ORIGINAL PAPER Assessing the economic impacts of the EU-Singapore FTA with a dynamic general equilibrium model Zornitsa Kutlina-Dimitrova & Csilla Lakatos # European Union 2013 Abstract Negotiations for the EU-Singapore FTA were concluded on December 6, 2012. Given that this is the EU’ s first FTA with an ASEAN member country and the second one with a major Asian trading partner after the conclusion of the EU-Korea FTA, this agreement paves the way for future FTAs with countries in the region. The goal of this paper is to quantify the economic impacts of the EU-Singapore FTA using a dynamic computable general equilibrium model. The resutls estimated in this paper suggest that the bilateral reduction of tariff and non-tariff barriers brings benefits for both sides: Singapore GDP is expected to increase by € 2.7 billion whereas the EU gains are assessed at € 550 million. In addition, EU exports to Singapore would rise by some € 1.4 billion and Singapore’ s exports to the EU by some € 3.5 billion. In a complementary scenario, the current paper also assesses the value of this FTA as an insurance policy against any hypothetical tariffs hikes in Singapore to WTO bound levels. In such a “worst case” scenario, the EU-Singapore FTA will protect EU GDP from a decrease of € 350 million and prevents a loss of € 3.7 billion EU exports to Singapore. JEL classiffication F13 . F14 . C68 1 Introduction Recent years have seen a remarkable increase in the number of regional trade agree- ments 1 (RTAs). According to the WTO, some 575 RTAs (counting goods, services and Int Econ Econ Policy DOI 10.1007/s10368-013-0262-7 1 WTO defines a regional trade agreement as a reciprocal trade agreement between two or more trading partners. Acknowledgments The opinions expressed in this paper are the authors’ own and do not necessarily reflect any views of the European Commission. Z. Kutlina-Dimitrova (*) : C. Lakatos Chief Economist Unit, European Commission, DG Trade, Brussels, Belgium e-mail: [email protected]C. Lakatos e-mail: [email protected]
Transcript
ORIGINAL PAPER
Assessing the economic impacts of the EU-Singapore FTAwith a dynamic general equilibrium model
Zornitsa Kutlina-Dimitrova & Csilla Lakatos
# European Union 2013
Abstract Negotiations for the EU-Singapore FTA were concluded on December 6,2012. Given that this is the EU’s first FTA with an ASEAN member country and thesecond one with a major Asian trading partner after the conclusion of the EU-KoreaFTA, this agreement paves the way for future FTAs with countries in the region. Thegoal of this paper is to quantify the economic impacts of the EU-Singapore FTA using adynamic computable general equilibrium model. The resutls estimated in this papersuggest that the bilateral reduction of tariff and non-tariff barriers brings benefits forboth sides: Singapore GDP is expected to increase by € 2.7 billion whereas the EUgains are assessed at € 550 million. In addition, EU exports to Singapore would rise bysome € 1.4 billion and Singapore’s exports to the EU by some € 3.5 billion. In acomplementary scenario, the current paper also assesses the value of this FTA as aninsurance policy against any hypothetical tariffs hikes in Singapore to WTO boundlevels. In such a “worst case” scenario, the EU-Singapore FTA will protect EU GDPfrom a decrease of € 350 million and prevents a loss of € 3.7 billion EU exports toSingapore.
JEL classiffication F13 . F14 . C68
1 Introduction
Recent years have seen a remarkable increase in the number of regional trade agree-ments1 (RTAs). According to the WTO, some 575 RTAs (counting goods, services and
Int Econ Econ PolicyDOI 10.1007/s10368-013-0262-7
1WTO defines a regional trade agreement as a reciprocal trade agreement between two or more tradingpartners.
Acknowledgments The opinions expressed in this paper are the authors’ own and do not necessarily reflectany views of the European Commission.
