Journal of Policy Modeling 29 (2007) 505–522
Facing the challenge of rising China:
Singapore’s responses
Yunhua Liu ∗
Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University,
Nanyang Avenue S3-B2C-109, Singapore 639798
Received 1 March 2006; received in revised form 1 April 2006; accepted 1 January 2007
Available online 2 April 2007
Abstract
Singapore economy stumbled after the outbreak of 1997 Asian financial crisis. Competition is largely
from globalization and the rising of Chinese economy, which hit the region in two-fold by taking away much
of the share of export market and FDI. Recent development however shows a good signal for Singapore’s
exports to China’s market. This paper examines the trade and investment relationship between Singapore
and China, and reviews the policies that Singapore had taken to cope with the changing world. The strategy
of moving toward a knowledge-based economy becomes Singapore’s must choice. However, the smooth
engagement in the transition with developed economy and the dynamic Chinese economy could be a challenge
to Singapore.
© 2007 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.
JEL classification: O53; O19
Keywords: Singapore policy; Rising of China; Challenge
1. Introduction
1.1. The background of Singapore economy
The outbreak of Asian financial crisis in 1997 was critical for Singapore economy. Since
then, the development road became stumble and the future was getting unclear (see Table 2).
∗ Tel.: +65 67904949; fax: +65 67917180.
E-mail address: ayuliu@ntu.edu.sg.
0161-8938/$ – see front matter © 2007 Society for Policy Modeling. Published by Elsevier Inc. All rights reserved.
doi:10.1016/j.jpolmod.2007.01.004

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Y. Liu / Journal of Policy Modeling 29 (2007) 505–522
Table 1
National accounts, million Singapore dollars, calendar year, at current market prices
Item
1985
%
2004
%
1
Manufacturing
8,467.3
21.8
48,960.5
27.1
2
Construction
4,149.4
10.7
7,671.7
4.2
3
Trade
5,189.0
13.3
25,249.5
14.0
4
Transport and communications
5,192.3
13.3
19,525.4
10.8
5
Finance and business servicesa
8,916.9
22.9
42,454.8
23.5
6
Public administration and othersb
7,489.3
19.2
29,867.9
16.5
GDP by industrial originc
38,923.5
180,554.4
Source: Asian Development Bank (ADB)—key indicators 2005 (http://www.adb.org/statistics).
a Covers financial and business services.
b Covers other services industries, hotels and restaurants and owner-occupied dwellings.
c Reflects reclassification using SSIC 2000.
Before the crisis, however, the city-state documented a long-term high growth rate since its inde-
pendence in 1965. With a population size of 4.35 million people and land area of 700 km2,
Singapore has no natural resources except human capital and the geographically strategic loca-
tion as a world shipping center. The outward looking policies of Singapore had virtually made
a good use of the two main endowments and successfully turned the country into a world ship-
ping and trading center and industrialized with foreign investment initially in labor intensive
and export-oriented industries in 1970s and 1980s. In 2005, Singapore’s trade volume reached
S$715.7 billion, 3.7 times of its gross domestic production, and Singapore’s port serves as the
world’s largest trans-shipment hub. The stock of foreign direct investment as at 2003 is S$244.3
billion.
Starting from late 1980s, Singapore began upgrading its industries toward capital intensive,
high-tech and high value-added economy. Meanwhile, the economic structure has been shaped
into a healthily diversified one with relative balance in manufacturing, services, construction,
trade, transport and communications (see Table 1). Among them, manufacturing and financial
and business services become increasingly important in the economy. The economic success of
Singapore of being one of the world’s advanced and wealthy nations received worldwide recog-
nition. Strong and efficient government, rigorous legal system, well-developed infrastructure,
high-quality labor force and well-organized society made Singapore a very competitive country
in the current world.
With a highly ranked per capita national income of US$ 26,800 in 2005, however, Singapore
economy has reached the stage of a namely matured economy. High labor cost and high land cost
become two major disadvantages which are gradually eroding the country’s competitiveness in
world export market and in attraction to foreign direct investment (FDI). The competition was
initially in a harmlessly narrow area among four Newly Industrialized Economies (NIEs),1 and
later from neighboring countries like Malaysia, Thailand, Philippines and Indonesia. In fact, the
accelerated globalization and regional integration are all pushing forces for Singapore to upgrade
its production level to less labor-intensive industries.
