Commentary

U.S.-Singapore’s FTA Packs a Quiet Punch

Thus far, the U.S.-Singapore Free Trade Agreement (USSFTA) has been met with overwhelming indifference in the United States. Americans are unconvinced of its significance. After all, the drama of an acrimonious domestic debate, customary during trade negotiations, was absent. And, Singapore is already one of the most open economies in the world, so the likelihood that the deal will spark a U.S. export surge is small. But such a dismissive assessment overlooks the full implications of the USSFTA, which in the years ahead could be considered a watershed of U.S. trade and foreign policy.

The relative quiet from U.S. anti-trade groups does not imply insignificance. Singapore doesn’t make steel, has no agricultural industries, and is hardly a competitive threat in textiles. And those industries comprise the majority of protectionist sentiment in the United States. Most of them will oppose the other trade deals in the pipeline, so arguably this one was the easiest to achieve politically. But these perceptions belie the significance of the USSFTA.

The USSFTA achieves sweeping liberalization in the area of services. U.S. banks, telecommunications suppliers, insurance companies, delivery firms, and law firms — many of which enjoy huge economies of scale and comparative advantage over Singaporean firms — have faced barriers to competing in Singapore; this agreement dismantles those barriers.

After notorious episodes of backtracking on steel and agriculture, the USSFTA is the first clear step forward for the Bush administration’s trade policy. The symbolism alone is important. It is the biggest U.S. free trade agreement since NAFTA, 10 years ago. It is a deal that offers an alternative approach — and prospective template — to how labor and environmental infractions should be addressed in trade agreements. It will be the first test of the president’s new trade promotion authority, which should be used frequently in the years ahead.

At present, the United States is engaged in several bilateral, regional, and multilateral trade negotiations. U.S. Trade Representative, Robert Zoellick has characterized this approach as “competitive liberalization.” By simultaneously pursuing multiple deals, the argument goes, countries will be compelled to abandon entrenched negotiating positions out of fear of missing the boat.

Champions of the multilateral approach warn that the web of country-specific regulations comprising dozens of independent agreements will be more trade diverting than expanding. While such concerns are valid, these potential costs must be measured against the cost of a multilateral stalemate. Zoellick’s strategy is to hedge on pursuing the multilateral track exclusively, which just might improve the odds of multilateral success.

If the United States vested its faith solely in the multilateral process, its failure to progress would mean no trade liberalization at all. Japanese and European intransigence to meaningful agricultural reforms will likely persist if the U.S. isn’t making progress on other fronts. But if the U.S. has viable alternatives, Japan and Europe might be inclined to adopt positions more amenable to U.S. interests. While the world would be better off if all countries removed their most onerous trade barriers, the conventional approach to trade negotiations is to yield as little as possible in the way of domestic reform in exchange for the greatest possible reforms abroad.

The USSFTA is a compelling testament to the “competitive liberalization” strategy. As international companies seek a presence in Singapore for, among other reasons, preferential access to the U.S. market, other ASEAN countries will have to improve their own appeal or risk losing even more investment and foreign exchange opportunities. Crafting their own deals - or a pan-ASEAN deal - with the U.S. will become priorities. Indeed, over the past several months, U.S. discussions with Thailand, the Philippines, and the Association of Southeast Asian Nations (ASEAN) have begun to take shape.

ASEAN is a market of 500 million people. Collectively it is the fourth largest export market for U.S. products, purchasing over $41 billion worth of U.S. goods in 2001. While the economic situation has stabilized within ASEAN since the depths of its financial crisis in 1998, economic growth has been stymied by anemic demand in the United States, Europe, and Japan, and by China’s ascent as the primary destination for foreign direct investment in Asia.

A U.S. deal with ASEAN would improve that region’s capacity to serve as an economic engine - a role Japan and Europe have proven incapable of fulfilling adequately. It will also signal to China and Japan that the United States is serious about this potentially lucrative region. Beyond the obvious economic benefits, this goal is consistent with the “competitive liberalization” philosophy. By staking a claim to ASEAN, the U.S. could deprive China or Japan of the opportunity to pursue a similar strategy there - or at least avoid being outflanked by them.

While ASEAN and China have already begun discussing prospects for bringing China into the group, current ASEAN members desire a deal with the U.S., nonetheless. China’s growing economic power is a source of concern for ASEAN nations, all of whom compete with China for Western investment, and most of whom would like to mitigate their dependence on the Chinese market. Indeed, they would also like greater immunity from China’s weak currency policy, which has made Chinese exports even more competitive. In this regard, a U.S-ASEAN deal would provide greater investment opportunities and alternative paths for economic growth in this geo-politically significant region.

Recognizing the link between economic stagnation and terrorism in Islamic countries, the Bush administration hopes to use trade policy to advance foreign policy objectives. Indeed, this is Zoellick’s primary justification for pursuing talks with Morocco. It is also applicable to Southeast Asia.

The USSFTA - and its possible extension to ASEAN — ties U.S. economic interests directly to a region of foreign policy concern. Indonesia, the most populous Muslim country, was the setting for the worst post-911 terrorist carnage to date. Al Qaeda cells are known to operate in the Philippines. Terrorist threats against sites in Thailand and other countries in the region have been pervasive. Increased U.S. engagement in the region would not only improve mutual economic prospects, but it help with the objective of eliminating breeding grounds for terrorism.

Unheralded at its arrival, the US-Singapore Free Trade Agreement will be viewed as a quiet, commendable achievement in the years ahead.

Daniel J. Ikenson is the associate director of the Center for Trade Policy Studies at the Cato Institute.