Economics & Strategy
Singapore: Opportunity from the
trade war
Group Research
30
Irvin Seah
Senior Economist
Please direct distribution
queries to
Violet Lee +65 68785281
violetleeyh@dbs.com
The trade war is not
just about trade
1 October 2018
• The ongoing trade disputes between the US and China will likely disrupt
trade and investment dynamics in Asia, thus affecting trade dependent
economies such as Singapore
• But beyond trade dilution, ASEAN countries, including Singapore, could
benefit from the corresponding trade diversion, as well as the reshuffling
of supply chains by global companies in the medium term
• Singapore is in a favorable position to mitigate against the risks, and to
capitalize on the opportunities.
• Companies would have to re-orientate their business strategies by
leveraging on FTAs, technologies and diversify to the ASEAN region
Trade war
The ongoing trade war is not just about trade but rather, a power struggle between
the two biggest economies in the world. Such tit-for-tat trade disputes has already
sent the global financial markets into tailspins. The risk is that further escalation could
potentially disrupt global trade flows and cast a shadow over longer term economic
prospects. This will have a profound effect on the global landscape and ultimately
impact trade dependent economies such as Singapore.
The latest: the Trump administration has recently announced another round of tariff
hikes on Chinese goods. The tariffs on USD 200bn worth of products came on top of
an earlier round of tariff hikes on USD 50bn of China’s exports. The most recent wave
of tariffs will start at 10% before rising to 25% on 1 Jan19. In return, China retaliated
with another round of tariff hikes on USD 60bn of products at 5% and 10%, after an
earlier round of tariff hikes on USD 50bn of imports from the US.
Singapore’s vulnerability to trade cycles
Singapore, with total trade to nominal GDP at 216%, is highly exposed to external
environment dynamics. Consequently, Singapore is highly sensitive to global business
cycles. It was hit by various shocks such as the Asian financial crisis in 1997/98 and the
global financial crisis of 2008, just as it benefited from strong global growth over much
of the past few decades. In fact, whenever the non-oil domestic exports (NODX) tanks,
Singapore dips into a recession (chart next page).
Refer to important disclosures at the end of this report.
Singapore: Opportunity from the trade war 1 October 2018

GDP vs NODX growth

% YoY
40 NODX GDP 25

30 20

20 15

10 10

0 5

-10 0

-20 -5
Asian Global
-30 financial Dot.com financial -10
crisis bust crisis
-40 -15
1990 1994 1998 2002 2006 2010 2014 2018

Source: Department of Statistics

So, amid the backdrop of the ongoing trade war between the US and China, the natural
assumption is that Singapore could be more badly hit than most economies in the
region due to the high dependency on trade.

Trade dilution versus trade diversion

However, apart from the tariff hikes on steel and aluminium products, the trade action
by the US is specifically targeted at China. It is largely bilateral and other trade partners
with the US could be less affected compared to a scenario whereby a blanket tariff
hike is applied across the board on all exporters of a particular product class. Such
scenario will only benefit local US suppliers due to the import substitution effect. In
The trade war has been
this current situation, the import substitution effect is relatively less.
largely bilateral

Singapore NODX share to key markets, 2017

Indonesia
5.1%
Others
28.5% Malaysia
8.1%
EU
10.8%

Japan
US 5.6%
8.9%

China
18.2% Hong Kong
8.2%
Taiwan
6.7%

Source: Department of Statistics

Yet, the tariff actions by both the US and China could dilute trade flows between these
countries. China’s exports to the US could be adversely affected given the lop-sided
trade dynamics between these two countries. China shipped about USD 505bn worth

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Singapore: Opportunity from the trade war 1 October 2018

of goods to the US in 2017. In contrast, exports from US to China registered only USD
130bn, resulting in a deficit of USD 375bn.

Singapore’s manufacturing base is largely focused on high value-added intermediate

products, and a large proportion is shipped to China for subsequent processing. As a
result, a decline in US’s demand for Chinese goods could indirectly hit Singapore’s
exports. Note China is Singapore’s largest export market, accounting for 18.2% of total
non-oil domestic exports (NODX) (chart in previous page). In this regard, trade war
could impact Singapore’s growth and export performance adversely.

