Why global trade is important

Why global trade is important

Free trade is usually seen as an economic issue, but its effects go much further and the global trading system has, over the past seven decades, essentially shaped the world as we know it today.

For Singapore, global trade is intertwined with the well-known story of its economic success. As a newly independent island with no hinterland, it got its start by attracting foreign investors to set up shop here, bringing much-needed jobs.

Today, globalisation continues to be the lifeblood of a nation with no significant domestic market and whose key sectors, such as shipping, depend on a free flow of trade.

A study by management consulting firm McKinsey & Company in March this year ranked Singapore tops in its inflows and outflows of goods, services, finance, people and data, relative to the country's size and population.

At the end of World War II, the United States and the Soviet Union quickly became rival superpowers that sought to spread their opposing ideologies of capitalism and communism.

Trade with other countries became the US' way of cementing ties with its allies and projecting its influence abroad. In other words, America's economic agenda was an extension of its foreign policy.


As an April article in the Harvard Business Review said: "Together with military alliances, trade agreements helped bind together the major free-market democracies, their growing prosperity serving as an effective counter to the centrally planned economies of the Soviet Bloc and the People's Republic of China."

While the Cold War drew to a close in the late 1980s, economic integration did not diminish in importance. With the US victorious and the Soviet Union disintegrating, countries began worrying about what a world with a sole superpower would mean.


To guard against US unilateralism in a post-Cold War world, it was invited to join the Asia-Pacific Economic Cooperation (Apec) when the trade organisation was formed in 1989, said Dr Malcolm Cook, a senior fellow at ISEAS - Yusof Ishak Institute. "It was also to keep the US involved in East Asia both at the strategic level and the economic level," he added.

The first Apec ministers' meeting, held in Canberra in 1989, was attended by 12 founding members. An Apec secretariat was set up in Singapore in 1993 and the first leaders' meeting was held in Seattle that year.

It became an annual affair for leaders to discuss freeing up regional trade. Other economies, including China, came on board over the next decade, bringing the membership to 21 in 1998.

Around the time of Apec's founding, China was about 10 years into its economic reforms, opening up to foreign investment.

The country was dubbed the factory of the world as manufac- turing jobs poured in, lifting millions out of poverty.

In 2001, China was admitted into the World Trade Organisation (WTO). Its membership was heralded as a move that would give the emerging power a stake in maintaining a rules-based world order and ensure its continued peaceful rise.

Institutions such as the WTO have provided a stable set of rules and norms that govern cross-border trade and multinational activity, and businesses have grown accustomed to that over the last 20 years, said Dr Davin Chor, an associate professor of economics at the National University of Singapore.

"This has given firms the confidence and certainty to expand into new markets, as well as adopt new production and sourcing arrangements that span multiple countries," he said.

The meetings of such trade organisations have also evolved into important forums for world leaders to discuss the state of global affairs, "particularly at times when we think the world has changed and we're trying to grasp what it means", said Dr Cook.

For instance, the 2001 Apec Summit was the first major international meeting after the Sept 11, 2001 terrorist attacks in New York.

Similarly, last month's Apec Summit in Peru took place a week after a pivotal event in the US - when Mr Donald Trump became the US president-elect on an anti-free trade platform. This has fuelled anxiety that the US will detach itself from the world economy, and Prime Minister Lee Hsien Loong said at the summit that this will risk unsettling the global trading system that it had helped nurture and foster over the decades.

For now, it is still too early to tell what direction the new United States leadership will take.

But if indeed the world's No. 1 economy turns inwards, such an outcome can only be negative for Singapore.

The road ahead

The Asia-Pacific Economic Cooperation (Apec) Summit last month took on extra significance because it came amid rising anti-globalisation and protectionism sentiment.

At the end of the week-long series of meetings, world leaders vowed to fight protectionism and implement policies to win back confidence in the global trading system. It was a reassuring message from the leaders of the 21 member economies, which together account for 44 per cent of world trade.

There was also acknowledgement that while globalisation had boosted economic growth, the fruits of free trade have not been evenly spread and there was a need for more inclusive growth.

One way is to help micro, small and medium-sized companies to innovate and use technology to tap into overseas markets. Such enterprises account for 97 per cent of all businesses and employ about half of the two billion workers in the Asia-Pacific. Giving these businesses a leg up will counter the impression that globalisation mainly benefits large companies while leaving ordinary people worse off.

Other policies include helping workers develop skills for the digital economy, where good jobs will increasingly be found as electronic commerce in the Asia-Pacific region is expected to have increased 30 per cent from 2015 to 2017.

Ms Joanne Guo, assistant executive director of strategy and development at the Singapore Business Federation, says that, given the political environment, "businesses are likely to take measures to contribute to more inclusive growth".

Any plans must result in tangible improvements in the lives of people. After all, as Prime Minister Lee Hsien Loong said at the Apec Summit, it is not enough to just educate people about globalisation's benefits. Governments need to ensure that "the reality reflects the rhetoric".

But any plans must result in tangible improvements in the lives of people. After all, as Prime Minister Lee Hsien Loong said at the Apec Summit, it is not enough to just educate people about global- isation's benefits. Governments need to ensure that "the reality reflects the rhetoric".

Referring to the economic deterioration in US states like Ohio, he said initiatives must be made to improve conditions so that people can feel hopeful about the future.

"Otherwise, if we tell them it's all for the best and you are just part of the necessary sorrow in this best of possible worlds, I don't think you are going to win very many votes," he said.

But National University of Singapore economics associate professor Davin Chor said it will be an uphill task for US states that are already strapped for resources to adopt the necessary measures.

"A responsible approach would be to strengthen social safety nets for displaced workers, while providing them the incentives to upgrade their skills and that of the next generation through the education system. What is unclear, though, is whether the parts of the US that most need to adopt such policies have the fiscal resources to deliver them," he said.


There was agreement at the Summit that the Apec approach to globalisation is more pertinent than ever. Participation is voluntary, the institution is consensus-driven and steps taken are incremental.

Apec has always functioned as a test bed for ideas to boost free trade as it is non-legally binding and economies can pull out anytime. Such a system may be more palatable to the public in the current political environment where rules-based, legally-binding free trade agreements are becoming an anathema.

"Apec as an organisation, and the Free Trade Area of the Asia Pacific that Apec is an incubating supporter of, has been given more relevance," said Dr Malcolm Cook, a senior fellow at ISEAS - Yusof Ishak Institute.

But all these do not address the proverbial elephant in the room: What will the future Trump administration do with regard to trade?

While Mr Trump has made many statements denouncing free trade, the president-elect has changed his mind often on previous positions and there is no telling if he will follow through on his protectionist pledges to slap tariffs on imports.

Dr Cook said it is not even clear if Mr Trump will attend next year's Apec Summit in Vietnam and his absence would test the trans-Pacific dimension of the organisation.

There is consensus in the business community that there is uncertainty ahead because it is not known what policies the Trump administration will adopt, said Ms Guo. However, "businesses are resilient enough to take measures to reduce risks and search for opportunities elsewhere as there are still countries that believe in free trade and open investments", she said.

Indeed, PM Lee said at the end of his trip that the world was in a state of watchfulness as it awaits the future direction of the impending Trump presidency.

"It is a mood of watchfulness, of waiting to see and being cautious not to foreclose options prematurely, so that you find yourself at a dead-end unnecessarily," he told Singapore reporters.

This article was first published on Dec 11, 2016.
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