Balanced trade, imbalanced trade-offs

PUBLISHED : Saturday, 13 January, 2001, 12:00am
UPDATED : Saturday, 13 January, 2001, 12:00am

How interesting to see Singapore at the forefront of international efforts to promote free trade.

Trade and Industry Minister George Yeo, frustrated with a lack of progress in global talks through the World Trade Organisation, now wants to talk free trade with the European Union.

He has already signed a free-trade agreement with New Zealand and is looking for more.

This is all very laudable of course. Few measures to promote efficiency in any economy can do more than the one of knocking down trade barriers. It still leaves you one question, however. Why should Singapore in particular be such a fervent backer of the idea?

Here is a clue. The EU may be reluctant (why bother to set up the EU except to create Fortress Europe?) but three European states share Singapore's ardour and are willing to swap signatures. They are Switzerland, Iceland and Lichtenstein.

Now think about that.

Singapore's big salted cod industry will no longer face tariff barriers in Iceland and Iceland will be able to ship Brand's Essence of Chicken to Singapore without hindrance. Enormous market openings those.

Of course small countries like free trade. They are the greatest beneficiaries. On the one hand they produce few of the goods their domestic markets consume and those few are mostly specialised ones.

This is enough on its own to deter foreign competitors if the small size of market were not sufficient.

On the other hand, their industries tend to be focused on single-sector exports to larger countries that in most cases have producers of the same goods.

Small countries lose little by removing their own tariff barriers. They gain a great deal if other countries do it.

But while progress towards free trade has undoubtedly slowed since the Seattle fiasco, it is also becoming less important.

Manufacturing around the world has evolved its own ways around import barriers.

In the first place, it is fast losing its national attributes. Component goods come from many countries and the one in which they are finally put together as a finished product does not necessarily add much value.

Impose tariff barriers against that product and it could be your own country's component suppliers that you penalise.

Secondly, if a car producer is faced with a 30 per cent tariff on its cars its remedy, increasingly, is to set up a plant in the country imposing the tariffs. This will add to production costs, of course, but it is that country's consumers alone who will have to pay for it.

The original manufacturer still gets his full share of the winnings.

So it may not be all such terrible news that free trade is a faltering movement at the moment. It is far more threatening that all the talk is concentrated on freedom of trade while the flip side of the balance of payments, the capital account, has been disregarded and many countries are actually chipping away at freedoms in it.

If Singapore wants equal opportunity in trade from the world why not make it a fair exchange and offer the world equal opportunity in Singapore's financial markets? The pace of Singapore's financial reforms has quickened recently but it is still slow and the Singapore financial market a mighty closed one.

However, small countries tend to shun this. It is bigger countries that are the beneficiaries of this arrangement. They have the financial muscle, the expertise and the commercial efficiencies.

This is how we get that non-meeting of the minds when Singapore wants free goods trade with the US while the US wants free financial trade with Singapore.

Don't look at Mr Yeo as a paragon of modern economic virtues. He is only talking his own book.