Singapore-U.S. Free Trade Agreement

Singapore-U.S. Free Trade Agreement

Order Code RS20755
Updated January 24, 2003
CRS Report for Congress
Received through the CRS Web
Singapore-U.S. Free Trade Agreement
Dick K. Nanto
Specialist in Industry and Trade
Foreign Affairs, Defense, and Trade Division
Summary
The United States and Singapore have completed negotiations on a free-trade
agreement that would, with a phase-in period, eliminate tariffs on all goods traded
between them, cover trade in services, and protect intellectual property rights. The
agreement is expected to be submitted for legislative approval in late January 2003 with
an implementation date in 2004. This report will be updated as circumstances warrant.
In November 2002, the United States and Singapore concluded the eleventh round
of negotiations on the U.S.-Singapore Free Trade Agreement (FTA) with the hope of
completing the agreement by year end. U.S. Trade Representative Zoellick stated that the
substance of the FTA was done except for one issue (whether Singapore can place
controls on the transfer of capital during a financial crisis) which was settled in January
2003. The USTR is expected to notify Congress of the agreement in late January 2003.1
The negotiations for the U.S.-Singapore Free Trade Agreement were launched under
the Clinton Administration in December 20002 and have continued under the Bush
Administration. The FTA would be the fifth such agreement the United States has signed
and the first with an Asian country. As initiated, it was to be modeled after the
U.S.-Jordan FTA and is to eliminate tariffs on all goods over time and cover substantially
all services sectors. According to the U.S. Trade Representative (USTR), the FTA has
broken new ground in electronic commerce, competition policy, and government
procurement. It also includes what the USTR considers to be major advances in
intellectual property protection, environment, labor, transparency, customs cooperation,
and transshipments.3
The U.S.-Singapore FTA is of interest to the Congress because: (1) it would require
Congressional approval; (2) if implemented, it would continue the trend toward greater
1 Asean and the US-S’pore FTA. The Business Times Singapore, November 21, 2002. P. 1.
2 For information on U.S.-Singaporean relations, see CRS Report RS20490, Singapore:
Background and U.S. Relations.
3 Rahil, Siti. U.S., Singapore Strike FTA Deal. Kyodo News Service, November 19, 2002.
Congressional Research Service ˜ The Library of Congress

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trade liberalization and globalization; (3) it contains environmental and labor conditions
acceptable to the Bush White House; and (4) it may affect certain trade flows that would,
in turn, affect U.S. businesses, particularly import-competing industries such as textiles
and apparel.
The U.S.-Singapore FTA may serve as a step toward realization of the Asia Pacific
Economic Cooperation (APEC) forum’s “Bogor Vision,”under which the United States
and APEC’s other 21 members are working toward “free and open trade in the Pacific.”
It also is in accord with the Enterprise for ASEAN Initiative, a new trade initiative with
the Association of Southeast Asian Nations in which the United States has offered the
prospect of FTAs with those countries committed to economic reforms and openness.
In March 2002, the U.S.-ASEAN Business Council and the U.S. Chamber of
Commerce announced the formation of a U.S.-Singapore FTA Business Coalition with
75 members and chaired by Boeing, ExxonMobil, and UPS to support the FTA.4 On
February 19, 2002, the U.S. International Trade Commission (ITC) began investigating
the probable economic effect of a U.S.-Singapore FTA (No. 332-439). On July 2, the ITC
began investigation No. 332-443 into the effects of eliminating tariffs on certain
agricultural goods under a U.S.-Singapore FTA. These reports have been submitted to
the U.S. Trade Representative but are not open to the public.
Background
Singapore is a city state located in Southeast Asia at the southern tip of Malaysia and
across the Strait of Malacca from Indonesia. It has a population of 3.5 million, an area
roughly 3.5 times the size of the District of Columbia, gross domestic product of about
$100 billion, and per capita income of about $30,500. Singapore has been a major
proponent of trade liberalization and supports the U.S. security role in Asia.
Singapore is America’s largest trading partner in Southeast Asia with two-way trade
of $32.6 billion and a U.S. bilateral merchandise trade surplus in 2001 of $2.7 billion, up
from a deficit of $1.4 billion in 2000. The United States generally runs a surplus in
services trade with Singapore. Singapore is the 11th largest export market for the United
States with $17.7 billion in merchandise exports in 2001. It is the 14th largest source for
goods imported into the United States with $15.0 billion in 2001. As shown in the
Appendix, in bilateral trade by sectors, the United States runs surpluses with Singapore
in aircraft, plastic, instruments, chemical products, and aluminum. The U.S. incurs
deficits with Singapore in electrical machinery, knit and woven apparel, special other
repaired products, organic chemicals, books and newspapers, fish and seafood, rubber,
and ships and boats.
Singapore already has 99% free trade. Only beer and certain alcoholic beverages are
subject to import tariffs. Singapore, however, does impose high excise taxes on distilled
spirits and wines, tobacco products, and motor vehicles (which are all imported). These
are aimed at discouraging consumption for environmental and health purposes. The
government also bans chewing gum (after it caused subway doors to jam).
4 For more information, see the U.S.-Singapore FTA Business Coalition web site at:
[http://www.us-asean.org/ussfta/index.asp]

