Keeping the flames of free trade alive

Moller-Maersk A/S — the world’s largest owner of container ships and a bellwether of global trade — says global container demand in 3QFY2022 ended September is now expected to shrink between 2% and 4% this year, compared with its previous guidance at the lower end of the ±1% range.

Although Maersk posted its 16th straight quarter with y-o-y earnings growth, it warns that global freight rates have peaked and are starting to normalise because of softer demand and easing supply chain congestion. Next year, the global container market could also contract given the current macroeconomic backdrop. “With the war in Ukraine, an energy crisis in Europe, high inflation and a looming global recession, there are plenty of dark clouds on the horizon,” says Maersk CEO Søren Skou.

Singapore, whose economic viability is and has always been inextricably linked to the function of international trade, will invariably have to navigate these difficult conditions. Among the most visible signs was the 5.6% y-o-y drop in non-oil domestic exports (NODX) for October — the first y-o-y contraction since November 2020.

Despite macroeconomic headwinds forcing the global economy astern, Singapore has reaffirmed its commitment to serve as a key node of international trade — although the trade-reliant city-state, devoid of a natural hinterland and whose rudder and engine has long been bound to its entrepôt status, may have little other choice.

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The end of globalisation

Modern Singapore was founded in 1819 as a port for Britain’s East India Company. Over the next century and a half, the Crown colony developed into a significant entrepôt thanks to its strategic location along the India-China shipping route.

Since gaining independence in 1965, the role of Singapore as a conduit of trade between Asia and the rest of the world has continued to evolve. The country has grown from a simple port city to develop into a sophisticated trading and logistics hub, supporting direct trade, re-exports, as well as the increasingly important transhipment and offshore trade activities.

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Much of this growth was further accelerated by the phenomenon of hyper-globalisation — a period that began in the late-1990s and carried over into the 21st century, spurred on in no small part by the economic forces of cross-border trade that contributed to greater global wealth.

Pundits have taken the decline in the flows of goods, capital and people across borders as evidence of the end of globalisation, which — as defined by Harold James, professor of history and international affairs at Princeton University — is “the movement of money, goods, people, ideas, technologies and cultures across frontiers”.

Even before the onset of the Covid-19 pandemic and the war in Ukraine, global trade in goods peaked as a share of global gross domestic product (GDP) in 2008, with global foreign direct investment (FDI) inflows peaking around 2007 and global migration flows to developed economies like the eurozone also peaking before the Global Financial Crisis of 2008.

Macroeconomic instability over the past two years, coupled with the ongoing climate crisis, has only further stifled globalisation. The closure of international borders to combat the pandemic — not least of which includes China’s persisting travel restrictions — can be seen as starkly emblematic of this period of “deglobalisation” or “slowbalisation”, with countries around the world rethinking external dependencies and turning their focus inwards.

And while countries attempt to reconfigure supply chains and place greater emphasis on resilience to withstand external shocks, global central banks are also rapidly tightening monetary policy in synchrony as they prioritise reining in inflation. With the prolonged era of cheap money now history and without the option of looking inwards, Singapore has taken this as a sign to double down on its commitment to push for trade openness and liberalisation.

Singapore raises on trade value; bets big on infrastructure

As part of the Singapore Economy 2030 plan unveiled in March, Minister for Trade and Industry Gan Kim Yong highlighted a plan to leverage Singapore’s advantageous position as the foremost global business and transport hub in Southeast Asia, one of the world’s most economically dynamic regions.

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Aside from strengthening regional economic integration through Asean and continuing negotiations for key regional Free Trade Agreements (FTAs), Singapore’s Trade 2030 ambitions include growing its export value from $805 billion in 2020 to at least $1 trillion by 2030 and doubling its offshore trade value from US$1 trillion ($1.41 trillion) to US$2 trillion in the same period.

This strategy will enable Singapore to capture more re-exports and transhipment flows, plugging the country more deeply into global supply chains and enhancing its status as a global trade hub, says Lee Pak Sing, Enterprise Singapore’s assistant chief executive in an interview with The Edge Singapore.

Lee: Not everybody can be a transhipment hub because you needto have deep waters … and you also need to have very efficient port operations for quick transhipment turnaround

As opposed to direct exports — goods produced and sold by businesses in Singapore — re-exports refers to foreign goods imported into and subsequently exported from Singapore after the implementation of some form of value-added trade. Meanwhile, transhipment refers to goods that only pass through Singapore’s logistics hubs without ever coming ashore.

