ANNEX ONE SINGAPORE 1. INTRODUCTION

ANNEX ONE SINGAPORE 1. INTRODUCTION As described in section 2 of the position paper, following the pause in negotiations of the regional ASEAN-EU FTA in March 2009, the Council in December 2009 gave the green light to initiate bilateral FTA negotiations with individual ASEAN countries beginning with Singapore. These individual agreements should be seen as building blocks towards the ultimate objective of an agreement with ASEAN countries in the regional framework. The first set of negotiations started with Singapore in early 2010 with the first round being held from 8-15 March. As set out in the position paper, when the SIA was commissioned, negotiations were in progress to conclude an EU-ASEAN FTA. By the time the study was completed the negotiations had been paused. While the SIA deals with the impacts of the EU-ASEAN FTA, these findings remain valid and relevant in view of the EU's ultimate goal of an agreement in the regional framework with ASEAN, despite the focus on bilateral agreements will during an intermediate phase. This being said, the study does contain useful elements at country level which will be relevant for bilateral negotiations. It provides country level details where relevant (specific issues and sectors) and gives an overall picture of directions and magnitude of impacts, with a special focus on the impact of concluding an FTA with the EU on individual ASEAN countries. And with long term objectives unchanged, the longer term impacts should remain more or less the same. However, there may be some effects that are not taken into account at this moment in the modelling results, including for instance first mover advantages. In the case of Singapore in particular, gains may be staggered over time, as the gains described in the study will partially depend on also other ASEAN countries concluding a preferential agreement with the EU. Only such a more comprehensive trade liberalisation between the EU and ASEAN countries will lead to substantially increased trade and investment within ASEAN as a region, and a substantial part of Singapore's gains from an EU- ASEAN FTA would derive from its position as a hub connecting other ASEAN countries with external trade partners like the EU. Singapore holds a unique status amongst ASEAN countries as a developed and industrial economy with a highly educated population. Singapore is often rated as one of the easiest country in the world with which to do business and in terms of transparency and corruption issues, Singapore is one of the world s leaders ranked 4th in the Global Enabling Trade Report 2008. Singapore's developed open economy, its experience in FTA negotiations (both alone or as part of the ASEAN group) and its record in concluding ambitious agreement with developed economies like the US and Japan indicate that the EU could aspire to negotiate a comprehensive and ambitious FTA with Singapore. It would not seem unreasonable to expect that overall, negotiations in the three main negotiating areas tariffs, services and the regulatory issues (such as intellectual property, government procurement, regulatory transparency, sustainable development, competition and dispute settlement) will lead to ambitious results. Such an outcome would provide a valuable point of reference also for other FTA negotiations. In this sense, for the EU the merit of FTA negotiations with Singapore lies as much in the intrinsic commercial benefit of such a deal, as in the systemic value of establishing a good precedent of what a comprehensive 21 st century FTA should look like. In terms of its relationship with the EU, Singapore is the largest receiver of EU FDI in ASEAN. It has zero tariffs on most goods coming into its territory. Under an FTA, the most important sector affected, both in the EU and Singapore, will be the services sector and in particular financial and professional services. In contrast, for example certain environmental issues are less relevant to Singapore in the absence of large forests or substantial agricultural or fishing activities. 1