Z. Kutlina-Dimitrova (*) : C. LakatosChief Economist Unit, European Commission, DG Trade, Brussels, Belgiume-mail: [email protected]
accessions separately) have been notified to the GATT/WTO from the early 1990s untilend of July 2013. Of these, 379 entered into force. The European Union (EU)concluded more than 35 FTAs, the majority of which already entered into force andrecently finalised negotiations of trade agreements with Canada, Singapore, Columbia,Peru, Central America and Ukraine, just to mention a few. These notable efforts inliberalising external trade and investment continue as the EU is currently negotiatingfree trade agreements (FTAs) with India, MERCOSUR, Eastern Neighbourhood andAfrican, Caribbean and Pacific countries (ACP). Moreover, the EU has set up anambitious trade policy agenda for the coming years and launched, what is expectedto be the biggest trade deal ever, the Transatlantic Trade and Investment PartnershipAgreement with the US. Negotiations with Japan, Thailand and several others have alsobeen launched.
It is indisputable among economists that the economic gains from multilateral tradeand investment liberalisation are the largest. Nonetheless the increasing number ofRTAs shows that countries and regions have decided to focus attention on regional freetrade agreements. The reason for this is simple: the Doha Development Round (DDR)negotiations are currently stalling and multilateral liberalisation has not made anysubstantial progress 2 so far. The EU, as many other countries/country blocks, hasdecided to reap the economic benefits of bilateral/regional trade and investmentliberalisation in the meantime.3
One way of multiplying the gains from regional free trade is by striving a deepeningof the level of FTA commitments not only by elimination of tariffs but also non-tariffbarriers (NTBs) in goods and services trade and liberalising investment flows. Oneexample of an ambitious free trade agreement of this type is the one analysed in thispaper, i.e. the FTA between the EU and Singapore. The negotiations for this agreementwere concluded on 16 December 2012.4 This is the first EU agreement with a memberof the Association of Southeast Asian Nations (ASEAN) and the second with a majorAsian trading partner, after the conclusion of the EU-Korea FTA.
The rationale for concluding the EU-Singapore FTA is apparent on both sides. Forthe EU, Singapore is the most significant trading partner in the region, accounting forabout one third of EU-ASEAN trade in goods and services. In 2011 Singapore was thelargest ASEAN investor in the EU; it accounted for 94 % of the ASEAN inwardinvestment stocks in the EU.5 Over 8800 EU companies have established affiliates inSingapore. Many European companies are serving the entire region out of Singapore.As for Singapore, the EU is the second largest trading partner after Malaysia in 2012.Singapore is also a recipient of more than 60 % of all EU outward investment stocks toASEAN countries. After the entry into force of the agreement Singaporean exporterswill benefit from increased market access to an internal market with 500 millionconsumers in 28 EU Member States.
2 On the economic reasoning of the Doha round failure, see Mattoo and Subramanian (2009).3 Decreux and Fontagné (2011) estimate the economic impact of potential outcome of the Doha developmentagenda (DDA). The authors estimate total economic gains of $167 billion using dynamic computable generalequilibrium model of the world economy (MIRAGE). Note however that these gains do not include any cutsin NTBs in goods and merely a 3 % cut in services barriers is applied in the model. The study takes account ofthe level of commitments in liberalising good and services trade submitted in the Doha round.4 The entry into force is expected by the fall 2014 after the completion of regulatory procedures.5 Eurostat, latest figures available 2011.
Z. Kutlina-Dimitrova, C. Lakatos
The goal of this paper is to analyse the economic impact of the EU-SingaporeFTA with a dynamic general equilibrium model by reflecting the modalities of therecently negotiated agreement. Exploring the existing academic literature there isno other assessment of the economic impact of the FTA between the EU andSingapore to the knowledge of the authors. The only study available is Ecorys(2009) which examines the impact of the FTA between the EU and ASEAN usinga general equilibrium model.6
The rest of the paper is organized as follows: Section 2 describes the modellingframework used as a basis for the economic analysis; Section 3 presents the design ofthe simulations, i.e. the EU-Singapore FTA and an alternative scenario of Singaporeraising its tariffs to levels bound in the WTO. Section 4 presents and discusses theeconomic results of the simulated scenarios and finally, Section 5 provides conclusionsand policy implications.
2 Modelling framework
The economic analysis of the FTA between the EU and Singapore is based on adynamic computable general equilibrium (CGE) model of the world economy. Modelsof this type are built to answer what-if questions by simulating the response ofmacroeconomic variables such as income, prices, production, etc. given certain changesin trade policy measures.
