Singapore and Costa Rica Free Trade Agreement: Analytical Essay

Executive Summary

In this report, I will be discussing about Singapore and Costa Rica Free Trade Agreement (SCRFTA). It will be giving a brief background of what is Free Trade Agreement (FTA) and a brief overview of my specific FTA which is SCRFTA. It will be explaining in details, 3 benefits SCRFTA have make Singapore-based companies more competitive. The 3 areas are trade in goods, investment and trade in services. With SCRFTA, the elimination of tariffs will allow companies to gain access to cheaper market, gain more investment opportunities and expand their market. It will also be discussing 2 challenges faced by Singapore-based companies. The 2 challenges are new industries cannot develop and over-dependence on trade for revenue. New industries will not be able to compete with the existing companies with the removal tariffs and companies will take a big impact when the country faces recession. Finally, I will sharing my thoughts on the SCRFTA, whether I find FTA good to Singapore economy.

Brief background on the topic on Free Trade Agreement (FTA)

FTA is a trade between countries where goods and services can be imported and exported across international borders with minimal or no government tariffs, subsidies, quotas, or prohibitions to restrain their exchange. Lower prices for domestic consumers, improved resource allocation, cheaper imported production inputs can be achieved with free trade. Consumers’ purchasing power will increase with lower prices and firms’ profitability increases with lower production costs. Domestic employment will increase with both of these effects, benefitting the country. FTA is often implemented by means of a formal and mutual agreement among the parties in the modern world. However, FTA may simply be the lack of trade barriers. Governments that carries out free trade agreement do not automatically give up all control of imports and exports or remove all protectionist policies. FTA allows business in the country to focus on producing their specialties and selling the goods that best use their resources while they import goods that are harder to find in their country or unavailable domestically, both country will be able to complement each other for what they are lacking in such as technologies and food.

Brief overview of the specific FTA allocated

SCRFTA was initiated in December 2018 and after 4 rounds of negotiations, it was concluded on January 2010 and signed on April 2010. On 1 July 2013, SCRFTA has entered into force. Singapore and Costa Rican companies will enjoy greater access to each other’s market and pave the way for stronger trading links between the countries under the SCRFTA. The SCRFTA is a broad-ranging agreement that covers multiple issues such as technical barriers to trade, trade in goods, customs procedures and trade in services. The objectives of SCRFTA are to facilitate trade in goods and service by removing tariffs for all product where Singapore grant instant duty-free access for all the imports from Costa Rica and enhance trade facilitation with increase cooperation and better transparency to phytosanitary and sanitary measures, conformance and standards along with customs procedures. Both countries will also need to be dedicated to ensure that companies would be able to challenge on the same path with domestic suppliers for government procurement contracts, surpass certain thresholds. Start-up a framework for cooperation in broader ranging areas to promote social development and economics and a liberalising framework to support investment flows and trade in services in both countries. Under the SCRFTA, product can qualify for preferential treatment if at least 35 percent of the value-add has taken place in the country of origin or the product has experience changes at the 6 digits level of the tariff classification. Once the product qualifies for tariff concessions, the producer or exporter will only need to complete and sign a Certification of Origin to certify that the good qualifies as an originating good and upon the importation of good into the territory of the party, an importer may claim preferential treatment.

3 areas on how the specific FTA has helped to make Singapore-based companies more competitive

Companies in Singapore that have applied for SCRFTA will be more competitive than other company that did not apply. When an importer is considering which company to import their goods from, the company with FTA will be more favourable than the company without FTA as they do not need to pay for custom duty and is seen as a form of discount to them. The 3 main areas that SCRFTA make Singapore-based companies more competitive are trade in goods, investment and trade in services.

1. Trade in goods

Firstly, SCRFTA can make Singapore based companies more competitive as it removes tariffs for all product traded between the countries and in the long run, ensures the stability of exporters. Tariffs refers to a tax on imports which Singapore charges around 7 percent and Costa Rica charges around 1-15 percent. Eliminating custom duties for up to 90.6 percent of its tariff lines in Costa Rica, while the remaining products would have the tariffs eliminated over a span of 10 years and all imports from Costa Rica to Singapore would be granted immediate duty-free access. Singapore imports goods from Costa Rica such as machinery, miscellaneous, wood, electrical and electronics products. The removal of tariffs, companies will be able to save more money on trading and make exports more competitive as compared to company without FTA.

