Risks to Singapore Economy Given Present External Uncertainty

Mr Saktiandi Supaat asked the Minister for Trade and Industry (a) whether he can provide an update on the likely impact that Singapore may face from the US-China trade war and the widening reach of US export controls on emerging and foundational technologies; and (b) what measures and policies can be introduced to ensure headwinds from the escalating US-China trade war, disruptions to the global supply chain and global slowdown will not affect our economy significantly.

Mr Seah Kian Peng asked the Minister for Trade and Industry (a) how will the ongoing trade war between China and USA impact Singapore; (b) whether the Ministry can name the top three things that the man in the street should be prepared for; and (c) how will the Government cushion the impact.

Mr Ang Wei Neng asked the Minister for Trade and Industry (a) what are the implications of the trade dispute between US and China on Singapore's economy; and (b) what are the measures that the Government is prepared to implement should our economy slow down significantly.

Mr Pritam Singh asked the Minister for Trade and Industry (a) what is the Government's assessment of the impact of the US-China trade war on the Singapore economy and which sectors are envisaged to be worst-hit or particularly vulnerable; and (b) what measures will the Government institute to support Singaporean workers in these sectors.

Ms Sylvia Lim asked the Minister for Trade and Industry whether he can (i) give an assessment of the risk of a global trade war and (ii) elaborate on the strategies that Singapore is deploying to manage that risk.

Mr Speaker, Sir, I will group the answers into three parts: first, the state of Singapore’s economy; second, our medium term outlook, and third, our strategies to manage the challenges and seize new opportunities.

The global economic environment has weakened. The IMF has lowered its forecast for global GDP growth this year by 0.2%-points, from 3.5% to 3.3%. Key uncertainties include and these include: (a) the US-China trade dispute, which has gone beyond retaliatory tariffs to other areas, including restrictions on technology access and sales; (b) the uncertainty and the risk of a disorderly Brexit; and (c) the political uncertainties of some regional economies.

All these have dampened consumer and business confidence. Lower demand in our key export markets has in turn affected our outward-oriented sectors such as electronics, precision engineering and wholesale trade, whose performance remains weak. Although EDB is on track to achieving its Foreign Investments targets for this year, we are watching businesses’ investment decisions very closely.

However, there are pockets of strength in our economy. The information and communications sector is expected to grow given firms’ robust demand for IT and digital solutions. The education, health, and social services sector is similarly expected to remain resilient. The construction sector has also turned around after three years of contraction. Our labour market remains resilient – employment continued to increase in the first quarter of the year, while unemployment remains low at 2.2%.

In May, MTI projected that our economy would grow between 1.5% and 2.5% this year. MTI will review our forecast in August, taking into account the full set of economic data for the second quarter, as well as the latest external economic conditions. Let me touch on the second part of my answer and the medium-term outlook for Singapore.

The medium-term outlook for the Singapore economy will be determined by the following factors.

First, how the US-China trade conflict develops. Further tariffs will impact more goods, and bring about even greater re-organisation of global supply chains. The IMF had estimated that the US-China tariffs could cut global economic output by 0.5%-points in 2020. Both countries’ agreement to resume trade negotiations is welcome news, but there are fundamental disagreements between them and those will take time to resolve. Prolonged US-China tensions will further undermine global business and consumer confidence.

Second, our medium-term outlook will depend on how our major export markets perform. Southeast Asia remains a bright spark, and the US economy appears to be holding up. However, China’s economy could slow down more sharply than expected due to the trade conflict with the US and this could further dampen its import demand from the region. And Europe needs a decisive resolution on Brexit.

While we must weather these immediate challenges, we must, more importantly, navigate more fundamental shifts in the global economy that will shape our medium- to long-term prospects.

One is the future of the multilateral trading system. Over the past 40 years, Singapore has benefited from increased economic integration and free trade, underpinned by international rules that apply to countries big and small, and anchored by the World Trade Organization (WTO).

Unfortunately, the multilateral trading system is currently under stress. The risks of economic balkanisation, where markets are bifurcated and trade, talent and data flows are disrupted, have grown. An increasingly protectionist global environment would reduce our access to markets. When we are all reduced to competing for a slice of a shrinking economic pie, no one wins.

The second is the emergence of global rules that may affect our status as a global trading hub. For instance, on-going discussions to introduce minimum effective tax rates across countries will affect our competitiveness and carbon caps will constrain our growth potential. We must navigate this carefully to preserve our economic space.

