2: raising Singapore's tariffs to bound levels

6. Conclusions

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Annex 1: Sectoral aggregation and tariffs

Table A1.1: Sectoral mapping: GTAP sectors to model aggregation

Table A1.2: Applied and bound tariffs by sector (%)

Annex 2: Sectoral results

Table A2.1: FTA scenario, changes in value-added and bilateral exports (EU)

Table A2.2: FTA scenario, changes in value-added and bilateral exports (Singapore)

Table A2.3: Scenario 2

Tables

Table 1: Regional trade agreements between Singapore and its partners

Table 2: the EU's key goods trading partners outside Europe

Table 3: The main foreign investors in Singapore

Table 4: The main investors from Asia in the EU

Table 5: Services Sectors fully or largely committed by Singapore

Table 6: Tariff elimination schedule

Table 7: Macroeconomic effects of scenario 2

Figures

Figure 1: The EU's trading partners in goods and services in ASEAN

Figure 2: EU trade in goods with ASEAN / Singapore

Figure 3: EU trade in commercial services with ASEAN / Singapore

Figures 4 and 5: Main items in EU-Singapore trade in goods

Figures 6 and 7: Structure of EU services exports and imports with Singapore

Figures 8 and 9: ASEAN / Singapore investment ties

Figure 10: US goods trade with Singapore before and after the FTA

Figure 11: US services trade with Singapore before and after the FTA

Figure 12: US total trade with Singapore before and after the FTA

Figure 13: Australia's goods trade with Singapore before and after the FTA

Figure 14: Australia's services trade with Singapore before and after the FTA

Figure 15: Australia's total trade with Singapore before and after the FTA

Figure 16: Japan's goods trade with Singapore before and after the FTA

Figure 17: Japan's services trade with Singapore before and after the FTA

Figure 18: Japan's total trade with Singapore before and after the FTA

Figure 19: Korea's goods trade with Singapore before and after the FTA

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Figure 20: Korea's services trade with Singapore before and after the FTA

Figure 21: Korea's total trade with Singapore before and after the FTA

Figure 22: New Zealand's goods trade with Singapore before and after the FTA

Figure 23: New Zealand's services trade with Singapore before and after the FTA

Figure 24: New Zealand's total trade with Singapore before and after the FTA

Figure 25: Macroeconomic effects of scenario 1

Case Studies

Case Study 1: Motor Vehicles

Case Study 2: Avoiding double testing for electrical and electronic products

Case Study 3: Facilitating meat exports

Case Study 4: Public tendering opportunities in the utilities sector

Case Study 5: Geographical Indications

Case Study 6: Enhanced Protection for phonogram producers

Boxes

Box 1: Features of the GCE model

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It is the EU’s first free

trade agreement with

one of the dynamically

growing economies in

Southeast Asia.

1 Ecorys, Trade Sustainability Impact Assessment of the FTA between the EU and ASEAN – Final Report, 19

June 2009.

2 Note that the ASEAN TSIA estimates significantly higher real economic gains than this report. There are several reasons for that, the most important one being that in the TSIA study trade liberalisation have been applied to all ASEAN countries and the EU and not only to EU-Singapore trade. Furthermore, the scenarios developed for the modelling simulations rely on very ambitious assumptions in respect to NTBs reduction in services trade. In addition, the TSIA includes also a cut in trade facilitation costs, which is not included in the scenarios simulated in this report. Another feature of the ASEAN TSIA modelling is the inclusion of the completion of the Doha round in the baseline. Hence, this report and the TSIA should not be compared.

3 Unless otherwise indicated, all figures included in this report are from Eurostat. References to the EU relate to the EU of 27 Member States ("EU 27") as it was prior to Croatia's accession on 1 July 2013.

1. Introduction

On 16 December 2012, EU Trade Commissioner de Gucht and Singapore’s Minister of Trade and Industry Lim announced the conclusion of negotiations for an EU-Singapore Free Trade Agreement (EUSFTA). It is the EU’s first free trade agreement with one of the dynamically growing economies in Southeast Asia and thus the first milestone towards the EU’s strategic

objective of concluding an EU-ASEAN region-to-region agreement. The EU considers bilateral FTAs with individual ASEAN members as intermediate steps, or “stepping stones” towards that long-term goal. Singapore has the most developed economy in that group, and is by far the EU's most important trade and investment partner in the region.

This report offers some analytical insights of the EUSFTA potential economic effects and places it into the context of EU trade relations with Southeast Asia.

After the launch of FTA negotiations with a group of ASEAN countries in 2007, a Trade Sustainability Impact Assessment (TSIA)1 was carried out by external consultants. The TSIA concluded, as its mid-range scenario, that an ambitious EU-ASEAN FTA would deliver important positive impacts – in terms of GDP, income, trade and employment – for both the EU and Singapore. National income effects on the EU side were estimated at €13 billion and for Singapore at €7.5 billion2. These figures were based on trade patterns around 2007. EU-ASEAN trade in goods has in the meantime grown to €181 billion (2012), and trade in services to €51 billion (2011)3.

The present analysis differs from the TSIA in two key respects. First of all, it only seeks to evaluate the bilateral FTA between the EU and Singapore. The TSIA on a 'region-to-region' EU-ASEAN FTA does not offer precise guidance as to the trade and GDP effects to be expected from a bilateral EU-Singapore FTA. Secondly, this "ex post" analysis builds on the actual outcome of negotiations, and does not need to speculate about theoretical outcomes.

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Singapore has for the first

time agreed to sectoral

disciplines to tackle non‐

tariff barriers in key

manufacturing sectors.

4 WTO Secretariat Report, Trade Policy Review of Singapore (WT/TPR/S/267), 5 June 2012, p. 12. It should

be noted that goods just passing through Singapore's harbour or entrepots are not considered as 'originating' in Singapore, and thus cannot claim preferences under the EUSFTA.

This being said, however, estimating the future effects of trade agreements is not an exact science, even if the content of an agreement is known. Apart from the usual problems associated with estimating economic effects of trade liberalisation, discussed in section 5.1, certain aspects in relation to Singapore make this a particularly challenging task:

First, the future development of trade patterns is especially uncertain with respect to a regional hub like Singapore. It is an important entrepot at the junction of key East-West trade routes, linking Europe and East Asia. The WTO estimates that some 45% of Singapore's merchandise exports may be re-exports4. Growth in EU-Singapore trade and investment flows will thus in part not only be determined by factors in the EU and Singapore itself, but hinge on the development of the wider economic relations between the EU and East Asia.

This applies in particular to trade and investment flows between Europe and the ASEAN group. Singapore holds a central position as the origin or destination of a substantial part of these flows. Even where Singapore's port is not directly involved in the flow of goods between other ASEAN countries and the EU, Singapore's services sector may well be involved in the logistics, in providing finance or giving legal advice. Thus, as trade increases between the EU and other parts of Southeast Asia, this will also inevitably affect EU-Singapore trade. In this respect, the FTAs currently under negotiation with several ASEAN members will be particularly relevant. Yet, today it would be speculative to predict the impact of any of these agreements, if and when concluded.

Second, any estimates of future trade patterns are particularly challenging where a free trade agreement contains new commitments entered into for the first time by a trading partner. In respect of such new commitments, there is little in the way of country-specific precedents to base the analysis on. In such cases, the analysis will inevitably have to rely in part on generally established parameters and principles.

Experiences made with similar agreements concluded by the Parties offer some guidance as to the potential effects of comprehensive trade agreements. For the Singaporean side, in section 5.1 we carry out a descriptive analysis of how trade flows between Singapore and its FTA partners have developed after entry into force of the respective agreements.

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5 European Commission, Annual Report on the Implementation of the EU-Korea Free Trade Agreement,

25.2.2013, COM(2013)100 final.

As for past experiences on the European side, the EUSFTA is in many respects broadly comparable to the EU-Korea FTA, which has been in application since July 2011. EU exports to Korea rose during the first year of FTA implementation by 37% overall and by 54% for those products benefitting from immediate full tariff liberalisation compared to 27 % for the same products to the rest of the world5.

These are encouraging pointers. However, the EUSFTA also contains novel commitments for both sides where any analysis of potential effects enters unchartered territory. For example, Singapore has for the first time agreed to sectorial disciplines to tackle non-tariff barriers in key manufacturing sectors (cars, electronics, pharmaceuticals and green technologies), to new regulatory principles in some services sectors, and to facilitate European meat exports. Importantly, Singapore will also introduce a new regime for the protection of EU geographical indications and will protect them to a higher level as required by the WTO's TRIPs agreement.

As for the EU, the EUSFTA is set to be its first FTA to include EU-wide rules on investment protection. Compared to the current situation, where only half of the EU's Member States have bilateral investment treaties with Singapore (which in many cases date back to the 1970s), this new breadth and quality of protection is set to strengthen investment ties between the two parties – but there is little in the way of parameters to gauge the size of that boost.

Third, in contrast to some of its neighbours, Singapore is already a relatively open economy. In particular, Singapore already applies most import duties at zero level, albeit on a voluntary basis. Most conventional studies analysing the impact of a free trade agreement on trade and GDP focus on the effects of tariff liberalisation. Such effects are negligible for EU exporters to Singapore. However, they are not negligible for imports from Singapore as the EU has tariffs that are liberalised in the agreement. This will also be to the benefit of the many EU companies which use their presence in Singapore as a basis for exports back to the EU.

The focus of the analysis is thus much more on the impact from other elements of the "comprehensive" EUSFTA, especially the liberalisation of services and procurement markets, the removal of technical and regulatory barriers, and investment provisions. Moreover, the EU's modern trade agreements contain not only market access commitments, but also regulatory chapters dealing with a range of issues shaping the business environment. Important provisions in these regulatory chapters include cross-cutting rules on competition, regulatory transparency, IPR protection, transparency in public tendering and dispute settlement. Here, the aim is to ensure a level playing field

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EUSFTA is considered a first

building block towards an

eventual EU agreement

encompassing the entire

ASEAN region.

6 See, similarly, the U.S. International Trade Commission, U.S.-Singapore Free Trade Agreement: Potential

Economy-wide and Selected Sectoral Effects, June 2003.

between EU firms, domestic ones, or those from third countries. The economic effects of these regulatory provisions on the FTA are by their nature difficult to quantify.6

These various elements make a quantification of the economic effects of the EUSFTA on both parties particularly challenging and the present analysis can only offer some modest directions.

However, a true assessment of the value of the EUSFTA will not be limited to its effects on bilateral trade, but place it in the wider regional context.

As mentioned above, the EUSFTA is considered a first building block towards an eventual EU agreement encompassing the entire ASEAN region. It is difficult to imagine that countries like Malaysia, Thailand or Vietnam would agree to a comprehensive FTA with the EU if the Union had not managed to secure a deal with the most advanced economy in the region, i.e. Singapore. There is a pattern in trade relations in Southeast

Asia that Singapore moves first to conclude an FTA with a trade partner, and then other countries in the region follow suit. For example, a bilateral FTA with Singapore preceded the respective ASEAN FTAs in the cases of Japan (2002/2008), Australia (2003/2010), China (2005/2009) and Korea (2006/2009). However, the present report looks primarily at the EUSFTA's effects on the bilateral economic relations between the EU and Singapore and cannot account for the "pathfinder" effect of the EUSFTA opening the door to preferential access to other ASEAN

markets.

After the success of the EU-Korea FTA, concluding a comprehensive FTA with Singapore within a reasonable time frame has also strengthened the credibility of the EU's trade agenda in Asia. This is important to bear in mind at a time when the EU's global competitors are increasing their engagement with the region and actively seek commercial preferences for their own businesses (see section 2).

Beyond the trade arena, many voices in Asia welcome and support a growing role for the EU in East Asia as a means for the countries in the region to diversify their commercial and political ties.

Last but not least, the EU’s active free trade agenda, and the positive media coverage this is generating, also offers a valuable counterweight to news coverage in Singapore and Asia about the economic situation in Europe, which has recently been dominated by the Eurozone crisis.

All this makes it fair to assume that concluding the EUSFTA provides the EU with impetus for other ongoing negotiations in the region. However, it is impossible to quantify this and to factor it into the economic modelling of the impact of the EUSFTA on the Parties' mutual economic

The rapidly growing

middle class in Southeast

Asia is likely to continue

to support increasing

demand for European

goods.

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For Singapore,

a deal with the world

largest trading bloc

is naturally attractive.

7 European Commission, Global Europe: Competing in the World, COM(2006)567 final, October 2006.

8 European Commission, Trade, Growth and World Affairs, COM(2010)612 final, November 2010, as well as the Commission contribution to the European Council of 7-8 February 2013 (footnote 7).

9 OECD, Southeast Asian Economic Outlook 2013, November 2012, p. 23; Asian Development Bank, Asian Development Outlook 2013, 2013, p. 4; World Bank, East Asia and Pacific Economic Update, April 2013, p. 13.

10 OECD, precit., p. 26; PWC, Marketmap 2012 Issue 2, p.10.

relations.

Bearing these aspects in mind, this report is structured as follows. First, it seeks to explain the policy context and rationale for concluding the EUSFTA (section 2.). Then, it looks at the existing economic and trade relationship between Singapore and the EU (section 3), before summarising the content of the EUSFTA for key policy areas (section 4). Finally, literature review and economic modelling tools are applied to assess of the main economic impact of the agreement (section 5).

2. The rationale for an EU-Singapore FTA

Trade is an important determinant for achieving economic growth. For the foreseeable future, at least 90% of world economic growth is predicted to be generated outside Europe. At a time of weak economic growth and rigorous fiscal consolidation, the EU needs to actively tap into external sources of growth. External demand is currently considered as Europe's most important source of growth.

It is rational that the quest for external demand growth focuses on those global economies with the highest growth potential. The markets in Southeast Asia play a prominent role in that respect. Already the Commission's 2006 Global Europe communication7 identified the ASEAN countries as key markets for further EU export growth. This finding has more recently been confirmed in subsequent Commission papers8.

After years of solid growth, current predictions foresee continued high growth in the ASEAN region of between 5.5% and 6%9. The rapidly growing middle class in Southeast Asia is likely to continue to support increasing demand for European goods10.