This annex will highlight some of the economic, social and environmental impacts on Singapore of an FTA as predicted by the study, looking at sectors which are likely to be most affected in Singapore. Section 2 will examine the findings of the report and Section 3 will examine the policy recommendations of the SIA in relation to Singapore. The impact on the EU of an FTA is discussed in the position paper. 2. OVERVIEW OF FINDINGS i. ECONOMIC According to the study, the overall effects of an FTA are positive for Singapore. Under the most ambitious scenario, national income could rise by 21.5 billion, GDP could increase by 12.89%, skilled real wages could increase by 10.84%, unskilled real wages by 9.36% and the value of exports could increase by 13.82%. The authors of the study also argue that in percentage terms Singapore stands to gain most in the electronics equipment, textiles and insurance sectors. However, textiles is small to negligible in absolute terms in comparison to other ASEAN countries and overall Singapore stands to gain most in the services sector. Manufacturing sectors such as machinery and equipment and transport equipment see a declining trend. Singapore will also see an increasing demand for skilled labour, as its economy shifts towards higher value added and skilled activities. The expansion of the insurance sector is also expected to be a main contributor to real income growth. Investments and the reallocation of capital are the main drivers behind the long run dynamic efficiency gains from an FTA, which have been assessed as potentially substantial. Singapore, which already has high base of fixed capital formation, will therefore see substantial dynamic effects in the longer run. In absolute terms and thus substantially affecting expected GDP growth, Singapore stands to gain most substantially in terms of increased trade flows, consolidating its position as a regional trading, sourcing and distribution hub and financial centre. In specific sectors, Singapore sees small shifts as many of its industries are small scale. For example agriculture shows some very low percentage shifts but with agriculture only representing 0.1% of Singapore s economy the effects are negligible. Although small, the textile industry in Singapore could see an increase in output of up to 17.56% under the most ambitious long term scenario. The wearing apparel industry is expected to decline in Singapore and the leather industry may see a decline in terms of output and employment. It is possible that textile producers will set up a main production/distribution centre for specific high-end products, which can then be used by regional apparel producers, especially in a scenario of the EU concluding FTAs with many ASEAN countries. This example already illustrates the strong inter-linkages between the textiles and apparel sectors, which are often reflected in trade. There is also a strong predicted export performance of textile exports for Singapore which may be explained by its role as a regional node for distribution of specialised textiles from foreign investors. Singapore is already an important global player in financial services (and to a lesser extent in insurance services) with financial services and insurance accounting for more than 10% of GDP. Singapore has a competitive advantage in the financial services sector in ASEAN and will benefit most significantly in this sector from an FTA with a large increase expected in its exports of both financial services (almost 18 percent under scenario 2 and 3) and insurance (around 28 percent under the same scenarios). Increases in output (e.g. increases in bank services provided, asset management services provided, etc.) are expected to be most substantial with a gain of almost 6.7 percent in the long run most ambitious scenario. For insurance, output is expected to increase by 16 percent in the long run. This is likely to translate into a substantial impact on the economy as a whole as the financial services sector, 2

including insurance, constituted 12.4 percent of total value added in 2007. Employment of both skilled and unskilled workers in the financial services and insurance sectors will see a clear increase. In terms of the opening up of the EU s market in financial services, from Singapore s perspective although the EU has opened its markets significantly, the study argues that a major non-tariff barrier is constituted by the absence of convergence in regulation among member states, including accounting standards and differences in the implementation of the Basle-II framework for banks, as well as different regulatory requirements for banking and other financial services. These relate to reciprocal national treatment clauses, local licensing requirements, regulatory approval for setting up operations, and the absence of national treatment in some cases. The SIA study also highlights the current situation in the financial services sector and points out factors of interest to EU negotiators, for example: though foreign equity limits have been removed the government has indicated that it will not allow foreign ownership of some main banks; Bound WTO commitments still set a 49 percent limit on foreign ownership for insurance; entry for reinsurance broking and MAT insurance is only open to US companies (approved by Monetary Authority of Singapore); Foreign full banks, except for US banks, may not increase their number of places of business without approval of the Singapore Monetary Authority; they are limited to up to 25 branches and offsite ATMs. (Under the US-Singapore FTA, US banks can establish as many branches as a local Singaporean bank). Restrictions on new establishments of insurance companies and representative offices, branching permitted only when engaged in external business only; Singapore also would stand to gain from improvement in IPR protection levels as a better operating environment for IP-centric firms and sectors would in turn induce knowledge and technology transfers. The CGE model results in the SIA estimate that the income gains attributable to NTB reduction in EU- ASEAN FTA for ASEAN as a whole lies between 6,7 billion (scenario 1) and 20 billion (scenario 3). The deeper the FTA scenario, the larger the gains for ASEAN as a whole are expected to be. In scenario 3, Singapore would gain significantly. Given the large estimated effect of IP infringements on investment in the ASEAN region, the results from the CGE model are expected to underestimate the positive impacts on the economy induced by FDI (which is not completely incorporated into the model). This implies that additional FDI attraction effects, induced by improved IPR climates, might bring significant additional benefits to the ASEAN regions, especially for Thailand and Singapore and in knowledge-intense or copyright-sensitive sectors ii. SOCIAL In the small textile and garments sector, working conditions in Singapore are generally found by the study to be good with comparatively clean and safe working conditions in factories. Migrant workers make up a significant share of the total workforce in the textiles and particularly clothing factories. Many are legal migrants from e.g. Indonesia and Bangladesh. Singapore has signed a number of agreements with labour exporting countries on temporary labour. Laws on trade unions do exist, but the role assumed by trade unions is sometimes questioned. Under an FTA some employment increases are to be expected in the textiles sector in Singapore. However it should be borne in mind that this is a small sector compared to Singapore's overall economy. Any increase will in any case exert a pull on workers from other Asian countries, given the dependence of the TCF sectors on foreign workers in Singapore. The biggest expected decrease in 3

