International Trade Theories: Case of Singapore Assignment

International Trade Theories: Case of Singapore Assignment Words: 2227

Introduction The report below is going to be based on the success story of a country named Singapore. Careful analysis of Singapore’s external trade operations is presented. The Economy of Singapore is a highly developed and successful capitalist mixed economy. Unlike it’s close Asian neighbors Singapore is perceived as developed country and has one of the highest standards of living in the world. According to country profile presented on International Monetary Fund, the countries economy success is highly due to it’s proper policy toward external trade.

Thus, this country has been perceived as subject of interest for us to analyse in the given report devoted to countries external trade operations. Section A In the given part the composition of countries major traded products are presented. Moving straight down to a point the import composition of major products is presented in Table 1. Singapore imports 2006Imports in $ value Imports as a share of total imports (in percentage terms) All industries238,704,171 100 Electrical and electronic equipment81,417,446 34 Mineral fuels, oils, distillation products 44,914,841 18. 8

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Boilers, machinery,nuclear reactors38,904,227 16 Optical, photo, medical apparatus7,391,9263 Table 1 As it can be seen from the Table 1 the major products to be imported are electrical and electronic equipment. It comprises 34% of all the imported products. This industry is followed by mineral fuels, oils, distillation products, etc. Next let’s take a look at the results for exports Singapre exports 2006Export in $ valueExports as share of total exports All industries271,800,896 100 Electrical and electronic equipment105,015,978 38. 6 Boilers, machinery,nuclear reactors48,714,488 17. 9

Mineral fuels, oils, distillation 35,661,068 13. 1 Organic chemicals13,879,726 5. 1 Table 2 Here again we have electrical and electronic equipment being leading. Moreover, boilers, machinery, nuclear reactors were one of the major products imported as well. How can this be explained that a country imports and export in large amounts almost the same (at first sight) products? To answer this question we will elaborate more in the next section. Section B The section below attempts to test to what extent the various theories of trade appear to explain the countries’ commodity pattern of trade.

In order to do this we first examine the commodity pattern of exports, the commodity patter of imports, the commodity patter of net exports in absolute amounts and as a percentage of total trade This is presented in the table below: Singapore : exports and importsExports in valueImports in valueNet trade in valueNet trade All industries271,800,896 238,704,17133,096,725 6. 5 Electrical and electronic equipment105,015,978 81,417,44623,598,532 12. 7 Boilers, machinery,nuclear reactors48,714,488 38,904,2279,810,261 11. 2 Mineral fuels, oils, distillation 35,661,068 44,914,841-9,253,773 11. 5 Organic chemicals13,879,726 ,381,3689,498,358 52. 0 Commodities not elsewhere specified11,563,153 4,723,9456,839,208 42. 0 Table 3 Moving on, what can be derived from the numbers we obtained? To answer this question firstly, we would like to briefly discuss several trade theories and see to what extent it might suit the case of Singapore. 1. Ricardian model. The classical economist David Ricardo in the Principles of Political Economy and Taxation (1817) stressed that the potential gains from international trade were not confined to Adam Smith’s absolute advantage . Ricardo presented the concept of comparative advantage.

The essence of his argument is that international trade can benefit both countries as long as they trade the commodities in which they have comparative advantage in. Nevertheless, Ricardo assumed labor productivity the only factor of requirement. In the case of Singapore, this theory is not vastly suitable. The population of Singapore is about 4,68 million people( and this is not even labor force). According to official sources the populations is steadily declining. In particular year of 2006, the total fertility rate was only 1. 26 children per woman, the 3rd lowest in the world and well below the 2. 0 needed to replace the population . This can definitely be said to be a small number to name the economy labor intensive. 2. Neoclassical trade theory. The principal change in the theory from that of Ricardian as that it does not only rely on labor productivity theory. Heckscher-Ohlin theorem postulates that a nation will export the commodity whose production requires the intensive use of the nation’s relatively abundant and cheap factor and import the commodity whose production requires the intensive use of the nation’s relatively scarce and expensive factor.

This theory is often referred to as factor-proportions or factor-endowment theory. According to Dominick Salvatore H-O theory remains the centerpiece of modern trade theory for explaining international trade today. In our point of view this theory fits our case somewhat. Nevertheless, some of the drawbacks will be discussed later. Singapore is capital abundant country, and it exports mostly electronics. However, to mention that in terms of land resources it is a poor country. It almost has not natural resources together with being located on numerous islands.