For Singapore, despite the economic crisis in Europe, a deal with the world largest trading bloc is naturally attractive. Singaporean firms will be given secure access to 500 million consumers in 28 countries. EU importers and consumers will get beneficial access to goods and services from Singapore.

However, for trade and investment to fully deliver on their potential contribution to societal

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11 On the benefits of the trade, see the Commission Staff Working Document, Trade as a Driver of Prosperity,

SEC(2010)1260, November 2010, p. 4 et seq.

development11, they must not be unduly hampered by obstacles. Such obstacles, or "trade barriers", can take a variety of forms, ranging from tariffs, to a lack of access to services and procurement markets, to technical regulations. Moreover, trade is also affected by regulatory issues such as the degree to which intellectual property is protected, whether licenses are granted in a transparent and non-discriminatory manner, whether investments are properly protected, or whether competition authorities ensure a level-playing field between domestic and foreign competitors. Naturally, this cuts both ways. The EU will gain from access to the Singaporean market and from opening up itself further to Singapore.

FTAs allow firms from FTA-partners to enter each other’s markets on a preferential basis, providing them with a competitive edge over firms from countries without a FTA with the country they are exporting to. Therefore, when negotiating FTAs with countries having granted preferences to third countries (as is the case with Singapore, see below Table 1), it is a key objective for the EU to reinstate – at least – a level playing field for EU exporters through the negotiation of FTAs of its own. The same holds true for Singapore, which, at present, lacks preferential access to the EU market. It is also evident that, beyond the level playing field, trade negotiators from both sides seek additional benefits in specific areas of interest to each party.

When looking at Southeast Asia’s markets specifically, the competition for preferential access to these markets has recently been intensifying:

The ASEAN group of countries has already negotiated so-called “ASEAN plus 1 FTAs” with six partners (Australia, China, India, Japan, Korea and New Zealand). The depth and breadth of these FTAs varies and fall short of the ambition pursued by the EU in its own FTAs. However, the FTAs do provide some preferential access in a number of markets for exporters from the participating countries, such as for motor vehicles, machinery or chemicals.

Moreover, on 20 November 2012, the ASEAN group has announced its intention to fold its existing six “ASEAN plus 1 FTAs” into a regional FTA, known as the “Regional Economic Comprehensive Partnership” (“RCEP”). This consolidation process is set to yield additional market access, going beyond the current bilateral ties.

The United States is leading negotiations on a regional FTA called the “Transpacific Partnership” (“TPP”). TPP negotiations currently involve 12 countries, including four ASEAN members (Brunei, Malaysia, Singapore and Vietnam) as well as Japan and Australia. Other countries including Colombia, Costa Rica, South Korea, Thailand and the Philippines may join sooner or later.

It remains to be seen how fast, and to what level of ambition, these regional negotiations comprising somewhat heterogeneous participants can be completed. It is also reasonable to

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expect that some results of these negotiations, such as enhanced regulatory governance, transparency and predictability, or the liberalisation of certain economic sectors, will also benefit European companies. To use WTO jargon, certain commitments will be de facto “MFN-ised” (i.e. extended to all trading partners), since transparency and good governance, for example, can hardly be practised on a selective basis. An interesting question will also be to what extent EU companies already established in one or other of the participating countries may also benefit directly from selective preferences agreed under these FTAs.

However, whatever the ultimate ambition of these initiatives, once they have successfully been completed, some of the preferences available to businesses from the participating countries will erode the current market position of EU exporters in Southeast Asia. Staying inactive in terms of seeking preferences will thus in the medium term carry high opportunity costs for Europe’s economic prospects in the region. Therefore, engaging ASEAN countries proactively not only opens new

opportunities for businesses from both sides, but also protects European exporters from losing their relative competitive position.

The EU is therefore pursuing an ambitious trade agenda in Asia. Today, the efforts launched initially with Global Europe are beginning to bear fruit, thus supporting Europe’s competitive position in Asia:

the EU-Korea FTA has been in operation since 1 July 2011. This is the first of a new generation of comprehensive “21st century” FTAs, addressing tariff reduction (worth some €1.6 billion annually to EU exporters), the removal of non-tariff barriers to trade (such as diverging technical standards), the liberalisation of services and procurement markets, the protection of intellectual property including Europe’s valuable geographical indications (GI), competition, and effective dispute settlement. The FTA also offers a new approach to trade and sustainable development, including through the involvement of civil society in implementation and monitoring.

negotiations on an EU-India FTA are at an advanced stage, and there is a prospect of concluding a free trade agreement with the world’s most populous democracy (and growing market of 1.2 billion) in the not too distant future.

after the switch to a bilateral format of negotiating FTAs with individual ASEAN countries, negotiations on the EU-Singapore FTA were completed relatively swiftly, despite the depth and comprehensive nature of the commitments taken. Negotiations are also under way with Malaysia, Vietnam and Thailand, while preparatory talks are on-going with Indonesia and the Philippines.

negotiations on an ambitious FTA with Japan, the world’s fourth largest economy, were launched on 25 March 2013. The Japanese market is huge, but EU companies are

Staying inactive in terms of

seeking preferences will carry

high opportunity costs for

Europe’s economic prospects

in the region.

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12 Source: Singapore Department of Statistics.

13 Talks on investment protection started later than the rest of EUSFTA negotiations, and have not yet been completed. Yet at the time of writing both sides hope to wrap up also that chapter in the near future.

currently struggling with a range of non-tariff barriers which to some extent explain why Japan has one of the lowest import penetration rates of any OECD country. The EU-Japan trade and investment relationship is clearly underperforming and could be greatly enhanced.

Singapore is the EU's largest trading partner in the ASEAN region, accounting for about a third of EU-ASEAN trade in goods and services, and for more than three-fifths of investment ties between the two regions (see section 3.2 below). Singapore is the first port of call for many European businesses seeking to do business in Southeast Asia. Over 900012 EU companies, active in a range of manufacturing (e.g. electronics, petrochemicals or pharmaceuticals) and services (e.g. engineering,

transport, financial, legal, education or R&D) sectors, have established themselves in Singapore and use it as a hub to serve the wider region. The EU, by starting its bilateral ASEAN FTAs with Singapore, aims to support European exporters.

Moreover, the well-established investment ties between the two partners make Singapore a obvious candidate to be among the first countries to negotiate on investment protection with the EU. The EU's 2010 Lisbon Treaty equips the EU with a new, comprehensive competence on investment. Accordingly, in 2012 the EU launched a first package of negotiations on investment protection with

Canada, India and Singapore (negotiations on market access in investment have already been on the EU agenda for some time).13 These aspects are particularly important considering Singapore's role as a regional hub. Many European exporters enter the region from their base in Singapore. Therefore, future market access commitments negotiated by Singapore's neighbours in FTAs with the EU may lose some of their practical value if European operators were deprived of their current entry platform in Singapore.

Secondly, Singapore already has a good track record of negotiating and implementing ambitious trade agreements (see Table 1).

Table 1: Regional trade agreements between Singapore and its partners

Economic partner In force

ASEAN (including Singapore)

ASEAN 1993

Many European exporters

enter the region from their

base in Singapore.

16


China

Agreement on Trade and Goods: 2005

Trade in Services Agreement: 2007

Investment Agreement: 2010

Japan 2008-2009

South Korea 2009

India 2010

Australia, New Zealand*

2010

Singapore

New Zealand 2001

Japan 2002

Australia 2003

EFTA 2003

United-States 2004

India 2005

Hashemite Kingdom of Jordan 2005

South Korea 2006

Brunei, New Zealand, Chile 2006

Panama 2006

Peru 2009

17


14 2012 figures from Singapore's Department of Statistics, http://www.singstat.gov.sg/statistics/latest_data.html,

downloaded on 6 September 2013. For conversion from S$ to Euro in this report, average annual exchange rates of the respective years as published by Eurostat have been used. For numbers where no year is specified we used the average between the first two quarters of 2013.

China 2009

Gulf Cooperation Council 2013

Source: http://www.fta.gov.sg/. *Note that the RTA of Cambodia and Laos entered into force in 2011 and of Indonesia in 2012.

In particular, the 2004 US-Singapore FTA ("USSFTA") is a modern and comprehensive agreement addressing many issues which are also on the EU’s trade agenda. Similarly, with countries like Australia, Singapore has been able to "top up" bilaterally its existing commitments undertaken as part of the regional 'ASEAN plus 1 FTA'.

After the slow progress made in EU-ASEAN 'region-to-region' FTA negotiations, there was thus a solid prospect for swiftly concluding a comprehensive FTA with Singapore, which would live up to the EU's expectations as set out in its 2006 Global Europe communication.

Singapore's readiness to assume comprehensive negotiations was further corroborated during exploratory or "scoping" discussions held between the European Commission and Singapore prior to the official launch of bilateral FTA negotiations. During these talks, Singapore had signalled a readiness to start negotiations from an ambitious base line. This ambitious stance was without doubt facilitated by Singapore's existing competitiveness and the openness of its economy (see section 3.1).

3. Overview of EU-Singapore economic and trade relations

3.1 Singapore's economy and trade

Singapore has a population of some five million with a real GDP of S$305 billion14 (about €174 billion). Adding Singapore to the area where EU businesses can trade freely and securely is comparable to opening up an economy the size of Finland.

Although Singapore is not an OECD member, its economy is a developed one. The standard of living in Singapore is high, in the top ten of the world, and about 40% higher than the average for the EU. Unlike most other high income economies in the world, Singapore continues to record

18


15 The World Economic Forum currently ranks Singapore second in terms of competitiveness ("The Global

Competitiveness Report 2012-13"). The IMD currently ranks Singapore fourth in terms of competitiveness ("The World Competitiveness Scoreboard 2012").

16 Transparency International currently ranks Singapore as the fifth least-corrupt country ("2012 Corruptions Perceptions Index").

17 The estimate for Singapore is from 2009 and based on the OECD and WTO TiVA database.

18 Singapore is not part of the OECD Product Market Regulation (PMR)-database or the World Bank STRI-database.

impressive growth rates.

Over the last 10 years, Singapore's real GDP increased by 80%, implying a remarkably average annual growth rate of almost 7 % in real terms. Singapore consistently ranks high in various international rankings for its competitiveness and for its favourable business climate15. Furthermore, Transparency International regularly ranks Singapore as one of the least corrupt countries in the world16.

Singapore's economy is relatively open to international trade and by some measures it is one of the most open economies in the world. The clearest evidence of this openness can be found in relation to customs duties / tariffs, which are for the most part already applied at zero level in Singapore. Only very few countries in the world have chosen such a liberal regime.

Singapore’s export-led growth model is dependent on this openness as the country needs imports from its neighbours and from other sources for their production. The imported content of the exports from Singapore is 50 %, compared to 13% in the EU17. This means that EU–based firms source 87 % of the inputs from the internal market whereas Singapore firms only source 50 % of their inputs domestically. Thus, Singapore is dependent on imports to participate in global value chains. It should be noted, however, that for Singaporean exports to the EU to benefit from the future EUSFTA preferences, these exports have to comply with the agreed rules of origin, which limit Singapore's flexibility to source foreign inputs.

Moreover, surveys of European businesses established in Singapore carried out by the European Commission report that access to Singapore's market is, in many sectors, unhampered by regulatory or technical barriers (hereinafter referred to as "non-tariff barriers" or "NTBs"), although objective data on this is scarce18. This finding echoes similar conclusions reached by

19


19 The United States Trade Representative only lists a few trade barriers, mostly relating to certain services

sectors, in relation to Singapore in the 2013 National Trade Estimate Report on Foreign Trade Barriers. A similar conclusion is reached by the U.S. International Trade Commission (cf. footnote 3 p. x), as well as the U.S. Congressional Research Service in The U.S.-Singapore Free Trade Agreement, of 15 June 2004.

20 World Bank, Logistics Performance Index 2012.

21 TEU = Twenty-foot Equivalent Unit, i.e. one standard container. Source: World Shipping Council. The EU's most active container port Rotterdam occupies 10th place in the WSC's global ranking with 11.0 million TEUs, followed by Hamburg on 14th place (9.0 m TEUs) and Antwerp on 15th place (8.7 million TEUs).

22 World Bank / IFC, Doing Business 2013, p. 86.

23 UNCTAD, World Investment Report 2013, p. 3.

the United States19 as well as the World Bank.

The effects from Singapore's openness to trade are further magnified by two further and mutually reinforcing aspects. For one thing, Singapore's regulatory and physical infrastructure offers high

logistical efficiency. Singapore ranks first in the World Bank's Logistics Performance Index, partly due to having the most efficient customs procedures in the world20.

Singapore's port – the second largest in the world in terms of container turnover with 30 million TEUs in 201121 – acts as a major point of exit and entry between South East Asia and the rest of the world. All in all, the World Bank ranks Singapore in its annual Doing Business report to be the top performer in the world when it comes to “ease of trading across borders”. 22

Secondly, Singapore's openness to trade is further underpinned by its openness to, and attractiveness for, FDI. Singapore has again in 2102 been the 8th largest recipient of inward investments in the world.23 More recently, Singapore has also become an important outward investor, moving up the global tables to 16th rank last year. Singapore has also made important investments in the EU, notably via its two sovereign wealth funds Temasek and GIC.

3.2 Singapore as a hub for trade and investment between the EU and Southeast Asia

3.2.1 Trade relations

3.2.1.1. EU-ASEAN trade

Already in 2006 the Commission’s Global Europe communication predicted that the ASEAN countries would be an important export market for EU businesses. In 2012, ASEAN was the EU’s third largest trading partner outside Europe, after the US and China (Table 2).

Singapore's port ‐ the

second largest in the

world ‐ acts as a major

point of exit and entry

between Southeast

Asia and the rest of the

world.

20


Table 2: Extra-EU key partners in goods trade (2012)

Rank Partners Billions Euro % of total trade

Total Extra EU27 3 476 100.0 %

1 United States 497 14.3 %

2 China 434 12.5 %

3 ASEAN 181 5.2 %

4 GCC 145 4.2 %

5 Japan 119 3.4 %

6 Brazil 77 2.2 %

7 India 76 2.2 %

8 South Korea 76 2.2 %

Source: Eurostat

Inside the ASEAN group, Singapore is by far the EU's most important trade partner (figure 1):

Figure 1. The EU’s trading partners in goods and services in ASEAN -2011 ( Source: Eurostat)

EU-ASEAN trade in goods has grown by more than 50% since 2007, when negotiations on a region-to-region FTA were first launched, and reached €181 billion in 2012 (figure 2). After a crisis-related dip in 2009, trade has expanded rapidly, especially over the past two years (+32%).

