Singapore’s Economic Diplomacy

Yang Shichao

Singapore, a small country in Southeast Asia, has made the most of its advantages since independence to pursue economic diplomacy through a variety of measures. It has not only achieved rapid economic growth and great improvements in its people’s well-being; the country has also integrated its development with the interests of major external powers in the region, effectively safeguarded its national security, and strongly enhanced its international status.

I. How Singapore Carries Out Economic Diplomacy

The definition of economic diplomacy is two-fold. First, the term refers to the adoption and implementation of foreign policies by states,international organizations or their representatives for economic benefits or purposes. Second, it is defined as states, international organizations or their representatives that adopt and implement foreign policies based on their economic power to realize strategic goals or seek benefits beyond the economic realm. In summary,economic diplomacy can be interpreted as diplomatic actions taken by states with economic power as a means or as an objective.Mainly, economic diplomacy deals with the implementation of policies on the production, transfer and exchange of goods, services,investment and official assistance. Singapore has given priority to reaching political and security goals through economic diplomacy in different periods since its independence.

1. Attracting foreign investment with indigenous advantages

Singapore is skilled at creating advantages and bringing them into full play in a bid to pave the way for economic diplomacy. As a gateway to the Strait of Malacca, one of the most crucial global shipping lanes, Singapore enjoys an advantageous geographical position. In the early days of Singapore’s independence, it lobbied for international attention and investment by playing up the strategic importance of its geographic environment to other countries’development. For instance, it emphatically told Japan that Japanese ships might have trouble dealing with toll collectors when passing the Strait of Malacca if Singapore sided with coastal countries such as Indonesia or Malaysia. Utilizing such leverage, Singapore eventually turned itself into a major production and transportation hub for Japanese companies in Southeast Asia. In its dealings with Europe, Singapore claimed that it was a guardian of the freedom of navigation and an invaluable stepping-stone for European companies to expand their businesses into other parts of Asia, thus convincing countries like Germany and the Netherlands to prioritize Singapore as one of their primary investment destinations in Southeast Asia. Thanks to its unparalleled location and flexible diplomatic attitude, by the year 2000, Singapore had attracted investment from more than 7,000 multinationals, some 5,000 of which designated the country as their production and service base in Southeast Asia.

Since people of Chinese origin constitute the majority of Singapore’s population, its special relationship with China has provided it with yet another advantage. Singapore strengthened its ties with China when China opened its door to the outside world in the early 1980s. While stressing its understanding of China’s history, culture and politics, Singapore expressed a willingness to help China swiftly integrate into the international community. It also worked together with China on major projects including the China-Singapore Suzhou Industrial Park. Given China’s rapid development and growing need for international economic cooperation, Singapore started to encourage Chinese companies to get listed on Singapore’s stock exchange. In 2004, 84 Chinese companies were listed in Singapore with a combined market value of more than RMB 8 billion (S$1.6 billion), accounting for 40 percent of the total number of foreign companies listed on Singapore’s stock market. By 2011, the number of Chinese companies listed in Singapore had risen to 146, accounting for 18.89 percent of the total number of listed companies in Singapore, and their combined market value amounted to RMB130 billion (S$26 billion). At the same time,as Singapore helps introduce China’s market conditions and business environment, with which it is familiar, to the world, it has gained a unique advantage in assisting other countries in exploring the Chinese market. Many countries highly emphasize Singapore’s analysis of China.

2. Forging close links with neighboring countries

As a founding member of ASEAN, Singapore is active in promoting various forms of economic cooperation within the organization, which it strongly believes offers strategic support for its efforts to pursue economic development and diplomatic influence. The country first put forward the concept of regionalization in the early 1980s when it established the so-called“Growth Triangle”with Malaysia and Indonesia. In the early 1990s, Singapore committed itself to promoting the establishment of an ASEAN Free Trade Area. In Singapore’s view, ASEAN’s efforts to strengthen regional economic links and explore internal markets are not only conducive to the economic growth of ASEAN countries; they can also help Singapore acquire labor, land and raw materials, cement economic bonds with other ASEAN countries and create a good neighboring environment for development. Over recent years,Singapore has explored ways to tie its own interests to the interests of neighboring countries through multiple approaches- including industrial parks, bilateral investment, and mergers and acquisitions - so that neighboring countries will prioritize relations with Singapore at the top of their agenda.

