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

This article appeared on Cato.org on December 13, 2002.
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Thus far, the U.S.-Singapore Free Trade Agreement (USSFTA) hasbeen met with overwhelming indifference in the United States.Americans are unconvinced of its significance. After all, the dramaof an acrimonious domestic debate, customary during tradenegotiations, was absent. And, Singapore is already one of the mostopen economies in the world, so the likelihood that the deal willspark a U.S. export surge is small. But such a dismissiveassessment overlooks the full implications of the USSFTA, which inthe years ahead could be considered a watershed of U.S. trade andforeign policy.

The relative quiet from U.S. anti-trade groups does not implyinsignificance. Singapore doesn't make steel, has no agriculturalindustries, and is hardly a competitive threat in textiles. Andthose industries comprise the majority of protectionist sentimentin the United States. Most of them will oppose the other tradedeals in the pipeline, so arguably this one was the easiest toachieve politically. But these perceptions belie the significanceof the USSFTA.

The USSFTA achieves sweeping liberalization in the area ofservices. U.S. banks, telecommunications suppliers, insurancecompanies, delivery firms, and law firms -- many of which enjoyhuge economies of scale and comparative advantage over Singaporeanfirms -- have faced barriers to competing in Singapore; thisagreement dismantles those barriers.

After notorious episodes of backtracking on steel andagriculture, the USSFTA is the first clear step forward for theBush administration's trade policy. The symbolism alone isimportant. 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 environmentalinfractions should be addressed in trade agreements. It will be thefirst test of the president's new trade promotion authority, whichshould be used frequently in the years ahead.

At present, the United States is engaged in several bilateral,regional, and multilateral trade negotiations. U.S. TradeRepresentative, Robert Zoellick has characterized this approach as"competitive liberalization." By simultaneously pursuing multipledeals, the argument goes, countries will be compelled to abandonentrenched negotiating positions out of fear of missing theboat.

Champions of the multilateral approach warn that the web ofcountry-specific regulations comprising dozens of independentagreements will be more trade diverting than expanding. While suchconcerns are valid, these potential costs must be measured againstthe cost of a multilateral stalemate. Zoellick's strategy is tohedge on pursuing the multilateral track exclusively, which justmight improve the odds of multilateral success.

If the United States vested its faith solely in the multilateralprocess, its failure to progress would mean no trade liberalizationat all. Japanese and European intransigence to meaningfulagricultural reforms will likely persist if the U.S. isn't makingprogress on other fronts. But if the U.S. has viable alternatives,Japan and Europe might be inclined to adopt positions more amenableto U.S. interests. While the world would be better off if allcountries removed their most onerous trade barriers, theconventional approach to trade negotiations is to yield as littleas possible in the way of domestic reform in exchange for thegreatest possible reforms abroad.

The USSFTA is a compelling testament to the "competitiveliberalization" strategy. As international companies seek apresence in Singapore for, among other reasons, preferential accessto the U.S. market, other ASEAN countries will have to improvetheir own appeal or risk losing even more investment and foreignexchange opportunities. Crafting their own deals - or a pan-ASEANdeal - with the U.S. will become priorities. Indeed, over the pastseveral months, U.S. discussions with Thailand, the Philippines,and the Association of Southeast Asian Nations (ASEAN) have begunto take shape.

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

A U.S. deal with ASEAN would improve that region's capacity toserve as an economic engine - a role Japan and Europe have provenincapable of fulfilling adequately. It will also signal to Chinaand Japan that the United States is serious about this potentiallylucrative region. Beyond the obvious economic benefits, this goalis consistent with the "competitive liberalization" philosophy. Bystaking a claim to ASEAN, the U.S. could deprive China or Japan ofthe opportunity to pursue a similar strategy there - or at leastavoid being outflanked by them.

While ASEAN and China have already begun discussing prospectsfor bringing China into the group, current ASEAN members desire adeal with the U.S., nonetheless. China's growing economic power isa source of concern for ASEAN nations, all of whom compete withChina for Western investment, and most of whom would like tomitigate their dependence on the Chinese market. Indeed, they wouldalso like greater immunity from China's weak currency policy, whichhas made Chinese exports even more competitive. In this regard, aU.S-ASEAN deal would provide greater investment opportunities andalternative paths for economic growth in this geo-politicallysignificant region.

Recognizing the link between economic stagnation and terrorismin Islamic countries, the Bush administration hopes to use tradepolicy to advance foreign policy objectives. Indeed, this isZoellick'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 forthe worst post-911 terrorist carnage to date. Al Qaeda cells areknown to operate in the Philippines. Terrorist threats againstsites in Thailand and other countries in the region have beenpervasive. Increased U.S. engagement in the region would not onlyimprove mutual economic prospects, but it help with the objectiveof eliminating breeding grounds for terrorism.

Unheralded at its arrival, the US-Singapore Free Trade Agreementwill be viewed as a quiet, commendable achievement in the yearsahead.