1 The four newly industrialized economies in Asia, Hong Kong, Taiwan, Korea and Singapore.

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Y. Liu / Journal of Policy Modeling 29 (2007) 505–522
507
Table 2
Key indicators of Singapore economy 1994–2005
Year
GDP growth
Unemployment
Per capita
Exchange rate
rate (%)
ratea (%)
GDP (S$)
(S$ per US$)a
1994
11.6
1.7
31,556
1.5274
1995
8.1
1.8
33,886
1.4174
1996
7.8
1.7
35,555
1.4101
1997
8.3
1.4
37,520
1.4848
1998
−1.4
2.5
35,161
1.6736
1999
7.2
2.8
35,440
1.6949
2000
10.0
2.7
39,784
1.7239
2001
−2.3
2.7
37,130
1.7917
2002
4.0
3.6
37,976
1.7906
2003
2.9
4.0
38,599
1.7422
2004
8.7
3.4
42,852
1.6903
2005
6.4
3.2
44,666
1.6646
Source: http://www.singstat.gov.sg/keystats.
a Annual average.
1.2. Recently appeared problems
The occurrence of 1997’s Asian financial crisis seriously hit the region, caused unstable cur-
rencies and significant withdrawal of FDI. Although weathered the crisis smoothly,2 Singapore
was put into a deep uncertainty for its future. Worldwide economic recession in 2000, September
11 attack in the US in 2001, outbreak of SARS in 2003 and the recent bird flu all form a shock to
the small-sized economy. The ever-worried fragility of a world market dependent small economy
becomes reality. For the past 8 years since 1998, Singapore suffered the pain of drastic fluctuations
in employment, stock prices and property wealth and is now still haunted by the unclear future
(see Table 2 and Fig. 1).
1.3. Challenges and opportunities with the rise of China
Accompanying the stumble road for Singapore economy since late 1990s is the emerging
Chinese economy. Though China’s no depreciation policy during the crisis helped the region out
of the downturn trend eventually, but some also believe that the devaluation of Chinese Yuan in
1994 and then fast expanded China’s exports in labor-intensive products were one of the important
factors to the crisis occurrence. And the consequently well-developed Chinese economy brought
an unpresedented shock not only to the region of Southeast Asia and but also to the rest of the
world.
The immediate challenge from China’s rising is the competition in world export market for
labor-intensive products and in attraction of international FDI. Before China’s emergence, South-
east Asian countries enjoyed a good inflow of FDI from developed countries and easy access to
the markets of developed economies. With China’s joining competition, both previously enjoyed
2 At the height of the Asian Crisis in January 1998, Singapore dollar depreciated by only 1.1% on a real effective exchange
rate basis, compared to 54.8% for Indonesia, 36.2% for Malaysia, 35.7% for Korea, 34.2% for Thailand and 292.9% for
the Philippines. The Singapore economy was also not as volatile as in the other countries in inflation, employment and
stock market (Lim, 2002).

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Y. Liu / Journal of Policy Modeling 29 (2007) 505–522
Fig. 1. Singapore property price index (4Q 1998 = 100).
benefits shrunk. On the other hand, however, the opportunity appeared is China’s large market.
The negative and positive effects from China’s rising are already fully experienced by Singapore.
Singapore’s exports to US market slowed down since 1996, accompanied by the fast market
share increase of China’s exports in US market (Table 4), the FDI inflow decreased from US$
13.5 billion in 1997 to US$ 5.53 billion in 2003, while FDI inflow to China increased rapidly
throughout the past two decades, in 2003, and annual inflow reached US$ 53.5 billion (see
Table 6).
In summary, a paragraph from a recent report by the Economic Review Committee in Singapore
may give us a brief description of the current status of Singapore economy.3
The Singapore economy has been undergoing two very significant changes in that it is gradu-
ating from being an investment-driven economy to an innovation-driven economy, and it is also
transiting from an era of growth continuity to an era of growth discontinuity.