However, as the trade war is largely bilateral in nature, there could be some degree
of trade diversion, which could benefit Southeast Asia economies, including
Singapore (see DBS article “Another perspective of the trade war” dated 23 Mar18).
Import tariffs imposed on certain products from China could benefit exporters of
ASEAN could benefit similar products from other countries. Essentially, the trade flows could be “diverted”
from trade diversion
from China to other competing suppliers. That is, if US importers find it too expensive
to source from China, they could switch their procurement sources to countries like
Vietnam, Cambodia, Thailand, Malaysia and even Singapore (diagram below).

Trade dilution

Trade diversion
Southeast Asia

Beyond the obvious better trade terms for their exports to the US, these countries
could potentially see more inflows of foreign investment as companies reassess their
global supply chains in the medium term. Specifically, countries such as Vietnam,
Cambodia and Thailand, with manufacturing cost structure similar to China could see
more demand for their exports, as well as investments by Chinese companies looking
to circumvent the US tariff wall. Being a regional shipping and financial hub, Singapore
could see positive spinoffs in terms of demand for its re-exports, logistics and financial
intermediation services.

While the trade war will bring about a lose-lose outcome for both the US and China -
exports performance for China and tax / inflation on US consumers - countries in
Southeast Asia could be the main beneficiaries given the trade diversion effects.
Specifically, the impact of the trade war on Singapore could well be positive from
such a perspective.

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Singapore: Opportunity from the trade war 1 October 2018

Overcoming trade barrier via FTAs

Countries with existing trade agreements with the US and China whereby the trade
terms are more favourable could even see added advantages. To safeguard its trade
interests, Singapore has invested significant amount of resources over the past two
decades in securing bilateral FTAs and participating actively on several regional trade
agreements. To date, it has a comprehensive network of more than twenty high
quality FTAs with many of its trading partners (table below). Amid the ongoing
uncertainties in the global trade environment, these legally binding agreements will
be useful in enhancing Singapore’s overall value proposition.
FTAs will give some
economies added
advantages Implemented FTAs Regional FTAs
• China-Singapore FTA (CSFTA) • ASEAN-Australia-NZ FTA (AANZFTA)
• ASEAN-China FTA (ACFTA)
• India-Singapore Comprehensive • ASEAN-India FTA (AIFTA)
Economic Cooperation Agreement (CECA) • ASEAN-Korea FTA (AKFTA)
• Japan-Singapore Economic Partnership • ASEAN FTA (AFTA)
Agreement (JSEPA) • EFTA-Singapore FTA (ESFTA)
• GCC-Singapore FTA (GSFTA)
• Korea-Singapore FTA (KSFTA) • Trans-Pacific Strategic Economic
Partnership (TPSEP)
• NZ-Singapore Comprehensive Economic
Partnership (ANZCEP) Concluded/signed FTAs
• Panama-Singapore FTA (PSFTA) • EU-Singapore FTA (EUSFTA)
• Peru-Singapore FTA (PeSFTA) • Comprehensive and Progressive
Agreement for Trans-Pacific Partnership
• Singapore-Australia FTA (SAFTA) (CPTPP)
FTAs undergoing negotiation
• Singapore-Costa Rica FTA (SCRFTA)
• ASEAN-India (Services & Investment)
• Singapore-Jordan FTA (SJFTA)
• ASEAN-Japan (Services & Investment)
• Sri Lanka-Singapore (SLSFTA) • Eurasian Economic Union-Singapore FTA
(EAEU)
• Turkey-Singapore FTA (TRSFTA) • Pacific Alliance – Singapore FTA
• US-Singapore FTA (USSFTA) • Regional Comprehensive Economic
Partnership (RCEP)

Against the backdrop of the trade war, Singapore companies must familiarize
themselves with these FTAs, as well as pitch this advantage to customers in the US or
China. As such unique comparative advantage will not be easy to replicate in the near
term, the FTAs will provide local companies the opportunities to gain further foothold
in the two key markets.

