27 December 2018

CPTPP will keep the trade beat drumming for Singapore

The success of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), which starts today for Singapore and five other signatories, will be measured by the level of business adoption.

The themes raised in the cult 1980s British TV satire - Yes, Minister - remain just as relevant today for their ability to make light of uncomfortable truths.

One classic episode involved Minister ‘Jim Hacker’ taking a tour of a newly built hospital. During the tour, the administrators proudly boast how the hospital is the most efficient in Britain – largely because it didn’t have any patients yet. An incredulous Prime Minister asks the point of the hospital if not to heal the sick.

The same message could be applied today when it comes to free trade agreements. There is no point having 500-page dossiers with preferential arrangements for member businesses unless they actually get used.

This is the challenge facing countries within the CPTPP, including Singapore, now that the pact starts in earnest today.

The challenge should not take the gloss off member countries’ successfully concluding the CPTPP. Whilst its 13-year negotiations have been of Tolstoy-like proportions, it is now one of the few global bright spots amongst trade tensions and skittish outlooks for many of the world’s major economies.

Indeed, research by the Peterson Institute has CPTPP boosting trade for members by 6% and adding 1% to real incomes as of 20301.

The trade pact, which covers 14% of global GDP2, will have early harvest business benefits for ratified countries: New Zealand, Australia, Canada, Japan, Mexico and Singapore. Vietnam has now also completed ratification and so will follow within weeks, with Chile, Peru, Brunei, and Malaysia set to ratify in the coming months.

First, 90% of the planned tariff cuts will be immediately removed, and non-tariff enablers such as pre-arrival customs clearance and self-certification of origin will reduce administration and compliance costs for businesses. CPTPP will also provide for full cumulation meaning businesses in CPTPP markets can use inputs sourced from other member countries to qualify for preferential tariffs within the region.

This will be very welcome news for Singapore as CPTPP countries accounted for $214 billion - a fifth - of Singapore’s total goods trade last year, according to Singapore’s Ministry of Trade & Industry3.

But perhaps the most significant kickers will be the liberalisation of services sectors and the staving off of cross-border data restrictions: two significant commercial pain points for SMEs, who make up around half of Singapore’s economy4.

From a services perspective, firms in one CPTPP country will receive the same treatment as firms in another. This includes lifting restrictions on hiring local or foreign professionals, or having the freedom to have either physical or virtual operations in a target country.

CPTTP will also place restrictions on member countries forming their own data localisation laws. Free flow of non-personal data is a pre-requisite for any digital economy and data localisation laws or storing data within national borders prohibits data being freely transferred out of the country. More than most, SMEs are negatively impacted by data localisation laws, so CPTPP establishing shared rules on data is a powerful tool in the kitbag.

Together, these provisions have the potential to foster a meaningful and flourishing SME ecosystem within Singapore.

This is all very positive but, right now, the CPTPP is like the brand new (albeit patient-less) hospital in Yes, Minister. The fundamental question is whether the CPTPP will convert to business adoption - because otherwise it will remain just words on a page.

The willingness to use free trade agreements is definitely there. HSBC’s 2018 Trade Navigator research found that 60% of ASEAN businesses collectively viewed relevant FTAs as having a positive impact on their business5. But that attitude does not necessarily translate into usage. Research by the Economic Research Institute for ASEAN and East Asia in 2015 found that roughly 12% of ASEAN-based manufacturing firms were using FTAs6.

There are a few historical reasons for the inertia around trade pact adoption but essentially it boils down to SMEs simply not having the necessary resources to analyse the agreements’ benefits or seeing the bottom-line impact from tariff reductions being commensurate to the effort to comply.

The CPTPP is a modern trade agreement which offers tangible benefits, and efforts by government and private agencies in Singapore to educate businesses on the details are welcome, including developing education portals and seminars.

There are practical steps that business can take to begin better optimising the CPTPP:

  1. Determine what documentation is required in the importing country such as customs declarations and certificates of origin, and how to obtain these.
  2. Seek information on preferential rules of origin and documentation requirements through national customs authorities. For example, Enterprise Singapore has a tariff finder7 which outlines the Customs duties, preferential tariffs and taxes applicable to a specific product, the rules of origin, and the import procedures for specific countries.
  3. Seek expert advice from state-supported advisory services like the Singapore Business Federation and various Singapore-based chambers of commerce.

The CPTPP has the potential to provide a meaningful counterbalance to rising global trade tensions and cyclical downturns in trade-relevant sectors in Asia, like electronics. It also has the door open to other countries joining like Indonesia, Thailand and Korea. Since signing CPTPP earlier this year, most members have moved quickly to advance domestic procedures for a smooth implementation. But for the CPTPP to be truly successful it needs to be a liveable document and not one that’s left in a desk draw. The onus is on governments, business groups and businesses themselves to ensure this happens.

A contribution piece by Alan Turner, Head of Commercial Banking, HSBC Singapore, first published in The Business Times on 27 December 2018.

1 Petri, P., Plummer, M., Urata, S., and F. Zhai (2017), Going it alone in the Asia-Pacific: Regional trade agreements without the United States, PIIE.

2 https://www.mti.gov.sg/-/media/MTI/Newsroom/Press-Releases/2018/11/Press-release---The-CPTPP-Enters-Into-Force-in-December.pdf

3 https://www.mti.gov.sg/-/media/MTI/Newsroom/Press-Releases/2018/11/Press-release---The-CPTPP-Enters-Into-Force-in-December.pdf

4 https://www.singstat.gov.sg/~/media/Files/visualising_data/infographics/economy/singapore-economy22032018.pdf

5 https://www.business.hsbc.com/trade-navigator/asean

6 http://www.eria.org/research/the-use-of-ftas-in-asean-survey-based-analysis/

7 https://www.smeportal.sg/content/smeportal/en/resources/toolkits/have-a-free-trade-agreement-fta-or-export-question.html