With full awareness of the vulnerability of small states, Singapore government had done a lot in
shaping their economy to avoid the risks by heavy reliance on and active participation in regional
and international organizations (Low, 2002). Very unfortunately, it is still not enough given the
ever-changing world environment. How should Singapore face the new challenges? What will be
the new prosperous road? To survive and to maintain growth, new niches must be developed and
new strategies must be assembled. There are no sure answers for these questions, but it can only
be left for future exploring.
The purpose of this paper is to examine in detail (1) how the rising China influences Singapore’s
economy in different aspects, (2) what are the responses of Singapore to these changes, and (3)
how well these responses might work. Section 2 examines the challenges and opportunities to
Singapore in facing rising China. In this section, we will examine the competition in world export
market and in FDI market, also examined is the economic complementarity of the two economies
in trade and investment. Section 3 reviews policies that Singapore adopted in facing the challenge
3 An Economic Review Committee of 85 professionals was formed in 2002 in the Institute of Policy Studies (Singapore)
to review the economic strategy for Singapore, the report “Restructuring Singapore economy”, published by Times
Academic Press, 2002.

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Y. Liu / Journal of Policy Modeling 29 (2007) 505–522
509
of rising China and evaluates the possible consequences of the effectiveness of these policies.
Section 4 concludes the paper.
2. Challenges and opportunities to Singapore facing the rising China
2.1. Competition in world export market
The success of China’s economic reform generated tremendous economic power as a huge
trade nation and magnetic field for international investment capital. The abundant labor and land
have turned China into a world production factory for labor-intensive products. China’s WTO
entry in 2001 further ensured the world market access for its exports in the coming time. Within
just 10 years, China’s exports increased from US$ 120 billion in 1994 to US$ 762 billion in 2005,
ranked second largest exporting country in the world, after Germany.
Given the steady slow growth of world market demand for labor-intensive goods in the past
10 years, fast expansion of China’s exports will inevitably take certain market shares away from
traditional labor-intensive products exporting countries. The NIEs are the immediate affected
ones, among them, Singapore is the most likely affected because a large proportion of China’s
exports production is relocated from Taiwan and Hong Kong, which produce the similar goods as
Singapore does. Table 3 shows that since 1997 financial crisis, Singapore’s exports experienced
drastic ups and downs while China’s exports grew often at a high rate of more than 20%.
Table 4 indicates that within US market, Singapore maintained a steady market share of around
2.5% in early 1990s, but declined all the way since 1997, while China’s market share in US
increased persistently.
Although there could be many reasons for the change in Singapore’s exports, by just looking
at the data, we can prove that the competition from China is the most important factor. To further
check the extent of impact and time period of China’s competition in specific type of industry, a
simple market share regression model is used as follows,
MSs = a + bMSc + u
(1)
Table 3
Singapore and China’s world total exports in billions of US dollars
Singapore
China
Exports in billions of US$
Growth of export (%)
Exports in billions of US$
Growth of export (%)
1994
96
31
121
33
1995
118
23
149
23
1996
125
6
151
2
1997
125
0
183
21
1998
110
−12
184
1
1999
115
4
195
6
2000
138
20
249
28
2001
122
−12
266
7
2002
125
3
326
22
2003
144
15
438
35
2004
184
28
593
35
2005
232
13
762
28
Source: Asian Development Bank (ADB)—key indicators 2005 (http://www.adb.org/statistics).

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Y. Liu / Journal of Policy Modeling 29 (2007) 505–522
Table 4
US imports from Singapore and China in billions US dollars
World total of
Singapore’ s
Singapore’s export
China’s export
China’s export share
US
export to US
share in US market
to US
in US market (%)
(%)
1987
424.4
7.3
1.72
3.1
0.73
1988
459.5
9.5
2.07
3.5
0.76
1989
492.9
10.7
2.17
4.7
0.95
1990
517.0
11.7
2.26
5.8
1.12
1991
508.4
11.9
2.34
6.8
1.34
1992
553.9
13.6
2.46
9.6
1.73
1993
603.4
15.1
2.50
18.4
3.05
1994
689.2
17.6
2.55
22.5
3.26
1995
770.9
21.2
2.75
26.0
3.37
1996
822.0
23.2
2.82
28.9
3.52
1997
899.0
23.1
2.57
35.4
3.94
1998
944.4
22.0
2.33
41.2
4.36
1999
1059.4
22.6
2.13
47.4
4.47
2000
1259.3
23.6
1.87
62.3
4.95
Source: World Trade Analyzer (WTA) CD-ROM, 2001 and International Monetary Fund, International Financial Statistics,
2001.
