The Influence of the FTA with Singapore on the Japanese Manufacturing Industry

Recognition of the FTA with Singapore which Encourages Reconsideration of FTA Promotion

The FTA with Singapore and its small-scale economy was at the time not considered to have a large effect (influence); in fact, it was thought of as a way to accumulate experience with a look ahead to FTAs with China and South Korea. (According to economic models, Japan’s benefits from the Japan-Singapore FTA were calculated at a miniscule 0.07% of the GDP).

This essay evaluates the influence of the FTA with Singapore on the Japanese manufacturing industry three-plus years since the agreement was put into effect.

Why are US and European Manufacturing Industries Expanding into Singapore?

Singapore has a strong financial image, but in fact the manufacturing industry’s share of the Singapore GDP is surprisingly high at 27% (2005). Electronics occupies a high percentage (37%) of the manufacturing industry’s GDP, and is followed by bio-medical science (18%) and chemistry (14%). Singapore’s Economic Development Board (EDB) has set a goal to maintain the manufacturing industry’s percentage of the GDP at around 25%, and is desperately trying to attract new investment from overseas manufacturers while retaining foreign companies with bases in Singapore. To achieve this, the EDB is pursuing 1. intellectual property rights protection, 2. sound infrastructure, 3. increases in research and development funding for areas such as bio-science, and 4. upgrades in human resources. It is also actively promoting the conclusion of other FTAs, as it strives maintain its status as a manufacturing hub in Asia.

HP (Hewlett-Packard) has placed Singapore as an important hub for its strategy in Asia. HP has cited Singapore’s FTA with Japan as its reason for having a manufacturing base in Singapore, as it understands that manufacturing in Singapore (manufacturing servers) has the significant merit of eliminating tariffs with the Japan, the world’s second largest IT market.

The major chemical company Dupont owns a polymer manufacturing plant on the Jurong island of Singapore. For its reasons for being in Singapore, Dupont points to 1. the most advanced intellectual property protection in Asia, 2. excellent infrastructure, and 3. the FTA with Japan, which imports 35% of all production from the plant. Compared to extremely high manufacturing operations costs in Japan, Singapore’s excellent infrastructure, preferential tax system, and various effective procedures make lower manufacturing costs possible. In addition, efficient distribution systems solve the problem of the distance to the Japanese market.

GSK (GlaxoSmithKline), a major British medical products manufacturer, owns a R&D division and plant in Singapore, and has placed Singapore as its strategic hub for Asia. R&D investment in medical products occupies a higher portion of sales compared to other industries, and the ease of securing human resources to conduct R&D and management, the high standards of intellectual property protection, as well as the fact that English is used were all major factors in the selection of the base (cheap labor was not an important element). Because of this, GSK is putting off expansion into China, where intellectual property protection is inadequate. For GSK, the greatest market in Asia is Japan. It is common practice to have plants and R&D divisions within close proximity to the market, but official procedures in Japan (such as the approval of medical products) are quite opaque, which obstructs GSK’s expansion into Japan. In addition, the Japan-Singapore FTA will be a big incentive for GSK to remain in Singapore in the future.

Implications of the Japan-Singapore FTA

The Japan-Singapore FTA has not been regarded as having significant meaning for Japan. The Singapore government, however, is effectively utilizing its FTA with the enormous market that is Japan, and considers the conclusion of the FTA a trump card in courting foreign manufacturers. Placing Asian headquarters in Singapore, establishing a R&D division, using surrounding countries (Thailand, Indonesia, Malaysia, China, India) as suppliers, conducting final assembly in Singapore, and exporting to Japan – this is becoming a supply-chain model in Asia.

The conclusion of comprehensive free-trade agreements across East Asia is currently becoming a topic of interest in Japan. While there is widespread concern over the problem of agriculture, there are few who would argue against the significant benefits related to the manufacturing sector. Establishing supply-chains in Asia or even globally is currently becoming a worldwide trend, and the conclusion of comprehensive free-trade agreements serve to accelerate these currents. However, the conclusion of FTA accords without preparation might invite the outflow from Japan of primarily U.S. and European knowledge-intensive sectors (such as R&D) to Singapore or other regions in Asia. The result of this would be to thwart sustained growth in Japan’s manufacturing industry.