Located between Malaysia and Indonesia, Singapore sees great value in establishing rapport with its two powerful neighbors through economic diplomacy. Take the Singapore-Malaysia relationship for instance. Although bilateral relations suffer setbacks from time to time because of historical and present disputes, their economic interdependence continues to grow.Singapore is Malaysia’s largest trading partner and foreign investor in ASEAN. In 2004 alone, Singapore’s state investment company Temasek purchased a 5 percent stake in Telekom Malaysia for US$420 million. Mapletree, a capital management company held by Temasek, invested US$130 million to launch Malaysia’s first joint venture real estate fund in collaboration with CIMB, Malaysia’s second largest financial group. At the end of that year, Temasek bought 15 percent of the shares in both Malaysian Plantations Bhd and Alliance Bank. Singapore’s frequent investment deals made in Malaysia reveal its intention to strengthen economic bonds with Malaysia.

3. Balancing relations with major powers

Shortly after its independence, Singapore came to realize that it would be of little importance to China and Russia without the United States, Britain, other European countries, Australia and New Zealand on the frontline. During a visit to the Soviet Union in the early 1970s, a Singaporean leader said that the maintenance facilities it provided the United States on a commercial basis were open to other countries as well. When the Soviet Union asked to use shipyards previously belonging to the British Navy,Singapore informed Britain, which then consulted the United States. The United States showed concern and demanded that Singapore make clarifications. Singapore explained that it intended to help Britain and the United States maintain their presence in Southeast Asia, believing that the Soviet Union’s move had given Singapore a card to play, because the presence of the U.S. Seventh Fleet made it easier for Singapore to develop relations with China and the Soviet Union.

Singapore signed a free trade agreement with the United States in May 2003. During the negotiation process, it argued that the agreement was important because without the United States,East Asian regional cooperation would be gradually dominated by one single country, resulting in diminished breathing space for other countries in the region. Although Singapore did not specify the name of this country in its public statement, it was widely assumed that Singapore was alluding to China, which it believed would become the sole superpower in East Asia and thus should be balanced by the United States. Meanwhile,Singapore continued to boost cooperation with China on every front. While encouraging companies to invest in China, it vowed to devise a China strategy that would allow it to seize opportunities to capitalize on China’s economic growth. In 2004,Singapore became China’s seventh largest foreign investor. In 2011, it rose as China’s fourth largest foreign investor with total investment in China that year reaching US$6.328 billion.

4. Promoting free trade, especially the establishment of bilateral free trade areas

Singapore, which joined the General Agreement on Tariffs and Trade in 1973 and became a full member of the WTO upon its creation in 1995, has long been committed to greater trade facilitation among WTO members. It has also made a number of important proposals, fostering its image as a staunch advocate for global free trade. As small-scale free trade mechanisms represented by the North American Free Trade Area underwent rapid development, Singapore redoubled its diplomatic efforts to promote bilateral free trade in Asia. By April 2012, Singapore had signed 18 regional and bilateral free trade agreements involving 24 countries, becoming the country with the largest number of free trade agreements.

When promoting bilateral free trade agreements, Singapore pursues easy goals before difficult ones with an incremental approach. It negotiated its first bilateral free trade agreement with New Zealand because the two countries’economic structures are highly complementary, with agriculture barely existing in Singapore and New Zealand being a large exporter of agricultural products. They are ideal partners for a free trade experiment, largely because such an agreement would bring about minimal harm to their economies, given the fact that bilateral trade took up a small proportion of their total foreign trade. Singapore could accumulate experience through negotiations with New Zealand. It could also try to write provisions in its favor into their agreements to set a precedent for future trade agreements.