From the picture above, it shows the item Singapore imported from Costa Rica. For example, machinery and electronic industries companies have imported 13,966,990 US$ worth of goods, the companies can save up to 7 percent of import duty which is roughly around 980,000 US$. This will greatly cut down on their cost and maximize the value they get from the amount they spend through this FTA. The companies can then use the imported goods to make products to be exported to other countries for revenues. The exports will increase as goods are cheaper than companies without FTA due to the cut in cost by not paying the tariff charges and able to sell it at a slightly lower price, more companies will be attracted to buying it.

2. Investment

Secondly, SCRFTA can make Singapore based companies more competitive as it creates more investment and business opportunities that companies in Costa Rica and Singapore can take advantage of. Singapore investors and investments in Costa Rica will be guaranteed with non-discriminatory treatment which mean they would be treated like domestic investors and not be treated differently just because they are foreign investors. In the event of indiscriminate expropriation of their investment in Costa Rica, Singapore investors would be compensated. When there is a dispute between Singapore investor and Costa Rican government, they would be able to gain access to international arbitration. Wide range of investment that Singapore investor can consider to invest in such as shares, stock, equities and rights conferred by licenses and permits. Singapore investors will also be allowed to freely deliver and transfer funds related to the investments in and out of Costa Rica. Singapore companies can invest in Costa Rica safely without much worries as they are well protected by laws set for their agreements. Singapore companies can also get the opportunities to venture into infrastructure, transport and logistics, e-services, energy, oil refining and tourism, some of Costa Rica’s major industries, creating business opportunities for the companies, helping in the growth of Singapore economics.

3. Trade-in service

Lastly, SCRFTA can make Singapore based companies more competitive through services such as food, e-banking, information communication technology and maritime services. Service providers from both countries received non-discriminatory and regulatory disciplines. Through the FTA, service suppliers enjoy preferential trade commitment from both countries, it seeks to safeguard market access and ensure beneficial environment for service suppliers to succeed in. In Costa Rica, there is already Singapore-based companies such as American President Lines (APL) and Olam International Ltd. American President Lines is a Singapore based container and shipping company that is a leader in global container transportation, connecting all major markets around the world with a world-class network with fast and reliable services. It has expanded to Costa Rica, providing more people with the maritime services and provide customers to capitalize on the fast-growing opportunities around the region. This allows more people around the world to know about APL and find them for shipping services, making them the leader of container transportation.

2 challenges faced by the Singapore-based companies pertaining to the specific FTA

Singapore-based companies have benefited from SCRFTA, making trading within Singapore and Costa Rica easier, increasing investment and business opportunities. However, there is still downside to SCRFTA on Singapore-based companies, making them hard to sustain and profit over the years. The 2 areas are new industries cannot develop and over-dependence on trading for revenue.

1. New industries cannot develop

SCRFTA allow companies to gain access to goods of lower prices as they do not need to pay for tariffs duty. Companies can cut down on their cost of goods as they paid lesser when importing the goods in. New industries may find it hard to establish themselves whether in Singapore or Costa Rica as current companies are already gaining access to cheaper markets. The new companies will not be able to make themselves seen by others as the current companies are becoming more popular with the help of the FTA, more importer will want to import from those companies and the newer ones cannot shine. This is one of the challenges new Singapore-based companies will faced when starting up the business.

2. Over-dependence on trading for revenue

Singapore-based companies will trade with Costa Rica more as the SCRFTA remove tariffs, it will be cheaper to import and export goods. However, this will cause the companies to be over-dependence on the Costa Rica on exporting to earn revenue. When a recession happens in Costa Rica, it will cause the exports to the country to decrease rapidly, much lower than the usual exports and the revenue for the company will drop. For example, during this Covid-19 period, every country in the world is affected by it, causing trading around the world to be less demanding. When companies in Singapore rely mainly on exports, they will suffer a big hit and may need to resort to shutting down the business. Some companies will also not be able to pay salary to their employee and cause unemployment to increase in the country. This is another challenge that Singapore-based companies will faced when over-depending on trading with Costa Rica.

The conclusion is drawn from the analysis

In conclusion, I feel that SCRFTA is beneficial to Singapore-based companies to be competitive in the long run as SCRFTA remove tariffs which allows company to gain access to better quality and cheaper goods, create business and investment opportunity for companies in Singapore and expand companies overseas. Singapore can get access to Costa Rica market easier and increase on its export. However, there is also challenges of SCRFTA, new industries are unable to develop against bigger companies due to the removal of tariffs and over-dependence on trading for revenue which will cause a big impact to company when a recession hit the country. Despite the challenges faced from SCRFTA, I feel that the benefits outweigh the challenges as SCRFTA can boost Singapore economy and allow companies in Singapore to earn higher income, benefit many people in through it.