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Singapore has signed a free trade agreement with New Zealand (effective January
1, 2001), with European Free Trade Area (signed June 26, 2002, with Iceland, Norway,
Switzerland, and Liechtenstein), and in January 2002 concluded one with Japan that
excludes agricultural products. The country also has concluded FTA negotiations with
Australia and New Zealand, is negotiating with Mexico and Canada, and is seeking an
FTA with the European Union. Asian nations also have been discussing an East Asian
free-trade zone which would include ASEAN plus Japan, China, and South Korea.
The United States also has low trade barriers. The U.S. already has free trade
agreements with Canada, Mexico, Israel, and Jordan, is considering free trade with Chile,
Latin America, Australia, Morocco, and also is a member of APEC. A free-trade area
with Singapore, therefore, is not likely to have a large effect on bilateral trade flows
except in U.S. industries that are relatively protected (such as textiles and apparel).
Singapore generally has an open investment regime. At the end of 2000, the stock
of U.S. foreign direct investment (FDI) in Singapore totaled $23.2 billion. In 2001,
investment commitments from the United States dropped 13% to about $1.8 billion. U.S.
FDI in Singapore is concentrated largely in manufacturing (notably industrial machinery
and equipment and electronics), finance, and petroleum.5 Singapore invested a net $6.1
billion in the United States in 2000 to bring its investment position here to $7.66 billion,
much of which has been in real estate, wholesale trade, machinery industries, and
depository institutions.
Issues
Since Singapore’s merchandise trade already is virtually free, U.S. negotiators
focused on removing Singaporean restrictions on a wide range of services. These
included high-technology sectors, such as engineering, medical, information technology,
environmental, legal, financial, education, and distribution.6
The sticking points in the negotiations included textile trade (including rules of
origin, customs, and transshipments), banking, and investment issues. One investment
issue was how to approach investor-to-state dispute settlements and the standards for what
constitutes a regulatory taking in the FTA. Investor-to-state mechanisms allow companies
and individuals to sue the government over regulations that deprive investors of rights to
their property.7 Access by U.S. banks to Singapore’s retail banking sector and limits on
the operations of professionals (lawyers, architects, etc.) also were negotiated. In legal
services, under the FTA, provisions are designed to make it easier for U.S. law firms to
operate joint ventures with Singapore firms. In financial services, there are provisions to
allow U.S. banks to expand their current retail banking operations and gain some access
5 The American Chamber of Commerce in Singapore has about 1,200 members representing
nearly 700 U.S. and foreign-owned companies.
6 For details on Singapore’s trade and investment barriers, see: U.S. Trade Representative. 2001
National Trade Estimate Report on Foreign Trade Barriers. On Internet at
[http://www.ustr.gov/html/2001_contents.html].
7 Administration Works on Investment Position for Singapore FTA. Inside U.S. Trade, December
15, 2000.

