Overview of the United States - Singapore Free Trade Agreement

The article explores provisions in the USSFTA and its effect

Free Trade Agreements

Singapore has recently entered into Free Trade Agreements (‘FTAs’) with New Zealand, Australia, Japan, the European Free Trade Association (which comprises Switzerland, Iceland, Liechtenstein and Norway) and the United States (‘USSFTA’) and is currently negotiating FTAs with Mexico, Canada, ASEAN, the People’s Republic of China, the Republic of Korea, India and the Hashemite Kingdom of Jordan.

The sense in this is obvious. Trade is and has always been an important source of economic wealth for the Republic. After all, Singapore has the highest GDP to trade ratio in the world. With this in mind, Singapore has taken pains to guard its trading interests by ensuring there exists a free and open international trading environment and has pursued this on a global scale (membership in the World Trade Organisation (‘WTO’), regionally the Asia-Europe Meeting (‘ASEM’), Asia-Pacific Economic Co-operation (‘APEC’) and Association of South-East Asian Nations (‘ASEAN’)), and now, bilaterally (through the FTAs).

Specifically, proponents of the bilateral FTA argue that as legally binding arrangements between member countries, it enhances trade and investment flows by providing lower tariffs for exports, improves market access for various commercial and professional services, allows for better terms for investment in foreign countries etc. From this, it is argued, a framework is set for ‘Singapore’s businesses to grow and expand globally, which in turn will generate more employment opportunities for Singaporeans’.¹

Background to the USSFTA

The substantive conclusion of the USSFTA was announced in November 2002, and was signed by Singapore Prime Minister Goh Chok Tong and US President George W Bush in Washington DC on 6 May 2003. Since then, it has been approved by the US House of Representatives (25 July 2003) and by the US Senate (1 August 2003). It is scheduled to come into force on 1 January 2004.

As the first free trade agreement to be concluded between the US and an Asian country, it is hoped that the USSFTA will cement the already strong economic ties between Singapore and the US. It has to be said that none of Singapore’s previous FTAs have attracted quite as much attention as the USSFTA has (and it is not just because of the chewing-gum). Quite apart from the fact that the USSFTA is more comprehensive in nature than the other FTAs, there are various other economic and socio-political circumstances that come into play.

Economically, the trading relationship is of immense importance to both countries (particularly Singapore) — the US is Singapore’s second largest trading partner (after Malaysia) and largest foreign direct investor with cumulative investments in manufacturing exceeding US$16bn at end 2001. Last year, trade between the two countries amounted to US$34bn, accounting for nearly 15% of Singapore’s global trade. Singapore is US’s 12th largest trading partner, the second largest investor from Asia and home to 1,300 US companies, over 300 of which have made Singapore their regional Asia-Pacific headquarters.

Politically, Singapore views the US presence as vital to the security and stability of Asia. This has become even more pronounced with the growing threat of terrorism. And because of this, the US is keen to cultivate a credible economic relationship with countries in a region (South East Asia) where 20% of the world’s Muslim population resides.

Exploring the Provisions of the USSFTA

The USSFTA contains commitments that go way above each country’s respective obligations under the WTO and above the US’s commitments under the North American Free Trade Agreement (‘NAFTA’) in a number of areas including the protection of intellectual property, the inclusion of e-commerce, advanced rules of origin and customs co-operation.

Trade in goods

Customs duties

These are to be immediately removed by Singapore on the few categories of US goods that are currently subject to duties, while US duties on Singapore goods will be removed progressively according to schedules. There is also a blanket prohibition on the imposition of export taxes on Singapore goods to be exported to the US and vice versa.

Integrated sourcing initiative (‘ISI’)

The USSFTA introduces the unique ISI that allow products imported to the US from Singapore to be immediately conferred Singapore origin, regardless of where they are manufactured. Since, under the USSFTA, merchandising processing fees (which are ordinarily imposed by the US on all imports entering the US) are automatically waived for products of Singapore origin, products which are listed in the ISI would not be subject to the merchandising processing fee when imported to US from Singapore, even if the products were imported into Singapore solely for re-exportation to the US.

