The economic impact. Free Trade Agreement. of the EU - Singapore. September Trade

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

2 EUROPE DIRECT is a service to help you find answers to your questions about the European Union Freephone number (*): (*) Certain mobile telephone operators do not allow access to numbers or these calls may be billed LEGAL NOTICE Cover Ralf Gosch - Fotolia.com More information on the European Union is available on the Internet ( Cataloguing data can be found at the end of this publication. Luxembourg: Publications Office of the European Union, 2013 ISBN DOI /66069 European Union, 2013 Reproduction is authorised provided the source is acknowledged. Printed in Belgium

3 The economic impact of the EU - Singapore Free Trade Agreement An analysis prepared by the European Commission s Directorate-General for Trade

4 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. 1

5 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 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 2

6 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. 3

7 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 An ambitious FTA with Singapore strengthens the credibility of the EU's trade agenda in Asia by building on the 4

8 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. 5

9 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 Trade relations FDI 4. The content of the EU-Singapore FTA 4.1 Trade in Services 4.2 Trade in Goods Tariffs and rules of origin Non-tariff barriers Customs 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 Economic modelling Selected scenarios 5.3 Results Scenario 1: creating an FTA between the EU and Singapore Scenario 2: raising Singapore's tariffs to bound levels 6. Conclusions 6

10 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 7

11 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 8

12 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 It is the EU s first free trade agreement with one of the dynamically growing economies in Southeast Asia. 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 billion 2. These figures were based on trade patterns around 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. 1 Ecorys, Trade Sustainability Impact Assessment of the FTA between the EU and ASEAN Final Report, 19 June 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

13 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-exports 4. 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. Singapore has for the first time agreed to sectoral disciplines to tackle nontariff barriers in key manufacturing sectors. 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. 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. 10

14 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 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 world 5. 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 crosscutting rules on competition, regulatory transparency, IPR protection, transparency in public tendering and dispute settlement. Here, the aim is to ensure a level playing field 5 European Commission, Annual Report on the Implementation of the EU-Korea Free Trade Agreement, , COM(2013)100 final. 11

15 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. EUSFTA is considered a first building block towards an eventual EU agreement encompassing the entire ASEAN region. 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. The rapidly growing middle class in Southeast Asia is likely to continue to support increasing demand for European goods. 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 6 See, similarly, the U.S. International Trade Commission, U.S.-Singapore Free Trade Agreement: Potential Economy-wide and Selected Sectoral Effects, June

16 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. For Singapore, a deal with the world largest trading bloc is naturally attractive. 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 communication 7 identified the ASEAN countries as key markets for further EU export growth. This finding has more recently been confirmed in subsequent Commission papers 8. 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 goods 10. 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 7 European Commission, Global Europe: Competing in the World, COM(2006)567 final, October 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 OECD, precit., p. 26; PWC, Marketmap 2012 Issue 2, p

17 development 11, 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 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. 14

18 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. Staying inactive in terms of seeking preferences will carry high opportunity costs for Europe s economic prospects in the region. 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 This is the first of a new generation of comprehensive 21 st 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 ongoing with Indonesia and the Philippines. negotiations on an ambitious FTA with Japan, the world s fourth largest economy, were launched on 25 March The Japanese market is huge, but EU companies are 15

19 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 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. Many European exporters enter the region from their base in Singapore. 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 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. 16

20 Agreement on Trade and Goods: 2005 China Trade in Services Agreement: 2007 Investment Agreement: 2010 Japan 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

21 China 2009 Gulf Cooperation Council 2013 Source: *Note that the RTA of Cambodia and Laos entered into force in 2011 and of Indonesia in 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$305 billion 14 (about 174 billion). Adding Singapore to the area where EU businesses can trade freely and securely is comparable to opening up an economy the size of Finland. Although Singapore is not an OECD member, its economy is a developed one. The standard of living in Singapore is high, in the top ten of the world, and about 40% higher than the average for the EU. Unlike most other high income economies in the world, Singapore continues to record figures from Singapore's Department of Statistics, downloaded on 6 September For conversion from S$ 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

22 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 climate 15. Furthermore, Transparency International regularly ranks Singapore as one of the least corrupt countries in the world 16. 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 EU 17. 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 scarce 18. This finding echoes similar conclusions reached by 15 The World Economic Forum currently ranks Singapore second in terms of competitiveness ("The Global Competitiveness Report "). 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 STRIdatabase. 19

23 the United States 19 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 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. logistical efficiency. Singapore ranks first in the World Bank's Logistics Performance Index, partly due to having the most efficient customs procedures in the world 20. Singapore's port the second largest in the world in terms of container turnover with 30 million TEUs in 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 8 th 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 16 th 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 Trade relations 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). 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 World Bank, Logistics Performance Index TEU = Twenty-foot Equivalent Unit, i.e. one standard container. Source: World Shipping Council. The EU's most active container port Rotterdam occupies 10 th place in the WSC's global ranking with 11.0 million TEUs, followed by Hamburg on 14 th place (9.0 m TEUs) and Antwerp on 15 th place (8.7 million TEUs). 22 World Bank / IFC, Doing Business 2013, p UNCTAD, World Investment Report 2013, p

24 Table 2: Extra-EU key partners in goods trade (2012) Rank Partners Billions Euro % of total trade Total Extra EU % 1 United States % 2 China % 3 ASEAN % 4 GCC % 5 Japan % 6 Brazil % 7 India % 8 South Korea % 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 ( 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%). Singapore accounts for about a third of all EU ASEAN trade. 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 21

25 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, Source for figure 2 and 3: Eurostat 22

26 Figure 3: EU trade in commercial services with Singapore / ASEAN Singapore's exports to the EU are concentrated in a number of manufacturing sectors, such as petrochemicals, electronics and pharmaceuticals 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. 23

27 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. For EU exports, royalties and license fees are a key element in its services trade with Singapore. 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. 24