A main feature of dynamic CGE models is a simulation of a dynamic baseline thatoffers the benchmark against which the estimated policy changes will be compared toand a set of scenarios, reflecting different changes in the policy environment. This set-up enables a straight-forward comparison between clearly distinguishable economicoutcomes. The baseline scenario incorporates projections of the economic status-quo ofthe analysed economies, under the assumption that there are no specific changes inpolicy. The simulated scenarios, on the other hand, reflect the economic outcome of apolicy change as a difference to the baseline.
The model used for carrying out the economic assessment here is the dynamicGTAP model (GDyn). GDyn (Ianchovichina and McDougall 2000) is a multi-sector,multi-region dynamic general equilibrium model and extends the standard, comparativestatic version of the GTAP model (Hertel 1997) by including international capitalmobility, endogenous capital accumulation and adaptive expectations theory of invest-ment in a recursive dynamics setting. Savings are treated as in the comparative staticGTAP model where the representative household allocates regional income that wouldmaximize per capita utility based on a Cobb-Douglas utility function complementedwith non-homothetic preferences on the private consumption side. The Cobb-Douglasspecification keeps the budget shares constant, implicitly assuming a constant marginalpropensity to save of the household.
Capital is assumed to be perfectly mobile across sectors determining a single rentalprice of capital that clears the market. As in most recursive dynamic models, eachperiod’s equilibrium determines the level of global savings and implicitly the aggregateamount of investment expenditure available in that specific period. International capital
6 A comparison between the two modelling assessments will be made further on in the current paper.
Assessing the economic impacts of the EU‐Singapore FTA
mobility is modelled using a disequilibrium approach that reconciles investment theorywith empirical findings.
The disequilibrium approach of GDyn is described by two mechanisms: first, thereis a gradual convergence of expected rates of return in the long run; and second, errorsin expectations with respect to the actual rate of return are eliminated over time.Investors are assumed to respond to expected rates of return when making investmentdecisions allowing for errors in expectations.
The base year for the simulations is 2007 which is the default year of the GTAP 8.1database (Narayanan et al. 2012). The modelling results are reported with respect to thebaseline and projected out 10 years to the year 2025.7 Tariffs are explicitly included inthe standard GTAP database and can therefore be directly linked to the model from thestandard database.
2.1 Regional aggregation
The GTAP 8.1 database contains 134 different countries/regions. In order to be able tofocus on key results and the countries of interest, regions have been bundled toaggregates. The countries/regions selected for an explicit analysis in the CGE model-ling of the FTA between the EU and Singapore are the following: EU27, Singapore,USA, Australia, New Zealand, Japan, Korea, rest of ASEAN and finally, the rest of theworld.
2.2 Sectoral aggregation
The GTAP database contains 57 sectors which were aggregated into 14 main sectors forthe purposes of this paper. The reason for this aggregation is that reducing the numberof the sectors enables to focus on key results and strikes a balance between compre-hensiveness and readability. Table 8 in the annex provides an overview of the sectorsselected for the CGE modelling. The last column shows the chosen sectoral aggregationwhile the first column lists the GTAP sectors included in this aggregation.
2.3 Calculation of applied and bound tariffs per sector
Table 1 presents applied tariffs by sector in the GTAP database and depicts the relativeprotectiveness of certain sectors in the EU and Singaporean economy. In the case ofSingapore, EU exporters of beverages and tobacco products face an overall 2.02 %tariff while all other sectors are completely liberalised. On the other hand, exportersfrom Singapore to EU markets face significantly higher barriers especially in textiles(9.9 %), beverages and tobacco (4.6 %) and low-tech manufacturing (4.02 %). The lastcolumn of the table displays bound tariff rates per sector for Singapore. These are fedinto the model to simulate a hypothetical scenario of Singapore raising its tariffs tolevels bound in the WTO (see Section 3).
7 The baseline contains projections of different macroeconomic variables such as GDP, population, skilled andunskilled labour. In addition, the EU-Korea FTA has been included in the baseline.