Since 2007, ASEAN’s share of EU imports has remained stable at around 5.5%, whereas the importance of ASEAN markets for EU exports has risen from 4.4% to close to 5% today.

As far as trade in goods is concerned, by far the more important product group traded both ways was machinery and transport equipment, accounting for half of all EU exports to ASEAN, and for just under 40% of EU imports from ASEAN. Inside this group, there are, however, some variations: the bulk of EU imports from the ASEAN countries

Singapore accounts for

about a third of all EU‐

ASEAN trade.

21


relates to office and telecommunications equipment, for which ASEAN countries are the second largest supplier to the EU, after China. In contrast, among EU exports of machinery, transport equipment and other machinery figure more prominently (respectively 15% and 24% among all EU exports from ASEAN).

Other goods much traded between the two regions include various other manufactures, such as chemicals. Food items (including beverages) accounted for 6.4% of EU exports and 7.7% of EU imports, with a higher concentration of beverages in EU exports.

Whereas the EU has a deficit of trade in goods vis-à-vis the ASEAN region, the EU holds a surplus in trade in services. Trade in services between the EU and ASEAN has grown by a third between 2007 and 2011 (the last year for which figures are available), reaching €51 billion in 2011 (figure 3).

The bulk of services trade between the EU and ASEAN focuses on professional and business services on the one hand, and transport services on the other. Reflecting the innovative nature of many EU businesses, the EU is also collecting substantial royalties and license fees from the ASEAN region, whereas EU expenditure of such fees to the ASEAN region is negligible. In contrast, the ASEAN region remains an important exporter of travel services to Europe.

As demonstrated by figures 1, 2 and 3, Singapore occupies a prominent place in EU-ASEAN trade. Although the city state has less than one percent of the entire ASEAN population, Singapore accounts for about a third of all EU-ASEAN trade. This makes Singapore by far the EU’s largest trading partner in ASEAN.

Figure 2 EU trade in goods with Singapore* / ASEAN, 2008-2012

Source for figure 2 and 3: Eurostat

22


Figure 3: EU trade in commercial services with Singapore / ASEAN 2007-2011

3.2.1.2. EU-Singapore trade

Singapore is the ASEAN country with which EU exports of goods and services have increased the most in absolute numbers during the above period, from €59 billion (2008) to €74 billion (2011).

The profile of EU-Singapore trade in goods differs somewhat from that of EU trade with the ASEAN region as a whole. This applies not so much to EU exports, for which Singapore is a broadly representative importer in Southeast Asia. The major difference lies with Singapore's exports to the EU, which tend to concentrate in a number of manufacturing sectors, such as petrochemicals, electronics and pharmaceuticals. The high cost of land and labour in Singapore implies that it is not a major exporter of textiles, shoes, agricultural or fisheries products to the EU, in contrast to certain other ASEAN countries.

Singapore's exports to the EU

are concentrated in a number of

manufacturing sectors, such as

petrochemicals, electronics and

pharmaceuticals.

23


Figures 4 and 5: main items (≥ 4 % of trade flows) in EU-Singapore trade in goods (2012)

Source: Provisional 2012 data on trade in goods by HS chapter and partner. *Items are HS chapters.

When comparing EU-Singapore trade in services (not including GATS mode 3, i.e. services sold by local subsidiaries) with EU-ASEAN relations, Singapore is broadly representative of the region. However, reflecting Singapore's role as a services hub, trade in transport services – especially sea transport – take a more prominent role in in EU-Singapore trade. Singapore’s importance as a financial hub can also be seen in the trade flows.

For EU exports, the collection of royalties and license fees is a key element in its services trade with Singapore, which may well reflect the more developed nature of the IPR regime in the city state. There is also a considerable flow of business services between the two economies.

In 2011, 2.5 % of total EU exports of commercial services were sold to Singapore.

For EU exports, royalties

and license fees are a key

element in its services

trade with Singapore.

24


Singapore attracts

more than 60% of all

EU FDI into the

region.

Figures 6 and 7: Structure of EU services imports and exports with Singapore (2011) not including delivery by commercial presence

Transportation, 36%

Financial services, 12%

Other services, 51%

Source: Eurostat. Note that the category “other services” does not correspond to Eurostat’s definition of other services, as it comprises all services other than those shown in the graph, including travelling and a range of business services, such as computer services, communication services and many other business services.

3.2.2 FDI

European companies also have a well-established record of investing in Southeast Asia. In 2012, the value of accumulated investments from EU companies in the ASEAN region is close to the € 200 billion mark, and

EU imports of services from Singapore

EU exports of services to Singapore

25


Singapore attracts more than 60% of all EU FDI into the region (figure 8).

Figure 8: EU outward investment stocks Singapore/ASEAN 2007-2011

Source: Eurostat, 2011 figures

European companies established in Singapore are active in a wide range of manufacturing and services industries. Available indications suggest that the majority of EU firms established in Singapore use the Southeast Asian countries as a hub to serve the Pacific Rim, and the ASEAN markets in particular. However, there are also some sectors, such as pharmaceuticals and petrochemicals, where European (and other global) firms have invested in Singapore as a basis for exporting to the EU.

The strong economic relationship between Europe and Singapore also makes EU companies the largest group of foreign investors in Singapore. However, as Table 3 shows, whilst the EU's position as the major foreign investor in Singapore remains unchallenged, investors from emerging Asia are catching up fast, albeit from a low base.

The decline in the relative importance of EU investments in Singapore's economy reflects this trend: whilst the EU accounted for a third of the FDI stock in Singapore in 2005, that ratio has gradually shrunk over the following years until it was little more than a quarter of all foreign FDI stock in Singapore.

The EU position as

the major foreign

investor in

Singapore remains

unchallenged.

26


24 Source: Eurostat FATS-data

Table 3: The main foreign investors in Singapore

FDI Source Investment Stock

(€ billion, 2011)

Growth of investment stock 2007-2011

EU 107.3 + 27 %

US 43.1 + 51 %

Japan 29.1 + 11 %

Switzerland 15.9 + 5 %

ASEAN-9 14.2 + 57 %

India 13.2 + 83 %

Hong Kong 13.0 + 241 %

Norway 12.1 + 21 %

Malaysia 10.3 + 64 %

China 8.1 + 536 %

Source: Singapore's Department of Statistics: "Foreign Equity Investment in Singapore 2011", May 2013.

Regarding sales by European affiliates in Singapore, the available data shows that in 2010 EU affiliates sold goods and services at a value of almost €125 billion in Singapore24. This is almost three times the value of all EU exports to Singapore, which underlines the economic importance of commercial presence. Generally speaking, a large proportion of sales by affiliates tends to be in the area of services. This would indicate that the EU's economic relationship with ASEAN contains a larger share of services than what might appear to be the case if one only looks at the trade flows.

In 2010 EU affiliates sold goods

and services at a value of

almost €125 bn in Singapore.

27


Figure 9: Singapore/ASEAN inward investment stocks in the EU 2007-2011

Source: Eurostat, 2011 figures.

For its part, Singapore is the second largest Asian investor in the EU (after Japan; see table 4) but before China and South Korea, and is thus directly supporting thousands of jobs in the EU. Singaporean private and public companies, including Singapore's Sovereign Wealth Fund Temasek, have substantial investment in certain sectors of the European economy, such as port operations and the financial sector. Within the ASEAN region, the vast majority of investments into the EU from the region are managed from Singapore. More than 90 % of ASEAN FDI stocks in the EU originate in Singapore (figure 9). This does not necessarily mean that all of those investments originate in Singapore; Singapore has also developed an advanced financial infrastructure and is thus the unchallenged regional hub for FDI. It is, however, difficult to determine how much of this capital originates in Singapore, or from other sources.

Table 4: The main investors from Asia in the EU (2011)

FDI source Value of Stock of FDI in the EU (€ billion)

Japan 144

Singapore 67

Hong Kong 64

China 15

South Korea 11

India 10

Malaysia 4

Source: Eurostat

28


25 All figures in the paragraph are taken from Department of Statistics, Ministry of Trade and Industry,

Singapore's Investment Abroad 2011, April 2013.

Singapore's outward foreign investments flows in 2011 reached €249 billion, of which some €34 billion were invested in Europe (compared to €45 billion in China, €21 in Hong Kong, €20 billion in Australia, €19 billion in Malaysia and €18 billion in Indonesia) 25. In terms of sectoral coverage, the majority of Singapore's direct investments in the EU have been concentrated in the financial sector, although important inflows were also recorded in other sectors, such as manufacturing, wholesale and retail, and real estate.

4. The content of the EU-Singapore FTA

A comprehensive trade agreement like the EU-Singapore FTA sets out to establish a free trade area between the parties. This decision to create a free trade area is normally underpinned by a number of policy objectives. The prime objective is, of course, to create new opportunities for businesses from both sides. FTA partners therefore negotiate new commitments on market access either through the liberalisation of services, investment and procurement markets, or the removal of tariff or non-tariff (i.e. regulatory or technical) barriers to trade.

An FTA also offers an opportunity to reinstate a level playing field for exporters where preferences have been granted to competitors. From the EU perspective, an FTA with Singapore allows the EU to make up for lost ground on Singapore's market as a result from the FTAs

Singapore has concluded bilaterally or as part of the ASEAN region.

For its part, Singapore was probably interested in matching the high level of market access on goods and services granted by the EU in the EU-Korea FTA and to hedge against a loss of position resulting from other FTAs under negotiation. Presumably, these moves help Singapore to preserve its

attractiveness as a FDI recipient for companies looking to export to Europe under competitive conditions from an Asian production base.

A related objective is to use FTA commitments to bind the existing openness a partner country may currently be granting to exporters on a voluntary or "ad hoc" basis. Such openings are practised on top of commitments entered into at the level of the WTO. Legally, any trade partner is free to revoke such factual voluntary openings. This creates some degree of legal uncertainty for the foreign business community. FTAs, therefore, typically endeavour to lock in a partner country's current openness, as a safeguard against any potential digression in the future.

Moreover, modern FTAs seek to ensure that exporters can operate in a foreign market as much as possible on level playing field compared to their domestic competitors. To this effect, such modern FTAs contain a range of regulatory chapters flanking the market access commitments negotiated.

Singapore is

the second

largest Asian

investor in the

EU.

An FTA with Singapore allows

the EU to make up for lost

ground on Singapore's market as

a result from the FTAs Singapore

has concluded bilaterally or as

part of the ASEAN region.

29


26 Ecorys, op. cit. (footnote 1), Final Report p. 25.

The individual commitments negotiated under the EUSFTA reflect these objectives and can be summarised as set out in the following subsections.

4.1 Trade in Services

The 2009 Trade Sustainability Impact Assessment highlighted the fact that the greatest benefits from an EU-ASEAN FTA, for both the EU and Singapore, would come from the liberalisation of services26. For many sectors, Singapore is the main services hub in Southeast Asia and many EU services providers also operate from Singapore across the region. As a result, Singapore accounts for more than half of all EU-ASEAN trade in commercial services (Figure 3).

Singapore has pursued a strategy of gradually opening many of its services sectors to international competition. Singapore’s 2004 FTA with the United States ("USSFTA") already contains ambitious commitments for many services sectors. Given that the EU also has an important and sophisticated services industry, which sees substantial further business opportunities in Singapore as well as in the wider region, comprehensive liberalisation of many services segments is a key pillar for the EUSFTA. In the EU-Korea FTA the EU committed itself to the liberalisation of a wide range of services sectors on a preferential basis and so Singapore had an interest in obtaining a similar level of access.

The Commission sought at least the same as Singapore's best current commitments and additionally asked for (and in many cases obtained) valuable new commitments in a range of sectors: telecommunications, environmental services, financial services, engineering and architectural services, postal services, maritime transport, and computer services.

Singapore, for its part, sought and obtained commitments from the EU comparable to those granted by the EU in its ambitious and comprehensive FTA with Korea. Such commitments give Singaporean services providers the highest level of access to the EU’s large services market available to any Asian country. When measuring these EU commitments against its current multilateral commitments as set out in the 1994 WTO General Agreement on

Trade in Services (GATS), the EUSFTA substantially expands EU commitments for Singaporean operators in a broad range of business sectors. This includes telecommunications services, financial services, computer services, transport services, environmental services as well as certain business services. In the EUSFTA, the EU has also gone beyond commitments in the EU-Korea FTA in a few areas, such as on postal services.

As for its part, Singapore has entered unqualified commitments (i.e. without sectoral limitations) in the EUSFTA in an unusually large number of services sectors and sub-sectors and this for the three main modes of supply (Table 5). These commitments are designed to ensure that EU services provides get the best possible access to Singapore's services market, and to help them to

Singapore has entered

unqualified commitments

in an unusually large

number of services sectors.

30


operate on a level playing field with domestic competitors.

Table 5: Services sectors fully or largely committed by Singapore (not exhaustive)

Code Sector / Subsector Limitations in modes 1-3

511-18 Construction services None

61111-12

61120

61130

Most retail and wholesale sale of motor vehicles

Maintenance / repair services of motor vehicles

Sales of parts and accessories of motor vehicles

None

621** Commission agents' services (exc. pharmaceuticals medical goods and cosmetics)

None

6310

632**

Retail sales of food and non-alcoholic beverages

Retail sales of non-food except pharmaceuticals etc.

None

63211

62251-52

Retail sales of pharmaceuticals and medical goods

Wholesale trade of these goods

None for modes 2 and 3

641 Hotels / lodging services None

71231-34 Freight transportation of various goods None for modes 2 and 3

71222-23 71240

Rental services of cars / buses / commercial vehicles with operators


721***

748**

Various maritime transport and auxiliary services None, except registration of Singapore-flag ship for international transport

7471-72 Tour agencies and tour guides services None

7511*

Postal services – Express letter services

Postal services – Basic letter services

None, subject to commercial arrangement for mode 1

Idem. Incorporation for mode 3

7512* Courier services, incl. letters above 500 gr None

752** Most Basic and value-added telecommunications services, incl. mobile telephony, data transmission

None; limitations as in 7511* for basic and mobile services

82*** Various services relating to real estate, incl. renting / leasing for non-residential real estate

None, with limitations linked to the development of Sentosa

8310* Most Leasing and rental services None

31


84 Computer services None

851-3 Various research and development services None

861**

86190

Legal services - international and home country law

International Commercial Arbitration Services

None except registration

None

862 Accounting, Auditing and Bookkeeping Services None, except residence or partnership requirement for public accountants

863 Taxation Services None

864 Market research and polling services None

865-6 Management consulting and related services None

8671 Architectural Services None

8672-3 (Integrated) Engineering Services None

8676** Technical testing None, except for mode 1 for automobiles, plants, etc.

