Singapore Prime Minister Lee Hsien Loong (R) with European Council President Donald Tusk  as they arrive to attend an EU ASEAN leaders meeting at the European Council in Brussels on October 19, 2018. Photo: AFP/Olivier Hoslet
Singapore Prime Minister Lee Hsien Loong (R) with European Council President Donald Tusk as they arrive to attend an EU ASEAN leaders meeting at the European Council in Brussels on October 19, 2018. Photo: AFP/Olivier Hoslet

Amid rising trade tensions between the world’s two largest economies, the Asia-Europe Meeting Summit (ASEM) in Brussels last week saw leaders from both regions fly the so-called flag of free trade.

Although there was no explicit mention of American trade policies in the meeting’s joint declaration, the specter of unilateralism seemed to loom large over proceedings.

It was there that Singapore and the European Union signed a landmark trade deal reputed to serve as the building blocks for a wider future trade pact with the Association of Southeast Asian Nations (ASEAN). While sought for years, a trade deal linking the two regional organizations is still in the early stages of negotiations.

Negotiated for the better part of a decade, the EU-Singapore Free Trade Agreement (EUSFTA) is a bid to improve business ties with the wealthy city-state, the EU’s top trading partner in Southeast Asia. The agreement, expected to come into force next year, had been touted as a boost for Singapore’s companies and their exports.

Symbolically important deal

The deal also held symbolic importance, with Singapore’s Prime Minister Prime Minister Lee Hsien Loong framing the effort as a bid to shore up a multilateral system that has come under severe stress, owing to certain countries resorting to protectionist unilateral actions and repudiating multilateral approaches and institutions.

“If countries take a purely realpolitik approach acting on the basis that might is right, they may gain in the short term, but they will forgo many more opportunities for win-win cooperation in the long term,” said Lee, adding that such a course would “exacerbate rivalries” and “further risk destabilizing the world order.”

Those remarks were yet another rhetorical indication of Singapore’s receding confidence in American leadership. Though not a US treaty ally, the wealthy city-state has traditionally been a key ally and in recent years has encouraged American policymakers to roll out a comprehensive economic initiative or risk being excluded from the region.

Lee has appeared to lean toward Beijing in ongoing trade disputes between the US and China, earlier this year praising Chinese attempts to defuse the stand-off prompted by Washington’s tariffs on Chinese goods, the likes of which could negatively affect or disrupt trade and investment dynamics to the detriment of Singapore’s trade-dependent economy.

Though a further escalation of the trade conflict could see the disruption of global trade flows, analysts believe Singapore is in a favorable position to mitigate those risks by leveraging on its extensive network of bilateral free trade agreements (FTAs) with trading partners, as well several regional trade agreements signed over the last two decades.

“Amid the ongoing uncertainties in the global trade environment, these legally binding agreements will be useful in enhancing Singapore’s overall value proposition,” says Irvin Seah, a senior economist at DBS Bank. FTAs, he says, also provide an “element of certainty” that enhance Singapore’s appeal as a strategic investment destination for multinationals.

A boost to trade

The new EUSFTA, signed alongside separate investment protection and cooperation deals, appears crafted for that purpose as advocates of rules-based trade policies across the two economic regions seek to grow their operations in both directions. The 1,150-page agreement is the first of its kind signed between the EU and an ASEAN member state.

The EU was Singapore’s third-largest trading partner in 2017, with bilateral trade in goods exceeding $71 billion, making up slightly more than 10% of the city-state’s total trade. The EUSFTA is expected to boost those trade figures by 10% within five years of entering into force. The city-state will be dropping tariffs on all EU products.

The EU will in turn drop tariffs on 84% of Singapore’ products with reductions of the remaining 16% within three to five years, giving the city-state’s exports a competitive boost. Analysts believe the processed food, chemicals, pharmaceuticals, electronics and petrochemicals sectors, in particular, are tipped for gains.

The deal also includes flexible rules of origin for some key manufactured goods, such as automobiles, which would allow for materials sourced from other ASEAN member countries to be deemed as originating from Singapore, allowing a range of exports to qualify for concessions under the EUSFTA’s zero tariff regime.

It remains to be seen to what extent the EU will benefit from the arrangement, given the size of the deal relative to its entire economy. Some, however, read political significance in the EU’s moves to deepen trade ties with regions that have not traditionally been major trading partners, particularly with uncertain Brexit negotiations underway.

Britain remains in the deal with Singapore until its official exit from the 28-member bloc at the end of next March. When asked how the deal would be ported over to Britain, Lee told British Prime Minister Theresa May that Singapore can extend the agreement’s terms to the UK until “a more definitive arrangement” can be agreed upon post-Brexit.

Lee said the UK had also expressed an interest in joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), a move Singapore supports. US President Donald Trump pulled the US out of an earlier iteration of that deal during the first week of his presidency, unnerving the city-state, one of its vocal proponents.

Investment dispute mechanism

“From the economic point of view, it is hard to make the argument that you will be in a superior position outside the EU than in,” Lee told BBC Radio 4 when asked about his thoughts on Brexit. “But I fully understand you have other considerations which may outweigh the economic one.”

While the EUSFTA has earned praise among certain quarters, others have flagged concerns. An analysis published by the Foundation for a Free Information Infrastructure (FFII), a non-profit consumer rights association based in Berlin, argued that the deal omits stronger data protection safeguards recently introduced by the European Commission.

The FFII believes, moreover, that the deal’s investment dispute mechanism, which calls for the establishment of a multilateral investment tribunal, would “give investors too generous possibilities to claim compensation” in contrast with domestic law systems, potentially impeding measures to counteract climate change and reform intellectual property rights.