Services

The USSFTA adopts a negative list approach. This means that all cross-border services are subject to the national treatment and market access commitments in the USSFTA unless there are specific reservations. Neither the US nor Singapore may maintain or adopt measures which will affect market access and national treatment such as the imposition of quotas and economic needs tests, unless these reservations are made.

In addition, the USSFTA requires both countries to freely permit the transfer and payment of salaries, profits, interest, royalties, contract payments, investments as well as funds taken abroad to consume a service.

Investments

The USSFTA chapter on investments also adopts a negative list approach such that all investments are covered unless they are specifically reserved by the parties. The USSFTA seeks to provide a secure, predictable framework for investors. For example, if there is an expropriation of property, it must be for a public purpose, non-discriminatory and must result in payment of prompt, adequate and effective compensation equal to the fair market value of the investment and in the event of an investment dispute, the USSFTA contains provisions on investor-state arbitration. This means that an aggrieved investor would have locus standi to take advantage of the investor-state dispute settlement provisions in their own right without having to lobby their home governments to bring such a claim on their behalf.

Telecommunications

According to the telecommunications commitments in the USSFTA, both Singapore and the US agree to ensure that enterprises of the other party have access to and use of any public telecommunications network and this access to public communications networks must be provided in an ‘unbundled’ manner and at cost-oriented rates that are reasonable and non-discriminatory. This means that an enterprise is only required to pay for the services it requires.

Under the USSFTA, major suppliers of leased circuit services must provide enterprises of the other party’s leased circuit services (that are public telecommunications services) on terms and conditions under pricing structures and at rates that are reasonable, non-discriminatory and transparent. The provisions in the USSFTA dealing with local leased circuits may address concerns by many US telecommunications companies over the prices which SingTel charges other operators for the use of local leased circuits in the Singapore broadband business market, as well as for other telecommunications services. Such prices have been the subject of formal complaints made by major US telecommunication companies to Singapore’s Infocomm Development Authority (‘IDA’).

Regulatory bodies must be separate and independent of any supplier of telecommunications services and its decisions must be impartial. In addition, both Singapore and the US must divest ownership interests in public telecommunications suppliers and the ‘Side Letter on Telecom Divestment’ deals specifically with the Singapore government’s divestment of its stake in SingTel.

E-commerce

Both the US and Singapore recognise the economic growth and opportunity provided by electronic commerce and the importance of avoiding barriers to its use and development. As such, both parties agree that electronic commerce between them will remain free of duties, fees or charges on the importation or exportation of electronically transmitted digital products.

Intellectual property (‘IP’)

As stated by the US Industry Functional Advisory Committee on IP Rights for Trade Policy Matters, the USSFTA ‘sets out the highest standards of protection and enforcement for IP yet achieved in a bilateral or multilateral instrument, treaty or convention’. Many of the changes are important and far-reaching and it is clear that exciting times lie ahead for Intellectual Property Rights (‘IPR’) owners.

Each party has six months to implement the obligations set out in the chapter on IPR (one year for certain obligations, pertaining mainly to copyright). The Singapore government is currently in the process of reviewing Singapore’s IP laws in order to bring it in line with its obligations under the USSFTA. The Intellectual Property Office of Singapore (‘IPOS’) is currently in consultation with industry leaders and has formed a high level taskforce, which includes prominent business leaders as well as heads of relevant government ministries, to seek further input on these legislative amendments. It is anticipated that some of the changes to these laws (namely amendments to Singapore’s Patents Act (Cap 221)) will take place as early as the first quarter of next year.

Pursuant to the provisions of the USSFTA, Singapore must make changes in the four main areas of IP law, mainly to:

Trademarks/domain names

• Give effect to Arts 1 through 6 of the Paris Union and WIPO Joint Recommendation Concerning Provisions on the Protection of Well-Known Marks (1999).
• Remove the requirement, as a condition for registration, that signs be ‘visually perceptible’ (and further make better efforts to register scent marks).
• Ensure public access to a reliable and accurate WHOIS database of domain name registrant contact information.
  

Copyright

• Extend the term of copyright protection for works to life of the author plus 70 years and for performances and phonograms to 70 years from the date of first publication.
• Enact legislation prohibiting the use of anti-circumvention devices.
• Protect rights management information.
• Protect encrypted program-carrying satellite signals.
  