871 Advertising Services None

872 Personnel services None

873** Most security services None

874 Building cleaning services None

87905 Translation and Interpreting services None

87909* Convention and exhibition management services None

881-885 Services incidental to most sectors of manufacturing, mining, agriculture or forestry

None

8868** Maintenance / repair of urban transport equipment or of vessels


8929** Franchising Services None

92*** Post-secondary technical and vocational training

Other higher education services except doctors

Adult and other education services

None

93110** Hospital services (non-government owned) None

931*** Medical, Dental, Midwife, Nursing, Physiotherapist and Ambulance services


932 Veterinary services None

940*** Various environmental services like sanitation, None for modes 2 and 3

32


exhaust gas cleaning, waste / refuse management Incorporation - refuse services

9619 Entertainment services None

96311 Library services None

9632 Museum and archiving services Mostly None

964** Sports / recreational services, excl. gambling/betting


As for the financial services sector, it is a key pillar of Singapore's economy, and many European financial institutions have a presence – sometimes quite significant – in Singapore. Some EU banks use Singapore as their regional headquarters, not only for their operations in Southeast Asia, but for all of Asia in some market segments. Yet, compared to other parts of the economy, Singapore's banking market is tightly regulated, especially retail banking. This in part corresponds to the situation in most countries, including the EU, where stringent prudential requirements are applied. This being said, Singapore has undertaken comprehensive commitments in financial services sector in the EUSFTA, thus setting a good benchmark for other countries in the region.

Financial institutions from the EU are active in a range of business activities in Singapore, including wealth management, wholesale and investment banking, insurance and re-insurance, or securities trading. In those sectors, the EU obtained commitments which are at least on a par with what its global competitors obtained. As for Singapore’s retail banking market, which is subject to particularly tight restrictions, the currently licenced EU banks will be able to double, under certain conditions, their number of customer locations. No restrictions apply as to the number of operators allowed in the more important segments of Singapore’s financial services market relating to insurance, wholesale (where an additional location will be granted to EU operators) and merchant banking.

Elsewhere, the EUSFTA prohibits limitations, such as equity caps, to establishment in most non-services sectors, notably manufacturing. From a market access point of view, European manufacturers will remain unhampered, should they wish to set up factories in Singapore and retain full control of their operations.

The sector-specific rules of the EUSFTA are accompanied by disciplines on non-discrimination and transparency so as to create predictability and a level playing field in key sectors. Many of these rules reflect important elements of the EU acquis and advanced disciplines discussed in the WTO. For example, the rules governing trade in telecommunication services for both sides provide detailed provisions on issues such as interconnection, unbundling, co-location, resale, number portability, leased circuits, submarine cables, universal service obligations, as well as competitive safeguards and dispute resolution. Similarly, the rules pertaining to the postal sector contain guarantees for the independence of the regulator and prohibit anti-competitive practices in a sector typically dominated by large incumbents.

33


27 Namely, products covered by the 1996 Ministerial Declaration of Trade in Information Technology Products

(ITA), as amended, and the WTO Pharmaceutical Agreement.

28 Only a handful of tariffs lines for some fisheries and processed agricultural products, which carry hardly any trade, are exempted from liberalisation.

As a novelty for both the EU and Singapore, the EUSFTA also ensures in a cross-cutting manner that licensing requirements are not used to obstruct market entry. This is an important element

for the EU, especially when looking at the regional context. The agreement also sets out detailed procedures aiming at mutually recognising professionals of both sides.

All in all, the services chapter is set to become a new benchmark in services negotiations. It will provide a valuable point of reference for the EU's other negotiations in Asia.

4.2 Trade in Goods

The centrepiece of all free trade agreements is the reduction, if not elimination, of all import duties levied on trade between the parties to an FTA (see 4.2.1). In addition, modern FTAs address a range of technical barriers to trade (4.2.2), including for products of animal or plant origin (4.2.4), all of which can be important obstacles to commerce. Another feature of the EUSFTA relevant to trade in goods are its rules to facilitate trade via more efficient customs procedures (4.2.3).

4.2.1 Tariffs and rules of origin

WTO rules stipulate that in order for a free trade area to qualify for the exemption from the general WTO “most favoured nation” principle, the agreement should eliminate duties and other restrictive regulations of commerce on "substantially all trade between the constituent territories in products originating in such territories" (Article XXIV(8)(a)(i) GATT). This is a benchmark which the EUSFTA easily meets: both parties have agreed to eliminate virtually all tariffs at the latest five years after the entry into force of the FTA. The EU will thus eliminate its tariffs on the basis of similar parameters as those agreed in the EU-Korea FTA.

Today, already more than half of EU imports from Singapore enter the EU free of import duties. This comparatively high figure can be explained by the fact that a good proportion of Singapore’s exports to the EU is concentrated in sectors subject to special sectorial WTO tariff elimination agreements27. Under the EUSFTA, the EU commits itself to eliminate tariffs on three quarters of all imports from Singapore immediately, and on virtually all other goods over a three- or five-year transition period.28

To this effect, goods are classified into four categories: (i) tariffs fully eliminated upon the entry into force of the agreement; (ii) tariffs eliminated after three years; (iii) tariffs eliminated after

The currently licenced

EU banks will be able

to double their

number of customer

locations.

Both parties have agreed

to eliminate virtually all

tariffs at the latest five

years after the entry into

force of the FTA.

34


29 E.g. Singapore’s tariffs on HS Chapter 87 - vehicles and parts - are not bound at all in the WTO.

five years, and (iv) products which are excluded from tariff elimination. Tariffs which are eliminated after a transition period (i.e. categories ii and iii) will be progressively reduced during that period.

Table 6: Tariff elimination schedule

EU Singapore

At entry into force 75% 100%

After three years 85% 100%

After five years 99.99% 100%

Tariff elimination expressed in terms of percentage of trade value for the agreed reference period (2007-2009).

In contrast, the point of departure for Singapore’s tariff liberalisation is a different one. On the one hand, Singapore already autonomously applies zero MFN duties on the vast majority of imports, be they industrial, agricultural or fisheries products. For most products, Singapore has chosen to do so unilaterally, as part of their national development strategy as an open economy. On the other hand, about a third of all tariff lines in Singapore have not been bound at the WTO and for those tariffs which are bound at the WTO, these are normally bound at a significantly higher level than their current level of application. In particular, this applies to many manufacturing sectors of high interest to EU exporters.29 Without the agreement, Singapore could at any moment increase their tariffs applied on those goods to the levels bound multilaterally.

Moreover, under the EUSFTA, Singapore not only fully binds its current level of tariff free access for EU exporters it also eliminates all its remaining tariffs on certain alcoholic beverages, including beer.

Having appropriate rules of origin is part and parcel of any free trade agreement leading to a preferential reduction of tariffs. In today’s global economy, many sectors are characterised by successive steps of production organised in international value chains. As a result, final products are composed of components

and inputs coming from various sources. It is important, therefore, to distinguish those goods which qualify for the preferences agreed in an FTA (because they ‘originate’ in the country in question), from those goods which do not. The rules of origin agreed in an FTA establish the parameters to determine which goods can be considered as “originating”.

The EUSFTA uses rules of

origin which have been

simplified compared to earlier

agreements.

35


30 Developed in the World Forum for Harmonisation of Vehicle Regulation within the United Nations

Economic Commission for Europe (UN ECE).

In the interest of cutting red tape, the EUSFTA uses rules of origin which have been simplified compared to earlier agreements, so as to further facilitate trade. The rules are also in line with the on-going modernisation of the EU's preferential rules of origin and will thus be familiar to European exporters.

With this in mind, the rules of origin in the EUSFTA also take into account the supply patterns of today's economies in two ways:

first of all, the rules strike a prudent balance: on the one hand, they leave companies some degree of flexibility to source some of their parts elsewhere, which is a crucial element to preserve companies’ international competitiveness. On the other hand, the agreed rules of origin establish with sufficient clarity the minimum conditions which have to be met to qualify for preferences under the FTA.

Secondly, the EUSFTA acknowledges the fact that Singapore's economy – and that includes the many EU subsidiaries set up in the region – is well integrated into supply chains across the ASEAN region. The EUSFTA therefore contains a short list of tariff lines for manufactured products for which some degree of cumulation of origin inside the ASEAN region will be allowed. The principles governing this limited cumulation are similar to those applied – on a much wider scale – under the EU's GSP regulation, from which most ASEAN countries benefit. Moreover, once the EU has concluded additional FTAs with other ASEAN countries, a more wide-ranging regional ASEAN cumulation will be allowed between those FTA partners and the EU.

4.2.2 Non-tariff barriers – Technical Barriers to Trade (TBT)

The Chapter on Technical Barriers to Trade (TBT) in the EUSFTA contains cross-cutting rules to address certain technical barriers to trade. These rules are based on the relevant provisions in the WTO TBT Agreement, and go beyond these provisions in some respects. In particular the EUSFTA contains WTO-plus rules on marking and labelling, which are particularly important, since such requirements can in some cases represent almost insurmountable barriers to entry.

Moreover, the EUSFTA contains sectoral disciplines which address a number of non-tariff barriers in several of the key EU export sectors:

(i) According to the rules on motor vehicles, Singapore will recognise current EU standards and testing on cars and car parts. This is based on the assumption that cars which are safe to drive on European streets will not be unsafe on Singaporean ones. Looking beyond Singapore, the text also recognises that the car standards used in Europe30 are the relevant international standards.

36


31 Cars 21 High level Group, Final Report 2012, 6 June 2012, p. 11.

Case Study 1: Motor vehicles

The European automotive industry – vehicle manufacturers, suppliers and aftermarket – is a key sector for the European economy, providing over 12 million jobs and a positive contribution to the trade balance of around €90 billion (in 2011), which is essential for continued European prosperity.31

Searching for new sources of demand, the European motor vehicles industry is now looking with increasing interest to the car markets in Southeast Asia. These are currently dominated by cars produced in the wider region. The EU market share for both passenger cars and commercial vehicles, whilst relatively high in Singapore (+/- 40%), is stated to be small in most other ASEAN countries, usually between 1% and 5%. The combination of a low current market share, high current import barriers (which could be substantially reduced, if not eliminated, by the EU's FTA negotiations with other ASEAN countries) as well as a rapidly growing middle class indicate a high potential for further sales expansion.

Typical barriers to EU exports of cars can be both high tariffs, as they are still today found in many ASEAN countries, as well as technical regulations. The latter either prescribe standards different from the UN ECE regulations used in the EU or, whilst being based on similar standards, do not recognise international type approvals or require additional testing and certification. Meeting these tariff and regulatory requirements can easily double the price of a car made in Europe when sold in Asia.

Under the FTA, Singapore agrees to accept the UNECE Regulations used in the EU and elsewhere, as well as the relevant testing results and type approvals from the EU, with respect to both cars and car parts. Importers of new cars or car parts are thereby relieved of the need to test cars or parts again when they are imported into Singapore. Moreover, during the course of the FTA negotiations Singapore also announced a change in its so-called “green rebate” programme promoting the purchase of environmentally friendly cars. In the past, such a rebate was only available to cars with specific propulsion technologies (electric or hybrid), but did not cover the latest generation of other environmentally friendly vehicles even if these presented a similar, if not better, environmental balance as the subsidised technologies. The revised green rebate programme is now also available to the cleaner combustion engines made in the EU and can bring a cost advantage of up to €12,000 per car, according to industry calculations.

(ii) The sectoral rules on electronics will facilitate trade by removing red tape arising from double testing of certain products. The parties to the EUSFTA have agreed to gradually replace mandatory third party testing with lighter forms of conformity assessment (such as the supplier’s declaration of conformity, i.e. the system prevalent in the EU), to the extent that this is compatible with consumer safety, health and environmental concerns. Singapore will review its list of products still requiring third party testing with a view to

37


The EUSFTA will enhance

transparency in the way

authorities set the prices

of pharmaceuticals.

its progressive reduction.

Case Study 2: Avoiding double testing for electrical and electronic products

Cumbersome testing and certification requirements for electrical and electronic products, such as washing machines or TV sets, can considerably increase the cost of market entry, and thus pose potentially powerful barriers to trade. This applies all the more to comparatively small markets where economies of scale are more difficult to attain.

This has been recognised inside the EU’s internal market and has led the EU to replace mandatory third party testing with suppliers' declaration of conformity for many consumer and industrial products. The EU is today actively promoting the concept of using suppliers' declarations of conformity elsewhere as a means to facilitate trade, both multilaterally in the WTO as well as bilaterally in FTAs. The FTAs with Korea and Singapore are good examples of this approach.

In the EUSFTA, Singapore has agreed to remove a first batch of consumer electronics products from the list of products for which third party certification has so far been mandatory. This first step applies to a number of product groups including certain TV sets, water heaters, and air conditioners. This move is based on the conviction that what is safe for consumers in Europe should generally also be safe for consumers elsewhere.

Singapore will also conduct regular risk assessments for other items remaining on the list of products subject to mandatory third party testing for the time being. These assessments will ascertain whether the continued recourse to mandatory third party testing for those products is still required by public safety concerns. If not, these products would also be subject to a more trade facilitative regulatory regime.

It is estimated that the current cost of certifying compliance with applicable rules in Singapore is in the range of €1,800-3,100 per product, plus an administrative registration fee of S$180 (€110) plus tax. Simulations with a simple partial equilibrium model show that removing third party testing for this first batch of products at the entry into force of the agreement has the potential of increasing bilateral exports by an additional €0.4 million to €1.3 million in the first year of FTA application. This amount can grow considerably once third party testing requirements are removed for additional products.