employment from an FTA (percentage change in unskilled labour in the long range scenario would be 14.5% for clothing and 14.9% for footwear which represent a very small percentage of the workforce In the financial services sector, as opposed to most other ASEAN countries, employment is expected to increase together with the insurance sector. The SIA model expects an increase of 4.42% in skilled labour and 5.93% in unskilled labour. The effects on other sectors in Singapore are likely to be negligible. For example in the small fisheries sector, employment could decrease by between 0.3 and 3% in the long run. The effect of increased FDI in ASEAN is not included in the modelling results. This is likely to affect employment positively and particularly in Singapore as - at least so far - the main recipient of FDI in ASEAN. To the extent that this investment concerns outsourcing of activities, it is likely to benefit unskilled workers most, as they have traditionally been the main focus of outsourcing of back office services in the financial sector. In the longer-run, outsourcing may concern medium skilled and higher skilled labour as well. ii. ENVIRONMENTAL Given the scope of business activities pursued in Singapore, on its own the environmental impact of an FTA will be negligible. However, in its role as a major trading hub, Singapore cannot turn a blind eye to environmental issues, for instance in relation to illegal trade in environmentally sensitive goods (e.g. timber, wildlife, waste and chemicals) The effects of increased ASEAN-EU trade are difficult to quantify and the SIA does not attempt to break down the effects per country. The general effects as detailed in the main position paper under section 3 can be equally applied to Singapore. 3. RECOMMENDATIONS MADE BY THE CONSULTANT AND THE COMMISSION SERVICES' VIEWS ON THEM The recommendations of the SIA apply to all the ASEAN countries and as such, most of the conclusions in the chapter on recommendations (section 4) can be applied to Singapore, albeit to varying degrees on account of Singapore's peculiar economic structure vis-à-vis other ASEAN countries. This section highlights recommendations of particular relevance to Singapore. i) FTA Measures Inclusion of a sustainable development chapter As stated in the section 4.1, inclusion of a trade & sustainable development chapter is an essential feature in a modern EU FTA. While Singapore can be expected to abide by high labour standards and has signed up the core ILO conventions and similarly in the area of environment to have ratified the major conventions, measures to promote high levels of labour and environmental standards, including fisheries governance, are important. This is important for Singapore itself but will also be an important example for future bilateral FTAs. More discussions will be necessary on civil society dialogue including with trade unions. Such dialogues would enable civil society to take a strong role in monitoring and evaluation of the FTA as recommended by the consultants. As already mentioned, Singapore s economy is already rather open so some of the recommendations such as improvement of the business and investment climate are much less relevant in this specific context. 4

Singapore as a highly developed country receives no development assistance from the EU. Therefore, the EU will be ready to provide assistance in the form of dialogue and policy advice to address the issues arising from adjustment costs brought about by the FTA (recommendation 11) As far as specific economic issues are concerned dialogue and cooperation could be enhanced on competition policy issues. Although Singapore has liberalised and deregulated her economy well ahead of her ASEAN neighbours, it has only recently developed a Competition Law. Singapore has long argued that an open trade and investment regime will transmit competitive forces throughout the domestic economy. However, the experience of other countries shows that local firms and even government monopolies may collude to restrict entry. In 2004, the Competition Act was passed and Competition Authority established. ii) SOCIAL Most of the recommendations of the SIA are not under the remit of the EU as Singapore is not a recipient of EU assistance. Singapore's commitment to labour standards can be demonstrated by the fact that it has ratified twenty ILO Conventions covering a wide range of topics, among them forced labour, the worst forms of child labour, the right to organize and collective bargaining. More than 70 other instruments are under consideration with a view to ratification. In 2005 Singapore became the first deputy member of the ILO s Governing Body from the ASEAN grouping. The country has been elected as a titular member of the Governing Body for the ASEAN region for the term 2008-2011. iii) ENVIRONMENTAL While the environment is not expected to be significantly affected by additional commercial activity within Singapore, Singapore is still involved in these issues by virtue of its status as trading hub with ASEAN, and as member of the ASEAN group. For example, the issue of timber products harvested illegally and exported via Singapore merits attention, as does any illegal trade in environmentally sensitive goods. How this and other environmental issues (NTBs facing environmental goods and services, the scope for greener public procurement and investment patterns etc.) can best be addressed requires further reflection and dialogue with Singapore. 4. CONCLUSION Singapore holds a unique position in ASEAN as an economy that is, in terms of GDP per capita, on equal terms with the EU. Singapore can expect to gain most from the opening up of the financial services sector and the EU s services industry in general will benefit. The FTA can also provide the EU and Singapore an opportunity to declare their mutual interest and commitment to multilateral initiatives on a range of issues from human rights to climate change. 28/06/2010 5