Staff Papers
Published Date: 01 August 1998

Singapore's Trade Linkages, 1992-96: Trends and Implications

MAS Occasional Paper No. 7 August 1998 - By Domestic Economy Division, Economics Department

1          Singapore's international trade has experienced rapid growth over the last three decades, averaging 14% p.a. during 1965-1997. Despite the vital role played by external trade in Singapore's economic development, there has been relatively little analysis on the dynamics of its trade linkages with major trading partners. Using the technique of trade intensity analysis, this paper examines Singapore's trade linkages with its main trading partners and identifies its key driving forces over the period 1992-96.

2          Export and import linkages are defined in this paper as the shares of the trading partners in Singapore's total exports and imports respectively. Shifts in trade linkages can be attributed to (1) the changing importance of the various countries or regions in world trade, and (2) changes in trade intensity between Singapore and its trading partners. An increase in a country's or region's share of world trade, ceteris paribus, will lead to an expansion of its share of Singapore's trade. Trade intensity, on the other hand, measures the importance of a country or region to Singapore's trade relative to its importance to the rest of the world (ROW). This can be quantified by the export (or import) trade intensity index, which is defined as the country's or region's share of Singapore's exports (or imports) relative to its share of imports from (or exports to) the ROW.

3          To gain further insights into bilateral trading relationships, the trade intensity index can in turn be decomposed into an index that accounts for the commodity composition of the countries' trade, and another that reflects the intensity of trade in various commodities. The first is the complementarity index, which measures the extent to which Singapore's commodity export pattern matches the trading partner's import pattern relative to the commodity pattern of imports from the ROW. The second index is the special country bias index, which measures the degree of resistance in the trading partner's imports from Singapore relative to its average degree of resistance to imports from the ROW. This index is largely determined by factors such as relative geographical proximity, import preference granted to specific countries, associated flows of investment, technology and development aid. In summary, Singapore's trade linkages with a region can be expressed as:

Trade Linkages =
      Region's Share of World Trade x Complementarity Index x Special Country Bias Index

           Recent Trends in Singapore's Trade Linkages

4          Of the major geographical regions, Singapore's trade linkages with ASEAN-3 have strengthened the most in recent years. Between 1992 and 1996, the region recorded the largest increase in share of both Singapore's total exports and imports. Over the same period, Northeast Asia also became a more important export market, although its share of Singapore's imports declined. The strengthening of Singapore's trade linkages with ASEAN-3 and Northeast Asia mirrors a slackening of its linkages with both the EU and North America. While the shares of both the EU and North America in Singapore's total exports declined, they remained as Singapore's major sources of imports.

           Singapore's Export Intensity

5          An analysis of trade intensity reveals that Singapore's trade relations with ASEAN-3 were much stronger than implied by their bilateral export and import shares. The high trade intensity index of Singapore's exports to ASEAN-3 implies that Singapore's exports to the region were more than could be accounted for by the region's share of world trade. Among the ASEAN-3 economies, Singapore's export trade linkages with Malaysia were by far the strongest and, moreover, improved the most during 1992-96.

6          The expansion of ASEAN-3's share in Singapore's total exports over 1992-96 reflects the growing importance of the region as a world importer. A decomposition of the export intensity of Singapore's trade with ASEAN-3 shows that its decline reflects primarily the fall in the special country bias, which was, however, still considerably higher than the complementarity index. This implies that Singapore's exports to ASEAN-3 were based less on the degree of complementarity in commodity composition of traded goods than the fact that Singapore's exports encountered significantly lower resistance, compared to those from the ROW.

7          Singapore's strong and improving trade linkages with Northeast Asia, on the other hand, were predominantly due to the region's growing importance in world trade. The intensity of Singapore's exports to the region, however, was not particularly high and has in fact declined over the period. China is the only Northeast Asian economy that saw an improvement, albeit marginal, in the export intensity of Singapore's trade.

8          The diminution in Singapore's export linkages with North America owed much to the decline in its intensity of trade with North America, particularly its special country bias, even though the region's share of world imports has increased. This reflected a shift in bias of North American imports from Singapore to other countries, with Mexico being a particularly prominent beneficiary.

9          On the other hand, the decline in Singapore's export linkages with the EU was entirely due to the latter's decline in importance in world imports. The export intensity of Singapore's trade with the EU was unchanged over the 1992-96 period and has remained the lowest among the various trade regions. Indeed, Singapore's exports to the EU exhibited a special country bias index that was substantially lower than the complementarity index, implying a high degree of trade resistance between Singapore and the EU.