Although transhipment data is not included in trade statistics, Lee says that Singapore’s status as the world’s largest transhipment hub cannot be underestimated. Aside from providing business to Singapore’s ports, whose ecosystem provides thousands of jobs, the transhipment flows through the country position it as a critical player in the global trade network and supply chain. “Because goods that are shipped to Singapore can also be shipped to the rest of the world, this means that Singapore functions as an important node for international trade,” he says.

Lee adds that Singapore will continue to lean into its natural advantages and operational efficiency. “Not everybody can be a transhipment hub because you need to have deep waters as the ships are going to be bigger, and you also need to have very efficient port operations for quick transhipment turnaround,” he explains.

In 2021, Singapore marked a record high of 37.5 million twenty-foot equivalent units (TEUs) of container throughput. The megaport in Tuas that officially opened in September, when fully operational in the 2040s is expected to be the world’s largest fully-automated container terminal in a single location, with an annual handling capacity of 65 million TEUs — almost double what Singapore currently handles.

Singapore’s container port operator PSA is expected to move all operations at its Tanjong Pagar, Keppel and Brani Terminals to Tuas Port by 2027, while operations at the Pasir Panjang Terminal will be consolidated at Tuas Port when it is fully operational.

With the fully-automated Tuas megaport’s annual handling capacity, CEO of logistics technology company Container xChange Christian Roeloffs says that Singapore will provide the world with market access to a port of call with optimised logistics costs, turnaround time and efficient port operations.

This development comes at a time when producers are turning away from China to other Asian countries including the likes of Singapore, Malaysia, India, and Vietnam, says Roeloffs. He expects Singapore’s trade sector to witness higher demand, necessitating enhanced capacity of its ports to handle the increased trade volume.

From July to September, Container xChange’s Container Availability Index (CAx) saw Singapore’s readings for both 20-foot and 40-foot containers trending upwards, from around 0.6 at the start of July and peaking around 0.75 at the end of August. This is compared to the same period last year, which saw the country’s CAx scores hovering just below the 0.5 mark. The CAx monitors and forecasts global container equipment supply — an index reading of under 0.5 means that more containers leave a port than enter, while a score of over 0.5 means more containers are entering the port.

“Singapore, being a global maritime nation, is on its pathway to strengthen its footprint in the global supply chain and trading industry via the Tuas megaport,” says Roeloffs. “This megaport will serve as a binding agent to the global shipping industry to become a truly integrated market. It also is closer to the many industries in western Singapore which eventually will help reduce logistics costs and turnaround time.”

Tuas Port is set to anchor the upcoming Western Gateway and will be connected to industrial areas in the Jurong Lake District, Jurong Innovation District and Jurong and Tuas regions.

Roeloffs also points out that market projections suggest that the expanded TEU capacity ships are most likely to sail between megaports and transhipment terminals, cutting out the links between ports and cities. Tuas Port, he says, will ensure that Singapore does not get dropped off from direct port calls.

“With the emergence of diversified trade networks, Singapore is set to emerge as a key alternative for big shipping alliances and companies and is likely to shield itself from the implications of linear supply chains,” adds Roeloffs.

Chips down for global trade

However, some like Jamus Lim, associate professor of economics at the ESSEC Business School Asia-Pacific, have cautioned that Singapore’s infrastructure development in its effort to expand export levels will be swimming against a global trend — the slowdown in international trade integration, especially in merchandise.

“We have always been on the forefront of physical infrastructure, but my fear is that we continue to prioritise this front, even as the world begins to retreat away from a stress on the physical and toward the digital,” says Lim.

“My fear is that Tuas could sustain overcapacity for years to come as the world retreats from trade in goods although I hope not. Consolidating the various port operations into one common terminal is surely efficiency-enhancing. But the potential for expansion may not be there, insofar as global demand is concerned,” he adds.

Notably, however, another macroeconomic consideration — China’s harsh zero-Covid stance and ostensible tendency towards decoupling from the global economy — could be turning the tide in Asean’s favour.