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to protected automated banking networks, as well as provisions for greater U.S.
participation in securities, investment management, and insurance industries. The FTA
also is to allow limited imports of chewing gum (despite Singapore’s national ban on it)
and includes an Integrated Sourcing Initiative that is to extend some of the benefits of the
FTA to the nearby Indonesian islands of Batam and Bintan.
The textile issue includes concerns that Singapore’s increased access to U.S. textile
markets could encourage the transshipment of apparel from neighboring countries through
Singapore or other claims of Singapore as the country of origin to circumvent U.S. import
tariffs and/or quotas. This problem may be more acute in the case of Singapore because
it is a city state with limited land area, moderately high wages,8 and a booming entrepot
trade. Singaporean businesses have invested extensively in manufacturing facilities in
neighboring Indonesia, Malaysia, and other lower-wage countries. The Integrated
Sourcing Initiative may affect this activity.
On April 2, 2002, the National Retail Federation (NRF) threatened to oppose the
FTA if proposed provisions dealing with textiles and apparel were retained. These would
have kept quotas in place until 2005 and maintained high U.S. tariffs on the “vast majority
of textile and apparel products from Singapore for 10 years after the agreement enters into
force.”9
With respect to intellectual property rights, Singapore has been on the Special 301
Watch List since 1995.10 This stems from U.S. concerns regarding the consistency of
Singapore’s intellectual property rights (IPR) regime with provisions of the World Trade
Organization (WTO) Agreement on Trade-Related Intellectual Property Rights (TRIPS)
and the inadequacy of police enforcement against IPR piracy. The FTA includes tough
penalties for piracy and counterfeiting, including criminal penalties for companies that
make pirated copies from legitimate products, assurances by Singapore that IPR laws will
be enforced against traded goods, including trans-shipments, and mandates for damages
under Singaporean law for IPR violations.

The Bush Administration is taking a different approach from that of the Clinton trade
team with respect to including labor and environmental provisions. Such provisions in
trade agreements have become a source of considerable dispute between Democrats and
Republicans, business and labor, and among other interest groups in the United States.
The Jordan-U.S. agreement attempts to address both labor rights and environmental
protection without impinging on the other’s sovereignty. It mainly commits each country
to enforce the laws they already have in place. However, the agreement also contains a
mechanism for enforcement. Apprehension about possible trade sanctions resulting from
the agreement was allayed somewhat by side letters between the United States and Jordan
8 According to the U.S. Bureau of Labor Statistics, for production workers in 1999, hourly
compensation costs were $7.18 for Singapore, $5.44 for Hong Kong, $6.71 for Korea, $5.62 for
Taiwan, and $20.89 for Japan.
9 National Retailers Federation. Comments Concerning Negotiation of a U.S.-Singapore Free
Trade Agreement. Letter to Trade Policy Staff, U.S. Trade Representative, April 2, 2002.
10 Under the Special 301 provisions in U.S. trade law, the U.S. Trade Representative identifies
countries with particular problems of protection or enforcement of intellectual property rights,
places them on a “watch list” or “priority watch list,” and monitors them closely for progress.

