Explain why trade occurs between Singapore and its trading partners. [10]

International trade refers to the exchange of goods and services across international boundaries. In this essay, I will be explaining why trade occurs between Singapore and its partners such as China, the United States, and other countries of the world.

The law of comparative advantage states that a country is able to enjoy higher consumption levels if it were to specialise in goods in which it has comparative advantage in, and trade the good for other goods in which it has a comparative disadvantage in. For mutually beneficial trade to occur, the terms of trade, which is the exchange rate of the 2 goods between Singapore and its trading partners, must lie within the relative opportunity costs of producing the goods of the 2 countries involved. This theory explains that trade arises because different countries have different opportunity costs of producing different goods. This is due to differences in supply conditions which arise because of differences in factor endowments, the relative abundance of the factors of production. Factors of production such as land, labour and capital are unevenly distributed across different countries. For instance, land abundant countries like Australia and the USA can produce land intensive products such as agriculture more cheaply than land scarce countries like Singapore. Labour abundant countries like India and China can produce labour intensive products such as clothing and footwear more cheaply than developed countries with higher labour costs like Singapore and the USA. Developed countries with a strong technological and capital base like Japan, Korea and Singapore have a comparative advantage in the production of ‘high-tech’ products such as computers, electronics and transportation equipments.

It is thus clear that Singapore’s economy is heavily dependent on trade. Not only are exports the main engine of growth, Singapore also imports inputs to produce these exports and imports most of its consumer goods like food, clothing, footwear, and households appliances. However, not all of Singapore’s imports are used for domestic consumption or as inputs for domestic production. Instead, many goods are imported into Singapore only to be re-exported out to the other countries. Such trans-shipment takes place because Singapore is a main shipping hub located strategically along the major shipping routes. One of the high volume of trans-shipments going through Singapore, the trade figures show the value of both Singapore’s imports and exports to be greater than her Gross Domestic Product (GDP). One way of measuring if a country has a comparative advantage in the production of a particular good is to look at the net export figures that are specific to that good. Singapore is a net exporter for chemicals and chemical products, machinery and transport equipment, hence suggesting a comparative advantage in these goods. Given that Singapore is a developed country, the specialization in such capital and technology intensive products seems to correspond to comparative advantage theory. Conversely, Singapore is a net importer of food, crude materials, animal and vegetable oils. Being a small but developed country, Singapore has expensive land. Hence, the lack of specialization in these land intensive products also seems to correspond to comparative advantage theory.

In conclusion, due to the nature of Singapore’s small and open economy, this makes it even more important for her to trade.

JC Economics Essays - This essay is a H1 A levels Economics essay on why trade occurs between Singapore and its trading partners, contributed and kindly shared by HH in April 2015. Special thanks to HH for her kind contribution. 

In this essay, the author's writing is clear, to the point, and explains economic theory alongside real world examples and the context that is required to answer the question. This paper is well crafted and thought through carefully, and deserves a high mark, especially if it is written under examination conditions in a real economics examination. 

How can you write clearly, accurately, and relevantly, addressing the requirements of the essay question? Thank you for reading and cheers! 

To what extent does "traditional" or "standard" economic theory explain Singapore's FTAs? [15]

A Free Trade Area (FTA) refers to a trade bloc where more than two countries agree to engage in free trade with one another while maintaining members’ own individual levels of external barriers against non-member nations; for instance, the North American Free Trade Area (NAFTA) and the ASEAN Free Trade Area (AFTA). This economics paper discusses the extent to which economic theory, in particular trade creation and trade diversion, explains Singapore’s FTAs, while arguing that non-traditional and other non-economic considerations also play a role in explaining Singapore’s FTAs. 

