Looking for Free Trade Far from Home

Singapore wants pacts with partners outside the region

The Singaporean government is well-known for fretting about the future. Time and again, its technocrats have spied clouds ahead and shifted economic strategy. This survival instinct has become even more prevalent since the financial crisis pounded Southeast Asia, leaving the trade-dependent island nation surrounded by shell-shocked economies. While Singapore's economy grew 10% last year, it is expected to grow half as fast in 2001, thanks to the U.S. slowdown and regional stagnation.

Seeking to protect itself, Singapore has adopted a radical plan. It is pursuing free-trade pacts with partners outside the region. On Feb. 21, Australian and Singaporean officials began negotiating a trade deal that could be concluded by year's end. In mid-March, a Singapore delegation will travel to Washington for a third round of talks with U.S. officials. Singapore has already signed an accord with New Zealand, and hopes to conclude deals with Chile, Japan, and Mexico. Because Singapore has lower tariffs than most other Asian nations, says Supachai Panitchpakdi, soon-to-be chief of the World Trade Organization, it "can easily get involved in preferential trading arrangements elsewhere."

FUSSY RULES. Singapore's first challenge is to reduce high overseas tariffs on its exports. Currently, the U.S. levies from 2% to 10% on some Singapore shipments. Mexican import tariffs on petrochemicals run as high as 18%, while Chile slaps a surcharge of up to 8% on semiconductors. In Japan, meanwhile, customs inspectors can halt shipments of Singapore goods to make sure the containers have been shipped in compliance with Japan's notoriously fussy trade rules. It all increases the cost of manufacturing and shipping from Singapore, whose labor and real estate are already costly.

The government aims to make Singapore more attractive to foreign manufacturers by ensuring that their exports are not taxed when they reach their end markets. This would be a special boon to companies that make components in Singapore and assemble them elsewhere. Right now, Singapore-based U.S. contract manufacturers pay tariffs on motherboards exported to Japan, say, even though they are being used in PCs assembled and sold there.

Singapore also hopes that turning itself into a tariff-free zone will lure foreign investment that might otherwise end up in China after it joins the WTO. Singapore Deputy Prime Minister Lee Hsien Loong recently announced a wholesale divestment of state-owned companies that until recently were off-limits to foreign investors. Already, contract manufacturer Solectron Corp. in Milpitas, Calif., has purchased the government's 33% indirect stake in NatSteel Electronics. Singapore's regulators figure a free-trade deal with the U.S. may help to attract more American buyers.

INTANGIBLE. Free trade also lessens Singapore's dependence on Southeast Asia. In 1998, Singapore fell into a recession because a quarter of its two-way trade was with the nations hardest hit by the crisis: Indonesia, Malay-sia, the Philippines, and Thailand.

Finally, Singapore is hoping for something intangible from its free-trade blitz. Maybe confidence will slowly return to Southeast Asia if the outside world sees a flurry of activity in Singapore and interprets it as a sign that the region is not completely "dormant," as a senior Singaporean official puts it. The idea is to build bridges between the Association of Southeast Asian Nations and, say, the North American Free Trade Area. "Singapore could become a linchpin in linking ASEAN with the rest of the world," says Supachai. "I think it's a good idea."

Not everyone thinks so. "We have to give priority to multilateral frameworks," Indonesian President Abdurrahman Wahid told BusinessWeek. "That would be for the prosperity of all, not one part of the region." Wahid wants Singapore to help restore Indonesia's economy, not search far afield for new trade partners.

But such resentments are not stopping Singapore's technocrats. A team of economists at National University of Singapore is running simulations showing that free-trade agreements could increase gross domestic product growth by nearly one percentage point. Singapore's planners are betting that the more free trade there is in the world, the better off Singapore will be--no matter what happens to the neighbors.

By Michael Shari in Singapore

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