Heckscher-Ohlin Model considers the factor endowments and factor intensities of a country, and the country has a comparative advantage in goods that use relatively intensively their relatively abundant factors. However, considering Singapore’s case, Heckscher-Ohlin Model does not work as accurately as Ricardian Model. Singapore’s only factor endowment is its geographical location, providing the country with good transport and port services. Singapore’s current comparative advantage arises from highly skilled labor, which is created from its institutions, not its natural factor endowment. This kind of comparative advantage has developed over time and is affected by various factors. Therefore, Heckscher-Ohlin Model is limited when applied to Singapore’s trade patterns.
From Singapore’s trade statistics, it can be seen that intraindustry trade is very common in Singapore. For example, it both imports and exports agricultural goods such as alcohol of less than 80% volume and non-agricultural goods such as electronic integrated circuits and petroleum oils. Both Ricardian and Heckscher-Ohlin Model fail to explain this kind of trade pattern. It is made possible because of internal economies of scale when an individual firm experiences falling average costs as it increases production, and external economies of scale when the firm’s average costs fall with industry output. It benefits the country by lowering both the prices of imports and exports, increasing number of firms and increasing consumer choices. With Singapore’s industrial policies facilitated by the government such as broad-based tax incentives and research funding under the Research Innovation Enterprise plan (Singapore Country Commercial Guide), its intraindustry trade has helped the country achieving a significant economic growth.
Singapore is generally a free port and an open economy. More than 99% of all imports into Singapore enter the country duty-free. For social and environmental reasons, Singapore levies high excise taxes on distilled spirits and wine, tobacco products, motor vehicles and petroleum products. As a nation with a small domestic market that depends on imports for food, energy, and industrial raw materials, Singapore places the highest priority on the multilateral trading system embodied by the World Trade Organization (WTO). It believes that the WTO can provide a stable framework for developing sound multilateral rules that ensure that goods and services can flow freely with minimum impediment. The primary objective of Singapore’s trade policy is to guard its trading interest by ensuring a free and open international trading environment.
Singapore advocates that trade efforts are undertaken in the regional context such as APEC (Asia Pacific Economic Cooperation), ASEM (Asia-Europe Meeting) and ASEAN (Association of Southeast Asian Nations) as well as bilateral Free Trade Agreements (FTAs) to accelerate the momentum of trade liberalization and strengthen the multilateral trading system. It has actively pursued a number of legally binding arrangements with trading partners, concluding FTAs with the United States, ASEAN, Australia, New Zealand, Hashemite Kingdom of Jordan, China, India, Japan, South Korea, Costa Rica, Panama, Peru, Chile, and New Zealand under the Trans-Pacific SEP (Strategic Economic Partnership) Agreement. FTA negotiations are ongoing with Canada, Mexico, Pakistan and the Ukraine (Future Ready Singapore).
The Singapore – United States Free Trade Agreement (SGFTA) was signed by Prime Minister Goh Chok Tong and U.S. President George W. Bush on May 6, 2003 and went into effect on January 1, 2004. The goal of this trade agreement is to boost bilateral trade between the two countries by eliminating almost all import duties between Singapore and the US and removing other barriers to business between the two countries as well. In addition to lowering of tariffs, the implementation of the agreement also allowed easier movement of citizens from both countries.
Singaporean citizens are able to reside in the United States for extended periods of time. United States citizens coming to Singapore are allowed to work in most business occupations for 3 months without a visa or Professional Visit Pass. During the 10 years, United States-Singapore total trade volumes have grown by 53 percent, reaching US$50 billion dollars. In addition, US exports to Singapore have risen by 85 percent and services exports have increased by more than 100 percent, making the city-state the US’s 13th largest export market.
The Singapore Dollar is the currency of Singapore. Ever since Singapore became an independent nation known as the Republic of Singapore in 1965, the Board of Commissioners of Currency, introduced the Singapore Dollar, with the first banknote series issued in 1967. The currency was initially pegged to the British Pound at a rate of 60 SGD to 7 GBP. The currency repegged to the US Dollar and then to a weighted basket of currencies. In 1985, the Singapore Dollar adopted a market oriented approach and was allowed to float, although it was still closely monitored. Singapore dollar is managed against a basket of currencies of their major trading partners and competitors. Singapore follows a managed floating exchange rate system, and this allows the exchange rate to fluctuate within an undisclosed policy band, rather than a fixed value. This band also provides flexibility for the system to accommodate short-term fluctuations in the foreign exchange markets. If the exchange rate moves outside the band, the Monetary Authority of Singapore (MAS) will step in to steer the exchange rate back within the band. MAS chose not to use a floating exchange rate system because of two reasons. First, they found the exchange rate to be the most effective instrument to keep inflation low. The benefit of a floating regime, the ability to pursue an independent monetary policy, is less relevant to Singapore than to other larger, less open economies. The currency is not fixed because both inflation and interest rates have been lower in Singapore than in the US. There is no need to manage inflationary expectations or for the discipline imposed by the monetary policy of a foreign country. In addition, a fixed exchange rate would make it more difficult for the country to absorb shocks from aboard (Monetary Authority of Singapore).