In August, average trading prices for Southeast Asian ports saw a 36% rise to US$3,133 from US$2,300 in July, as well as a 21% increase in the one-way leasing rates for containers in Southeast Asia. Meanwhile, average leasing rates for containers from China to the rest of the world sank by 25%.

The way Container xChange’s Roeloffs sees it, this trend of rising container prices and leasing rates for Southeast Asia validates the “China plus one” strategy of companies as the demand for containers rises in Singapore, Vietnam, Malaysia and other Asean ports.

“The growth of containerised trade in Southeast Asia indicates a favourable trade environment for shippers and exporters in the region. For global container shipping companies that are looking to diversify their cargo trade lanes from linear to more distributed routes, countries like Singapore, Malaysia and Vietnam are emerging as strong contenders, more so for a China plus one strategy in the long term,” he explains.

And with businesses around the world forced to turn to ports in Asean to tackle the uncertainties caused by their dependency on linear supply chains with China, Roeloffs says that the emergence of smaller, diversified trade networks to ports in Southeast Asia will decrease the importance of the old US-China linear trade route across the Pacific, even when Chinese restrictions ease.

Deeper, wider offshore trade

Against the backdrop of slowing growth of global trade, Singapore’s 2030 objective of increasing its export value by 25% in a decade pales in comparison to its ambition to double offshore trade value — which is still very much tied to the health of global trade.

The macroeconomic events that have played out over the last two years could explain why Singapore has placed greater emphasis on the need to increase the latter part of its trade value.

“One of the outcomes that a lot of businesses have identified partly as a function of the Covid-19 pandemic and partly due to geopolitical issues, is the need to reduce redundancy in their supply chains and the need to be able to adapt and become agile,” says Kavilash Chawla, founder of Singapore-based financial think tank Foresight Economics.

Chawla says there needs to be an “optimised flow” for the goods and services involved in triangular trade strategies among producers, suppliers and customers. He believes Singapore possesses the necessary data-driven, highly efficient characteristics to play this expedient role in global trade.

Chawla: Businesses have realised the need to reduce redundancy in their supply chains and the need to be able to adapt and become agile

EnterpriseSG’s Lee says this is exactly how Singapore’s offshore traders, who predominantly engage in trade conducted outside of the country, will play a critical function in facilitating global trade even for goods and services that do not pass through Singapore’s ports.

For example, Singapore, which does not produce any of its own rubber, handles 80% of the global rubber trade, serving as a merchant hub that connects parties across the entire value chain, from producers and suppliers to their customers — mitigating its risk of becoming redundant to the supply chain.

He says EnterpriseSG is working with each of the roughly 400 companies engaged in offshore trade in Singapore to increase their volume of trade by connecting them to more global traders, as well as increasing the variety of goods being traded. He adds that EnterpriseSG is also actively working to bring offshore trading companies to set up their trading operations in Singapore.

In the oil and gas industry, trading companies that have recently set up operations in Singapore include Colombia’s Ecopetrol, Saudi Aramco and the Abu Dhabi National Oil Company (ADNOC). “By increasing the number of companies, by deepening trading activities and by expanding their range of products, that is how we increase our offshore trade value,” Lee says.

And as Singapore grows the number of companies trading and the variety of products traded from here, he says the presence of “diverse counterparties” can only make the country more ideal as a hub for offshore trade. “Singapore is a very easy place to find new business and to grow your operations because we have suppliers from all over the world and in every industry present here.”

Lee adds that the infrastructure that supports offshore trade — such as the banking, legal, insurance and shipping businesses due to the finance, contract and logistics-heavy nature of global trade — similarly benefits companies in these sectors in Singapore.

“Without offshore trade being conducted in Singapore, the financial sector would not be as significant to the Singapore economy. The amount of financing that a Singapore trading company would need to raise to fund the trading of physical goods is huge, which is of benefit to our financial sector,” he explains.

ESSEC’s Lim agrees, saying that while administrative and legal activities such as trade financing and professional services are “less glamorous”, they are critical to “oiling the wheels” of global trade. He notes that as opposed to the slowdown of global trade in merchandise, trade in services has continued to expand.

“Should Singapore wish to leverage this dimension, it will need to expand its domestic capacity in offering tradable services,” he says. “These are also areas that are enormously complementary to our existing strength in trade logistics. They are also extremely specialised and it is unclear how well we are prepared to meet an expansion in demand for such niche services.”