First, how do the standard economic theories of trade creation and trade diversion explain FTAs in theory? Trade creation arises when entry into a FTA causes the production of a good to be shifted from a less efficient to a more efficient producer, while trade diversion arises when entry into a FTA causes the production of a good to be shifted from a more efficient to a less efficient producer. A country joins a FTA if it expects to benefit from overall trade creation; economic theory suggests that a country chooses whether or not to enter a FTA based on whether trade creation outweighs trade diversion. When countries join a FTA, the country gains from a rise in export demand and export prices, resulting in an improvement in the terms of trade. When there is trade creation, the country benefits from importing a good at a cost that is lower that what it could produce domestically. Hence when there is trade creation, the country benefits from joining a FTA. Conversely, when there is trade diversion, the country ends up paying more for its imports as it is now importing from a relatively more inefficient foreign producer and this worsens its terms of trade. If the rise in import prices exceed the rise in export prices, the terms of trade worsens, hence the country should not join the FTA. 

However, despite standard economic analysis, since Singapore has no initial trade barriers for almost all goods and services, it experiences neither trade creation nor trade diversion, so Singapore’s decision to join an FTA must be based on other considerations other than trade creation and trade diversion, such as gaining new export markets, creating more transhipment business, attracting FDI, enhancing bilateral relations with its neighbours, and improving cooperation on security issues. 

This economics paper now discusses other possible reasons that could suggest why countries choose whether or not to enter an FTA with Singapore. The first alternative reason could be that the signing of an FTA with Singapore enables the country’s exports to bypass trade barriers and gain access to a third party market that also has an FTA with Singapore. For example, China may get to enjoy tariff-free access (or at least tariff reductions) to the USA if they were to export their goods through Singapore rather than exporting their goods directly to the USA. 

Secondly, Singapore may also be offering some other benefits to a FTA partner. For example, Singapore could offer to transfer knowledge and technology to the other country, and this would result in the signing of FTAs despite the fact that other countries already know that Singapore has little or no trade barriers on their goods. 

Thirdly, extradition treaties and cooperation in security issues could also be part of the agreement. For instance, countries could sign FTAs in Singapore in order to ensure that wealthy tax evaders do not escape the law in their country by bringing their wealth to Singapore, and these tax evaders can be extradited back home to face trial in their home countries. Hence, political considerations also come into play alongside economic ones.

Fourth, and arguably most importantly, by negotiating a vast network of FTAs, Singapore enhances its position as a shipping hub because Singapore’s transhipment is an important aspect of the Singapore economy. Transhipment refers to the shipping of goods to an intermediate destination, on their way to their final destination, and this is a major aspect of Singapore’s maritime trade. Transhipment increases Singapore’s earnings from port and shipping related services as more ships stop at Singapore to offload the goods that are meant for re-export. The FTAs also draw in foreign investments because foreign firms need to set up processing operations here in order to meet the requirements stipulated by the Rules of Origin. Hence, transhipment operations could explain why Singapore has signed so many FTAs.

In conclusion, trade creation and trade diversion go a small way to explain why Singapore enters FTAs, and it can be argued that non-economic reasons go a longer way in explaining why Singapore enters FTAs with other countries, because Singapore’s lack of tariffs does not permit her to have trade creation, which suggests that other considerations are more important. Thus, standard economic theory based on trade creation and diversion only explains at best a small part of Singapore's FTA networks, whereas practical real world considerations like third parties bypassing trade barriers, technological transfer, political considerations, and transhipment explain why Singapore signs FTAs to a very large extent. In my view, the most important explanation for Singapore’s FTAs is the rise of globalisation, which has led to the need for third parties to bypass trade barriers, increased international mobility, and led to the rise of the importance of non-economic, political reasons for such agreements.

JC Economics Essays - H2 Economics essay on trade creation and trade diversion, and Singapore's Free Trade Agreements. This economics essay was crafted by two co-authors to explain the economics ideas and concepts of trade creation and trade diversion for an economics tutorial on economic integration (a topic closely related to international trade and globalisation). Remember to reflect on the essay as you read it. Focus on the evaluative conclusion for a moment. What is good about the evaluation, and what can be made even better? What would be a better way to craft the evaluative conclusion? Thank you for reading and cheers! 

