Using trade deals to spur investment

SINGAPORE officials have been busy lately simultaneously negotiating in two mega-regional trade agreements. The first, the Trans-Pacific Partnership (TPP), brings together 12 members spanning the Pacific Ocean - Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. The second, the Regional Comprehensive Economic Partnership (RCEP), links up Asean members with dialogue partners Japan, South Korea, China, India, Australia and New Zealand.

In the run up to the TPP finish line, it is worth pausing to recall why officials pursue trade agreements in the first place.

First, agreements open markets for trade between member countries with better terms and conditions than non-members receive. In Singapore, the market for goods is already extremely open. But for companies attempting to export goods or services into some TPP member countries, barriers can still be high. These include formal blocks or impediments to trade as well as issues such as regulations or standards that make it tough for companies to move products across borders.

Second, trade deals can unleash significant opportunities for inward and outbound investment. As an example, consider the rapid expansion of foreign direct investment into Vietnam from Singapore. Most Singaporean investment can be found in industrial parks - with five parks attracting S$506 million in investment in the first six months of this year. Singapore is the third largest investor in Vietnam overall, with cumulative investments of over S$30 billion.

While the Vietnam-Singapore Industrial Parks can provide an easy entry platform for Singaporean companies, they do not allow firms as much flexibility and access to local markets as market forces might demand. This is where deeper, high-quality integration in trade agreements can make a substantial difference.

Of course, Singapore and Vietnam are already connected through Asean, with the prospect of improvements in business conditions as the Asean Economic Community (AEC) provisions are steadily implemented. But the AEC provides benefits mostly for companies doing business with other Asean member countries.

CREATING OPPORTUNITIES

In a world of value chains or complex supply chains, inputs and final products are increasingly needed for different, non-Asean markets. The mega-regional agreements are recognition of the need to create larger trade agreements that include more options for location, investment, and sales than smaller FTAs.

For Vietnam, the prospect of joining the TPP has already resulted in increased investment flows. Much of the new, inward investment is in the textile sector as mostly South Korean and Chinese companies are starting to build capital-intensive weaving and dyeing plants in Vietnam. But, as the TPP agenda comes into clearer focus, the opportunities for firms to expand into one of the fastest growing, lowest cost markets will grow.

Third, additional provisions in the TPP can reinforce the incentives to invest. For instance, as a member, Vietnam will be changing a range of intellectual property laws to better protect the ideas, words, designs and trademarks of companies. Many standards in areas such as food regulations and labelling requirements may also come into closer alignment with Singapore.

These additional, deeper integration provisions are a key feature of the TPP. They distinguish it from other FTAs that generally skip over such elements or treat them very lightly. But for firms looking to invest and expand, the promise of improved trade facilitation measures, competition rules, transparency and harmonisation of rules, procedures and standards are often just as critical as the decision to open markets in the first place.

In short, as officials race to conclude the TPP and make progress in the RCEP negotiations, businesses in Singapore and in other member countries ought to be applauding their efforts. The payoffs from a successful conclusion of both mega-regional agreements will be beneficial for economic growth in countries as diverse as Singapore and Vietnam.