Patents (mainly in relation to pharmaceutical products)

• Permit the use of an existing pharmaceutical patent by a third party where that use is specifically intended for attaining marketing approval.
• Extend the term of a patent to compensate for unreasonable delays that occur during the patent application process.
• Withhold approvals for generic drugs during the term of the patented pharmaceutical in question.
  

Enforcement of IPR

• Ensure that all government agencies use only authorised computer software.
• Provide legal incentives for service providers to co-operate with copyright owners in deterring the unauthorised storage and transmission of copyrighted materials where, amongst others, the service provider does not initiate the chain of transmission and implements a policy to terminate the accounts of infringers (where appropriate).
• Expand the concept of counterfeiting ‘on a commercial scale’ to include both infringements with financial gains and infringements with indirect motivation of financial gain (which is targeted at corporate end-users).
  

Financial services

The chapter on financial services provides for non-discrimination, most-favoured nation treatment and additional market access obligations. Singapore’s retail banking sector has traditionally been heavily regulated and entry for foreign retail banks difficult. Aside from limits on the number of qualifying full bank licences to be granted to foreign banks and their customer service locations, foreign banks do not have access to the local automated teller machines network. However, Singapore has made a commitment to approve, by the date of entry into force of the USSFTA, one new full bank licence and two additional customer service locations for a financial institution of the US.

In addition, local incorporated subsidiaries of US banks and branches of US banks will be able to apply for access to the local automated teller machine network within two and a half years and four years, respectively. Furthermore, within 18 months after the USSFTA enters into force, the quotas on the qualifying full bank licences will be removed for US banks.

Competition

Even before the singing of the USSFTA, the Singapore government announced that it would enact a generic competition law and set up an independent competition authority within the next few years. The USSFTA commits Singapore to setting up a general competition regime by 2005. Specifically, the USSFTA requires that each party adopts or maintains measures to prescribe anti-competitive business conduct. Although designated monopolies and government enterprises are permitted under the USSFTA, they will be obligated to make use of commercial considerations in the sale and purchase of goods or services and act in a manner consistent with the chapter’s objectives (except for government procurement).

Singapore has committed itself to maintaining the existing policy of not interfering with the commercial decisions of Government Linked Companies (‘GLCs’), ensuring that GLCs are commercially run and do not discriminate against US companies.

The US and Singapore agree to co-operate on competition law and policy development and in order to ensure transparency, each party must make available, upon request of the other party, public information concerning enforcement measures, information concerning government enterprises and designated monopolies and exemptions from anti-competitive measures.

Government procurement

The USSFTA builds on the ‘WTO Government Procurement Agreement’ and adopts the negative list approach. Singapore has made additional commitments on non-discrimination in government procurement on this basis. The annexes to the government procurement chapter set out exclusions and lower present monetary thresholds, and the applicable thresholds are subject to an indexing formula to account for inflation. The lowering of these monetary thresholds will subject more government procurement contracts to the non-discrimination obligations.

Conclusion

Singapore has learnt from previous experience that FTAs do provide tangible results. For example, after implementing the Singapore – New Zealand FTA on 1 January 2001, trade between the two countries recorded growth of 35% in the first two months of 2001 alone.

Even more hopes are pinned on the USSFTA. In fact, it has been argued that the USSFTA should be able to ignite the local economy even if Singapore’s four other FTAs are not able to.²   Trade between the US and Singapore has declined by approximately US$8bn from 2000 when it hit a high of US$42bn (the figure stood at approximately US$34bn last year). In addition, the share of US-Singapore trade in Singapore’s global trade has declined since 1998 when it was nearly 20% (the figure stood at approximately 15% last year). While the decline of US-Singapore trade reflects the general conditions of the broader global economy, it is hoped that the USSFTA will at least cushion this decline.

Legally, the USSFTA will require, among other things, substantial amendments made to Singapore’s IP laws and the introduction of an anti-competition regime. However, the economic-cookie may crumble, the USSFTA’s impact in the realm of the law is undeniable.

Edmund Leow
Baker & McKenzie.Wong & Leow
E-mail: edmund.leow@bakernet.com

Endnotes