The element of certainty that these FTAs provide, particularly against the backdrop
of an increasingly challenging trade landscape, will also enhance Singapore’s appeal
as a strategic investment destination for multinational companies hoping to diversify
their operations to Southeast Asia. However, companies would have to familiarize
themselves on the technical aspects of the FTAs, particularly the Rules of Origins (ROO)
within the various FTAs to enjoy the preferential treatments under the trade
arrangements [1].

Indeed, while some companies will be negatively affected by the trade war, those
that are able to quickly re-orientate their strategies and leverage on Singapore’s
FTAs would stand to gain new business grounds.

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Singapore: Opportunity from the trade war
Diversification is key in
navigating the new
trade environment
Singapore companies
need to focus more on
ASEAN
1 October 2018
Diversification and regionalisation
The ongoing trade disputes has highlighted the importance of diversification. Having
a well-diversified supply chain and market portfolio would enable companies to avoid
concentration risk. In this regard, Singapore may have to focus more on ASEAN going
forward.
Growing importance of China in terms of NODX share
NODX share, %
China US
40
35 Asean 3 (MY, ID & TH) China + Hong Kong
30
25
20
15
10
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: Department of Statistics
While Singapore has a diversified export profile, its exposure to ASEAN is relatively
limited. In contrast, the liberalisation of China in the late 1980s and the drive towards
internationalisation had led to Singapore’s trade structure to be skewed towards
China over the years. NODX share to China rose from just 1.1% in 1990 to 18.2% in
2017. Including Hong Kong, which is often seen as a transhipment hub for China, the
figure rises to 26.4%, from 5.7% over the same period (chart above).
Yet, although Singapore’s total NODX share to her top three ASEAN partners
(Malaysia, Indonesia and Thailand) is comparable to that of China, it has been
moderating in recent years. It eased to 17.5% in 2017, from 20.3% in 2003.
There is a similar profile in terms of outward direct investment (ODI) by Singapore
firms into ASEAN too (chart next page). ODI share to ASEAN has been falling while
investment into China has risen over the years. Note that these numbers are likely a
little distorted because of the high proportion of FDI outflows that are coming from
MNCs based in Singapore.
Nevertheless, diversification into ASEAN will offer additional opportunities for
Singapore companies as well as to reduce exposure to China amid the new trade
landscape [2]. Besides, an increasing share of global FDI could be redirected to within
a few hours’ flight of Singapore as global companies reshuffle their supply chains in
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Singapore: Opportunity from the trade war 1 October 2018

the coming years. This could bring about more opportunities for Singapore companies,
especially if they have strong presence in the region.

ODI to Asean has been falling

% share of total ODI
40 ASEAN China
35
North America EU
30

25

20

15

10

0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: Department of Statistics

Innovation and competitiveness

As much as bringing about more opportunities for Singapore companies, stronger

foreign investment flows into ASEAN could also stoke more competition. Companies
would have to up their game to benefit from the changes and remain relevant.
Leveraging on technologies and enhancing business capabilities will enable
Singapore companies to have the competitive edge in their internationalisation
efforts.

From a macro perspective, Singapore is well-placed to take advantage of these

opportunities as well as to manage the risks. The World Economic Forum recently
ranked Singapore as one of the best positioned economies in terms of innovation and
business sophistication.
Innovation and
technology will give Singapore is ranked highly in competitiveness and innovation
Singapore companies Index
an edge Global competitiveness index Innovation/business sophistication
6.0

5.5

5.0

4.5

4.0
Sweden
Hong Kong

Italy
Finland

Norway

United States

Canada
Denmark
New Zealand
Switzerland

Taiwan
Germany

Korea, Rep.
Austria

France
Israel

Spain
Singapore

Belgium
Netherlands

Australia
Japan
Ireland

United Kingdom

Source: Global Competitiveness Report, World Economic Forum

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Singapore: Opportunity from the trade war 1 October 2018