The third is our ability to harness our new technologies and create opportunities, especially in the digital economy. I will elaborate on this shortly.

Let me now talk about our strategies to manage these challenges and to seize the new opportunities.

To overcome these challenges and seize the opportunities, we will focus our economic strategy on three prongs: first, strengthen our fundamentals to distinguish ourselves from the competition; second, create opportunities by constantly refreshing our offerings to business and investors; and third, promote a conducive global and regional business environment with like-minded countries and companies.

Let me elaborate on the first, strengthening our fundamentals to distinguish ourselves amidst the uncertainty.

Our fundamentals that have put us in good stead include the following:

First, a stable political environment with a competent and united leadership.

Second, a pro-business environment, including rule of law, a pro-innovation regulatory environment, and a safe harbour for talent and ideas.

Third, superior connectivity in supply chains and distribution networks, spanning the physical dimensions like air, land and sea; and including the non-physical dimensions of data, finance, talent, technology and rules.

Fourth, a skilled workforce that continues to upgrade itself through training and retraining.

Fifth, a progressive tripartite partnership that enables the Government, businesses and labour to overcome our challenges together.

Each of these attributes enhances our competitiveness. Collectively, they enable Singapore to be much more than the sum of its individual parts. That is why the IMD recently ranked Singapore the world’s most competitive economy. We must, however, extend our lead, by continuing to build on these fundamentals and seizing new opportunities.

Let me now touch on the new opportunities, which is the second prong of our economic strategy is to constantly refresh our offerings to business and investors.

As a small, open economy, Singapore must always adapt to changing external circumstances, and harness the power of our people and technology.

We are making encouraging progress transforming our industries through the work of the Future Economy Council (FEC) and the Industry Transformation Maps (ITMs). For example, in Advanced Manufacturing, we are creating new niche areas such as additive manufacturing and advanced materials. Our strong manufacturing sector will allow us to plug into global supply chains to meet demand from emerging adjacent industries, such as Electric Vehicles.

We will build the next-generation industrial and technological estates such as the Jurong Innovation District (JID) and the Punggol Digital District. We will also redevelop entire tracts at Sungei Kadut and Kranji for new industries.

To enrich our tourism offerings, we are rejuvenating the two Integrated Resorts, transforming Orchard Road and exploring a tourism site at Jurong Lake District. We will also be developing Mandai and the Greater Southern Waterfront. These initiatives will enhance our position as a global city for business and leisure.

Beyond transforming existing sectors and industries, we are also developing brand new sectors.

For example, we are establishing a new Agri-Food Innovation Park in Sungei Kadut to realise our agri-tech ambitions. The Innovation Park will bring together high-tech precision farming and R&D activities, including indoor plant factories, insect farms and animal feed production facilities. This will create a completely new range of jobs in agriculture and give a new generation of young technopreneur farmers the platform to commercialise their ideas.

Another new area that we are focusing on is Precision Medicine. This uses each patient's biological data to more precisely predict, diagnose and treat diseases. EDB is working hard to bring to Singapore various biotech firms, medical technology firms and digital health players. I have just opened Glaxo Smith Kline (GSK)'s two new manufacturing facilities last week. GSK is investing more than $100 million in Singapore to produce new medicines faster, with a lower carbon footprint. GSK's investment reflects their continued confidence in Singapore's future.

Besides transforming entire sectors, we will also support our companies to better harness the regional and global opportunities.

We already have a vibrant start-up sector at block 71, One-North. But we can do a better job helping our companies scale up and grow. Enterprise Singapore will, therefore, launch the "Scale-up SG" programme on Wednesday to provide customised assistance to high potential companies to grow and internationalise. We must also continue to work hard to translate our R&D capabilities into new business opportunities with our companies.

And there is no lack of opportunities and possibilities in Singapore. We can only be constrained by our imagination.

To realise all these plans, we will continue to do our part to promote a conducive global and regional business environment with like-minded countries and companies. This is the third prong of our economic strategy.