(iii) The EUSFTA will enhance transparency in the way authorities set the prices of pharmaceuticals. As a result, operators from both sides will be better equipped to understand, and if needed challenge, the authorities’ decisions on pricing and reimbursement.

(iv) As a novelty, the EUSFTA contains rules to facilitate trade and investment in equipment to generate

38


renewable energy. The EUSFTA ensures that suppliers from both parties will get equal treatment and thus prohibits a party from granting preferences (for example via local content rules, a common phenomenon in the region) to its local suppliers. These sectoral rules also promote the international acceptance of technical standards and Singapore will accept without further requirements EU declarations of conformity or test reports for the purpose of placing such equipment on its market. The EU, for its part, will accept suppliers' declarations of conformity under the same terms as from European suppliers.

4.2.3 Customs

As mentioned above, Singapore's port is a major transit point for imports and exports travelling between Europe and East Asia. EU exporters in a number of sectors have also set up distribution centres in Singapore's harbour area from where they serve the wider region. Therefore, both sides share an interest in the efficiency of customs procedures.

To this effect, the FTA chapter on Customs and Trade Facilitation addresses key principles for the simplification, harmonisation, standardisation and modernisation of trade procedures. It seeks to reduce trade transaction costs at the interface between business and customs administrations and will provide a valuable benchmark for similar chapters with other FTA partners in the region.

At the same time, the importance of trade between the EU and Singapore also requires both sides to be vigilant about the safety and security of legitimate trade. The EUSFTA therefore contains initiatives to bolster supply chain security through strengthened cooperation. In particular, the EUSFTA envisages steps towards the mutual recognition of trade partnership programmes such as under the consolidated EU programme for 'Authorised Economic Operators' (AEO).

4.2.4 Non-tariff barriers – Sanitary and Phytosanitary measures (SPS)

The removal of non-tariff barriers to trade is also relevant to raw or processed products of animal origin (e.g. meat and meat products) and of plant origin (e.g. fruits and vegetables). These product groups include food and feed products which are of course particularly sensitive to human, animal and plant life and health. As a result, most jurisdictions in the world, including the EU and Singapore, put laws and procedures in place, i.e. sanitary and phytosanitray (SPS) measures, in a particularly stringent manner.

Whilst this is legitimate, normally in line with relevant WTO rules and based on international standards and science, these rules are also potent barriers to trade. Often SPS measures can amount to a de facto import ban of products which are deemed perfectly safe for consumption

elsewhere. Moreover, in some cases the procedures for approval of countries or products to

demonstrate that imported products are safe can be so lengthy and unnecessarily complicated that the cost of compliance can be prohibitive for individual companies to bear.

39


32 Source:

http://www.ava.gov.sg/FoodSector/ImportExportTransOfFood/AccredOfOverseasMeatEgg/List+of+overseas+meat+and+egg+processing+establishments.htm

To facilitate trade, while respecting the necessary levels of protection of importing countries, the EUSFTA establishes, especially for products of animal origin, that Singapore will update its import approval procedures. Currently, Singapore for most Member States applies a costly and burdensome system, especially for SMEs, of authorising imports on an establishment-by-establishment basis.

In the future, on the basis of its SPS import requirements, Singapore will switch to an evaluation of the performance of the inspection and certification systems put in place by the respective competent authorities of EU Member States. To some extent this reflects Singapore's current approach towards meat exports from a minority of EU Member States.

Case Study 3: Facilitating exports of products of animal origin (e.g. meat) on the basis of evaluations of inspection and certification systems rather than of individual establishments

Under Singapore’s current regime applicable to most EU Member States, each meat exporting establishment has to be inspected and approved individually by Singapore, and for each type of meat product, separately. AVA's resources to carry out the required visits to exporting countries in a timely fashion are also limited. These resource constraints can de facto be a further bottleneck for a quick expansion of EU meat exports from a larger circle of approved establishment.

As a result of these limitations, there is currently only a limited number of EU meat processors authorised individually to sell meat products to Singapore. Especially for European SMEs, the cost of gaining such authorisation has usually been prohibitive. AVA's table of establishments from which meat exports are allowed into Singapore shows that currently only establishments from 13 of the EU's 28 Member States have been authorised to export one or the other product category.32

The EUSFTA foresees an alternative regime, which guarantees a high level of safety in traded agri-food commodities in a resource and trade-friendly manner and respectful of parties rights and obligations under the WTO SPS Agreement. The adopted approach follows international standards on auditing, is non-discriminatory and transparent, and reduces disruptions to trade, whilst maintaining an appropriate level of sanitary protection. Under the EUSFTA, Singapore will switch its approval system to auditing whether the relevant SPS inspection and certification systems in place in EU Member States are sufficient to comply with Singapore’s high SPS level of protection. Once AVA is satisfied that these audits have successfully been completed, all meat

The agreement

will facilitate

exports of meat to

Singapore.

40


The EUSFTA covers new

Singaporean public entities

offering bidding opportunities for

EU companies for an additional

€446 m.

33 Source: European Commission,

http://ec.europa.eu/internal_market/publicprocurement/docs/implementation/20121011-staff-working-document_en.pdf

34 WTO document GPA/108/ADD.5 of 9 January 2013.

exporters from a given Member State are in principle eligible to export meat products to Singapore. The competent authorities of the Member States will have to continue ensuring that exporting establishments comply with all the relevant import requirements of Singapore and Singapore will retain the possibility of performing follow-up audits in EU Member States and import controls at Singapore borders.

4.3 Public Procurement

Both the EU and Singapore are members of the WTO Government Procurement Agreement (GPA). As such, the EU and Singapore have already taken substantial commitments on public tendering.

In the EU, the value of tenders advertised across all Member States (i.e. above the value “thresholds” commonly applied in the EU as well as in the EU's free trade agreements) was estimated at €420 billion in 201033. The Commission estimates Singapore’s procurement market to amount to some €5 billion to €8 billion annually. As far as the (more narrow) coverage under the GPA is concerned, Singapore has notified the WTO that public contracts worth close to €3.5 billion were passed in 201034, the latest year for which GPA figures are available.

Under the EUSFTA, both sides have agreed to substantially expand their commitments. The EU has committed additional entities of central government as well as entities active in certain utilities sectors. This expansion alone is worth €10-12 billion in annual opportunities. The EU is also ready to cover more types of public services contracts compared to its existing commitment vis-à-vis Singapore in the GPA.

Singapore, for its part, has been ready to cover additional procuring entities under the EUSFTA in an unprecedented fashion, including key entities in certain utilities sectors. The Commission estimates that in the EUSFTA, the coverage of Singaporean procurement entities has increased

from about half of relevant entities to about three quarters. In addition, Singapore has significantly expanded the types of public service contracts to be covered by its commitments on transparency and non-discrimination.

41


35 www.gebiz.gov.sg.

Case Study 4: Public tendering opportunities in the utilities sector

Business opportunities available in public tendering are an important market for many exporters. In the utilities sectors such as water and environmental services, postal services, and transport networks, public tendering often represents the primary source of all business opportunities. Many leading utilities suppliers come from the EU.

The EU has already covered substantial tendering opportunities in the WTO GPA. Under the EUSFTA, the EU has expanded coverage – for the first time in a bilateral FTA – to new tendering opportunities in the railway procurement market. Singapore, for its part, is covering – also for the first time – key procuring entities in the utilities sectors, such as the Public Utility Board, the National Environment Agency and the Energy Market Authority.

In addition, it is worth noting that some of the largest public tenders in the utilities sectors are typically passed as 'public-private-partnerships' (PPP) or 'concessions'. Under such contracts, the revenue of the successful tenderer derives at least in part from the right to exploit a certain infrastructure (e.g. a toll bridge) for some time.

In the EUSFTA, both parties have agreed to cover valuable public works concessions as part of their commitments. Once the EU has finalised its current reform of the rules pertaining to public tendering of services concessions, both sides envisage expanding coverage commitments into that area as well.

According to data from Singapore's official website on tendering opportunities ("GeBIZ")35, the newly added Singaporean entities passed contracts worth €446 million in the first seven months of 2013. Among these, one single public concession contract passed by the National Environment Agency accounts for more than a third of that amount (€183 million).

Additionally, the central government entities have allocated €4.3 million worth of public contracts with values falling between the old (GPA-based) and new (EUSFTA-based) procurement thresholds. The lower thresholds agreed in the FTA thus represent additional opportunities for European service and goods suppliers to tap into Singapore's relatively voluminous public purchasing market.

Also EU companies have successfully tendered for public contracts and concessions in the Singapore's utilities sectors. To name some recent examples, various EU companies:

- won a tender worth €770 million for the building of the Singapore Sports Hub, a modern complex including the new National Stadium, a new Indoor Stadium, an Aquatic Centre as well as a multi-purpose arena. This project is considered to be the world's largest

42


sports infrastructure PPP;

- supplied a new air traffic control system worth several hundred million euros to Singapore's civil aviation authorities;

- won public contracts from Singapore's National Environment Agency for cleaning most of Singapore public roads and expressways;

- won a public contract to provide refuse collection and recycling services to more than one million residents of Singapore; and

- supplied track equipment and passenger trains to Singapore's subway system.

4.4 Protection of Intellectual Property, including Geographical Indications

Both the EU and Singapore rely on innovation as a driving force to support their economies and social systems. Both parties have already established modern systems for the protection of intellectual property rights in their territories. The EUSFTA consolidates this high level of protection and sets out basic rules on enforcement, including at the border. The EUSFTA does not, however, contain rules on criminal enforcement.

The EUSFTA provides for 70 years of copyright protection; a single equitable remuneration for producers of phonograms for broadcasting by wireless means and public performance; provisions on the protection of test data submitted to obtain an administrative marketing approval to put both the pharmaceutical and agrochemical data on the market and on border measures provision with an extended scope.

Both parties have also agreed to maintain or set up a register for the protection of geographical indications ("GI", such as Champagne or Parma ham). Such a register provides more transparency and certainty as to which GI are protected in a given jurisdiction and can thus alleviate the costs for GI right holders.

The EUSFTA also establishes that such GI will enjoy a high level of protection, going in part beyond the rules contained in the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). In particular, agri-food items in Singapore will enjoy the same level of protection as wines and spirits, a policy change which also corresponds to a key objective for the EU in talks at the WTO level.

In view of the agreed provisions, Singapore has already carried a public consultation on the first batch of 196 GI terms which the EU has put forward for initial protection in Singapore. However, the future GI register in Singapore, once up and running, will be open for additional GI

Agri‐food items in Singapore

will enjoy the same level of

protection as wines and spirits,

a policy change considered key

objective for the EU in talks at

the WTO level.

Over time, consumers will

increasingly recognise the GI

label as a sign of quality, and

so might be willing to pay

premium prices.

43


36 All figures in this Case Study are cited from AND-International / DG Agriculture, Value of Production of

agricultural products and foodstuffs, wines, aromatised wines and spirits protected by a geographical indication, Final Report, October 2012, available at: http://ec.europa.eu/agriculture/external-studies/value-gi_en.htm.

applications as well.

Case Study 5: Geographical Indications

The EU has a long history of protecting its geographical indications (GI), such as Bordeaux wines, Parma ham or Bayerisches Bier. Consumers in third countries are also beginning to be aware of the quality of many European GIs and are increasingly ready to pay a premium price for such goods of higher quality.

As a result, GIs play an increasingly prominent role in EU trade: globally, it is estimated that in 2010, some €11.5 billion worth of GIs were sold outside the EU. Half of those exports were wines, followed by spirits and foodstuff GIs (such as cheeses, meat products, or primary products such as oranges or olives).

According to a recent study36, Singapore accounted for EU GI sales in 2010 of some €830 million in 2010, making it the EU's number two global GI export market together with Switzerland, after the US. Even though it is fair to assume that a part of EU GI exports to Singapore are subsequently re-exported to other parts of Asia, the affluence of the consumer base in Singapore makes it a key market for certain GI products.

Singapore has so far only protected a small number of European GI as trademarks, but has not offered GI protection as such. Under the EUSFTA, Singapore agrees to set up a new register for GI protection, and to protect registered GI to a higher level. The EU has put forward a list of 196 GIs which it would like to see registered in Singapore under this new register. Those GI terms accepted for registration in Singapore would thus gain exclusive protection in Singapore’s market. For example, certain distinctive European-named cheese, meat or beer products of non-European origin will no longer be sold in Singapore unless co-existence has been exceptionally granted.

The EUSFTA will reinforce Singapore's position as a key export destination for European GIs. Here, the higher substantive level of protection for some GIs will play a role, as will the facilitation of enforcement with the new GI register. Moreover, customs enforcement at the border will be extended to GIs, thus allowing a more efficient crackdown on counterfeit trade. This is particularly important for a transport hub like Singapore. As a result, GI exports to Singapore are set to flourish further.

Moreover, consumers will over time be increasingly able to recognise the GI label as a sign of quality and thus possibly be willing to pay premium prices. Last but not least, the exclusive

44


protection to be granted in the future by Singapore to certain GIs, such as Parma ham, will also considerably strengthen the market position of certain EU products and especially of certain meat and dairy products.

Case Study 6: Enhanced protection for Phonogram producers

The EU-Singapore FTA will also bring benefits to the music sector because it includes provisions on sound recording performance rights which are already familiar in the EU. According to industry estimates, these rights generated close to €1.4 billion in royalties globally in 2012 and are an increasingly important source of financing for music production. The performance rights included in the FTA will enable music producers to obtain broadcasting and performance royalties in Singapore and will encourage investment in the Singapore market and artists. They will also help Singapore producers to compete with neighbouring Malaysia and other countries that have these rights.

Singapore's Copyright Act currently does not provide for a provision equivalent to Article 15 of 1996 WIPO Performances and Phonograms Treaty (WPPT). This provision establishes the right of performers and phonogram producers to remuneration for broadcasting and communication to the public. This is a right that many countries in the world, including all EU countries, grant.

Within two years from the entry into force of the Agreement, Singapore will introduce into its legal system a provision granting producers of phonograms a right to be remunerated, for example, (a) when their sound recording is being broadcasted by radio including the playing of the broadcast in a public place; (b) for playing of a sound recording in a public place such as a shopping mall; or (c) when a sound recording played in a radio broadcast is played over the internet.