where MSs is Singapore’s total market shares in the US for a particular type of products, MSc
is the China’s market share in the US for the same type of products. The assumption is that the
sign of parameter b should be negative if competition happened between Singapore and China
for that particular type of product. If a positive sign appears for parameter b, the assumption of
competition of China and Singapore should not hold in that product. Statistically, the method
should also overcome the possible problems of heteroscedasticity when different products are
pooled into one group. Another assumption is that the sum of the market shares of the two
countries maintains a stable trend. The data covers one-digit and two-digit SITC goods and the
time periods are 1987–1992 (Chew & Liu, 1998) and 1987–2000 (Liu & Luo, 2004). The results
are presented in Table 5. It is so much clear that in the period 1987–1992, no competition was
seriously appearing except in the group of manufactured good of SITC 81–89. However, after
Table 5
Competition between Singapore and China in US exports market (1987–1992, 1987–2000)
Products
1987–1992
1987–2000
N
b
N
b
Primary goods (SITC 0, 1, 2, 3, 4)
30
0.06 (1.62)
70
0.15 (3.45)
Manufactures (SITC 5, 6, 7, 8, 9)
30
−0.05 (1.00)
70
−0.08 (2.06)
Food and beverages (SITC 1–12)
66
0.05 (3.46)
168
0.17 (4.35)
Crude materials (SITC 21–43)
80
−0.03 (1.62)
224
−0.06 (2.17)
Chemical and related products (SITC 51–59)
52
−0.12 (0.68)
126
−0.09 (1.30)
Basic manufactures (SITC 61–69)
54
−0.01 (0.69)
126
−0.02 (3.42)
Machines and transport (SITC 71–79)
54
1.91 (5.46)
126
0.37 (1.86)
Manufactured (SITC 81–89)
46
−0.03 (2.49)
112
−0.03 (4.16)
Note: (1) N represents the number of observations; numbers in parentheses following the estimators are t-values. (2)
Details of the SITC can be found in United Nations, Commodity Trade Statistics. Data source: World Trade Analyzer
CD-ROM, through the period 1987–2000.

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Y. Liu / Journal of Policy Modeling 29 (2007) 505–522
511
extension to the period 1987–2000, the big category of basic manufactures (SITC 61–60) turned to
be significantly negative and the bigger group of one digit regression (SITC 1–5) also turned to be
significantly negative. Overall, we can conclude that the export competition in US market between
Singapore and China was getting severe starting from the early mid-1990s. The results are not
surprising and are consistent with our common believe that Singapore has a relatively advanced
production level among the four NIEs, but as time passed, China caught up very quickly in the
basic and mid range of industrial products. It means that in the coming years, Singapore will face
further pressure from China, given China’s fast learning ability.
2.2. Competition in attracting FDI
No doubt, the diversion of FDI from Southeast Asia to China is an obvious fact. The main flow
of FDI to Asia has changed the direction in recent years that more than 70% of the FDI is now
flowing into China instead to Southeast Asia as before. Table 6 shows the FDI diversion pattern
for Singapore and China over the past two decades. Historically, Singapore relies on FDI heavily
for its economic expansion and for its industry level upgrading. Even the economy size is small,
the FDI inflow to Singapore only fell behind China significantly after 1991. Less capital inflow
and own capital outflow could mean less economic growth and less jobs, but some argued that
the competition could appear any time and the jobs might not be kept if one country’s economic
environment is not competitive enough. FDI diversions need to be viewed in different perspectives
(Chen & Ku, 2003).
