19 October 2018

HSBC Singapore supportive of EU-Singapore Free Trade Agreement

**Singapore’s electronics, pharmaceuticals, chemicals and processed food sectors to benefit.
**Enhances the Republic’s position as a springboard to ASEAN.
**Places ESG standards front and centre for future trade and investment activity.

HSBC Singapore welcomes the signing of the EU-Singapore Free Trade Agreement (EUSFTA); a significant moment for the two dynamic economies and for ASEAN.

Through eliminating virtually all tariffs and lowering non-tariff barriers, the agreement enables businesses to unlock new opportunities to further sell their goods and services. Furthermore, as the first of its kind signed between the EU and an ASEAN nation1, the agreement sets a precedent to extend open, fair and rules-based trade policies across the two economic regions.

Pact to create opportunities amongst Singapore corporates

Tariffs on qualifying Singapore goods exports into the EU will be steadily abolished over the course of five years, with electronics, pharmaceuticals, petrochemicals and processed food products (among the main beneficiaries) becoming more competitive in the EU as a result.2 These industries collectively make up around 10% of Singapore GDP.3

Non-tariff barriers will also be addressed to remove burdensome administrative and double-testing procedures. For example, ensuring there are common safety and quality standards across certain sectors which will, therefore, remove the need for testing at both sides of the trade corridor.4 This will benefit key sectors including electronics, motor vehicle and vehicle parts, pharmaceutical and medical devices.5

The EUSFTA’s services chapter also provides for transparency and non-discrimination in licensing and qualification procedures as well as for the future mutual recognition of professional qualifications. This will enable the smoother flow of professionals between each market.

Alan Turner, Managing Director and Head of Commercial Banking, HSBC Singapore, said: “ The signing of the EUSFTA is a panacea for the Singapore and European economic corridor. Its impact goes to the heart of sectors and issues that matter for Singapore including electronics, pharmaceuticals, and chemical manufacturing. While signing the trade agreement is an incredible first step and milestone, the key now is to convert trade policy into pragmatic commercial activity for Singapore corporates.”

Economic analysis prepared by the European Parliament finds that the trade pact could provide the following benefits:6

  • European exports to Singapore to grow 3.6% over a 10-year period (approximately €550m).
  • Singapore exports to the EU to grow 10.4% over a 10-year period (by approximately €3.5bn).

EUSFTA positions Singapore as a springboard to ASEAN supply chains

The EUSFTA will allow for some manufactured goods to have ASEAN cumulation. This means that inputs sourced by Singapore businesses from other ASEAN member states will be considered as domestic content for the determination of the origin of the final product made in Singapore.7 In other words, certain inputs will come under Singapore’s zero tariff regime with Europe.

Ajay Sharma, APAC Regional Head of Global Trade Receivables Finance, HSBC, commented on the wider opportunity for ASEAN: “ A high proportion of Singapore products have parts produced in other ASEAN countries. With the rule of ‘ASEAN cumulation’, more Singapore exports produced along intra-ASEAN value chains can benefit under the EUSFTA. This will have a significant impact for Singapore and for the ASEAN region - in areas like electronics and pharmaceuticals.”

ASEAN as an aggregate is the largest exporter to Singapore, with Singapore importing US$71.06bn of goods from ASEAN in 2017.8

Electronics is one of ASEAN’s most important sectors directly employing more than 2.5 million workers.9 According to the ASEAN Secretariat, the bulk of the world’s consumer electronics comes from the ASEAN region including 80% of the world’s hard drives which are produced in ASEAN countries. Singapore, Malaysia, Vietnam, Philippines, and Indonesia account for over 90% of ASEAN industry exports.10

EUSFTA’s ESG focused-agenda – a warning signal for ASEAN corporates

The EUSFTA will be driving green activity within the corridor by removing trade and investment obstacles in green technology and removing duties on many environmental goods.

This is important in ensuring Singapore and ASEAN businesses progress further along the green agenda.