            Singapore's Import Intensity

10         As in the case of exports, the intensity of Singapore's import trade with ASEAN-3 was the strongest among the various regions. It has, however, declined in recent years, reflecting a reduction in the special country bias factor. The rise in ASEAN-3's share of Singapore's total imports was thus attributable to the increased weight of the region as a world exporter.

11         Of the ASEAN-3 economies, the intensity of Singapore's import trade with Malaysia remained the highest, although it fell substantially. This was attributable to a drastic decline in special country bias as each country developed and extended its trade linkages further ashore. In contrast, the intensity of Singapore's import trade with both Thailand and the Philippines saw an increase, reflecting the growing importance of Singapore as an export market to these countries. The increase in import intensity was supported by a rise in complementarity of Singapore's import trade with the two countries. The special country bias factor also increased in respect of trade with Thailand, although that with the Philippines declined.

12         While Singapore's export linkages with Northeast Asia increased in recent years, its import linkages with the region declined somewhat. This was despite the region's increased importance in world exports over the same period. The decline was due to the fall in intensity, or more specifically the special country bias, of Singapore's import trade with Northeast Asia. This reflects the somewhat more diversified export markets of Northeast Asia, unlike in ASEAN-3 whose export markets were concentrated within the same region. The decline in Singapore's import linkages with Northeast Asia was attributable mainly to Japan where the special country bias index of Singapore's imports has fallen.

13         Turning to the Western economies, Singapore's import linkages with North America declined marginally but those with the EU improved. The decline in import linkages with North America was due to a fall in intensity of trade even though the region's share of world exports has increased. The improvement in import linkages with the EU, on the other hand, was due entirely to an increase in EU's share of world exports.

            Intra-Industry Trade

14         Intra-industry trade has in recent years made up an increasing share of Singapore's total trade with all the major regions. Trade with ASEAN-3 registered the highest proportion of intra-industry trade. Among the ASEAN-3 economies, the degree of intra-industry trade linkages with Malaysia was the strongest, followed by Thailand and the Philippines. Intra-industry trade with Northeast Asia was also significant while the bulk of Singapore's trade with North America and the EU was made up of inter-industry trade.

15         There are a number of possible explanations for the marked increase in intra-industry trade between Singapore and ASEAN-3, and Northeast Asia in recent years. First, the level of trade resistance among ASEAN economies was reduced, following a number of initiatives taken towards trade liberalisation within the region. Second, the rapid growth of intra-industry trade reflects ASEAN-3's increasing demand for capital goods and the capacity to produce them as a result of rapid industrialisation in recent years. Finally, the increased significance of intra-industry trade could also be ascribed to the trend in internationalisation of production in which multi-national corporations (MNCs) employ manufacturing facilities in several countries for production in order to harness locational comparative advantages.

            Trade Linkages and their Implications

16         From the foregoing anlaysis, several implications for Singapore's external trade can be drawn, especially in light of the current regional economic downturn. First, given Singapore's strong export linkages with the ASEAN-3 and Northeast Asian economies, the regional slowdown is expected to have an adverse impact on Singapore's export growth.

17         Second, the predisposition toward special country bias, rather than complementarity, in Singapore's exports to ASEAN-3 has highlighted the importance of such factors as geographical proximity, historical ties, and investment flows between Singapore and the regional economies. Just as these factors have buoyed Singapore's export growth during the boom export years of the ASEAN-3 economies in 1993-95, they are likely to pose a drag on Singapore's exports in the event of a protracted regional slowdown over the next few years.

18         Third, the adverse impact of a regional economic slowdown on Singapore may be mitigated somewhat by the significant share of its intra-industry trade or trade in intermediate goods with ASEAN-3, especially if the demand for final goods bound for the US and Europe remains healthy. However, high interest rates and cautious bank lending in the region have led to a credit squeeze on manufacturers which could sever key nodes in the regional production network.

19         Fourth, the slowdown in Singapore's export growth to Asian economies has accentuated the importance of the US and EU as its key export markets, notwithstanding their decline in recent years. Singapore's heavy reliance on ASEAN-3, economic uncertainty in the region and rising protectionst pressures from crisis-hit economies have underscored the need for Singapore to diversify its export base by reaching out to new growth areas outside the region.

20         Finally, the vulnerability of the Singapore economy to external shocks like the regional economic crisis has highlighted the importance for a more diversified economy. Singapore's economic base would have to be broadened to include the higher value-added services sectors, particularly financial and information technology.