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EU-Singapore FTA deal could have multi-faceted benefits
THE signing of the EU-Singapore Free Trade Agreement (EUSFTA) - expected to be announced later today - is a panacea for Singapore, and for Asean as a region.
As far as trade agreements go, this is a big one for Singapore.
The EU is not only Singapore's third largest trading partner, it has also been the biggest investor into Asean since 2010, representing 20 per cent of all FDI flows to the region.
Tariffs on qualifying Singapore goods exports into the EU will be steadily abolished over the course of five years. As a result, electronics, pharmaceuticals, petrochemicals and processed food products - all of which make up 10 per cent of Singapore GDP - will become more competitive in the EU.
Non-tariff barriers will be addressed to remove burdensome administrative and double-testing procedures. For example, creating common safety and quality standards across selected sectors will remove the need for testing at both sides of the trade corridor, which would save both time and money.
This will benefit key sectors including electronics, motor vehicle and vehicle parts, pharmaceutical and medical devices.
And the EUSFTA's services chapter will enable and encourage the smoother flow of professionals between the markets by mutually recognising professional qualifications across both blocs.
The economic benefits will be profound.
Indeed, European exports to Singapore are expected to grow 3.6 per cent, while Singapore's exports are expected to grow 10.4 per cent over a 10-year period.
The EUSFTA will also be a game changer for Asean's flourishing supply chains and will solidify Singapore at the centre of this trade activity.
This will happen through several manufactured goods coming under a concept within the EUSFTA known as "Asean cumulation".
What this means, effectively, is that inputs sourced by Singapore businesses from other Asean member states will be considered as "domestic content" for the determination of the origin of the final product made in Singapore.
Put even more simply, these inputs will come under the city state's zero tariff regime with Europe.
This is a big deal given a significant amount of Singapore products that have parts produced in other Asean countries, particularly in areas like electronics and pharmaceuticals.
Electronics, in particular, is one of Asean's most important sectors directly employing more than 2.5 million workers. According to the Asean Secretariat, the bulk of the world's consumer electronics comes from the region, with 80 per cent of the world's hard drives being produced in Asean countries.
Beyond the conventional freer flow of goods and services, the EUSFTA will help to encourage green activity within the corridor by removing trade and investment obstacles in green technology and removing duties on many environmental goods.
This is important in ensuring Singapore and Asean businesses progress further along the green agenda.
According to an HSBC-commissioned report released this year, only 24 per cent of Asian respondents have an ESG (environmental, social and governance) strategy, compared to 48 per cent of corporates globally and 87 per cent of European and UK companies.
Europe is clearly leading the way in ESG adoption, and the bloc's willingness to ensure its trading partners raise their own ESG standards is evident in the policies contained in the EUSFTA.
Large European corporations will want to see a similar shift in their suppliers' ESG stance. With South-east Asia increasingly becoming the supply chain "factory" for several European countries, suppliers of European clients will be expected to transform, or risk being left behind when further FTAs come into force.
This could act as a push for Asean businesses to start taking ESG more seriously and accelerate the region's sustainability efforts.
In sum, the EUSFTA is a significant moment for the two dynamic economies and its impact goes to the heart of sectors and issues that matter for Singapore.
By eliminating virtually all tariffs and lowering non-tariff barriers, the EUSFTA could not only create economic benefits, but open commercial opportunities and lead to substantial social changes and improvements.
While signing the trade agreement is an incredible first step and milestone, the key now is to convert trade policy into pragmatic commercial activity for Singapore corporates.
The opportunities are there, but it is up to corporates to capture them.
- The writer is managing director and head of commercial banking at HSBC Singapore.