According to a HSBC commissioned report released earlier this year, 24% of Asian respondents have an ESG strategy compared to 48% of corporates globally and 87% of European and UK companies.11

Commenting on the need for ASEAN businesses to address ESG standards in light of the EUSFTA, Mr. Sharma said: “Europe is clearly leading the way in ESG adoption, and the bloc’s willingness to ensure its trading partners raise their own ESG standards is evident in the policies contained in the EUSFTA. This has a wider consequence for ASEAN. Large European corporations will want to see a similar shift in their suppliers ESG stance. With ASEAN increasingly becoming the supply chain ‘factory’ for several European countries, suppliers of European clients will be expected to transform, or risk being left behind when further FTAs come into force.”

Background to EUSFTA Announcement:

  • Negotiations on the EUSFTA began in March 2010. Alongside the Free Trade Agreement, the parties have also agreed an Investment Protection Agreement.
  • In order to be able to come into full force in its present form, all 28 individual EU countries would have to ratify the agreements.
  • Over 10,000 European companies operate in Singapore, many of which use Singapore as a hub – often as logistics and distribution centres for the region, and multinationals regional headquarters.
  • The agreement will be the first free trade agreement with a member of ASEAN and the second EU agreement with an Asian country after South Korea.
  • The EU continues negotiations towards an FTA with Vietnam and Malaysia. The latest on these negotiations is available here.
  • The EU-Singapore Investment Protection Agreement encompasses investment protection and investment protection dispute resolution.

Importance of Singapore/Europe trade corridor

  • The EU is Singapore’s third largest trading partner.12
  • Services make up a significant portion of bilateral trade – and the EU is Singapore’s biggest trading partner in services. In 2016, EU-Singapore trade in goods increased by 4.5% and trade in services show a surge of 28% (2015).13
  • The lower barriers resulting from the implementation of the EUSFTA will enable firms to grow their operations in both directions.
  • EU FDI flows into ASEAN have more than doubled in the past decade, and its sectoral distribution has evolved from being manufacturing dominated to more finance and other services-related. This has benefitted Singapore to date, with the lion’s share of the EU’s FDI to ASEAN coming to Singapore.14

Importance of Europe for ASEAN

  • Since 2010, the EU has become the biggest investor into ASEAN, representing 20% of all FDI flows to the region.15
  • Still, FDI from the EU to ASEAN represents just 2% of total EU outward global FDI stocks, vs. 13% in Japan.16
  • Yet 51% of European businesses view ASEAN as providing the best economic opportunities.17
  • Two-thirds of the 100 largest EU MNEs have subsidiaries in ASEAN, and more than one-third have a presence in four or more ASEAN member states.18
  Goods (2017) Annual average growth Services (2016) Annual average growth
EU exports to Singapore 33.2 3.3% 22.4 6.5%
EU imports from Singapore 20.1 3.4% 22 14.5%

Source: Eurostat – all figures in € billion

  Population GDP (current US$)19 GDP Growth (2017)20
EU 508 million 17 trillion 2.4%
Singapore 5.6 million 324 billion 3.6%

1 European Commission: Key elements of the EU-Singapore trade and investment agreements

2 Ministry of Trade and Industry Singapore: European Union-Singapore Free Trade Agreement Fact Sheet

3 Singapore Economic Development Board (EDB), HSBC

4 European Commission: The EU-Singapore agreements explained

5 European Commission: Key elements of the EU-Singapore trade and investment agreements

6 European Commission: The economic impact of the EU - Singapore Free Trade Agreement

7 European Parliament: EU-Singapore trade and investment agreements closer to conclusion

8 ASEAN International Merchandise Trade Statistics

9 According to the International Labour Office (ILO)

10 ASEAN in Transformation. Electrical and Electronics: On and Off the Grid, International Labour Organisation, 2016

11 HSBC: Are ASEAN supply chains vulnerable to lag in adoption of ESG?

12 Ministry of Trade and Industry Singapore: European Union-Singapore Free Trade Agreement Fact Sheet

13 ASEAN EU Business Council Trade and Investment Report, 2017

14 ASEAN Investment Report, ASEAN Secretariat, 2017

15 HSBC Global Research: ASEAN Perspectives, 28 August 2018

16 HSBC Global Research: ASEAN Perspectives, 28 August 2018

17 EU-ASEAN Business Sentiment Survey 2018

18 HSBC Global Research: ASEAN Perspectives, 28 August 2018

19 The World Bank: Data

20 The World Bank: Data