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in which the U.S. Trade Representative stated that “appropriate measures for resolving
any differences that may arise regarding the Agreement would be bilateral consultations
and other procedures, particularly alternative mechanisms, that will help to secure
compliance without recourse to traditional trade sanctions.”11
According to the USTR, the U.S.-Singapore FTA fully meets the labor and
environmental objectives set out by Congress in its provision of Trade Promotion
Authority to the President. Both labor and environmental obligations are part of the core
text of the trade agreement. With respect to labor and the environment, both parties are
to strive to ensure that their domestic laws provide for labor standards consistent with
internationally recognized labor principles and that their environmental laws provide for
high levels of environmental protection. The agreement makes it clear that it is
inappropriate to weaken or reduce domestic labor or environmental protections to
encourage trade or investment and requires that parties shall effectively enforce their own
domestic labor and environmental laws. These obligations are enforceable through the
Agreement’s dispute settlement procedures.
The dispute settlement procedures include open public hearings, public release of
legal submissions by parties, and the rights for interested third parties to submit views.
The emphasis reportedly is on promoting compliance through consultation and trade-
enhancing remedies. The enforcement mechanism includes the innovative use of
monetary penalties to enforce commercial, labor, and environmental obligations of the
agreement.12
Bilateral FTAs have been criticized because they introduce economic inefficiencies
by distorting trade flows. They tend to divert export and import trade toward the
countries involved. For example, under NAFTA, some U.S. importers have turned to
suppliers in Mexico rather than buying from Asia, and manufacturers from Asia have
relocated to Mexico to take advantage of the tariff-free access to the North American
market. These inefficiencies caused by such trade diversion, however, may be offset by
gains in efficiency through trade creation – additional trade generated by the existence of
the larger, unified market. Bilateral FTAs, moreover, also play a role in the trade
liberalizing process. Currently, markets are opened primarily through multilateral
negotiations under the World Trade Organization, through organizations such as APEC,
or by sectoral initiatives. Given the slowness of the WTO and APEC process and the lack
of further progress on sectoral trade liberalization following the Information Technology
Agreement13 in 1996, countries can do an “end run” around the WTO or APEC and
liberalize trade with other like-minded countries. The trade diversion created by such
FTAs, however, unleashes pressures for governments to either create FTAs of their own
or join into existing FTA arrangements. Traditionally protectionist countries, such as
China or Japan, now are actively seeking FTA-type arrangements with other nations.
11 Side Letter on Labor and Environment. U.S. Trade Representative Zoellick to the Ambassador
of Jordan. July 23, 2001.
12 U.S. Trade Representative. Free Trade With Singapore. Trade Facts. December 16, 2002.
On Internet at: [http://www.ustr.gov/regions/asia-pacific/2002-12-13-singapore_facts.pdf].
13 The Information Technology Agreement, concluded by 29 WTO participants in 1996,
eliminated duties on most IT products with extended phase-in periods for some participants.

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Bilateral FTAs, therefore, can become building blocks, rather than stumbling blocks, to
global trade liberalization.
Appendix: U.S. Merchandise Trade Balances With Singapore, 1998-
2001, by Major Two-Digit Harmonized System Commodity Codes
(Million dollars)
1998
1999
2000
2001
Harmonized System Code/Year
Balance
Balance
Balance
Balance
Total Bilateral Trade Balance
-2,662
-1,944
-1,372
2,652
Machinery
-8,182
-6,966
-5,020
-3,611
Special Other
-183
-423
-602
-463
Organic Chemicals
4
-199
-231
-463
Knit Apparel
-245
-252
-260
-228
Special Import Provisions
-94
-110
-116
-94
Woven Apparel
-51
-64
-82
-58
Fish and Seafood
-57
-50
-56
-49
Books/newspaper/manuscripts
-67
-54
-35
-46
Rubber
1
-39
24
21
Aluminum
137
141
67
25
Tanning, Dye, Paint, Putty
69
99
82
68
Inorgan.Chemicals/Rare Earths
46
58
71
73
Ships and Boats
18
-33
0
86
Iron and Steel Products
103
97
95
91
Photographic/Cinematographic
74
93
104
83
Misc. Chemical Products
249
278
341
259
Mineral Fuel Oil
-63
94
-47
264
Optical, Photo, Medical, Surgical
324
387
655
299
Instruments
Plastic
445
498
602
504
Machinery Electrical
2182
2070
1,174
1,429
Aircraft, Spacecraft
1765
1490
782
3,475
Source: Data from U.S. Department of Commerce.