Z. Kutlina-Dimitrova, C. Lakatos
3 Simulation design
Two scenarios have been simulated using the dynamic general equilibrium modeldescribed in Section 2. The first scenario quantifies the direct economic effects of afull-fledged FTA between the EU and Singapore. It reflects the removal of all appliedtariffs on goods imports from Singapore in the EU, as well as the removal of the fewSingaporean tariffs faced by EU exporters, according to the agreed implementationschedule.8 In addition to the liberalisation of tariffs, a symmetric reduction (for the EUand Singapore) of services NTBs of 3 %9 is applied in the model. This reflects cost-savings from reduced uncertainty for businesses achieved by binding applied levels ofservices sector protection. Binding protection enables predictability of the trade policyregime, which in turn positively affects trade and investment flows.
Cutting services barriers by 3 % is considered a conservative assumption as itreflects only the level of binding as opposed to higher reduction in services NTBswhich would imply additional market access. Indeed, the agreement envisages cross-cutting rules on NTBs that go beyond those specified in WTO agreements. Forinstance, the agreement will facilitate trade in electronics by removing double testingrequirements; it will also enhance trade of products of animal origin (e.g. meat) by
8 Singapore eliminates all tariffs at entry into force. EU eliminates 75 % of tariffs at entry into force, 85 % after3 years and 99.99 % after 5 years.9 The figure of 3 % as an estimation of trade cost reduction in services trade was applied in the same context inDecreux and Fontagné (2011).
Table 1 Applied and bound tariffs by sector in (%)
Sectors Applied trade weighted tariffs Bounda trade weightedtariffs in Singapore
Faced by the EU Faced by Singapore
Agriculture and minerals 0.00 2.52 10.00
Tobacco and beverages 2.02 4.60 3.46
Primary energy products 0.00 2.77 10.00
Low-tech manufacturing 0.00 4.02 7.34
Textiles 0.00 9.90 10.00
Energy 0.00 0.00 0.00
Chemicals 0.00 2.43 4.45
Middle-tech manufacturing 0.00 2.24 6.35
High-tech manufacturing 0.00 1.42 9.11
Electronics 0.00 0.41 1.10
Machinery 0.00 1.49 5.40
GTAP 8.1, WTO Bound Concession data and own calculationsa For tariffs lines that are unbound i.e. which are not included in the WTO concession data, it is assumed thatthe bound rate is equal to the trade weighted average of the bound rate of the HS2 chapter the consideredproduct belongs to. For tariff lines that are bound at very high rates (such as beer and tobacco products) thebound rate is assumed to be twice as high as the currently applied MFN tariff rate
Assessing the economic impacts of the EU‐Singapore FTA
setting up inspection and certification systems rather than of individual evaluations.These are two examples of areas in which cuts in goods NTBs were agreed.10 Due tothe lack of data availability, these specific measures have not been assessed with thegeneral equilibrium model used for the economic impact analysis.
The second scenario simulates the economic effects of Singapore raising its tariffs toboundMFN levels, which would have been possible had the FTA not been concluded.11
This scenario can therefore be considered as an “insurance” scenario, i.e. creating theFTA between the EU and Singapore will protect EU economies from an increase inprotectionism. The results presented in Sub-section 4.2 could therefore be considered asindirect economic gains for Singapore and for the EU of concluding the FTA. In order toimplement this scenario into the CGE model described above, bound rates werecomputed and fed into the model (see last column of Table 1). These bound rates areused to shock the model i.e. it is assumed that applied tariffs are raised to these levels.
4 Results
This section presents and discusses the macroeconomic and sectoral results. Theeconomic outcome is depicted relative to the baseline scenario and projected out to2025. The relative cumulative changes presented in the tables below hence reflect themarginal impact of establishing an FTA between the EU and Singapore or that ofraising Singapore tariffs to bound levels.
4.1 The EU-Singapore FTA: economic effects
This scenario considers the economic effects of abolishing all tariffs on imports in boththe EU and Singapore, as well as a symmetric reduction in services NTBs of 3 %.
