International trade has always played a major role in driving the Singapore economy. Indeed, the Singapore economy has been typically described as "small and open economy" because of our unique dependence on external trade to generate our GDP growth. The total volume of trade (see table 2) is very large at more than 300% of GDP, making Singapore one of the most open economies in the world.
Table 3: Singapore's Overall Trade Classifications
Officially Singapore's exports are broken down into the following categories:
Oil: This refers to petroleum trade.
Non-oil domestic exports (NODX): This refers to domestic exports less oil exports e.g. pharmaceuticals and electronics
Re-exports: Goods which are imported not for domestic consumption but for re-exports after repacking, sorting or grading. Historically, this was an important economic activity as Singapore acted as a hub or distribution centre for entrepot trade in this region.
Table 4: Singapore's Merchandise Exports
In the '60s and '70s, Singapore exports were based on entrepot trade and producing labour-intensive products, such as simple textiles and households electrical goods. Today, our exports are mainly capital intensive products and services such as petroleum refining, skill-intensive electronic goods such semi-conductors and wafer fabrication, petrochemicals, pharmaceuticals, biomedical and high income business and financial services. Tourism too has become an important export industry that our government intends to develop. For instance, Singapore has ventured into developing Integrated Resorts to grow the MICE (Meetings, Incentive Travel, Convention, and Exhibitions) tourism industry. On top of this, we are also developing Singapore into a regional educational hub catering to foreign students as well as a health-care centre to attract medical-tourists.
Table 5: Singapore's Merchandise Imports
Machinery and equipment, mineral fuels and lubricants, chemical and chemical products, manufactured goods, and food are our main imports.
Figure 1: Singapore’s Main Export Markets
The distinction between exports and imports has become blurred with the rise in the proportion of "intra-industry" trade. When Singapore was still developing, it was primarily engaged in supplying industrial countries with labour-intensive intermediate components and semi-finished products which were subsequently transformed into more sophisticated manufactured goods. As the semi-finished goods and the finished good itself are classified under the same category, this accounted for much of the intra industry trade. The amount of trade they did with a given developed country tended to reflect historical links and the presence of the MNCs originating from those countries.
As Singapore becomes increasing developed with broadening of its economic base and level of technological sophistication, its intra-industry trade patterns have shifted to the importing of intermediate inputs to manufacture advanced high value-added capital goods like aircraft engines, oil rigs and medical equipment. Singapore also produces huge range of processed food products for the international market while importing similar products from other countries to cater to demand for product variety by affluent and well-travelled Singaporean households.
As a small, developed economy with a strong technological base and a highly skilled workforce, Singapore has comparative advantage in producing and exporting capital, technology, and knowledge intensive products. On the other hand, as labour cost is high and its land area is limited, Singapore has a comparative disadvantage in labour and land intensive goods like clothing and agricultural products and hence imports such products from other less developed or more land abundant countries.
Assume before specialization, Singapore produces 20 units of vegetables and 30 units of petrochemicals which means it has to give up 3/2 unit of petrochemicals for 1 unit of vegetables or 2/3 unit of vegetables for 1 unit of petrochemicals. On the other hand, country X produces 15 units of vegetables and 10 units of petrochemicals which means it has to give up 2/3 unit of petrochemicals for 1 unit of vegetables or 3/2 unit of petrochemicals for 1 unit of vegetables. This shows that the Singapore and country X have lower opportunity costs or comparative advantage in producing petrochemicals and vegetables respectively. They will then choose to specialise in the products they have a lower opportunity costs and trade with each other, i.e. Singapore exports petrochemicals for imports of vegetables from country X.
Besides, inter-industry trade, Singapore also engages in intra-industry trade. Asian tiger economies like South Korea and Hong Kong have almost similar comparative advantage in the production of high-tech manufactured products and services like civil aviation; banking and finance and tourism. In such cases, despite a lack of comparative advantage, international trade in goods and services still take place between Singapore and these countries because of:
Differences in tastes and preferences: Consumers of both countries benefit from access to a wider choice or product differentiation. For instance, Singaporean residents get access to travel by different foreign airlines or use the services of foreign banks like HSBC.
Gains from internal economies of scale: Exporting overseas increases the producers’ scale of production or volume of output. Economies of scale enable producers’ to lower unit costs through various forms of cost savings such as bulk purchasing and administrative costs. The advantages are that consumers get to enjoy lower prices whilst producers get to reap higher profits. For this reason many Singaporean firms have ventured abroad to export their services to overseas markets e.g. private hospitals and banks.
Globalisation and Free Trade Agreements (FTAs)
In Singapore, globalization has also altered the composition of our trade partners. Traditionally, the major advanced economies like US and EU and regional economies like ASEAN have been our key trade partners. Today, due to the growing network of FTAs, trade has extended to emerging economies like China, India, as well as non-traditional trade partners like Peru, Panama, Russia, and some Middle Eastern Countries like Jordan. The forging of FTAs has been prompted by the need to diversify our markets (e.g. decoupling) to cushion the economy against the threat of contagion and protectionism in a globalised world.
Singapore network of FTAs also enable its FTA partners to bypass some of the trade barriers and gain access to another market that also has a FTA with Singapore. For example, China may get to enjoy tariff free access (or at least tariff reductions) to the USA if they were to export their goods through Singapore rather than exporting their goods directly to the USA. By negotiating a vast network of FTAs, Singapore enhances its position as a shipping hub. This increases her earnings from port and shipping related services as more ships stop at Singapore to offload the goods that are meant for re-export.
Protectionism
The theory of comparative advantage assumes that countries specialize and trade freely without trade barriers. However, countries may sometimes protect restrict imports from Singapore (and also other countries) to protect firms and workers in times of recession, to correct trade imbalances or for other political or strategic reasons (these will be covered in detail later in the notes)
Transport costs
Although cheaper imports may be obtained from countries which are located further away, differences in transportation costs may result in goods being imported from a nearer country. For example, although some types of fruits and vegetables may be obtained more cheaply from a country like India, Singapore firms may prefer to import such products from neighbouring Malaysia as it will probably be much cheaper and faster to transport such perishable goods by road than by sea.