Overall from the pattern of the nominal exchange rate in terms of U.S. dollar, the Singapore dollar is depreciating year by year as the number is rising from 2012 to 2016. Despite the recent sharp depreciation against the U.S. dollar, the Monetary Authority of Singapore (MAS) stated on 12 August that it, “does not focus on any specific bilateral exchange rate” and that the Singapore dollar remains within its policy band despite “increased volatility in foreign exchange markets following the recent shift in China’s exchange rate policy”. Nevertheless, the MAS added that it, “stands ready to curb excessive volatility in the trade-weighted Singapore dollar”.
Singapore’s overall balance of payments recorded a deficit of $3.9 billion in the fourth quarter of 2016, reversing the surplus of $5.4 billion in the third quarter. For the year as a whole, the deficit amounted to $2.5 billion, a reversal from the surplus of $1.5 billion in 2015. The deficit was due to larger net outflows from the capital and financial account with an amount of $81.9 billion, which outweighed the increase in the current account surplus with an amount of $78.1 billion. This was due to larger net outflows of “other investment as well as smaller net inflows of direct investment” (Economic Survey of Singapore 2016). These collectively exceeded the decline in net outflows of portfolio investment.
Recently, Singaporean businesses are burdened by the need to restructure in the face of the global cyclical downturn, high operating costs, policies restricting access to foreign labor, and weak productivity performance. Exports have been declining, manufacturing is facing high costs, as well as labor, and land shortages. Innovative upscaling is not happening fast enough. The slow growth in the economy happens both domestically and externally, leading to cyclical and structural unemployment. There are various reasons causing this cyclical downturn. First of all, the sustained slump in oil prices severely impacted our oil-related industries. World oil prices had been fairly stable from 2010 until mid-2014, at around US$110 a barrel, but they have almost halved since. Tens of thousands of jobs have been axed and some companies have defaulted on bond payments, sparking concerns over banks' exposure to the sector. The outlook for domestic demand is also subdued with the US Federal Reserve set to unveil further interest rate hikes, “Higher borrowing costs are likely to weigh on household and business spending, weaken the housing market and dampen construction activity. Rising inflation will drag down real income growth (Min)”. Demand from China has also slowed as Beijing restructures its own economy. In addition, tighter monetary conditions in China could lead to a steeper-than-intended pullback in credit and investment spending, resulting in sharper-than-expected slowdowns in the world’s second-biggest economy. The cyclical downturn and economic restructuring are also negatively impacting the Singapore labor market, with significant retrenchments in offshore and marine oil and gas, electronics, banking, construction, and real estate sectors. Professionals, managers, executives, and technicians account for over half the workforce, but face higher risks of retrenchment and difficulty in re-employment. Difficulties aggravated by a skills mismatch, and an increase in the workforce doesn’t necessarily improve the overall productivity.
The Monetary Authority of Singapore manages monetary policy by letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band based on its nominal effective exchange rate. In addition, through a more stimulative fiscal budget, the government hopes to help firms move into this digital space, support entrepreneurs in coming up with innovative ideas, and help workers gain new skills, since jobs available are mainly in the domestic-oriented sectors of information technology, healthcare, public infrastructure, and education. Overall, the government aims to move the Singapore economy up the innovation ladder, from being one that is "value-adding" to a "value-creating" one, therefore staying competitive and being able to maximize the capability (Soon).
The government has also urged workers to equip themselves with the necessary skills through the SkillsFuture scheme to help mid-career workers pick up new skills to fill current vacancies, as well as prepare for future jobs that emerge from ongoing technological disruptions. SkillsFuture is a program which helps mid-career workers move to industries with the potential to grow. Regardless of their positions in career and schooling years, everyone is able to find a variety of resources to help you attain mastery of skills. Through this movement, the skills and contributions of every individual will drive Singapore's next phase of development towards an advanced economy and inclusive society.
With that, momentum in economic growth appears to have carried over into the last quarter of the year, according to recent data. The services sector is also showing signs of further strengthening: Singapore’s economy shifted into a higher gear in the third quarter, as the upturn in the global electronics cycle boosted manufacturing output and stronger external demand led to a slight acceleration in services sector growth (FocusEconomics). Singapore's current account surplus narrowed to $16.08 billion in the third quarter of 2017 from $16.88 billion in the same period of 2016, as the goods surplus declined to $22.36 billion from $22.55 billion and the services deficit widened to $1.9 billion from $1.01 billion in Q3 2016 (TradingEconomics).
Overall, Singapore’s economy has achieved one of the highest rates of growth in the world over the past three decades. Due to Singapore’s scarcity in land, international trade becomes extremely important for the country. Its policies favor the country, making Singapore generally a free
port and an open economy, since most products enter the country duty-free, and the country itself is actively participating in various trade agreements to accelerate the momentum of trade liberalization and strengthen its multilateral trading system. Even though the country is currently facing several cyclical downturns, it seems that the government has been putting in efforts to move the Singapore economy up the innovation ladder. The potential is huge, and a greater number of firms expect better business conditions in the six months up to March 2018 (FocusEconomics).