Table 2 summarises the main results for the EU and Singapore. It is found thatbilateral trade liberalisation leads to an increase in real GDP in both countries althoughgains are of a different order of magnitude. EU GDP grows marginally in real termscorresponding however to a gain of nearly € 550 million 12 in absolute terms.Singapore’s economy on the other hand exhibits a significantly higher real growth rateof 0.94 % corresponding to a gain of € 2.7 billion.13 These results are in line withexpectations, as Singapore gains significant market access to European markets while
10 For more information on the agreement modalities see, Chief Economist Note (2013).11 Note that the second scenario considers tariff increases only as opposed to additional increase in servicesNTBs.12 Note that the GTAP database is denominated in US dollars. For the purpose of this paper, results areconverted in euros at an exchange rate of 1.3 EUR/Dollar.13 Ecorys (2009) estimates higher real economic gains than the current paper. There are several reasons forthat. In the first place the scenarios developed for the modelling simulations rely on very ambitiousassumptions in respect to the NTBs reduction in services trade. The most modest scenario assumes 25 %reduction of services barriers whereas the current paper assumes only 3 %. In addition, the same scenarioincludes 1 % cut in trade facilitation cost which is not included in the scenarios simulated in the current paper.Another feature of the modelling assumptions in the study is the inclusion of the completion of the Doha roundin the baseline. Finally, Ecorys (2009) estimates higher economic gains also because it considers an FTAbetween the EU and ASEAN i.e. tariffs and services NTBs cuts have been applied to all ASEAN countries andthe EU and not only to the bilateral EU-Singapore trade as in the current paper.
Z. Kutlina-Dimitrova, C. Lakatos
on the other hand tariffs applied by Singapore on imports from the EU were almostfully liberalised before the conclusion of the FTA.14
Similarly, the creation of the FTA with Singapore leads to a strong rise in bilateralexports between the two regions. EU exports to Singapore increase by 3.6 % (nearly €1.4 billion) and Singapore exports to the EU by 10.4 % (€ 3.5 billion).
Furthermore, EU and Singapore total imports and exports increase as well althoughless strongly than bilateral exports. This finding reflects trade diversion effects as far asthe rest of the world is concerned: as the EU and Singapore trade more amongst eachother, their trade with the rest of the world decreases. In addition, the growth of total EUexports is stronger than that of imports implying a positive effect on the EU trade balance.On the contrary, in Singapore total imports increase more than total exports implying adeterioration of its trade balance. This means that the significant real growth of theSingapore economy can be linked to an even stronger growth in imports pointing towardssignificant share of imported intermediates in Singapore economy. Indeed, the share ofimported intermediates in total production costs is close to 50 % and it ranges dependingon the sector from 23% in other commercial services to 92% in primary energy products.
From a dynamic point of view (see Fig. 1), in the EU most of the GDP gains (87 %)from liberalising trade materialise in the first 5 years: 68 % in the first year and the restwithin the next 4 years. The evolution of the overall trade balance exerts a negative pressureon EUGDP growth in the period 2014–2020 but this later turns into a positive contributionas exports grow stronger than imports in the period 2020–2025. Finally, investment growthexplains most of the increase in EU GDP in the initial stages of the liberalisation but asrelative rates of return decline in the EU, investment grows less strongly starting from 2016.
In the case of Singapore, gains from the agreement are more back-loaded as only51 % of the gains materialize in the first 5 years. As in the case of the EU until 2016,overall trade balance contributes negatively to GDP growth in Singapore over the
14 The exception is constituted by a few tariff lines corresponding to raw and processed tobacco products andalcoholic beverages.
Table 2 Macroeconomic effects of the EU-Singapore FTA
Country/variable In % In millions of euros
Real GDP
EU 0.00 548
Singapore 0.94 2651
Total exports (in volumes)
EU 0.01 710
Singapore 0.76 2105
Total imports (in volumes)
EU 0.01 587
Singapore 0.97 2576
Bilateral trade
EU exports to Singapore 3.57 1389
Singapore exports to the EU 10.36 3546
Authors’ simulations based on GDyn
Assessing the economic impacts of the EU‐Singapore FTA
simulated period, but the gap between the increase of imports and exports shrinks overthe years simulated here. On the other hand, increase in investment in Singaporecontributes significantly to GDP growth as investment flows increase by 0.84 % inthe first year of the liberalisation and continues growing to 2.05 % in 2025. These gainshowever are not entirely attributable to Singapore as EU companies are owners of alarge part of the capital stocks in Singapore. In 2011, the share of EU FDI in totalinward FDI stocks was 30 %15 and FDI accounted for 65 % of total capital stocks inSingapore. This implies that European companies could be considered recipients ofabout 20 % of the FTA capital gains for Singapore.16
4.1.1 Sectoral effects of the EU-Singapore FTA scenario
The effects on individual sectors diverge depending on the original level of protectionand the inter linkages between sectors. Starting with the sectoral results of the FTAscenario presented in Table 3, the highest increase in EU value added (€ 350 million)and bilateral exports (€ 1.1 billion) takes place in other commercial services. Machineryand middle- and high-tech manufacturing exhibit the second and third highest gain invalue added terms of € 54 and € 46 million. Production increases in these two sectorsare linked to substantial bilateral export surges of € 54 and € 77 million, respectively.