Explain whether Singapore’s trade patterns follow the outcomes as predicted by the economic theory of comparative advantage. [10]

This economics paper explains whether Singapore’s trade patterns follow the economic theory of comparative advantage, which is often called the "law" of comparative advantage, and, on the other hand, in which scenarios does comparative advantage fall short as an economic "law" in predicting Singapore’s trade patterns. 

First, what is the theory of comparative advantage? According to the famous economist David Ricardo, a country has a comparative advantage in producing a good if it has a lower opportunity cost of producing that good compared to another country. In this context, the opportunity cost of a good is the amount of another good forgone to produce an additional unit of the good. When countries specialise and trade according to comparative advantage, consumption possibilities for both countries rise.

Reflect: what diagram or diagrams would be useful in demonstrating this economic theory?

According to comparative advantage theory, developed countries tend to specialise in and export capital, technology, and skill-intensive products while developing countries tend to specialise in and export labour and land intensive products. Trade patterns will consist of inter-industry rather than intra-industry trade, which refers to trade between countries exporting and importing the same types of goods. The question is whether Singapore fulfils the predictions of this model in the real world context. First, let us consider Singapore’s real world exports. Singapore is a net exporter of chemical products, machinery, and transport equipment. Considering that Singapore is a developed economy, the specialisation in such capital and technology intensive products is in line with comparative advantage according to factor endowments, meaning that Singapore does export goods that are capital and technology intensive because of her comparative advantage. Furthermore, Singapore exports high-skilled labour-intensive services, for instance in the areas of Bio-Medical Research & Development and other high-technology that requires skilled labour, further providing proof that comparative advantage theory explains Singapore’s patterns of trade. 

Second, let us consider Singapore’s real world imports. Singapore is a net importer of non-oil products like food, beverages and tobacco and animal and vegetable oils. Considering that Singapore is a developed but small country, land and labour are expensive. Hence, the lack of specialisation in these land and labour intensive products is in line with comparative advantage, meaning that Singapore does import goods that are land and labour intensive because of her lack of these resources, because of her comparative disadvantage.

Third, in particular, Singapore has a large oil refining industry, largely based in Pulau Bukom and other offshore islands away from Singapore's mainland. In fact, Singapore imports crude oil to refine into oil-based products like diesel and petroleum. While much of the products are exported, some are for domestic use. This is the reason why Singapore is a net importer. While Singapore does not have any oil resources, it still has a comparative advantage in capital-intensive, high-tech, and high-skilled oil refining. Therefore, it would seem that, prima facie, comparative advantage theory does explain Singapore’s patterns of trade in the real world. 

However, on the other hand, there are several patterns that do not confirm to comparative advantage theory. As Singapore is a transhipments hub and is known to be a famous hub for entrepot trade, much its imports are re-exported out of Singapore, and often Singapore is only a temporary destination for goods meant for re-export. Such transhipment trade is not related to comparative advantage but more due to Singapore’s locational or geographical, positional advantage along major shipping routes. Furthermore, the existence of intra-industry trade, where countries with similar factors of production trade the same types of goods, for instance in electronics exports and electronics imports, suggests that comparative advantage is not a perfect theory. 

In conclusion, comparative advantage does explain some aspects of Singapore’s trade, but the real world context is far more complicated than theory suggests, and it is arguably the case that comparative advantage is far more likely to be a theory rather than an immutable economic law.

JC Economics Essays - This is a sample model economics essay on Singapore's trade patterns, on international trade, and on comparative advantage. This economics essay for H2 Economics at A level was co-written by two economics lecturers for a tutorial on international trade and globalisation. The essay was further edited and proofread by a Master's student who specialised in lecturing on international trade and globalisation at A levels. Perhaps, one could think about the various trade theories learnt. Think also about how this essay could be made more detailed, and how this essay can be improved. What else could the authors have done to make this an even better essay? Thanks for reading and cheers!