For instance, many Singaporean companies have transferred their production lines to countries such as Malaysia and Indonesia. Singapore must create conditions for these companies to benefit from free trade when negotiating rules on the place of origin. To that end, it introduced the concept of“outward processing”in its free trade agreement with New Zealand, a concept stating that part of the manufacturing process can be outsourced to neighboring countries. The notion, which recognized that Singapore was responsible for all stages of the manufacturing chain, became an important component of the rules in the free trade pact between Singapore and New Zealand, rules that went on to help strengthen Singapore’s status as a business hub in Southeast Asia. In bilateral free trade agreements that followed, Singapore stuck to these same rules, thereby securing an upper hand in negotiations.

In its pursuit of bilateral free trade agreements, Singapore views the United States as an important partner. The free trade agreement the two countries signed in May 2003 covered a wide range of fields, including financial services, telecommunications,e-commerce, investment, competition, government acquisition,intellectual property rights protection, transparency, labor,the environment and dispute settlement mechanisms. It contributed greatly to the advancement of bilateral economic relations. In 2004, the year the agreement went into effect, U.S.exports to Singapore increased 18 percent over the previous year, equaling the United States’exports to France, turning Singapore into the United States’fifth largest trade surplus country. While Singapore’s exports to the United States went up only 1.3 percent, exports from the manufacturing industry,the key sector driving Singapore’s economic growth, soared 6.4 percent, ending the downward spiral that lasted for three consecutive years. By 2011, bilateral trade had skyrocketed by 59 percent. U.S. exports to Singapore accounted for 40 percent of its total exports to the 10 ASEAN countries, making Singapore the 11th largest destination for U.S. exports.

II.What Motivates Singapore to Pursue Economic Diplomacy

1. Economic diplomacy is essential to Singapore’s national security.

Singapore is a densely populated country that covers an area of over 700 square kilometers with a population of 5 million people.It lacks space for land territory for strategic maneuvering and natural resources, and it even relies on Malaysia for its water supply. Moreover, it holds historical grudges against its two neighbors - Indonesia and Malaysia, because of longstanding ethnic problems. For these reasons and others, Singapore has always been devoted to developing close economic ties with other countries, especially major powers outside the region, in an effort to enhance its capability to safeguard its national security.

Singaporean leader Lee Kuan Yew reiterated in his memoir that Singapore always considered the quest for survival its fundamental mission. Beginning shortly after its independence in 1965, when it sought recognition from the international community, to later years when it focused on improving governance and promoting the stable development of the nation,Singapore has always sought to survive. In the early days of its independence, Singapore was active in leading economic diplomacy while building up its military by purchasing advanced equipment and involving all citizens in national defense.Singaporean leaders traveled extensively to Western developed countries to persuade large multinational corporations, which many countries regarded as tools for imperialist exploitation at that time, to invest in Singapore. It tried to invite major powers to the region and keep them there, helping strengthen their presence. Thanks to these efforts, Singapore has established an international economic cooperation system in which different departments efficiently collaborate under the coordination of the Economic Development Board. With this one-stop approach, it has succeeded in absorbing a large amount of foreign investment.As its economic ties with major investors such as the United States, Europe and Japan are growing closer, Singapore is able to safeguard its economic and security interests.

2. Economic diplomacy guarantees Singapore’s stable,long-term economic development.

With an export-oriented economy, Singapore’s foreign trade volume is two to three times its GDP, while foreign demand contributes to 70 percent of its economic growth. The country’s economic development depended heavily on transit trade and the expenditure of British troops before its independence, and it has been heavily dependent on international trade and manufacturing since its independence. Singapore remains highly reliant on the international market and it is still susceptible to changes in external economic conditions. One of the main goals of its economic diplomacy is to maintain good relations with investors and major trading partners. As an urbanized citystate, Singapore is free of agricultural issues that are sensitive in developed countries, providing an inherent advantage for it to engage in economic diplomacy, especially free trade negotiations.