The EU sector with the largest decline in value-added in both relative and absoluteterms is chemicals. The value added of chemicals declines by 0.08 % corresponding toa loss of € 323 million. As a result of the FTA, Singapore becomes relatively morecompetitive in the chemicals sectors and increases its production and exports. Thedecline in the EU value added of chemicals occurs as domestic production is substitut-ed for cheaper imports from Singapore.
In this context, value added of the chemicals sector in Singapore increases markedlydepicting the highest increase in relative terms (3 %) corresponding to a gain of € 750million (see Table 4). Exports of chemicals to the EU rise by 17 % leading to thehighest bilateral exports increase of more than € 2 billion.
Another sector which benefits markedly from the FTA in Singapore is othercommercial services. Although the growth rate of this sector is only the third highest,its increase in value added terms is by far the largest, accounting for almost € 1.2
15 Singapore’s Department of Statistics 2011 data.16 Note that these are back of the envelope calculations assuming pro rata profits. The dynamic CGE modelused here does not explicitly consider FDI and the activities of multinational companies.
Fig. 1 FTA scenario: dynamic results (cumulative % changes). Source: authors’ simulations based on GDyn
Z. Kutlina-Dimitrova, C. Lakatos
billion. This sector also exhibits the second highest rise in bilateral exports to the EU of€ 800 million. The EU-Singapore FTA also significantly affects the textile sector in
Table 3 FTA scenario, changes in value-added and bilateral exports by sector for the EU
EU Value added Exports to Singapore
in % in millions of euros in % in millions of euros
Agriculture and minerals 0.00 6.0 0.80 0.5
Tobacco and beverages 0.01 13.0 5.56 28.5
Primary energy products 0.00 −2.5 0.90 1.1
Low-tech manufacturing 0.00 27.7 0.86 16.6
Textiles 0.01 3.8 1.09 0.7
Energy 0.00 −7.9 0.93 0.9
Chemicals −0.08 −323 1.89 55.8
Middle-tech manufacturing 0.01 34.0 0.64 7.0
High-tech manufacturing 0.01 45.7 1.71 76.9
Electronics 0.02 19.0 0.39 6.7
Machinery 0.01 54.1 1.05 54
Government services 0.00 −8.1 1.24 6.2
Other commercial services 0.01 346 7.72 1111
Transport 0.01 29.9 0.38 22.4
Authors’ simulations based on GDyn
Table 4 FTA scenario, changes in value-added and bilateral exports by sector for Singapore
Singapore Value added Exports to the EU
in % in millions of euros in % in millions of euros
Assessing the economic impacts of the EU‐Singapore FTA
Singapore, which benefits from the highest growth rate in value added (7 %) and interms of bilateral exports growth (102 %). Note, however, that the share of the textilessector in total value added and exports in Singapore is rather small as these changescorresponding to gains of € 5.8 million and € 40 million, respectively.
According to the CGE results, two sectors in Singapore experience a relativelystrong decline in value-added in both relative and absolute terms: machinery andelectronics. Machinery contracts by 0.35 % and electronics by 0.14 % correspondingto a loss of € 47 million and € 27 million, respectively.
4.2 Raising Singapore’s tariffs to bound levels
In the following we discuss the effects of raising Singapore’s tariffs to bound levels.Table 5 summarises the main macro-economic results in terms of GDP, import andexport flows. As already mentioned this hypothetical scenario can be considered as an“insurance” scenario which reveals the cost for European exporters of a theoreticaltariff increase to levels bound in the WTO. The entry into force of the FTA between theEU and Singapore will eliminate this option.