Just for your note, Less than 5% of Singapore’s land is used for agriculture; tropical fruits and vegetables are intensively cultivated and poultry and hogs are raised. Country imports most of its food requirement. 3. Leontief paradox and Linder theory- the empirical finding that U. S. import substitutes were more K intensive that U. S. exports. This is contrary to H-O trade model, which predicts that, as the most K abundant nation the U. S. should import L-intensive products and less of K-intensive.

Leontief paradox gave a good reason for a new alternative theory to emerge. It was first proposed by Staffan Linder predicts that patterns of trade will be determined by the aggregated preferences for goods within countries. Those countries with similar preferences would be expected to develop similar industries. With continued similar demand, these countries would continue to trade back and forth in differentiated but similar goods since both demand and produce similar products. This develops the idea of intra-industry trade.

As for the case of Singapore, here we elaborate as it was noted in section A. Singapore does import and export a lot of similar but differentiated goods. Here again we refer to our case of majorly traded goods and see the degree of intra-industry trade in between them. Also, Elhnan Helpman and Paul Krugman asserted the theory behind comparative advantage as none which does not predict the relationship in the gravity model. They provided evidence that countries with similar income levels trade with each other with differentiated goods because of their similarities.

Singapore: intra industry tradeX in valueM in valueNet trade in valueTotal IITIIT as % All industries271,800,896 238,704,17133,096,725 47740834293. 52% Electrical and electronic equipment105,015,978 81,417,44623,598,532 16283489287. 34% Boilers, machinery, nuclear reactors48,714,488 38,904,2279,810,261 7780845488. 80% Mineral fuels, oils, distillation 35,661,068 44,914,841-9,253,773 7132213688. 52% Organic chemicals13,879,726 4,381,3689,498,358 876273647. 99% Commodities not elsewhere specified11,563,153 4,723,9456,839,208 944789058. 01% Table 4

As it can be seen from the Table 4 the highest degree of intra industry trade is in Boilers, machinery and nuclear reactors section accumulating to almost 89%, followed by 87% in electrical equipment industry. Also, very high degree of intra-industry(over 90%) trade may be observed in other industries to such may be example of vehicles, pharmaceutical products, beverages etc. This can be viewed as example prooving Linders hypotheses. However it very important to note; Singapore could be said to rely on an extended concept of entrepot trade.

By this it is implied that country imports mostly raw materials and export the ready made goods (manufactured). To such may be included wafer fabrication industry and oil refining. The country also has a strategic port which makes it more competitive than many of its neighbours to carry out such enterpot activities. One additional note to make is that later adding up to differentiating theory, there was bridging economic theory with empirical results, some economists have pointed to the possibility of intra-industry trade not as the result of differentiated goods, but because of “reciprocal dumping. In these models, the countries involved are said to have imperfect competition and segmented markets in homogeneous goods, which leads to intra-industry trade as firms in imperfect competition seek to expand their markets to other countries and trade goods that are not differentiated yet for which they do not have a comparative advantage, since there is no specialization. Section C The section below is going to discuss countries’ major trading partners. But before we start, what is it that determines the trade between countries? The classical answer is: ?

Distance, Barriers and Borders According to Krugman, there is a strong empirical relationship between the size of the country’s economy and the volume of both its imports and exports. This relationship is reflected in the celebrated Gravity Model: It predicts bilateral trade flows based on the economic sizes of the countries and distance between two units. Singapore’s key trade partners for the export case are: ?Malaysia 13. 1% ?U. S. 10. 2% ?Hong Kong 10. 1% ?China 9. 7% ?Indonesia 9. 2 Major importing trade partners are: ?Malaysia 13% ?U. S. 12. % ?China 11. 4% ?Japan 8. 3% ?Taiwan 6. 4% In the case of Singapore Gravity model might be subject to question. The country is fairly small but still trades significantly with the biggest economy in the world- USA. Moreover, taking into account geographical location of USA which is far overseas the emergence of trade surprises. Krugman argues that there are certain explanations to anomalies of Gravity model. In particular he includes cultural similarities between countries, multinational corporations, and political forces as determining factors.