3. Economic diplomacy is an important means by which Singapore expands international influence.

As a small country, Singapore has to intensify economic diplomacy in keeping with national conditions to strengthen ties with other countries, with a view to protecting its development interests and enhancing its international influence. Shortly after independence, Singapore’s economic diplomacy focused on attracting investment and input from developed countries,particularly the United States. Singaporean leaders repeatedly emphasized the importance of the United States. They said that U.S. companies first opened factories in Southeast Asia to support American troops in Viet Nam. Later on, they added,the companies continued to build factories unrelated to the war and sold products back to the United States, thus becoming an industrialization engine for Southeast Asian countries like Singapore. In this way, Singapore gained prominence in the global strategies of the United States and other developed countries.

Singapore started to push for the creation of various bilateral free trade areas near the end of 1999. In 2000, it signed its first bilateral free trade agreement, the Agreement on a Closer Economic Partnership, with New Zealand. The signing of the agreement not only marked Singapore’s initial progress in creating bilateral free trade areas; it also made the country the first ASEAN member to establish a bilateral free trade area. Its negotiation methods and outcomes garnered a great deal of attention in the region and beyond. The agreement served as a reference point for other ASEAN members such as Thailand and Malaysia when they later pursued bilateral free trade agreements of their own, bolstering Singapore’s influence in ASEAN. The Singapore-U.S. Free Trade Agreement, signed in May 2003, was deemed a model bilateral free trade agreement by both countries. It enhanced Singapore’s status and role in the United States’Asia-Pacific strategy.

III. Successful Experiences

As it vigorously promotes economic diplomacy, Singapore has fostered close economic and trade relations with major countries, and these countries have in turn played a pivotal role in boosting Singapore’s development and expanding its international influence. Singapore’s successful experience can be summed up in the following points:

1. Singapore sets great store by strategic planning.

Singapore makes full use of its favorable conditions - its geographic location, industrial structure, investment climate and administrative capacity - to develop a comprehensive advantage for economic diplomacy. Despite resource constraints,Singapore is adept at reaching negotiation goals by highlighting its advantages and addressing partners’concerns. For instance,during negotiations with the United States on their bilateral free trade agreement, Singapore repeatedly stressed that it was a production base for U.S. multinationals and that it was the United States’second largest foreign investor after Japan.A free trade agreement between the two countries would not only benefit U.S. multinationals in Singapore but also help the United States attract more investment from Singapore. While acknowledging Singapore’s strengths, the United States carried out a detailed survey. It found that trade between the United States and Singapore focused mostly on the high technology sector. Also, trade between multinational corporations accounted for over two thirds of bilateral trade. U.S. investment in the manufacturing industry in Singapore accounted for 60 percent of its total investment in Southeast Asia. U.S. companies in Singapore purchased 40 percent of U.S. exports to the country.The United States would therefore be the first to benefit from tariff reductions after the conclusion of a bilateral free trade agreement. When trying to persuade Congress to ratify the agreement, officials from the U.S. executive branch often cited these figures to support their case.

At the same time, Singapore touted the positive implications of the establishment of the Singapore-U.S. Free Trade Area in ASEAN, stressing that the move aimed to ensure a permanent U.S. presence in Southeast Asia, attract more investment from the United States and help safeguard the stability and development of Southeast Asia. Following Singapore’s example,Malaysia and Thailand started free trade negotiations with the United States. The United States, for its part, has continued to attach more importance to Singapore’s role as a coordinator in ASEAN.