Simulating this scenario reveals negligible real GDP decline in relative termscorresponding however to a loss of € 350 million. EU exports to Singapore shrinknoticeably by 11.5 %, reflecting a decrease of € 3.7 billion. In Singapore real GDPdeclines markedly by 1 % reflecting a decrease in real activity amounting to nearly €2.8 billion. This strong negative effect on Singapore is linked to the strong dependenceon cheaper inputs/intermediates from the EU. The fact that now inputs to the domesticproduction are more expensive drives production cost up and leads to significant loss ininternal and external competitiveness for the Singapore economy.
EU exports to Singapore decline noticeably by 12 % reflecting a decrease of € 3.7billion. Singapore exports to the EU decline as well although less pronounced by 1.2 %.Total imports and exports shrunk in both regions even though imports contract morethan exports in the EU and Singapore implying a positive effect on the trade balance.
Table 5 Macroeconomic effects of the “insurance scenario”
Countries/variables In % In millions of euros
Real GDP
EU −0.00 −350Singapore −0.99 −2751
Total exports (in volumes)
EU −0.02 −1129Singapore −1.05 −2866
Total imports (in volumes)
EU −0.02 −1515Singapore −1.00 −2596EU exports to Singapore −11.5 −3697Singapore exports to the EU −1.19 −367
Authors’ simulations based on GDyn
Z. Kutlina-Dimitrova, C. Lakatos
From a dynamic point of view, for the EU most of the losses (78 %) occur in the firstfive years following the increase in tariffs in Singapore. Exports are found to decreaseless than imports and thus the contribution of the trade balance to GDP is positive.Investment in the EU declines in the first two years following the increase in tariffs butthen it rebounds and has a positive contribution on overall EU GDP (see Fig. 2).
The increase in tariffs is found to hurt the Singaporean economy not only in the shortrun but more and more in the long run: GDP decreases continuously over thesimulation period from 0.13 % in 2014 to 1.18 % in 2025. Although both exportsand imports decline, the trade balance surplus contributes positively to real GDP until2024. In addition, as the Singaporean economy becomes less competitive, investmentdecline continues from 1.17 % in 2014 to 2.14 % in 2025.
4.2.1 Sectoral effects of the ‘insurance scenario’
Table 1 provides an overview of bound tariffs by sector in Singapore as simulated for thisscenario and hereby a preliminary indication of the sectors that will contract most by tariffhikes considered here. The impact of the “insurance scenario” on value added and bilateralexports for the EU and Singapore are depicted in Tables 6 and 7. In line with themacroeconomic effects described above value added decreases in several sectors. In theEU the largest decline of 0.09 % (corresponding to a loss of nearly € 280 million) takesplace in high-tech manufacturing. Due to the decline in domestic production in this sector,EU exports to Singapore fall by almost 38 % representing a loss of more than € 1 billion.
Value added and exports of the EU also decline markedly in two other sectors: low-tech manufacturing and machinery. Their value-added decreases by € 40 million andnearly € 130 million, respectively, while exports to Singapore fall by more than € 430million and € 1.1 billion. These results are not surprising as the average bound tariff ratein high-tech manufacturing of 9.11 % is the second highest. The bound tariff rates forlow-tech manufacturing (7.34 %) and machinery (5.4 %) are also significant.
On the other side, EU value-added increases by 0.08% in the electronics sector, whichgains in relative and absolute terms. This development is not surprising as the sector hasthe second lowest average bound tariff rate of only 1.1 %. This means that increasingtariffs to bound levels would imply a cost disadvantage of only 1.1 % in the model.
In the case of Singapore, value added decreases in all sectors. Most pro-nounced contract the sectors chemicals (almost € 350 million) and other
This paper assesses the economic impact of the recently concluded FTA between theEU and Singapore using a dynamic general equilibrium model tailor-made for tradepolicy analysis. The simulation results suggest that there are economic gains for boththe EU and Singapore, which are estimated to materialise over a 10-years period.
Given the economic size of the EU and the fact that before the FTA the EU wasimposing relatively higher tariffs on Singapore’s goods, the gains for Singapore (inrelative and absolute terms) are significantly larger; Singapore GDP is expected toincrease by 0.94 % or € 2.7 billion whereas the EU gains are assessed at € 550 million.A non-negligible part of the Singaporean GDP gains however are most likely captured byEuropean companies who are major foreign direct investor in Singapore. In fact EU firmscould be considered recipients of about 20 % of the FTA capital gains for Singapore.
