Impact of US-China Trade War on Singapore

Mr Kwek Hian Chuan Henry asked the Minister for Trade and Industry what are the implications on our economy and industries arising from (i) the increasing trade dispute between the US and the rest of the world, (ii) the current outlook of a multilateralism trading system and (iii) the recent efforts of the EU and China in exploring closer trade links.

Mr Speaker, the United States (US) and China are major economic partners to countries around the world. The trade conflict between the US and China and, indeed, with other trading partners, such as the European Union (EU), taking reciprocal measures in response to the US’ tariffs, will have global consequences. Not only will it inhibit global trade and global growth, there will also be disruptions to supply chains impacting businesses, jobs and consumers.

Our economic agencies are closely monitoring the impact on Singapore which will be transmitted at three levels. First, impact from higher generalised tariffs that are applicable to the majority of countries, including Singapore. This is what we call the direct impact. Second, the indirect impact arising from disruptions to global supply chains due to the tariffs imposed by the US and China directed at each other. And third, the consequences of a broad-based slowdown in global trade flows if escalation of the trade conflict among the US, China and other trading partners spills over to business sentiment and other factors of growth. Let me elaborate on each of them.

First, tariffs directly applicable to Singapore affect a relatively small set of products. These are essentially US tariffs applied globally on solar cells and modules, washing machines, steel and aluminium. Our exports of these products to the US account for about 0.1% of our total domestic exports to the world. While this is relatively modest, specific Singapore-based companies in the general manufacturing and electronics sectors that export such products to the US will become less competitive compared to manufacturers in the US when the tariffs are added on. Our agencies are in contact with impacted companies to facilitate applications for product exclusion and to explore alternative markets.

Second, there will be indirect impact from tariffs that are not targeted at Singapore. Members will have read about the US and China's imposition of tariffs on each other. Tariffs applied to products worth US$34 billion from each country have kicked in, with more on the way. With the EU, Mexico and Canada also imposing retaliatory tariffs on the US for the tariffs on steel and aluminium, there is a significant risk of widening disruption to global supply chains. While these tariffs do not directly affect our exports, they would have spillover impact due to our role in the global supply chains. For example, Singapore companies that produce intermediate goods used as inputs in the production of China’s exports to the US may see softer demand for their goods.

The net impact on the Singapore economy and our workers is less easily quantified, given the fluidity of the US and China’s tit-for-tat responses. The complexity of global value chains is also such that amidst disruptions, there will be potential for firms to mitigate some of the impact by redirecting exports of intermediate goods to other markets. In addition, traders in China which find imports from the US less competitive because of the tariffs may also source more from the Association of Southeast Asian Nations (ASEAN) region. There is, therefore, some offsetting effect. Our modelling indicates that based on the tariffs on product lines that have been announced, the net impact is likely to be modest. However, this assumes no further escalation in trade tensions between the US and China. On the whole, bilateral trade between the US and China indirectly contributes to 1.1% of Singapore’s gross domestic product, and any sustained disruption is unwelcome for the region. In the meantime, our economic agencies are working closely with companies to identify any disruptions promptly and restructure their supply chains where necessary.

Third, our greatest concern is the impact from an escalation of the trade conflict into a vicious cycle of tit-for-tat measures among major economies. Should these measures reach a tipping point that triggers a sharp and sustained fall in global business and consumer confidence, or a tightening of global liquidity conditions, the macro-economic environment will fundamentally change. In this scenario, the impact on global consumption and investment on top of the disruption to trade flows will significantly impact Singapore's open economy.

Amidst these developments, there are strengths in the composition and features of our economy that serve us well. These include the strong trading networks and diversified sectors we have developed over the years, which will enable companies in Singapore to navigate the disruptions and seek out new opportunities and alternative suppliers and demand markets. Our agencies will continue to facilitate this process and provide support where needed.

Ms Thanaletchimi and Mr Henry Kwek have also asked about whether the norm of free trade agreements and the multilateral trading system of the World Trade Organisation (WTO) will change. Indeed, the commitment to free and open trade has come under pressure, with greater protectionist instincts and the US’ unilateral measures to address what it has deemed unfair trade practices. Nevertheless, for the large majority of economies, the commitment to the WTO remains unchanged. Numerous economies have made clear their stance on this. The US has stated its openness to bilateral trade agreements and has remained engaged in various international forums to share its views on improving the rules-based multilateral trading system.

Mr Speaker, let me conclude by reiterating Singapore’s stance. Singapore’s external linkages that have made us more resilient in facing uncertainties in the global economy are best safeguarded by a strong set of WTO rules and enforcement, and by our network of Free Trade Agreements (FTAs) which we will continue to expand and deepen. We are in good standing with all our trading partners, including the US and China, and have urged that ongoing trade disputes be resolved through negotiation.

We have also forged ahead with like-minded partners to continue paving the way for regional integration to bring about more opportunities and growth. The signing of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in March this year is a tangible demonstration of the parties’ commitment to the collective goals of greater trade liberalisation and regional integration. ASEAN and our FTA partners are also pressing on with efforts to reach substantive conclusion of the Regional Comprehensive Economic Partnership (RCEP).

Our trading partners are also constantly looking for opportunities to improve trade links. The EU and China, for example, which Mr Henry Kwek has asked about, are working to improve trade connectivity between Asia and Europe to increase economic opportunities. We have an FTA in place with China, and another that is pending with the EU. With the FTAs in place, our companies are better positioned to seek out and benefit from new opportunities arising from new trade linkages and supply chains that are formed.

We will continue to work with all like-minded partners to uphold a rules-based multilateral trading system, and work towards greater regional integration which is the best way of maximising opportunities for our companies and supporting job creation for Singaporeans.