According to him, while Singapore has managed to climb the ranks in certain tradable services, such as back- and mid-office finance, as well as legal and logistical services, he believes the country is not yet globally competitive in areas including front-office finance, software and intellectual property development.

Lim says that Singapore is not new to the notion of introducing value to the supply chain as its traditional trade model has been based on entrepôt trade. “The trick to extracting value from offshore trade is, in my opinion, premised on how well we can play a role as a critical node in a regional trading network.”

He believes Singapore must “carve” itself a role from both the bottom up — Singapore firms and workers have to offer input that external parties find invaluable — and from the top down, as it prioritises regional exchanges to strengthen its economic ties, especially with Asean and other FTA partners.

Regional economic integration

Singapore’s maritime sector comprises over 5,000 companies, from major shipping lines to companies providing specialised services like shipping finance, maritime law and insurance, bunkering, shipbroking, and classification societies. And with the country also fast becoming Asia’s hub for maritime law and arbitration, Singapore is poised to become a comprehensive hub for intra- and inter-regional trade at a time when Asean is making large strides in its economic development.

Asean is already the world’s third-most populous economy and is projected to become the fourth-largest economy by 2030, by which time domestic consumption is expected to double to US$4 trillion.

At the Asean Summit on Nov 13, Kristalina Georgieva, managing director of the International Monetary Fund (IMF), noted that the IMF sees Asean growing at a rate of 5% this year and 4.7% in 2023, “well above” the global average. “This is because of steady progress on reforms and the tremendous integration of their economies. That is why I very much look to Asean to be a key player in helping to prevent fragmentation, and in actually encouraging the world to stay on the right path,” she adds.

Several days later at the Asia-Pacific Economic Cooperation (Apec) Leaders’ Summit on Nov 19, she described Asean as a beacon of light for the slowing global economy, whose growth the IMF is projecting to slip to 2.7% next year. “The three major engines of global growth — the US, China and Europe — are slowing down simultaneously and that is hitting the exports of emerging markets,” she says. “That said, there are a few bright spots: Asean is one of them.”

Denis Hew, director of the Apec Policy Support Unit, believes that for Asean to continue with its growth trajectory, Singapore needs to play a “prominent role” as a major transportation, logistics and financial hub for the region.

Hew’s research has included financial and economic integration issues in Asean and his work at Apec involves promoting trade and investment liberalisation, as well as business facilitation. Apec is a regional economic forum of 21 members across the Asia-Pacific region and includes all members of Asean except for Cambodia, Laos and Myanmar.

“Free trade is especially important in Southeast Asia because there is a nexus between trade and FDI, which is partly because of the increasingly developed supply chains or production networks in the region,” he says.

As one of the most open economies in Asean, Singapore can “lead by example” efforts to create an “economic community” within member states. “Asean is different from Apec because it is a much tighter regional grouping and has a common vision. A lot of its agreements are legally binding as opposed to Apec’s commitments which are voluntary in nature,” he notes.

Hew sees Asean headed in the direction of the European Union (EU). “Although Asean is in its nascent stages of economic integration [compared to the EU], it certainly appears to be heading in that direction of trying to create a much more integrated region, especially as a single market and production base,” he says.

Hew: Free trade is especially important in Southeast Asia because there is a nexus between trade and FDI

Meanwhile, as Asean works on intra-regional economic integration, inter-regional interest from the EU towards Asean is gaining traction. The 2022 Business Sentiment Survey from the EU-Asean Business Council (EU-ABC) — an annual publication that investigates the outlook of European businesses in Asean’s corporate landscape — found that 69% of respondents expect Asean markets to become more important in terms of worldwide revenues over the next two years, compared to 58% in 2021.

The survey also found that 97% of respondents would like the EU to accelerate FTA negotiations with Asean and its members, while 73% of respondents believe that the EU should pursue a region-to-region FTA with Asean presently. However, just 6% of the respondents feel that Asean economic integration is progressing fast enough.

Chris Humphrey, executive director of the EU-ABC, believes that the strong sentiment towards Asean stems from how the member governments have been responding well to deal with the pandemic, rolling out economic support for their companies and making employment a priority. “That has meant that Asean has seen a significant uptick in GDP growth over the last 18 months. I think this will continue for the rest of the year — and European businesses see that as well.”

