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14 Feb 2019
Ministry of Trade & Industry
Suggestion View - 343
Free trade agreements may have negative consequences

Each time I read that Singapore has signed a Free Trade Agreement (FTA), I do not rejoice. I do not automatically accept that it is a good development. I tried to read the details, but they are usually not covered by the newspapers. I harbor my doubts.

The latest is the FTA signed with the European Union.

Let me give my general views about FTA.

a) The FTA is a way to bring down tariffs. It encourages manufacturers to produce the products in a country which has the lowest cost of production. This is considered by economists to be beneficial to both countries as each country can produce the goods where it has the competitive advantage. This is the theory. The practical reality is different.

b) My view is that the free flow of production and investment benefits the multi national corporations and not the workers. It destroys jobs in some countries and bring the jobs to another country. The corporations earn a bigger profit but the workers suffer from job losses and stagnant wages. This has been the outcome over the past decades.

c) When tariffs are removed, the govt is not able to protect jobs of workers in a high cost country. In theory, there workers can do some other jobs. In practice, many of them are unemployed or have to accept low paying jobs. The income of the middle class is destroyed.

d) Tariffs can bring an important source of revenue to the govt. The govt needs funds to run its public and social services. Without tariffs, the govt has to depend on income tax and corporate tax. Due to the ability of multi national corporations to shift their profits to low tax countries, this source of revenue has become unreliable.

Without sufficient revenue, the govt has to run into a deficit and to borrow the money. This is what has happened to many countries. America is an extreme example.

I disagree with the notion that it is a good idea to have free trade and to remove tariffs. I believe that tariffs are important to allow a country to protect the jobs of its citizens and to bring an important source of revenue to the government. 

Let me come back to the case of Singapore.

An example of a bad FTA is the Comprehensive Economic Cooperation Agreement (CECA) signed with India. It has a clause to allow a large inflow of Indian professionals to work in Singapore without the need to pay a levy that is required for most foreign workers. 

This has resulted in a large inflow of Indian nationals who replace local Singaporeans in some occupations, especially in information technology and banking. The large inflow also increased the population and strain the public services in hospitals, schools, housing and transport.

The inflow of the Indian professionals and their families also benefit the economy, but the benefit seems to accrue mostly to the businesses. The workers and people in general suffer the negative consequences.

Similarly, the FTA agreement with America required us to implement certain business practices in financial services and market competition that have harmful consequences. I will cover them in a separate paper.

We should therefore examine the provisions of each FTA to make sure that all the parties are fairly treated and the overall benefit outweigh the cost. We should never blindly trust that every FTA is good for the country.

Tan Kin Lian

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