21 November 2019

The Europe Union Singapore Free Trade Agreement needs business action to make it a success

Tony Cripps, HSBC Singapore CEO

With the European Union-Singapore Free Trade Agreement (EUSFTA) entering into force on 21 November, the race is on for Singapore businesses to convert this trade pact into commercial advantage.

And it couldn’t come at a better time given the extent that Singapore’s open and trade-focused economy has been feeling the effects of global uncertainty in 2019.

We’re seeing the subdued conditions in the trade and economic data over the past few quarters and we’re also seeing it anecdotally. Indeed, HSBC’s annual Navigator trade confidence survey (launched in November) revealed only 65% of Singapore businesses expect sales to grow in the next 12 months - considerably lower than counterparts globally1.

Not only is the EUSFTA coming at the right time, it’s with one of Singapore’s most important economic partners.

The EU is Singapore's 2nd biggest trading partner in goods and biggest trade partner in services according to the European Commission. Moreover, 10,000 European companies operate in Singapore often as logistics and distribution centres for the region and multinational regional headquarters.2

 

EUSFTA – the benefits

Beyond the headline figures, the details of the FTA are very compelling. There are three areas, specifically:

  1. Tariff removal: Tariffs on qualifying Singapore goods exports into the EU will be removed progressively over the next five years. This makes many Singapore exports increasingly competitive in the EU, particularly electronics, pharmaceuticals, petrochemicals and processed food products – combined they make up 10% of Singapore GDP3.
  2. Non-tariff barriers will also be addressed to remove burdensome administrative and double-testing procedures. For example, creating common safety and quality standards across selected sectors will remove the need for testing at both sides of the trade corridor, which would save both time and money4.
  3. ASEAN cumulation: The EUSFTA will further amplify ASEAN’s burgeoning supply chains under a concept, within the EUSFTA, known as “ASEAN cumulation”. Essentially, this means that manufacturing inputs coming into Singapore from other Southeast Asian member states, for final assembly, will be considered as “domestic content”. In other words, these inputs will come under the city-state’s zero tariff regime with Europe.5

This is a key element of the FTA given a significant amount of Singapore products, particularly in areas like electronics, precision manufacturing and pharmaceuticals, have parts produced in other Southeast Asian countries.

Electronics, in particular, is one of Southeast Asia’s most important sectors directly employing more than 2.5 million workers.6 According to the ASEAN Secretariat, the bulk of the world’s consumer electronics comes from the region, with 80% of the world’s hard drives being produced in ASEAN countries.7

 

How to use the FTA

This is all very good news but will the FTA actually be used?

The EUSFTA may be 16 chapters long, but there are plenty of publicly available resources that can help businesses understand the gist of the deal – from which (and when) customs duties will be eliminated to how to qualify for rules-of-origin preferential treatment.

There are practical steps that business can take to begin better optimising the deal. Here are some suggestions we have for Singapore-based companies.

  1. Many globally traded goods already have tariffs removed, so the first step is to understand whether that is applicable to your product. All goods lines have a product code assigned by the World Trade Organisation. This could inform whether your product is tariff free beyond the EUSFTA.  
  2. Seek information on preferential rules of origin and documentation requirements through national customs authorities. For example, Enterprise Singapore has a tariff finder8 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. Determine what documentation is required in the importing country such as customs declarations and certificates of origin, and how to obtain these.
  4. For components that are brought in from across Southeast Asia, there are automated solutions available in the market that can determine eligibility of components across suppliers or gaps in their compliance.
  5. Seek expert advice from state-supported advisory services like the Singapore Business Federation and various Singapore-based chambers of commerce.

 

Bringing it together

The EUSFTA is a panacea for the Singapore and European economic corridor and its impact goes to the heart of sectors and issues that matter for Singapore, including electronics, pharmaceutical and chemicals, at a time when an economic shot to the arm is most needed. The unique concept of ASEAN cumulation will also further knit Southeast Asia together as a manufacturing hub and, thereby, enhance its overall competitiveness.

Whilst this a very positive development, the FTA is merely a sheet of paper at this stage. Extracting its value requires Singapore companies to take the initiative by using the tools and support available to understand its relevance to their businesses, and the steps needed to apply.

Disclaimer

This article was prepared by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch (“HSBC”).

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