Similarly, EU exports to Singapore would rise by some € 1.4 billion and Singapore’sexports to the EU by some € 3.5 billion. The latter includes the exports of large numberof European companies established in Singapore.
These gains should be considered as a lower bound as the economic modelling isbased on a conservative assumption according to which services barriers are cut onlyby 3 %, reflecting merely a binding of applied levels of services sector protection.There are, however, several expected gains from reducing various NTBs which due todata limitations were not fed into the model. Therefore these results should be consid-ered as rather underestimation of the real economic gains.
In addition, alternative simulations revealed the value of the “insurance effect” offeredby the FTA against a hypothetical tariff rise by Singapore to levels bound in the WTO. Insuch “worst case” scenario, the FTAwith Singapore will protect EUGDP from a decreaseof € 350 million and prevents a loss of € 3.7 billion EU exports to Singapore.
5.1 Policy implications
The EU-Singapore FTA as part of a new generation of ambitious and comprehensive freetrade agreements launched by the EU in 2007, goes beyond liberalisation of tariff barriersand includes special provisions on liberalisation of non-tariff barriers, liberalisation ofservices trade and investment, liberalisation of trade related aspects of public procure-ment and intellectual property rights (including geographical indications) and regulatoryharmonization. State of the art modelling tools (like the dynamic CGEmodel used in thispaper) that allows for the quantification of the economic impact of such a deep andambitious FTA are still not properly equipped in tackling these issues. More research isneeded in order to be able to incorporate the liberalisation of NTBs, public procurementor intellectual property rights first by means of data collection and also by improvingexisting modelling tools. Hence setting this issue on the policy agenda would contributeto improving the precision of economic analysis for policy making.
From a policy perspective, given that this FTA is the EU’s first FTAwith an ASEANmember country and the second one with a major Asian trading partner after theconclusion of the EU-Korea FTA, this agreement paves the way for future FTAs withcountries in the region. Ultimately, the EU aims to negotiate an agreement with allASEAN counties and the entire region. The ambitious commitments in the EU-Singapore FTA set high standards for other Asian FTAs to follow.
Assessing the economic impacts of the EU‐Singapore FTA
Annex
Table 8 Sectoral mapping: GTAP sectors to model aggregation
nmm Mineral products nec MTM Middle-tech manufacturing
i_s Ferrous metals
nfm Metals nec
Z. Kutlina-Dimitrova, C. Lakatos
References
Chief Economist Note - Special Report (2013) The economic impact of the EU-Singapore free tradeagreement
Decreux Y, Fontagné L (2011) Economic impact of potential outcome of the DDA, CEPIIWorking Paper No. 23ECORYS (2009) Trade sustainability impact assessment of the FTA between the EU and ASEAN. Report
prepared for the European Commission, RotterdamHertel TW (1997) Global trade analysis: Modelling and applications. Cambridge University Press,
CambridgeIanchovichina E, McDougall R (2000) Theoretical structure of dynamic GTAP, GTAP technical paper No. 17Mattoo A, Subramanian A (2009) From Doha to the next Bretton woods: a new multilateral trade agenda.
Foreign Aff 88(1):15–26Narayanan GB, Aguiar A, McDougall R (2012) Global trade, assistance, and production: The GTAP 8 data
base, center for global trade analysis. Purdue UniversitySingapore’s Department of Statistics (2011) http://www.singstat.gov.sg/, Accessed 4 11 2013
Table 8 (continued)
GTAP sectors Aggregation
Code Description Code Description
fmp Metal products
mvh Motor vehicles and parts HTM High-tech manufacturing
otn Transport equipment nec
ele Electronic equipment ELEC Electronics
ome Machinery and equipment nec MACH Machinery
ely Electricity ENR Energy
gdt Gas manufacture, distribution
otp Transport nec TRN Transport
wtp Sea transport
atp Air transport
cmn Communication OCS Other commercial services
ofi Financial services nec
isr Insurance
obs Business services nec
ros Recreation and other services
dwe Dwellings
cns Construction
trd Trade
wtr Water OSR Government services
osg Public administration/ Defence/Health/Education
Assessing the economic impacts of the EU‐Singapore FTA
