Singapore is switching gears to shore up its internationalisation efforts, and is urging other member states of a failed Pacific Rim trade pact to do the same.
But even as the city-state works to grow its external pie amid plans to restructure its economy, observers warned of risks down the road for Singapore’s growth and also its financial stability as the US retreats from world trade.
US President Donald Trump on Monday signed an executive order to withdraw the world’s largest economy from the 12-member Trans-Pacific Partnership (TPP).
The pact needs at least six countries representing 85 per cent of economic output of the Pacific Rim grouping to be ratified; Mr Trump’s order effectively killed the deal.
Leaders of TPP member countries, however, have in recent days held out hope that there would be some way in which the deal can still be ratified.
Singapore’s Ministry of Trade and Industry (MTI) struck a different tone on Tuesday. Its spokesman, in response to queries from The Business Times, said: “The US has indicated that it will pull out of the TPP agreement. Without the participation of the US, the TPP agreement as signed cannot come into effect.”
Instead, the MTI is looking at other regional integration initiatives such as the Regional Comprehensive Economic Partnership (RCEP) and the proposal for a free trade area of the Asia-Pacific.
“Singapore will continue to participate in these initiatives,” said the spokesman.
“We will have to discuss the way forward with the other TPP partners. Each of the partners will have to carefully study the new balance of benefits.”
The TPP’s demise comes just days before Singapore is expected to introduce a seminal report on how it will restructure its economy as its workforce ages and cost of labour rises.
Expanding overseas is expected to be a key pillar in the Committee on the Future Economy (CFE) report. Singapore’s leaders have been urging firms to do so in CFE-related events.
Song Seng Wun, economist at CIMB in Singapore, noted that with the TPP out of the picture, there are now fewer ways in which Singapore can participate in global trade.
“Even though we have a free-trade agreement with the US, there’s this huge obstacle in the way now, we really have to find our way around it,” he said.
And if Mr Trump’s decision on Monday is indicative of more protectionist measures to come, observers are worried about risks to global fiscal stability and in Singapore.
This is because, when combined with fiscal stimulus, America’s retreat from global trade may result in higher domestic consumer inflation.
This will prompt the US Federal Reserve to raise interest rates faster, said Chang Wei Liang, foreign exchange strategist at Mizuho Bank in Singapore.
“To us, this could pose a more severe test for emerging Asian currencies than trade alone.”
Faster rate hikes also spells trouble for Singapore’s “domestic-facing industries, which are weighed down by high household leverage”, said Joseph Incalcaterra, HSBC’s economist in Hong Kong.
But for now, the immediate financial fallout from the TPP’s demise seems limited; capital markets and currencies held relatively steady on Monday and Tuesday on both sides of the Pacific.
It was also not expected to have dealt a big blow to global trade, as global trade flows were already weakening in the months before, said observers.
Mahamoud Islam, senior Asia economist at Euler Hermes in Hong Kong, noted that early trade data showing that US dollar-denominated exports over the full year in 2016 fell in China by 7.7 per cent, in South Korea (-5.9 per cent) and Singapore (-4.9 per cent).
“We expect a limited improvement in 2017,” he said.
Alice Fulwood, Singapore-based economist at UBS, said the TPP’s death knell is also unlikely to have impacted companies’ decisions because it was uncertain that the US could ratify the deal even before Mr Trump signed the order.
“This uncertainty will likely have prevented companies and individuals from acting on expectations that it (the TPP) would proceed.”
However, early rumblings from the US’ exit from the TPP could be seen in Japan’s stock market and a dip in the US dollar.
Investors seemed to be spooked by Mr Trump’s focus on protectionism, as seen by his order to withdraw the US from the TPP on his first full day in office, as opposed to fiscal stimulus.
This notion was further reinforced by US Treasury Secretary nominee Steven Mnuchin’s comment that an “excessively strong dollar” is not good for the economy in the near term.
Emmanuel Ng, foreign exchange strategist at Singapore’s OCBC, warned of the prolonged effect of the US’ protectionist overtures in a Tuesday note.
If Mr Trump does not follow up with fiscal stimulus, “expect the broad US dollar to continue to capitulate lower across the board”, he wrote.
Meanwhile, political repercussions were starting to be felt from the TPP’s failure.
After having drummed up domestic support for the TPP, leaders from member countries are now faced with the stark reality of having to deliver on the promises of the pact.
Australian Prime Minister Malcolm Turnbull reiterated his focus on workers on Tuesday: “Losing the United States from the TPP is a big loss … but we are not about to walk away from our commitment to Australian jobs.”
This article was first published on January 25, 2017.
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