Digital trade is one such example. It is a key driver of our future economic growth. We will continue to advocate for an integrated, global digital economy. This includes our efforts to co-develop international trade rules for the digital economy. This is the reason why we are co-convenors of the Joint Statement Initiative on E-commerce (JSI) at the WTO which has since attracted participation from 78 countries. We are also pursuing a pathfinder Digital Economy Partnership Agreement with Chile and New Zealand, and are we are working with Australia on digital economy initiatives, which will all help to provide greater opportunities for our businesses in an increasingly digitalised future.

We will also continue to strengthen and deepen and diversify our trade links. We will forge new partnerships through on-going negotiations in the Regional Comprehensive Economic Partnership, or RCEP, as we call it, and the Pacific Alliance Free Trade Agreement (FTA). Once concluded, the RCEP will be the world's largest free trade area, bringing together economies accounting for a third of the global GDP and almost half of the world's population. The potential for Singapore businesses will be enormous.

At the same time, we will also review and upgrade our current partnerships, including the China-Singapore FTA, and the Comprehensive Economic Cooperation Agreement (CECA) with India. These upgrades will increase the benefits that Singapore companies already gain from the existing FTAs. Today, more than 90% of Singapore trade are covered by our various FTAs.

These efforts will ensure that our external linkages remain strong whatever happens elsewhere in the world. And collectively, they will give Team Singapore the best chance for success.

As Members can see, we are closely monitoring economic developments. While there are clouds looming, we believe we have the fundamentals to weather the storm. Our economic fundamentals are sound – we are in a strong fiscal position and we are making good progress in restructuring our economy. The Government also stands ready to step up our support for companies and workers in sustaining our core capabilities, enhancing our competitiveness to seize new opportunities. So, let us work together, plant the seeds for tomorrow's growth, till the land, and we should have a good harvest.

Notwithstanding the Minister's the very reassuring reply, I still have two further questions.

Firstly, as the Minister has just said, our global trade systems are under stress. Indeed, the way things are developing, the world may indeed be trading less with each other, or investing less with each other as well, and both are important. Trade and investments are always the key drivers for the Singapore economy. So, I want to ask the Minister: should we be concerned that more economies around the world are becoming more nationalistic, governments are increasingly looking at balance of trade, current account balances as a pure zero-sum game? How can tiny Singapore respond to this rising economic nationalism?

Secondly, beyond exporting goods and services to the consumers of the world, what are the other ways we can sustain growth within our economy? How can it create opportunities for Singapore? Can Singapore break out from this traditional C+I+G+X kind of model of growth?

Mr Speaker, Sir, indeed, Mr Liang Eng Hwa has raised a very serious concern for all of us, not just Singapore, but for all countries that are participating in the global trading system.

As countries become more nationalistic and undertake more unilateralist or protectionist measures, it is a concern to all. The concern will be that there will not just be a shift in the supply chains or the distribution networks or the production sites. The greater concern will be a general fall in the investors and consumer confidence.

For Singapore to respond to this scenario, we must make sure that our companies have real capabilities that can allow them to inter-operate across a more fragmented landscape. This is not easy but this is something that we must do in the face of a potential fragmentation of the global economy.

On the Member's second question, as any economics student will know, that GDP equation of C+I+G+X-M, that is for Gross Domestic Product (GDP). How must Singapore grow our economy, going forward? What the Member is alluding to, if I read him correctly, is that we must not just look at what is happening domestically in Singapore. And indeed, that is true.

There are three things that we should be focused on. First, what happens domestically. How do we help our companies and workers to build real capabilities in order to contest in the new world environment? That is domestic. How do we help them access markets; how do we make sure that the rules allow our companies to overcome both the tariff and the non-tariff barriers? So, that is the first part of how we need to run our economy.

The second part of how we need to run our economy goes beyond the GDP equation that we just mentioned. And we talked about the Gross National Product (GNP). How do we have a sizeable base of companies that operate beyond Singapore but contributing back to the Singapore economy. And I will use the example of PSA.

Once upon a time, we believed that the port is critical to Singapore and we continue to believe so. But a port has two possible functions. One is to promote trade with a particular country. The other – most ports are like that – they serve the local domestic economy.

But there is a second way of looking at the port which is the way the Singapore port has developed. We are an exchange platform so people do not just trade with Singapore; people trade through Singapore. So, night, the vast majority of the containers that come to Singapore come through Singapore and we are a major exchange hub. But having done that, it is still not sufficient because trade routes might change, and the global supply chains and patterns will also change, which is why over the years, PSA have built up a string of ports all around the world, allowing them not just to be a port operator, but allowing them to be global logistic players. So, even if the goods do not come to Singapore or come through Singapore, they will trade on the PSA platform or on the Singapore platform. This is a new way of looking at how we should do business.