4.5 General trade rules

The EUSFTA also contains a number of cross-cutting chapters which are intended to provide operators from both parties with a regulatory framework conducive to trade, and to ensure that

companies benefit from the full range of commitments undertaken in the EUSFTA.

In particular, both sides are committed to a high level of transparency in rule making. They agree to give operators from the other side the possibility as a matter of principle to state their views on draft rules of general application before these are adopted.

Trade can only flourish to the benefit of both parties if there is a level playing field for operators from both sides. To this effect, the EUSFTA also contains a basic set of rules on competition,

The agreement prohibits the

most distortive forms of subsidies

on goods and services, and

makes this prohibition

enforceable in bilateral

arbitration.

45


including on anti-trust matters and state aid. In particular, the agreement prohibits the most distortive forms of subsidies on goods and services and makes this prohibition enforceable in bilateral arbitration. More generally, the effective enforcement of commitments undertaken is of interest to both sides. Therefore, they have agreed on a framework for the settling of any dispute which may arise in the implementation of the EUSFTA in an effective, expeditious but also transparent manner. Rulings from the bilateral arbitration panel can be obtained faster than under the relevant WTO Dispute Settlement system. In addition, the EUSFTA offers an alternative avenue to discuss for example different interpretations on technical barriers via the means of a mediator.

4.6 Trade and Sustainable Development

Like the EU-Korea FTA, the EUSFTA contains a comprehensive chapter on trade and sustainable development. The thrust of that chapter is essentially four-fold. For one thing, it prescribes binding commitments to domestic levels of environmental and labour protection consistent with core international standards and agreements and to refrain from "race-to-the-bottom" practices as regards labour and environmental laws to attract trade or investment.

Second, it sets disciplines aiming at enhancing the contribution of trade and investment to sustainable development, including issues related to corporate social responsibility ("CSR"), sustainability assurance schemes, and the conservation and sustainable management of natural resources. The parties

undertake for example to address trade in products stemming from illegal fishing and from illegal logging – issues which are particularly relevant in the regional context.

Moreover, the chapter on trade and sustainable development establishes how civil society will be involved in its implementation and monitoring. To this effect, the parties have agreed to establish channels for inclusive consultations and dialogue with independent stakeholders representing a range of interests, including in particular employers, workers, environmental interests and business groups. Obligations in this regard are taken both individually by each Party (through the use of domestic mechanisms such as advisory groups) and jointly (through public sessions of the joint Board on Trade and Sustainable Development). Stakeholders may also submit views or recommendations to the parties on their own initiative.

Finally, in order to ensure an appropriate and effective system to deal with matters arising under the chapter on trade and sustainable development, that chapter foresees a specific track for settling any divergences on its implementation. This dedicated mechanism provides for both consultations and the possibility to unilaterally trigger a third-party independent arbitration system, coupled with a high degree of transparency to ensure public accountability.

Refrain from "race‐to‐the‐bottom"

practices as regards labour and

environmental laws to attract trade

and investment.

46


5. The potential economic effects of the EU-Singapore FTA

The development of trade patterns depends on the evolution of a large number of variables. To mention only a few, these variables include the effects of liberalisation under a free trade agreement, but also (i) economic growth in the two partners as well as in third countries; (ii) structural changes; (iii) changes in consumer preferences; (iv) currency fluctuations; (v) changes in freight costs; (vi) developments in the financial sector; as well as (vi) the market access negotiated by global competitors, etc. It is quite difficult to distinguish the effects of trade policy from other changes occurring. Bearing these limitations in mind, this section nonetheless sets out to offer some pointers as to possible impact of the EU-Singapore FTA on trade between the two parties. To this effect, section 5.1 first of all looks at some empirical analysis of the development of trade flows following the application of the FTAs concluded between Singapore and other key trading partners. The section also looks at the main findings of the academic literature on the effects of Singapore's FTAs. Section 5.2 then looks at the possible effects of the EUSFTA and quantifies two types of economic benefits. The first set of results estimates the direct benefits of the tariff liberalization brought about by the EUSFTA. The second set of estimates qualifies a hypothetical "worst case" scenario of Singapore raising its tariffs to the levels bound at the WTO. By binding tariffs at their current rates, the EUSFTA offers protection against such a scenario.

5.1 Singapore’s earlier FTAs and their potential effects

As a first proxy to the possible effects of the EUSFTA, this section looks at the evolution of the trade flows of goods and services between Singapore and five of its main FTA-partners before and after entry into force of the FTA.

In doing so, no statement is intended about the extent to which any increase or decrease in these flows can be attributed to an FTA, for the reasons mentioned at the beginning of this chapter. Nonetheless, this survey provides an idea of what happened when Singapore's previous FTAs entered into force.

The five FTAs considered in this context are the ones between Singapore and the US, Australia, Japan, Korea and New Zealand, which have entered into force between 2001 and 2006. They are all advanced economies at a level comparable to the EU (although they may differ in size). The analysis looks at the developments pre and post entry into force of each of those FTAs. Where possible, these developments are then also linked to quantitative research results.

5.1.1 United States

Figures 10-12 show the development of trade in goods and services between the US and Singapore and relate them to overall US trade. Here and in the following sub-chapters, trade flows are normalized to an index of 100 in the year of entry into force of the FTA, in the case of the USSFTA 2004.

47


Figure 10: US goods trade with Singapore before and after the FTA

Source: OECD (2013a), own calculations.

Figure 11: US services trade with Singapore before and after the FTA

Source: OECD (2013b), own calculations.

48


37 Weintraub, Sidney. (2004) Lessons from the Chile and Singapore Free Trade Agreements. In Free Trade

Agreements: US Strategies and Priorities, ed. J.J. Schott. Washington: Institute for International Economics.

38 U.S. International Trade Commission, U.S.-Singapore Free Trade Agreement: Potential Economy-wide and Selected Sectoral Effects, June 2003.

Figure 12: US total trade with Singapore before and after the FTA

Source: OECD (2013a, 2013b), own calculations.

The graphs shows that while US trade in goods with Singapore evolved less dynamic than overall trade, trade in services evolved slightly more dynamic. For total trade, the evolution is dominated by the less dynamic evolution in goods trade. However, the US could in both goods and services improve its already positive trade balance with Singapore.

At the time of signature, the agreement was considered by observers to be rather comprehensive in scope compared to other FTAs. A major feature of the FTA with Singapore was seen as setting a template for future FTAs in East Asia, as it covered issues such as services trade, public procurement, IPR and investment protection as well as social and environmental

issues. It was also highlighted that the US did not have to change its existing legislation. In economic terms, tariffs were regarded as subordinate because they were already low to begin with. However, their reduction or elimination will be a substantial source of welfare gains in the US’s future FTAs in the region37.

Prior to entry into force of the agreement, the US International Trade Commission38 conducted an analysis of its potential effects. The studies surveyed in the report find rather small impacts. This

While US trade in goods with

Singapore evolved less

dynamic than overall trade,

trade in services evolved

slightly more dynamic.

49


39 Nanto, D. K. (2010). The U.S.-Singapore Free Trade Agreement: Effects after five years (RL34315).

Washington, DC: Congressional Research Service.

40 Note that figures 10-12 show that this surge was not exceptional given an overall surge in world trade.

41 Heong, C. Y., & Mun, C. W. (2011). A Review of the US-Singapore Free Trade Agreement. In W. M. Chia & H. Y. Sng (eds.), “Crisis Management & Public Policy: Singapore's Approach to Economic Resilience”. Singapore: World Scientific Publishing Co. Pte. Ltd.

42 Toh Mun Heng & Khine Thet Suu (2009) Impact of Selected Bilateral FTAs on Singapore's Exports & Imports. Paper submitted to the SER2009 Conference.

43 The isolated effect of the FTA was complemented in their regression by an effect that the FTA had on price and income elasticities of import demand.

44 Parinduri, R.A and Thangavelu, S.M., (2013). “Trade Liberalization, FTAs and the Value of Firms: Stock Market Evidence from Singapore.” Journal of International Trade and Economic Development 22(6), 924-941.

is partly due to the effect that many aspects with potential gains could not be taken into account in the analysis due to lack of data, but also because Singapore's economy is rather small compared to that of the US.

Notwithstanding the consensus being that the economic effects were rather small, the studies’ findings in terms of economic benefits are quite diverse, ranging from less than 0.01% of GDP to 0.19% of GDP for the US. Using a CGE analysis, the USITC study produces its own estimates of economic effects.

Liberalising tariffs on goods only would increase exports of the US to Singapore by 0.5-1.1% and imports from Singapore by 3.8-10.5%. This asymmetric effect can be expected since Singapore had very low or zero tariffs applied on goods already before the FTA. The impact on US GDP is negligible. Five years after the FTA entered into force, the US Congressional Research Service39 concluded that the FTA led to a surge in trade with Singapore after the USSFTA entered into force.40 The study conceded, however, that despite this increase, the market share of US exports in Singapore had declined. Heong and Mun (2011)41 make similar observations, for trade in goods, however, their study takes a broader view and looks at, among others, services, as well. Contrary to the observations in figure 11, Heong and Mun (2011) find that Singapore’s services trade deficit with the US declined over the observed period, which is likely the result of their period of analysis (2001-2008) being different from the one used here (2004-2011).

A paper by Toh and Khine (2009) 42 econometrically analyses the effect of several of Singapore's FTAs. Looking at a time series of quarterly trade data, they find that the isolated effect of the FTA on goods trade was indeed positive. US exports to Singapore in 2006 were found to be US$76 million higher than they would have been in absence of an FTA.43 US imports from Singapore were even found to have increased by US$525 million. These numbers correspond to 0.3% and 3% of bilateral goods trade recorded by OECD (2013a), respectively.

A recent study by Parinduri and Thangavelu (2013)44 analysed time series data on stock prices of 144 firms listed on the Singapore Exchange. They find positive and significant effects of

50


The US Congressional Research

Service concluded that the

USSFTA led to a surge in trade

with Singapore.

45 Two of the positive coefficients are significant at the 5% level and one is significant at the 10% level.

concluding the USSFTA for three out of six sectors into which they group the firms in their sample.45 The value of firms is found to have increased by up to 11%.

5.1.2 Australia

The Australia-Singapore FTA entered into force in 2003. Whereas it is hard to compare provisions on services and other regulatory issues, one distinctive feature of that agreement is that tariff eliminations were not based on positive or negative lists of goods, but applied immediately and universally.

Figures 13-15 show the development of trade in goods and services between Australia and Singapore and relate them to Australia's overall trade. Bilateral services trade has grown stronger than overall services trade after the FTA entered into force.

Figure 13: Australia's goods trade with Singapore before and after the FTA


51


Figure 14: Australia's services trade with Singapore before and after the FTA


Figure 15: Australia's total trade with Singapore before and after the FTA


52


The picture is, however, more mixed when looking at trade in goods. Exports to Singapore had shown a less dynamic growth than Australia’s overall exports, whereas imports of goods from Singapore grew particularly strongly. The pronounced uptake in goods imports from Singapore coincides with the entry into-force of the FTA. Before that, their development was much in line with overall goods trade. This latter fact is also the one development standing out in the aggregate development.

Australia was among the group of countries surveyed in Toh’s and Khine’s 2009 paper. They estimate an effect of the FTA on Australia’s exports of goods to Singapore of 5.7%, whereas imports are estimated to have increased by 18%.

5.1.3 Japan

Singapore's FTA with Japan came into force 30th November 2002. Figures 16-18 show the evolution of Japan’s trade with Singapore for goods, services and on aggregate, respectively. Bilateral trade in goods, while generally following closely the evolution of Japan’s overall foreign trade in goods, has developed slightly less dynamic than the latter. In the last three to four years, this trend seems to have intensified. However, the trend itself is already visible in the data before 2002, when the FTA entered into force.

Figure 16: Japan's goods trade with Singapore before and after the FTA


With the FTA, Australia’s

exports of goods to

Singapore increased by

5.7%, whereas imports

are increased by 18%.

53


Figure 17: Japan's services trade with Singapore before and after the FTA


Figure 18: Japan's total trade with Singapore before and after the FTA


Services trade, on the other hand, while relatively on the decline prior to 2002, increased strongly

54


46 Hertel, T. W., T. Walmsley and K. Itakura (2001), ‘Dynamic Effects of “New Age” Free Trade Agreement

Between Japan and Singapore’ (mimeo, Centre for Global Trade Analysis, Purdue University, West Lafayette).

47 Being the only ones for which estimates were available at that time.

48 Since a large part of the results is due to the assumed multilateral component of this FTA, one cannot make the assumption that bilateral trade should have been affected stronger than total trade.

49 Lee, H. , ‘General Equilibrium Evaluation of Japan-Singapore Free Trade Agreement’, ICSEAD, Working Paper Series 2001-23, August. Although the author uses the same source for services protection data as Hertel et al , he interprets it quite differently. The former study simulated a reduction in construction and business services only, while Lee (2001) simulates a reduction of service NTB for construction and other services. Looking at their sectoral aggregation, the difference seems to be the utilities sector, which in Lee’s study is part of ‘other services’ and liberalized together with these.

50 Lee also models an alternative FTA scenario in which he assumes the increased competition brings about an increase in total factor productivity of 0.1% for both partners. That scenario has a much stronger GDP effect, 1.4% for Japan and 1.8% for Singapore.

after entry into force. In particular, service exports from Japan to Singapore increased. This trend is so pronounced that it leads to an overall stronger growth of Japanese exports to Singapore than that of Japanese exports in general. Aggregate imports from Singapore show a weaker development than total imports.

In 2001, Hertel et al. 46 simulated the effects of the FTA with the GTAP model. They used state of the art modelling techniques in their simulations by reducing trade costs related to customs procedures, customs-related delays, and issues of security and diverging standards in e-commerce. Following the philosophy of such trade barriers having multilateral effects, they are removed for all Singapore’s and Japan’s

trading partners, not only bilaterally.

