By all accounts, the journey toward a China-Singapore free trade agreement (FTA) was a fairly painless process. Negotiations took two years – lightning quick compared with many other bilateral trade deals – and the agreement was signed in October. It takes effect on January 1.
"In this case there was no strong opposition because mostly people gained," explained Peter Hwang, associate professor at the National University of Singapore’s business school. "Nobody was getting hurt; [there were] no real losers."
Although the Singapore deal is seen as a step toward an FTA between China and the vast Association of Southeast Asian Nations (ASEAN), no one expects the going to be so easy from here on in.
There are 10 ASEAN members – Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar and Cambodia – with a combined population of 560 million, a GDP of almost US$1.1 trillion, and a total annual trade of about US$1.4 trillion.
A master plan for an ASEAN-China FTA is supposed to be in place by 2010 and a fully working agreement by 2015. Not only is the global financial crisis likely to require an extension of these deadlines, it may also exacerbate tensions between the 11 nations involved, all of which have their own vested interests in the FTA.
"Progress has been steady but I think that 2010 is a pretty ambitious target," said Tai Hui, regional head of economic research, Southeast Asia, at Standard Chartered bank. "The idea with FTAs and free trade is it benefits everyone, but obviously that’s not true if you speak to a garment manufacturer in Thailand or a toy manufacturer in Malaysia."
In recent years China has started to produce simple electronics and household electrical goods, and its regional neighbors are already feeling the pressure, said Tai. In the next five to 10 years, China may also begin to encroach upon the automobile and shipbuilding industries.
However, much as certain countries might try to resist, the Singapore deal could be the thin end of the wedge. According to Shan Wenhua, an economic law professor at Xi’an Jiaotong University, Singapore now has a competitive edge in terms of doing business with China and this means other ASEAN nations will come under pressure to negotiate their own bilateral agreements with Beijing.
The political angle
China doesn’t rush into FTAs, having signed only seven so far. But at the same time, free trade pacts perform a political function in Southeast Asia: They allow China to build better economic relations with some of its neighbors and also gain an advantage over others.
Beijing was a keen observer from the sidelines as Japan secured its own ASEAN free trade deal, which goes into effect in December.
"China and Japan are competing in this region," said Hwang of the National University of Singapore. "Not only economically speaking, but also politically speaking, China wanted to sign a free trade agreement with Singapore. Then it is possible that other countries may follow suit and China can have a bigger influence in this region."
Mutual benefits: Anatomy of the deal
The China-Singapore free trade agreement (FTA) is a good fit. China is Singapore’s third-largest trading partner, and Singapore is China’s eighth-largest trading partner. Bilateral trade was worth more than US$62 billion in 2007. China is Singapore’s top investment destination, and Singapore is China’s seventh-largest investor.
The terms of the FTA:
Singapore will end tariffs on all imports from China. China will end tariffs for 95% of Singaporean products by 2010, rising to over 97% by 2012.
Notable Singapore gains:
Financial services, medical services, human resources training and the travel industry will all benefit. For example, a Singaporean travel agency will only need US$40 million in annual operating revenue to set up in China compared with the usual US$100 million.
Notable China gains:
Food processing, clothing and textiles, electronics, chemicals and auto parts can expect to do well. In electronics, China may begin to pose a direct challenge to more high-end Singaporean manufacturers.