2.3. Increasing importance of China’s market to Singapore
It is interesting to see that in 2003 and 2004 Singapore’s exports rebounded with a sharp increase
of 15 and 28%, respectively, compared to the 3% increase in 2002 (Table 3). The destination
change of Singapore’s exports for the past 10 years is shown in Table 7, from which we can
observe clearly that the quickest expanded market for Singapore is China. In 2004, Singapore’s
exports to China increased by 51.5%. In 2004, the trade volume between the two countries reached
Table 6
FDI inflows of China and Singapore (US$ million)
Year
China
Singapore
Year
China
Singapore
1980
57
1236
1992
11,156
2,204
1981
265
1660
1993
27,515
4,686
1982
430
1602
1994
33,787
8,550
1983
636
1134
1995
35,849
11,503
1984
1258
1302
1996
40,180
9,303
1985
1659
1047
1997
44,237
13,533
1986
1875
1710
1998
43,751
7,594
1987
2314
2836
1999
40,319
13,245
1988
3194
3655
2000
40,772
12,464
1989
3393
2887
2001
46,846
10,949
1990
3487
5575
2002
52,700
7,655
1991
4366
4887
2003
53,500
5,528
Source: (1) World Trade Analyzer (WTA) CD-ROM, 2001 and International Monetary Fund, International
Financial Statistics, 2001. (2) Data after 2000 are from http://www.singstat.gov.sg/keystats/economy.html and
http://www.uschina.org/statistics/fdi cumulative.html.

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Table 7
Direction of Singapore’s exports and imports (US$ billion)
Country
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
1. Malaysia
22.7
22.5
21.8
16.7
18.9
25.0
21.1
21.8
22.7
27.2
2. US
21.6
23.1
23.1
21.8
22.0
23.8
18.7
19.1
20.5
23.2
3. Hong Kong
10.1
10.2
12.0
9.2
8.8
10.8
10.8
11.4
14.4
17.6
4. Japan
9.2
10.2
8.8
7.2
8.5
10.4
9.3
8.9
9.6
11.5
5. P.R. China
2.8
3.3
4.0
4.0
3.9
5.3
5.3
6.8
10.1
15.3
6. Thailand
6.8
7.0
5.7
4.2
5.0
5.8
5.3
5.7
6.1
7.7
7. Korea
3.2
4.7
3.6
2.5
3.5
4.9
4.6
5.2
6.0
7.3
8. Germany
4.0
3.8
3.6
3.3
3.2
4.2
4.2
4.0
4.4
6.2
9. The Netherlands
3.1
2.8
3.0
3.7
3.8
4.0
4.0
4.3
4.6
5.4
10. Australia
2.6
2.8
2.9
3.1
3.1
3.2
3.1
3.3
4.6
6.6
Total exports
118.2
125.1
125.3
109.8
114.7
137.9
121.7
125.0
144.1
179.4
1. Malaysia
19.3
19.7
19.9
15.6
17.2
22.8
20.0
21.2
21.5
24.9
2. US
18.7
21.5
22.3
18.7
19.0
20.2
19.1
16.6
18.0
20.7
3. Japan
26.3
23.8
23.2
17.0
18.5
23.1
16.0
14.5
15.3
19.0
4. P.R. China
4.0
4.4
5.6
4.8
5.6
7.1
7.1
8.8
11.0
16.2
5. Thailand
6.4
7.1
6.8
4.8
5.2
5.8
5.1
5.4
5.5
6.7
6. Korea
5.4
4.8
4.1
3.0
4.1
4.8
3.8
4.3
4.9
6.9
7. Germany
4.3
4.7
45
3.4
3.6
4.2
3.8
3.9
4.8
5.6
8. Saudi Arabia
3.8
4.9
5.3
3.2
3.2
4.3
4.2
3.8
3.9
5.0
9. Hong Kong
4.1
4.2
3.9
2.8
3.1
3.5
2.7
2.8
3.0
3.6
10. The Philippines
1.1
1.3
1.9
2.3
2.9
3.3
2.5
2.5
2.8
4.2
Total imports
124.4
131.3
132.5
101.6
111.0
134.6
116.0
116.4
127.9
162.9
Source: Asian Development Bank (ADB)—key indicators 2005 (http://www.adb.org/statistics) May 2006.
US$ 31.5 billion, increased by 48.6%, accounted 9.2% of Singapore’s total trade, while in 1995,
it was only 2.8%. In 2004, China-replaced Hong Kong became Singapore’s fourth largest trading
partner after Malaysia, US and Japan. The year of 2004 also marked that the sum of trade volume
of Singapore with China and Hong Kong over passed Malaysia, making Singapore’s first largest
market, and this change only happened within less than 10 years.