Furthermore, they reduce trade barriers in two services sectors, business services and construction47 bilaterally. They estimate an increase in real GDP by 2020 of 1.67% in Singapore and 0.2% in Japan. The study does not present effects on overall bilateral trade. Overall exports of Japan to all countries are simulated to increase by 1.93% and imports by 1.82%. For Singapore, these figures are 1.0% and 0.64%, respectively.48

Another CGE based analysis has been published by Lee (2001).49 Unlike Hertel et al. (2001), Lee interprets reduction in customs related NTB as applied bilateral. The order of magnitude is similar, though there are differences which may impact the results and compromise the comparability of the two studies. Real GDP in 2020 is estimated to increase by 0.01% for Japan and by 0.08% for Singapore. Japan’s total exports increase by 0.95%, imports by 0.34%. For Singapore these figures are 0.23% and 0.25%.50

Toh and Khine (2009) (estimate from 2004) suggest that the Singapore FTA has increased Japan’s exports of goods to Singapore by US$ 204 million, corresponding to 1.1% of observed exports.

Recent estimates suggest

that in 2004 Japan’s exports

to Singapore increased by

$204 million after the FTA

entry into force.

55


5.1.4 Korea

The FTA between Singapore and Korea came into force on 2nd March 2006. As can be seen in Figure 19, Korea's exports to Singapore increased more significantly than its total exports of goods after implementation of the FTA, whereas the development of imports was more in line with overall imports. However, Korean imports from Singapore have been noticeably less affected by the drop in international trade in 2009.

Figure 19: Korea's goods trade with Singapore before and after the FTA

Source for figure 19 and 20: OECD (2013a), own calculations.

Figure 20: Korea's services trade with Singapore before and after the FTA

56


51 Cheong, I., Hansung, K. I. M.,& Jungran, C. H. O. (2010). Business Use of FTAs in Korea. RIETI

Discussion Paper 10-E-38. The Research Institute of Economy, Trade and Industry.

Figure 21: Korea's total trade with Singapore before and after the FTA


Korean exports of services to Singapore have also grown much stronger than total exports. However, the time series of available data covers too short a period before 2006 in order to reveal whether this trend coincides with the entry into force of the agreement. Bilateral imports of services closely follow movements of overall services imports of Korea, although their growth is slightly weaker. On aggregate, Figure 21 shows that in particular

Korean exports increased after the FTA entered into force. The overall trade balance of Korea with Singapore is dominated by the positive trade balance in goods which widened considerably since 2006.

For the Korea-Singapore FTA, no robust quantitative analyses are available in English, neither ex-post nor ex-ante. Cheong et al. (2010)51 perform a descriptive analysis of trade data similar to the one conducted above. It shows that Korea’s annual growth rate of bilateral trade with Singapore was slightly (0.08%) higher after than before the FTA, but 47% higher than growth of total trade with the rest of the world, a finding similar in magnitude with the evolution depicted in figures 19-21above. At the same time, Cheong et al. (2010) found that other Korean FTAs which are surveyed in the paper mostly achieve higher scores for both indicators. They also report that preference utilization rates of Korean imports for Singapore are comparatively low, about 30%. They attribute this to the hub nature of Singaporean manufacturing, which in many cases may lean to imports not complying with rules of origin.

Korea’s annual growth rate of

bilateral trade with Singapore was

slightly (0.08%) higher after than

before the FTA, but 47% higher than

growth of total trade with the rest

of the world.

57


5.1.5 New Zealand

New Zealand was the first industrialised country to sign an FTA with Singapore. It entered into force in 2001. Like Australia two years later, New Zealand did not exclude sensitive goods from tariff liberalisation.

Figure 22: New Zealand's goods trade with Singapore before and after the FTA


Figure 23: New Zealand's services trade with Singapore before and after the FTA

Source: OECD (2013a), own calculations

58


Figure 24: New Zealand's total trade with Singapore before and after the FTA

Source: OECD (2013a, 2013b), UNStats (2013), own calculations.

Figures 22-24 show the development of New Zealand’s trade. Trade in goods with Singapore shows a much more dynamic development than total goods trade. However, volumes did not take off until a few years after entry into force. In particular, imports have increased if compared to those from other partners.

The picture is similar for services trade and hence for aggregate trade showing a big increase in total trade (both exports and imports) in the period following the FTA entry into force.

Toh and Khine’s (2009) result where it comes to goods imports are different from the ones obtained here. For New Zealand’s exports, they too found a positive contribution of the Singapore FTA. Other quantitative estimates for this FTA are not available.

5.1.6 Summary

With respect to quantitative effects, the presented literature review indicates that the ex-ante studies available find positive but small effects on Singapore and its partners from concluding an FTA. Furthermore, econometric ex-post analyses of the various FTAs signed by Singapore found positive effects as well.

In addition, more qualitative studies, in particular those for the larger economies US and Japan, point out that apart from the economic benefits to be expected, the essence of the FTAs with Singapore lies in their template setting effect for the region.

The above analysis of trade flow time series suggests that in many cases, trade flows, especially in services, had a strong positive evolution after the FTA entry in force, whereas in few other

59


52 For in-depth technical discussion on the economic modelling assessment see Kutlina-Dimitrova, Z. and

Lakatos, C. (2013), forthcoming.

53 The baseline contains projections of different macroeconomic variables such as GDP, population, skilled and unskilled labour. In addition, the EU-Korea FTA has been included in the baseline.

cases bilateral trade with Singapore did not experience a significantly positive evolution, compared to global trends over the same period.

5.2 Estimated economic effects of the EU-Singapore FTA52

The purpose of this section is to analyse the economic effects of the FTA between the EU and Singapore, both for trade and for the overall economy of the two partners. Sub-section 5.2.1 describes the model used as a basis for the economic analysis and 5.2.2 presents the design of the simulations of EUSFTA and alternatively of Singapore raising its tariffs to levels bound in the WTO. Finally, section 5.3 presents and discusses the economic results of the simulated scenarios.

5.2.1. Economic modelling

The economic analysis of the FTA between the EU and Singapore is based on a computable general equilibrium (CGE) model of the world economy. Models of this type are built to answer what-if questions by simulating the response of macroeconomic variables such as income, prices, production, etc. given certain changes in trade policy measures.

A main feature of CGE models is a simulation of a dynamic baseline (no changes in trade policy) that will offer the benchmark against which the estimated FTA effects will be compared to and a set of scenarios, reflecting different changes in trade policy. This set-up enables a straight-forward comparison between clearly distinguishable economic outcomes. The baseline scenario incorporates projections of the economic status-quo of the analysed economies, under the assumption that there are no specific changes in policy. The simulated scenarios, on the other hand, reflect the economic outcome of a policy change as a difference to the baseline.

The CGE model used for the economic assessment here is based on the dynamic version of the GTAP model (Ianchovichina and McDougall, 2000) that incorporates features such as international capital mobility, adaptive expectations and endogenous capital accumulation. More technical details of the model are provided in box 1.

The base year for the simulations is 2007 which is the default year of the GTAP 8.1 database. The modelling results are reported with respect to the baseline and projected out 10 years to the year 202553. Tariffs are explicitly included in the standard GTAP database and can therefore be directly linked to the model from the standard database.

Regional aggregation

The GTAP 8.1 database contains 134 different countries/regions. In order to be able to focus on

60


54 Lakatos, C. and Walmsley, T. (2012), Investment creation and diversion effects of the ASEAN–China free

trade agreement, Economic Modelling 29, p 766–779.

key results and the countries and sectors of interest, for this report regions have been bundled to aggregates. The countries/regions selected for an explicit analysis in the CGE modelling of the FTA between the EU and Singapore are the following: EU27, Singapore, USA, Australia, New Zealand, Japan, Korea, rest of ASEAN and finally, the rest of the world.

Box 1: Features of the CGE model54

The model simulations are based on a multi-sector, multi-region dynamic general equilibrium model that extends the standard, comparative static version of the GTAP model (Hertel, 1997) by introducing international capital mobility, endogenous capital accumulation and adaptive expectations theory of investment in a recursive dynamics setting. Savings are treated as in the comparative static GTAP model where the representative household allocates a constant share of its regional income to final demand and savings.

Capital is assumed to be perfectly mobile across sectors determining a single rental rate across sectors that clears the market. As in most recursive dynamic models, each period's equilibrium determines the level of global savings and implicitly the aggregate amount of investment expenditure available in that specific period. International capital mobility is modelled using a disequilibrium approach that reconciles investment theory with empirical findings.

Investors are assumed to respond to expected rates of return as opposed to actual rates of return when making investment decisions allowing for errors in expectations. Finally, investors are assumed to behave adaptively and over time these errors are eliminated and the expected rate of return will converge toward the observed rate of return.

Sectoral aggregation

The GTAP database contains 57 sectors which were aggregated into 14 main sectors for the

61


55 Singapore eliminates all tariffs at entry into force. EU eliminates 75% of tariffs at entry into force, 85% after

3 years and 99.99% after 5 years.

56 The figure of 3% as an estimation of trade cost reduction in services trade was applied in the same context in Decreux, Y. and L. Fontagné (2011), Economic Impact of Potential Outcome of the DDA.

57 Note that the second scenario considers tariff increases only and not an decrease in services NTBs.

58 For tariffs lines that are unbound i.e. which are not included in the WTO concession data, it is assumed that the bound rate is equal to the trade weighted average of the bound rate of the HS2 chapter the considered product belongs to. For tariff lines that are bound at very high rates (such as beer and tobacco products) the bound rate is assumed to be twice as high as the currently applied MFN tariff rate.

purposes of this report. The reason for this aggregation is that reducing the number of the sectors enables to focus on key results and strikes a balance between comprehensiveness and readability. Table A1.1 in annex 1 provides an overview of the sectors selected for the CGE modelling of the FTA between the EU and Singapore. The last column of the annexed table shows the chosen sectoral aggregation and the first column the GTAP sectors which are included in this aggregation.

5.2.2. Simulation design

Two scenarios have been simulated using the general equilibrium model described above. The first set of results quantifies the direct economic effects of a full-fledged FTA between the EU and Singapore. It reflects the removal of all tariffs on goods imports from Singapore in the EU, as well as the removal of Singaporean tariffs faced by EU exporters, according to the agreed implementation schedule55. In addition, a symmetric reduction (for the EU and Singapore) of

services NTBs of 3% is applied. This reflects cost-savings from the reduced uncertainty for businesses achieved by binding applied levels of services sector protection. Binding protection enables predictability of the trade policy regime, which in turn positively affects trade and investment flows. Cutting services barriers by 3% is considered a conservative assumption as it reflects only the level of binding as opposed to higher reduction in services NTBs which would imply additional market access56.

The second scenario simulates the economic effects of Singapore raising its tariffs to bound MFN levels, which would have been possible had the FTA not been concluded57. This scenario can therefore be considered as an ‘insurance’ scenario i.e. creating the FTA between the EU and Singapore will protect EU economies from an increase in protectionism. The results presented in sub-section 5.3.2 could be considered therefore as indirect economic gains for Singapore and for the EU of concluding the FTA.

To implement this scenario into the CGE model described above, bound rates58 were computed

The first scenario quantifies the

direct economic effects of a full‐

fledged EUSFTA. The removal of all

tariffs on goods imports from

Singapore in the EU, and a symmetric

reduction (for the EU and Singapore)

of services NTBs of 3% are applied.

62


59 Note that the GTAP database is denominated in US dollars. For the purpose of this report, results are

converted in euros at an exchange rate of 1.3 EUR/Dollar.

60 The exception is constituted by a few tariff lines corresponding to raw and processed tobacco products and alcoholic beverages.

and fed into the model. An overview of the calculated bound levels is provided in table A1.2 in Annex 1. These bound rates are used to shock the model i.e. it is assumed that applied tariffs are raised to these levels.

5.3. Results

This section presents and discusses the macroeconomic and sectoral results. The economic outcome is depicted relative to the baseline scenario and projected out to 2025. The relative cumulative changes presented in the tables below hence reflect the impact of establishing an FTA between the EU and Singapore (5.3.1) or that of raising Singapore tariffs to bound levels (5.3.2).

5.3.1. EUSFTA: economic effects

This part looks at the economic effects of abolishing all tariffs on imports in both the EU and Singapore, as well as a symmetric reduction in services NTBs of 3%.

Figure 25 summarises the main results for the EU and Singapore. It is found that bilateral trade liberalisation leads to an increase in real GDP in both countries although gains are of a different order of magnitude. EU GDP grows marginally in real terms corresponding however to a gain of nearly €550 million59 in

absolute terms. Singapore's economy on the other hand exhibits a significantly higher real growth effect of 0.94%, reflecting a gain of €2.7 billion. These results are in line with expectations, as Singapore gains significant market access to European markets while on the other hand tariffs applied by Singapore on imports from the EU were almost fully liberalised even before the FTA60.

From a dynamic point of view it is found that in the case of the EU most of the gains (87%) from the liberalisation materialise in the first five years: 68% in the first year and the rest within the next four years. In the case of Singapore, the gains are more back-loaded as 23% of the gains occur in the first year and 51% in the first five years.

Similarly, as expected, the creation of an FTA with Singapore leads to a strong rise in bilateral exports between the two countries. EU exports to Singapore increase by 3.6% (nearly €1.4 billion) and Singapore exports to the EU by 10.4% (€3.5 billion).

Furthermore, EU and Singapore total imports and

EU GDP grows marginally in real terms

corresponding to a gain of nearly €550 million

in absolute terms. Singapore's economy

exhibits a significantly higher real growth effect

of 0.94% reflecting a gain of €2.7 billion.

EU exports to Singapore increase

by 3.6% (nearly €1.4 bn) and

Singapore exports to the EU by

10.4% (€ 3.5 billion).

63


exports increase as well although less strongly than bilateral exports. This finding reflects trade diversion effects as far as the rest of the world is concerned: as the EU and Singapore trade more amongst each other, their trade with the rest of the world decreases. In addition, the growth of total EU exports is stronger than that of imports implying a positive effect on the EU trade balance. On the contrary, in Singapore total imports increase more than total exports implying a deterioration of its trade balance. This means that the significant real growth of the Singapore economy can be linked to an even stronger growth in imports pointing towards significant share of imported intermediates in Singapore economy. Indeed, we find that the share of imported intermediates in total production costs is close to 50% and it ranges depending on the sector from 23% in other commercial services to 92% in primary energy products.

Figure 25: Macroeconomic effects of the EU-Singapore FTA

Source: GTAP simulations

The effects on individual sectors diverge very much depending on the original level of protection and the inter linkages between sectors. Annex 2 provides an overview of the sectoral results.