Singapore has one of the highest densities of industrial robots

No. of industrial robots per 10,000 workers, 2016
700
600
500
400
300
200
100
0

Italy
Sweden

Czechia
Switzerland
Canada

Finland

World average
Denmark

Taiwan
South Korea

Germany

Slovenia
US

Austria
Spain

France
Japan

Belgium

Netherlands

Australia
Singapore

Source: International Federation of Robotics

Moreover, the trade war is focused on goods and the corresponding effects will be
most keenly felt in the manufacturing sector. Given Singapore’s relatively higher level
of sophistication in this sector, it commands an edge in this regard compared to the
regional peers. According to the International Federation of Robotics, the economy
has one of the highest density of industrial robots in the world (chart above).

Beyond technology, Singapore also has high levels of human capital and skills, with
workers able to upgrade and adapt to new ways of working. This is supported by
active government initiatives on skills upgrading. Indeed, Singapore’s head-start in
technologies complemented with the right skill-sets, should put the economy in a
better position to ride through the trade war.

Implications

Companies must re-
orientate their
strategies to gain
from the trade war
Just as the trade war can be perceived as a power struggle between the US and China,
it can also be seen as a rebalancing of regional trade and investment dynamics. As the
game of attributions wage on between these two economic giants, there will be losers,
as well as winners. The regional economic landscape will change significantly.
While some economies could lose out, the reshuffling of supply chains and
diversification of sourcing locations by global companies in response to such
disruptions could in fact present others with opportunities. The key lies in how
economic entities (both companies and economies) respond and re-position
themselves in this new environment.

Singapore is in a unique position given its regional hub status, a comprehensive FTA
network and higher level of innovation and business sophistication. But to capitalize
on the arising opportunities and mitigate against the risks, companies must re-
orientate their business strategies by leveraging on FTAs, technologies and diversify
to the ASEAN region.

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Singapore: Opportunity from the trade war 1 October 2018

Notes:

[1] Details of the US-Singapore FTA (https://ie.enterprisesg.gov.sg/Trade-From-

Singapore/International-Agreements/free-trade-agreements/USSFTA).
Details of the China-Singapore FTA (https://ie.enterprisesg.gov.sg/Trade-From-
Singapore/International-Agreements/free-trade-agreements/CSFTA)

[2] Singapore companies are increasingly more encouraged to venture into ASEAN
markets. Based on the National Business Survey published by the Singapore Business
Federation (SBF), 69% of the companies that had ventured overseas in 2017 are
planning to intensify their Southeast Asia footprint; and the top three markets are
Myanmar (27%), Vietnam (25%) and Indonesia (21%).

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Singapore: Opportunity from the trade war 1 October 2018

Group Research

Economics & Strategy

Taimur Baig, Ph.D.

Chief Economist - G3 & Asia
Ma Tieying
+65 6878-9548 taimurbaig@dbs.com
Economist - Japan, South Korea, & Taiwan
+65 6878-2408 matieying@dbs.com
Nathan Chow
Strategist - China & Hong Kong
+852 3668-5693 nathanchow@dbs.com Radhika Rao
Economist – Eurozone, India, & Thailand
Masyita Crystallin +65 6878-5282 radhikarao@dbs.com
Economist – Indonesia & Philippines
masyita@dbs.com Irvin Seah
Economist - Singapore, Malaysia, & Vietnam
Joanne Goh +65 6878-6727 irvinseah@dbs.com
Regional equity strategist
+65 6878-5233 joannegohsc@dbs.com Samuel Tse
Economist - China & Hong Kong
Neel Gopalakrishnan +852 3668-5694 samueltse@dbs.com
Credit Strategist
+65 68782072 neelg@dbs.com Duncan Tan
FX and Rates Strategist - Asean
Eugene Leow +65 6878-2140 duncantan@dbs.com
Rates Strategist - G3 & Asia
+65 6878-2842 eugeneleow@dbs.com Philip Wee
FX Strategist - G3 & Asia
Chris Leung +65 6878-4033 philipwee@dbs.com
Economist - China & Hong Kong
+852 3668-5694 chrisleung@dbs.com

Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations).

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