2. Singapore is committed to balancing its relations with major powers.

Under this strategy, it takes advantage of, helps fuel, and even stirs up conflicts between these powers to reap more profits for itself. It has been Singapore’s consistent foreign policy to rely on major powers, position them against each other, and seek practical benefits. Singapore prizes the role of the United States in Asia, which it regards as the most important country that helps promote its economic development and safeguard regional stability in Southeast Asia. While negotiating with the United States on a free trade agreement, Singapore hyped the rhetoric that China would“dominate”Southeast Asia due to its rapid economic growth. By propounding this theory and utilizing its close political, economic and military ties with the United States, Singapore strengthened U.S. determination to make the Singapore-U.S. Free Trade Agreement a model for such agreements with other countries in Southeast Asia. Singapore told the U.S. government that China, an emerging power, would not be satisfied with the existing international order, an order that the United States, an established global power, is seeking to maintain. Therefore, signing a free trade agreement with Singapore to step up engagement with Asia was crucial for the United States to counterbalance China. Apart from Singapore,no other country or group of countries could play such a role, it stressed, in an attempt to continue to shape itself as a foothold for the United States to assert its influence in Southeast Asia and Asia at large. While highlighting the so-called China threat,Singapore claimed that Islamic extremists were gaining ground in Southeast Asian countries and underlined its vital role in coping with“politicized Islam”in response to U.S. concerns.All of this rhetoric was aimed at increasing Singapore’s value to the United States and ensuring long-term U.S. presence in Singapore and Southeast Asia.

3. Singapore plans domestic reforms and economic diplomacy in a coordinated way.

Singapore charts the course of reforms in key sectors in advance, always considering the needs of economic diplomacy.

It also uses reform measures and progress as bargaining chips to maximize its own interests. While negotiating bilateral free trade agreements, Singapore saw to it that domestic economic reforms were linked to free trade negotiations. In the beginning of the 21st century, Singapore implemented a series of reforms in the banking, insurance, legal services and telecommunications sectors, which laid a solid groundwork for the signing of the Singapore-U.S. Free Trade Agreement. For instance, the Monetary Authority of Singapore lifted the 40 percent foreign shareholding limit in Singaporean banks and the 49 percent limit in Singaporean insurance companies in 1999. Toward the end of these negotiations, Singapore and the United States were locked in a stalemate over capital controls. The United States asserted that the freedom of capital flows was a non-negotiable principle in its free trade agreements with 45 other countries.Singapore, however, insisted that the government should be able to exercise appropriate controls over capital flows in light of the lessons from the 1998 Southeast Asian financial crisis.Both sides adjusted their positions after numerous rounds of consultations. Article 15.7 of the Singapore-U.S. Free Trade Agreement stipulates,“Each party shall permit all transfers relating to a covered investment to be made freely and without delay into and out of its territory.”In the annexes to the agreement, however, Singapore ultimately retained the right to impose capital controls as long as they had a limited duration.It promised the United States that investors would be able to file lawsuits for compensation if controls exceed a year and severely impede capital operations. While accommodating U.S.concerns, Singapore was still capable of retaining its sovereign right to supervise capital movements. Its goal of taking domestic and international factors into consideration and progressing in a well-coordinated way while carrying out reforms in key sectors was successful.

4. Singapore is an adept innovator.

As the most developed country in Southeast Asia, Singapore has made distinctive innovations in forming an efficient government, devising development plans and conducting international economic cooperation. These moves have made a great difference. In particular, Singapore has put forward a series of proposals on promoting regional economic cooperation,which were met with positive responses from other parties and gave birth to various trans-regional mechanisms. Singapore joined APEC in 1992, proposed the establishment of the Asia-Europe Meeting in 1994 and initiated the Forum for East Asia and Latin America Cooperation in 1998. These Singaporean proposals have prompted other countries to strengthen ties with Asia, especially Southeast Asia. They have helped Singapore secure a favorable position in Asia’s changing dynamics and exert a greater influence in the region.

In general, economic diplomacy is an important measure Singapore has taken based on its national conditions and development needs; it is a means through which the country fights for strategic survival. It is also an important strategy that Singapore has adopted and implemented to promote longterm peace and stability by integrating economic and security interests. While conducting economic diplomacy, Singapore has been committed to making full use of its advantages, giving overall consideration to domestic and international factors,balancing relations with major powers, and fostering ties with neighboring countries. Economic diplomacy also works to pool all kinds of resources, explore international markets and provide advice for investors. All these efforts have played a positive role in promoting Singapore’s development and safeguarding its national security.