Moreover, transportations costs are viewed as one of the most important determinants. In addition the author supposes that the development of internet and communication systems has made “the world smaller”, which is not reflected in Gravity model. Nevertheless, mentioning the rest of the trade partners such as Malaysia, New Zealand, Korea- the rational behind this trade is quite clear. Coutnries are geographically close to eeach other, they are stated in mutual trade agreements so no barriers are created. In addition it is of political interest to be in good relationship with your neighboring countries.

It suits Gravity model can be agreed with. Singapore’s trade policy is based on two principles: a free-market system and an outward orientation. About 96 per cent of imports enter Singapore duty-free . Exports also have the same privileges, except when bilateral restraint arrangements are in force. There are no controls on foreign exchange and no protectionist measures. Singapore participates in multilateral trade forums such as the Asia-Pacific Economic Cooperation (APEC) and the Association for Southeast Asian Nations Free Trade Area (ASEAN AFTA).

Reflecting the republic’s commitment to global, multilateral free trade, the first World Trade Organization (WTO) Conference was held in Singapore in December 1996 Here in Table 4, we present some more of agreements of which Singapore is part of. EconomyAgreementAbbreviation New Zealand Agreement between New Zealand and Signapore ANZSCEP European Free trade Association Agreement between EFTA states and SingaporeEFTA-Singapre FTA JapanFor a New Age Economic PartnershipJSEPA AustraliaSingapore-Australia Free Trade AgreementSAFTA USAUSA-Singapore Free Trade agreementUSSFTA

Korea Korea-Singapore Free Trade AgreementKSFTA Table 5 As it can be seen from the table above, Singapore stimulates free trade flows and thus stimulates the economy. As a consequence Singapore has very developed trade system. Indeed it can be said a great example of the traditional trade theory postulating that countries benefit the most while having no barriers and no interventions into the flow of trade. Conclusion To sum up all which has been discussed above following can be commented. Small countries with no natural resources usually have to fight harder than most to survive.

Singapore has taken a pragmatic and carefully-planned approach to economic development–building on its traditional strengths in entrepot trade and shipping, while gradually diversifying into banking and financial services and other high-value-added sectors. It is operating in trade surplus for the last five years and it’s net exports are gradually increasing. It exports mostly machinery and equipment (including electronics) consumer good, chemicals, mineral fuels. It imports mostly machinery and equipment, mineral fuels, foodstuffs.

The Ricardian theory seems to be not the case for Singapore. According to it’s characteristics it has been classified as capital abundant country. The theory of Heckscher-Ohlin theorem suits for such weak points as foodstuff. Due to almost lack of agriculture Singapore imports the goods in which it does not have comparative advantage in, and exports it’s “strong points” machinery and electronics. On the other hand, for the industries such as vehicles and jewelry production we witness diversification and mutual intra-industry trade, the case for Linder theorem.

Overall, it is very hard to say that Singapore obeys one particular theory of trade. It is a colorful blend out coming in very high results for the economy overall. Keeping all the mentioned above in minds, it is worth to note that the task was perceived as very challenging, stimulated interest to the subject and revealed exciting results. Bibliography: Appleyard, Field, Cobb, 2006. International Economics 5th ed. USA:McGraw-Hill Irwin International Monetary Fund, 2008. Singapore Background [online] Available from: http://www. nternationalmonetaryfund. org/external/np/sec/pn/2008/pn0834. htm [Accessed: 30 April 2008] International Trade Center, 2006. Trade Performance HS : Exports and imports of Singapore (2006, in USD thousands) [online] Available from: http://www. intracen. org/appli1/TradeCom/TP_TP_CI. aspx? RP=702&YR=2006 [Accessed: 28 April 2008] Marrewijk Ch. ,2002. International Trade and The World Economy 1st ed. USA: Oxford University Press. Salvatore Dominick, 2004. International Economics 8th ed. USA: John Wiley and Sons, Inc. Salvatore Dominick, 2005.

Introduction to International Economics 1st ed. USA: John Wiley and Sons, Inc. Singapore Statistics, 2006. Key Indicators [online] Available from: www. singstat. gov. sg [Accessed: 1 May 2008] Krugman, Paul R and Obstfeld, Maurice, 2006 International Economics: Theory &Policy 7th ed. USA:Pearson-Addison Wesley. Pugel Thomas A & Lindert Peter H, 2000. International Economics 11th ed. USA: Irwin McGraw Hill. Wikipedia. org, 2008. Gravity Model [online] Available from: http://en. wikipedia. org/wiki/Gravity_model_of_trade [Accessed: 28 April 2008]

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