That is why Enterprise Singapore (ESG), together with the rest of our economic agencies, are spending so much effort to help our companies to use the world as our hinterland and never be constrained by our geographical size or geographical location. And that will be the next lap of our economic development, and that will be one way where we break the conventional paradigm of the GDP equation which Mr Liang mentioned C+I+G+X-M.

The third prong which we must always bear in mind and sometimes, not so obvious in the public consciousness in our economic strategy, will be how we manage our reserves and where we put our investments. Today, we are in a fortunate whereby for every $5 we spend in the budget, slightly more than $1 this year comes from our returns from our investment. This has given Singapore economy a significant boost and help our budgetary constraints very much. And thus, we must continue to harness our reserves judiciously to make sure that we create the biggest positive impact for Singaporeans.

So, going forward, our economic strategy is not just about looking at what we can do domestically, between local firms and foreign firms operating here. We must also look at how we grow the external wing, our GNP, and how we master our investment resources to make sure that we have the ammunition for us to weather the storm.

I would like to thank the Minister for answering the question just now. I think he highlighted the importance of strengthening the fundamentals in Singapore. I have two supplementary questions.

One is related to something more detailed, in particular, the recent US Department of Commerce proposed export controls on 14 categories of technology. And I think it has some impact on Singapore, in particular, what the Minister mentioned, in terms of investments as well. So, whether he can share with the House whether there would be potential impact on Singapore, in terms of investments and potential tech-related restrictions that US imposes on China, and how that affects Singapore companies as well. That is the first question.

The second is the Minister highlighted about the trade and tech diversions and the supply chain changes. In the region, other countries are also putting in efforts to pull in some of these trade diversions into their countries. Can the Minister share EDB's strategies, in terms of reaping some of the benefits, or pulling some of these production networks into Singapore, if any?

Mr Speaker, let me deal with the first one. Indeed, the restrictions on export of what is deemed as a sensitive technology will have implications for the entire global technological eco-system. In the short term, various companies and countries may be able to take measures to shift their production or supply chains elsewhere. This is what we call the substitution effect. But, in the longer term, what we are most worried about, is that it will lead to a bifurcation, if not, a fragmentation of the entire technological space. If that happens, then we are all for the worst of it because it means that the global production system cannot be optimised as a whole, but it will be sub-optimised in parts. This will lead to increased costs, a fragmented production chain and so forth. So, that will be the greatest concern.

Our Singapore strategy remains that we will thrive to be able to inter-operate across the different jurisdictions and different systems. But we must also inspire confidence in people who put their investments here that even in such a world, we are able to manage the different sensitivities across different countries, properly.

On the Member's second part about the shifts in the global supply chain, indeed, to use a very specific example, some people have said that various productions and supply chains have shifted out from China in the global re-organisation of that product chain. Some of it will come to some parts of the region, around here. Some of it might come to Singapore.

But I must say that Singapore does not compete with the rest of the regional economies for the entire shift in the global production chain. There are some things that we do much better; there are some things that will not be re-allocated here. The simple example is this: for what we call the low-mix, high-volume production, most of them will not come to Singapore because they compete on the basis of scale, labour costs, land costs. But what will come to Singapore will be what we call the high-mix, low-volume. This is where trust, standards, quality, assurance, intellectual property (IP) protection will become very important. And we have seen more of such investments siting in Singapore.

So, just to give an example, last week, I went to GSK to open the new facilities. Today's precision medicine is no longer just producing high volume at low cost. Those kinds of medicine and drugs will probably shift to other countries where there is a cost-competitive advantage. But GSK will be very keen to work with EDB to site their high-mix, low-volume pharmaceutical products in Singapore. Why? Because for such high-mix, low-volume production, they require speed to market. Which means that your supply chain, your distribution networks must be robust. That, we do better than most other countries. For such industries, it will require a strong IP regime where people can enforce their IP. That, we also do well. For such productions to happen in small batches, high volume, you require a certain agility in your regulatory framework, which we also do well.

So, there are and there will be sectors that will play to Singapore's advantage but it does not mean that everything that moves out of China or moves out of India will necessarily come to Singapore. That is not our strategy.