Tuesday, August 29, 2006

Free Trade Agreements and Singapore

a. Explain the economic justifications for the signing of free-trade agreements between Singapore and her trading partners. [6]

  • 'Explain': Make clear, give reasons for, elaborate on (i.e. go beyond stating reasons)
  • 'Economic justifications': Economic reasoning or 'motivation'
  • Application: between Singapore & trading partners
  • The small domestic market and the lack of resources: a strong need for Singapore to broaden its trading links beyond its own boundary and S.E.A; i.e. gain greater access to global markets (export-oriented nature of Singapore's economy); and to more and cheaper sources of imports (import-dependent economy).
  • Abolition of tariffs and non-tariff barriers on our exports: significant savings of several million dollars in import tariffs on our exports, enabling our exports to be more price competitive compared to neighbouring countries such as Malaysia & Indonesia.
  • Increased exports and investment into Singapore - in turn bring about rise in national income, promotes economic growth and higher living standards (via multiplier effect); provide more job opportunities; transfer of technology.
  • Foster closer economic integration and increased mobility of factors across countries: e.g. greater capital flows (including funds for development) and increased talent flow, thus expanding productive capacity of country.
  • In response to extremely keen competition posed by the expansion of low-cost manufacturers in China and India - ensuring exports remain competitive through technological advancement and keeping cost of production down.
  • FTAs provide impetus for economic restructuring in the economy if necessary.
  • In response to failure of WTO talks - seek to establish regional and bilateral ties instead.

b. With reference to the given information, comment on the key benefits that Singapore enjoyed as a result of the agreement. [9]

  • 'Comment on': Implies evaluation, making some form of judgment
  • 'Benefits to Economy': On Producers, Consumers and Society as a whole
  • Local firms enjoy cost savings from elimination of tariffs and improved market access to the NZ market. Cost savings also derived from customs cooperation measures and removal of onerous regulations, as well as from cheaper imports, allowing exports to be more competitive.
  • Evidence: Value of total trade has increased. Trade moved considerably in Singapore's favour. Trade balance with NZ chalked up a surplus that grew by 12.6%. Exports from Singapore rose 43% while Singapore bought 17% less from NZ.
  • Producers and service suppliers enjoy national (i.e. preferential) treatment, e.g. in government procurement tenders.
  • Investments into Singapore from NZ rose 106%, bringing about increased NY and employment in the Singapore economy (via the multiplier effect).
  • As more NZ service suppliers set up operations here, consumers also enjoy greater choice of services ranging from retail banking to education. Service standards expected to improve with foreign competition, and prevent monopoly by local firms in Singapore.
  • Increased talent flows and joint research projects also bring about potential benefits to Singapore's knowledge and technological base and can increase our productive capacity, hence promoting economic growth.
  • However, locals may find themselves competing with foreign talents for jobs. Structural unemployment can also occur as Singapore service sectors may need to restructure themselves in a bid to stay competitive in a more open domestic market after the signing of the FTA.
  • We are also not provided details on Singapore's trade volume with NZ relative to Singapore's total trade volume - impact of benefits may not be significant.

c. Using the data provided, critically examine the view that the FTA afforded little benefit for New Zealand. [10]

  • In the short run, NZ does experience a worsening trade position with Singapore;
    Singapore's imports from NZ tend to be on primary products that are inelastic in demand, compared to Singapore exports to NZ which are mainly manufactured goods which are more price elastic in demand. Hence, a reduction in tariffs to both countries will tend to benefit Singapore more in the form of lower import expenditure, but may lead to rising expenditures for NZ as they import more Singapore goods.
  • However, whether allowing free trade in services could reduce or worsen the current account deficit is uncertain, as NZ has certain comparative advantages in the services sectors.
  • NZ also experiences falling net investment inflow against Singapore, which means Singapore gains more from investment inflows into Singapore, that lead to higher income and higher levels of employment.
  • Talent flows between countries may bring about accelerated brain drain from NZ, as NZ workers may decide to work in Singapore to earn potentially higher wages (as evident from the significant disparity in GDP per capita between the two countries).
  • Distort development of secondary and tertiary education services in NZ.
  • Declining share of trade as a proportion of GDP.
  • However ('Critically examine'), other things to consider include:
  • Adjustments in both countries may take a longer period than 2 years.
  • Trade may alter when current contracts expire - or may take time for tastes to adjust to new, cheaper products or for information to circulate.
  • Data concentrates on visible and invisible trade - more data needed to judge this.
  • The change in trade position may have been the result of factors other than the FTA: exchange rates may have changed; terms of trade may have moved unfavourably for NZ (especially since NZ's main exports are agricultural goods/primary products which experience falling prices over time and are inelastic in demand; compared to Singapore's exports which are mainly manufactured, higher valued goods which are elastic in demand) or global economic conditions e.g. recession may have greater implications for NZ.
  • Other benefits for NZ may be less obvious:
    o Greater exposure in Singapore might promote trade, tourism or capital flows which may help NZ in the longer term.
    o Formation of FTA may be an early step and learning experience for more trade liberalisation with other countries to help reduce NZ's relative trade isolation.

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