“Pre-Covid, Asean was a beacon of growth globally and I think it’s going to remain a beacon of growth going forward as well,” he adds. “Companies want to invest in regions which are showing growth and on top of that, Asean is also a region which — at least externally — is doing a lot in opening up trade, maintaining a global rules-based system for trade and it’s a relatively young region with populations who are willing to take on new skill sets.”

Less positively, the EU-ABC survey also found that 81% of respondents believe that non-tariff barriers to trade in Asean are not decreasing, while 23% say they are increasing. Although this is an improvement from 97% and 38% in 2021 respectively, Humphrey says this may not be enough.

“Despite ongoing pressure from the private sector in Asean and oft-repeated statements from Asean to take action, the fact that 81% of our respondents do not perceive a decrease in non-tariff barriers to trade, demonstrates a continuing failure of Asean in this area,” he says. “Removing such barriers will only help innovation, drive competition, boost economies, and lower prices. At a time of increasing inflation and supply chain disruptions, it is vital that more meaningful action on eliminating non-tariff barriers is taken, and seen to be taken.”

Although the EU has an existing FTA with Singapore which entered into force in November 2019, one between the whole of Asean and the EU is not likely to happen in the short to medium term due to a “complete ambition disconnect”, according to Humphrey. For example, the EU wants to include issues such as human and labour rights and sustainability chapters in any trade deal it makes but these areas are not issues all Asean members believe should belong in trade deals, he says.

More than that, says Humphrey, what the EU is looking for is a rapid removal of tariffs and non-tariff barriers and the harmonising of trade standards, among other conditions — some of which are “too much for many on the Asean side to swallow”. In response, the EU has returned to the idea of bilateral trade deals before it reattempts to make trade deals at the regional level.

Singapore’s FTA with the EU — the first for an Asean member — is expected to serve as a building block for an eventual EU-Asean FTA, paving the way for increased region-to-region cooperation.

Open trade in a closed world

From the perspective of Foresight’s Chawla, Singapore’s open trading environment has been and will continue to be its greatest advantage in a global trading environment that is seeing an increase in trade barriers at a bilateral level.

“If we look at the last decade or so of global trade regulations and policies, there appears to be a shift away from more free trading mechanisms and a weakening of the World Trade Organization (WTO),” he says. “As we shift away from global trading architecture to either more bilateral or even sub-regional architecture, executing trade gets a lot more expensive and a lot more complicated.”

He believes Singapore is uniquely positioned to play a leading role in returning trade discussions to a global level and will need to do so to meet its trade objectives. “Singapore has achieved its success as a very deliberate strategy of being open and anti-corrupt, with a strong institutional and regulatory approach. These are the characteristics that made Singapore’s local economy robust and globally integrated.”

“The overarching mechanism that Singapore will need to take will be promoting and supporting and playing a leading role in globally-oriented architecture compared to the devolution of that infrastructure to regional and sub-regional levels,” adds Chawla.

Meanwhile, EnterpriseSG’s Lee says the confluence of macroeconomic factors has meant that trade is “high on everyone’s agenda” with the recognition of its importance in the post-Covid era. He notes that Singapore will not “constrain” itself to intra-Asean trade and that it will continue to look further ashore for global trading opportunities. Lee says he is “confident” that Singapore will meet its 2030 trade objectives.

Beyond the next decade, the opportunities for Singapore to continue establishing itself as a major global trading hub will continue to present themselves. Chawla believes that the global economy, including trade and capital flows, is undergoing a “fundamental shift” that will continue over the next 20 to 30 years. Megatrends like the tenuous dynamic of the US-China relationship and the fragmentation of existing global trade and financial architecture could see growing trading hubs, including Singapore, leading the global economy, he says.

Says Chawla: “Market stakeholders will be required to navigate these megatrends as these trends influence economies and trade and capital flows in different ways. The markets and countries that will thrive are those that have long-term strategies for success. Having a long-term strategy provides clarity to all market stakeholders, enabling them to plan and pivot as both internal and external environments evolve around them.”

“Markets like Singapore, where the government has developed and communicated a growth strategy and solid economic plan are poised to be able to emerge stronger. They will increasingly become attractive for capital flows, including FDI investors, and as regional trade hubs,” he adds.

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