Table A1.2 in Annex 1 presents applied tariffs by sector and depicts the relative protectiveness of certain sectors in the EU and Singaporean economy. On the one hand, we find that EU exporters of beverages and tobacco products to Singapore face an overall 2.02% tariff while all other sectors are completely liberalised. On the other hand, exporters from Singapore to EU markets face significant barriers with the highest tariff rates for sectors such as textiles (9.9%), beverages and tobacco (4.6%) and low-tech manufacturing (4.02%).

64


Starting with the sectoral results of the FTA scenario presented in table A2.1 in Annex 2, the highest increase in EU exports to Singapore takes place in other commercial services (7.7%) and the fourth highest in middle high tech manufacturing (1.7%). This corresponds to the most significant bilateral export surges of close to €1.1 billion or €77 million, respectively.

EU value added of the sectors middle- high tech manufacturing and machinery increases markedly by €46 and €54 million respectively. The sector with the highest growth rate – electronics – is less important in terms of value-added share as this corresponds to a midrange gain of €19 million. Similarly, the sector other commercial services exhibits rather negligible growth in value added terms but nonetheless benefits from the highest gain in absolute terms of €346 million.

The EU sector with the largest decline in value-added in both relative and absolute terms is chemicals. This relative decline is, however, marginal, corresponding to 0.08% (a decrease of €323 million). As a result of the FTA, Singapore becomes relatively more competitive in the chemicals sectors and increases its production. The decline in the EU value added of chemicals occurs as domestic production is substituted for cheaper imports from Singapore.

The decrease in value added of the chemicals sector in the EU corresponds to the highest increase in relative terms and the second highest in absolute terms in the same sector in Singapore (see table A2.2 in annex 2). The value added of the chemicals sector grows by 3% in Singapore (representing an augmentation of nearly €750 million). Exports of chemicals to the EU rise by 17% leading to the highest bilateral exports increase of more than €2 billion.

Another sector which benefits markedly from the FTA in Singapore is other commercial services. Although the growth rate of this sector is only the third highest, its increase in value added terms is by far the largest, accounting for €1.2 billion. This sector also exhibits the second highest rise in bilateral exports to the EU of €800 million. The FTA also significantly affects the textile sector in Singapore, which benefits from the highest growth rate in value added terms (7%) and in terms of bilateral exports growth of (102%). Note, however, that the share of the textiles sector in total value added and exports of Singapore is rather small, these changes corresponding to gains of €5.8 million or €40 million, respectively.

According to this analysis, two sectors in Singapore experience a relatively strong decline in value-added in both relative and absolute terms: machinery and electronics. Machinery contracts by 0.35% and electronics by 0.14% corresponding to a loss of €47 million and €27 million, respectively.

EU value added of the

middle‐ high tech,

manufacturing and

machinery sectors increases

markedly.

65


5.3.2. Raising Singapore's tariffs to bound levels

In the following the effects for the EU from raising Singapore tariffs to bound levels will be discussed. Table 8 summarises the main macro-economic results in terms of GDP and imports and exports flows. As already mentioned this hypothetical scenario can be considered as an "insurance" scenario which reveals the cost for European exporters of a theoretical tariff increase to levels bound within the WTO. The FTA between the EU and Singapore will eliminate this option.

This scenario leads to negligible real EU GDP decreases in percentage terms corresponding however to a loss of €350 million. EU exports to Singapore decline noticeably by 11.5%, reflecting a decrease of €3.7 billion.

Table 7: Macroeconomic effects: "insurance scenario" against a rise of tariffs to bound levels by Singapore

EU in % in millions of euros

Real GDP -0.00 -350

exports to Singapore -11.5 -3697


Table A1.2 in Annex 1 provides an overview of bound tariffs by sector in Singapore as simulated in this scenario. The table also provides a preliminary indication of the sectors that will contract most by tariff hikes considered here.

Table A2.3 in Annex 2 show the impact of the insurance scenario (raising Singapore tariffs to bound levels) on value added and bilateral exports per sector between the EU and Singapore.

In line with the macroeconomic effects depicted in table 8 value added decreases in several sectors. The largest decline of 0.09% (corresponding to a loss of €279 million) takes place in middle- and high-tech manufacturing in the EU. Due to the decline in domestic production in middle- and high-tech manufacturing, EU exports to Singapore fall by nearly 38% corresponding to a loss of more than €1 billion.

Value added and exports also decline markedly in two other sectors: low-tech manufacturing and machinery. Their value-added decreases by €40 million and nearly €130 million, respectively while exports to Singapore fall by €433 million and €1.1 billion. These results are not surprising as the average bound tariff rate in middle- and –high-tech manufacturing of 9.11% is the second highest. The bound tariff rates for low-tech manufacturing (7.34%) and machinery (5.4%) are also significant.

The EUSFTA protects

EU exporters from

losing €3.7 bn should

protectionism arise in

the future

66


5.3.3 Summary and additional modelling considerations

The economic impact of the EUSFTA on GDP, bilateral and total trade for the purpose of the current report was assessed within the framework of a dynamic general equilibrium model tailor-made for trade policy analysis. The simulation results suggest that there are economic gains for both the EU and Singapore, which are estimated to materialise over a 10-year period.

Given the economic size of the EU and the fact that before the FTA the EU was imposing relatively higher tariffs on Singapore’s goods, the gains for Singapore (in relative and absolute terms) are significantly larger; Singapore GDP is expected to increase by 0.94% or €2.7 billion whereas the EU gains are assessed at €550 million.

EU exports to Singapore would rise by some €1.4 billion and Singapore's exports to the EU by some €3.5 billion. The latter includes the exports of the large number of European companies established in Singapore.

These gains should be considered as a lower bound as the economic modelling is based on a conservative assumption according to which services barriers are cut only by 3%, reflecting merely the level of binding applied levels of services sector protection. There are, however, as mentioned in chapter 4, several expected gains from reducing various NTBs which due to data limitations were not fed into the model. Therefore these results should be considered as rather underestimation of the real economic gains.

In addition, the alternative simulations revealed the value of the "insurance effect" offered by the EUSFTA against a hypothetical tariff rise by Singapore to levels bound by the WTO. In such a "worst case" scenario, the EUSFTA will protect EU GDP from a decrease of €350 million and prevents a loss of €3.7 billion EU exports to Singapore.

6. Overall conclusions

The EUSFTA is the first FTA between the EU and a country in Southeast Asia. Hopefully, the agreement will facilitate the negotiations with other ASEAN countries and bring the EU closer to its long term goal, an EU-ASEAN FTA. Considering the dynamic economic development of the ASEAN bloc it is of vital importance for the EU to establish stronger economic ties with this region. Moreover, Singapore is a hub for over 9000 European companies for accessing the entire Southeast Asian region. Secure market access to

Singapore, with its second largest port in the world and advanced business services, is of vital importance for EU firms in the region.

However, the EUSFTA is not only a stepping stone towards something larger. For Singapore, it is naturally attractive to receive better market access to the world’s largest market and to its

Singapore is a hub for over 9000

European companies for accessing the

entire South East Asian region. Secure

market access to Singapore, with its

second largest port in the world and

advanced business services, is of vital

importance for EU firms in the region.

67


second largest trading partner.

Essentially, the EUSFTA:

eliminates all tariffs on all goods. Even though Singapore hardly applies any tariffs this still is valuable for the EU as it is an insurance against potential future tariff hikes.

tackles a number of NTBs, both related to SPS-measures and technical regulations, thus fostering increased trade in particular for motor vehicles, electronics and meat.

binds applied level of market access for services and in some sectors, like retail banking, opens up further.

legally protects the substantial FDI relationship between the EU and Singapore.

ensures better access to each other’s procurement markets.

contains enhanced provisions for protection of Geographical Indicators (GIs).

Studies of the effects of previous FTAs with Singapore show positive but small economic effects. The present economic modelling assessment of the EUSFTA, estimates the following economic gains:

EU exports to Singapore are rising by €1.4 billion and Singapore's exports to the EU rising by €3.5 billion annually.

Singapore’s GDP could increase by 0.94%, or €2.7 billion, and EU GDP by € 550 million. The lower gain for the EU is explained by the fact that tariffs are cut asymmetrically as Singapore already applies zero tariffs on almost all products.

These economic gains are underestimates of the real economic gains of the EUSFTA as due to data limitations NTB reductions and some other non-quantifiable provisions were not modelled. Finally, alternative simulations revealed the value of the "insurance effect" offered by the EUSFTA against a potential rise in protectionism. In an unlikely situation of Singapore raising its tariffs to the levels bound in the WTO, the EUSFTA protects EU from a loss of €3.7 billion in exports to Singapore.

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ANNEX 1: SECTORAL AGGREGATION AND TARIFFS

Table A1.1. Sectoral mapping: GTAP sectors to model aggregation

GTAP sectors Aggregation

Code Description Code Description

pdr Paddy rice

AGM

Agriculture and minerals

wht Wheat

gro Cereal grains nec

v_f Vegetables. fruit. nuts

osd Oil seeds

c_b Sugar cane. sugar beet

pfb Plant-based fibers

ctl Cattle.sheep.goats.horses

oap Animal products nec

rmk Raw milk

wol Wool. silk-worm cocoons

frs Forestry

fsh Fishing

omn Minerals nec

ocr Crops nec TBB Tobacco and beverages

b_t Beverages and tobacco products

coa Coal

PRM

Primary energy products oil Oil

gas Gas

p_c Petroleum. coal products

tex Textiles TEX Textiles

crp Chemical.rubber.plastic prods CHEM Chemicals

cmt Meat: cattle.sheep.goats.horse

LTM

Low tech manufacturing

omt Meat products nec

vol Vegetable oils and fats

mil Dairy products

pcr Processed rice

sgr Sugar

ofd Food products nec

69


wap Wearing apparel

lea Leather products

lum Wood products

ppp Paper products. publishing

omf Manufactures nec

nmm Mineral products nec

MLM

Middle low tech manufacturing i_s Ferrous metals

nfm Metals nec

fmp Metal products

mvh Motor vehicles and parts MHM Middle high tech manufacturing

otn Transport equipment nec

ele Electronic equipment ELEC Electronics

ome Machinery and equipment nec MACH Machinery

ely Electricity ENR Energy

gdt Gas manufacture. distribution

otp Transport nec

TRN

Transport wtp Sea transport

atp Air transport

cmn Communication

OCS

Other commercial services

ofi Financial services nec

isr Insurance

obs Business services nec

ros Recreation and other services

dwe Dwellings

cns Construction

trd Trade

wtr Water OSR Government services

osg PubAdmin/Defence/Health/Educat

70


Table A1.2. Applied and bound tariffs by sector (%)

Sectors

Applied tariffs Bound tariffs in Singapore

Faced by the EU

Faced by Singapore

Agriculture and minerals 0.00 2.52 10.00

Tobacco and beverages 2.02 4.60 3.46

Primary energy products 0.00 2.77 10.00

Low tech manufacturing 0.00 4.02 7.34

Textiles 0.00 9.90 10.00

Energy 0.00 0.00 0.00

Chemicals 0.00 2.43 4.45

Middle low tech manufacturing

0.00 2.24 6.35

Middle high tech manufacturing

0.00 1.42 9.11

Electronics 0.00 0.41 1.10

Machinery 0.00 1.49 5.40

Source: GTAP 8.1, WTO Bound Concession data and own calculations (see footnote 44)

71


ANNEX 2: SECTORAL RESULTS

Table A2.1. FTA scenario, changes in value-added and bilateral exports by sector

EU Value added Exports to Singapore

in % in millions of euros in % in millions of euros

Agriculture and minerals 0.00 6.0 0.80 0.5

Tobacco and beverages 0.01 13.0 5.56 28.5

Primary energy products 0.00 -2.5 0.90 1.1

Low tech manufacturing 0.00 27.7 0.86 16.6

Textiles 0.01 3.8 1.09 0.7

Energy 0.00 -7.9 0.93 0.9

Chemicals -0.08 -323.3 1.89 55.8

Middle low tech manufacturing 0.01 34.0 0.64 7.0

Middle high tech manufacturing 0.01 45.7 1.71 76.9

Electronics 0.02 19.0 0.39 6.7

Machinery 0.01 54.1 1.05 54.0

Government services 0.00 -8.1 1.24 6.2

Other commercial services 0.01 346.1 7.72 1111.4

Transport 0.01 29.9 0.38 22.4


72


Table A2.2. FTA scenario, changes in value-added and bilateral exports by sector

Singapore Value added Exports to the EU

in % in millions of euros in % in millions of

euros

Agriculture and minerals

0.00 0.0 7.57 2.3

Tobacco and beverages

-0.18 -0.4 16.80 2.2

Primary energy products

0.70 7.3 32.20 160.3

Low tech manufacturing

0.18 4.1 27.81 45.4

Textiles 7.04 5.8 101.78 40.1

Energy 0.87 11.9 -0.42 0.0

Chemicals 2.97 747.3 16.71 2142.1

Middle low tech manufacturing

-0.17 -5.0 15.59 18.4

Middle high tech manufacturing

-0.18 -3.7 7.86 17.9

Electronics -0.14 -27.1 3.13 134.3

Machinery -0.35 -46.8 11.51 201.5

Government services

0.34 123.7 -1.83 -3.0

Other commercial

services 0.93 1174.2 7.96 799.1

Transport 0.02 5.6 -0.36 -14.5


73


Table A2.3. Scenario 2 (raising tariffs to bound levels), changes in bilateral exports by sector

EU Exports to Singapore

in % in millions of euros

Agriculture and minerals -26.58 -11.0

Tobacco and beverages -3.48 -16.3

Primary energy products -61.65 -29.6

Low tech manufacturing -34.45 -433.0

Textiles -49.07 -16.8

Energy -0.50 -0.5

Chemicals -22.90 -511.1

Middle low tech manufacturing -33.97 -242.6

Middle high tech manufacturing -37.77 -1038.8

Electronics -9.64 -149.2

Machinery -32.64 -1123.1

Government services -0.68 -3.3

Other commercial services -0.81 -107.8

Transport -0.24 -13.9


74

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September 2013 The economic impact ... - European …Trade The economic impact of the EU - Singapore Free Trade Agreement An analysis prepared by the European Commission’s Directorate-General