Imports of Singapore from China show another facet of its trade relationship with China, the
increasing complementarity. More often than not, Singapore recorded a trade deficit with China
in the past 10 years. China’s diversified resources, products and technology became Singapore’s
important supplier in consumption goods and in production parts (Chew & Liu, 1998).
2.4. The composition of Singapore’s exports to China
The composition of Singapore’s major merchandise exports to China from 1990 to 2000 indi-
cates that machinery and transport equipment have taken over minerals fuels, lubricants and
related materials (petroleum, petroleum products) as the top exports (see Table 8). As can be seen
in the table, electrical machinery, apparatus and appliance have accounted for about a quarter of
Singapore’s exports to China in 2000, a tremendous increase compared to 1990. This may seem
surprising as Singapore firms are investing in China and China is gaining importance as an attrac-
tive production base for electronics products. However, from the data, China is also demanding
electronics components from Singapore. According to an article by the Ministry of Trade and
Industry (Loy, 2001) (MTI Singapore), China imports a large part of the electronic components

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Y. Liu / Journal of Policy Modeling 29 (2007) 505–522
513
Table 8
Singapore’s major merchandise exports to China (1990 and 2000)
SITC categories
Export share (% of total exports to China)
1990
2000
7—Machinery and transport equipment
16.0
57.8
77—Electrical machinery, apparatus and appliance
1.8
25.6
75—Office machines and automatic data processing
1.3
19.5
3—Mineral fuels, lubricants and related materials
39.4
14.0
33—Petroleum, petroleum products and related materials
39.0
13.2
5—Chemicals and related products, n.e.s.
15.0
14.5
58—Artificial resins, plastic materials and cellulose esters
9.5
7.7
8—Miscellaneous manufactured articles
3.3
6.1
6—Manufactured goods classified chiefly
4.9
4.5
Source: World Trade Analyzer CD-ROM and authors’ computation.
that it uses, thus Singapore’s exporters can benefit from the growth of electronic components
industries in China. The article pointed out that China imported a total of US$ 14 billion worth of
semiconductors in 2000, and only exported US$ 3 billion worth of semiconductors. Even though
Singapore’s exports of end products are dwindling, Singapore can play the role of a supplier
of sophisticated, highly specialized electronic components to firms involved in other electronics
production in the region, especially in China. The rise of the electronics industry can also benefit
Singapore’s domestic exports of chemical products for used in electronics manufacture.
2.5. The potentials of China’s WTO entry and future FTA to exports of Singapore
Facing the emerging Chinese economy, one major concern of the Asian countries was that
the rising China could become a threat to other countries politically and economically. Recent
development in the relationship between China and Asian countries, however, shows a very
different trend. The strong demand for investment and consumption in the fast growing Chinese
economy is appearing as a leading force to turn the economies of neighboring countries from
stagnation or downturn to a rising trend. The fast increase of exports of Japan, Malaysia, and
Singapore to China in recent years all shows the signal. The “world largest market” is functioning.
With China’s WTO entry and the on going progress of FTA between China and ASEAN coun-
tries, the impact of China’s tariff reduction and trade restriction removal on trade and investment
could be substantial to the related countries. To examine the effect of the policy and institutional
change of China on specific industries in Singapore economy, a model of Singapore’s exports
related to exchange rate, China’s tariff reduction and time trend is estimated using the SITC data
for the period of 1987–2000.
EX = a0 + a1ER + a2TR + a3YEAR + u
(2)
where EX = Singapore’s exports to China (US$), ER = exchange rate between Chinese Yuan and
Singapore dollar, Chinese Yuan/S$, TR = China’s import tariff rate, average tariff rate in a specific
industry (%).
Tariff and exchange rate are two of the many factors that influence trade. This model allows
us to analyze the effect of changes in the two variables on trade. According to economic theory,
both tariff and exchange rate share an inverse relationship with trade value. Therefore, the sign of
parameter of both tariff and exchange rate should be negative. Another variable added to our model

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Y. Liu / Journal of Policy Modeling 29 (2007) 505–522
Table 9
Tariff effects for different products in China market from Singapore (1987–2000)
Products
N*
a2
Primary goods (SITC 0, 1, 2, 3, 4)
168
−732.63 (−1.88)
Food and beverages (SITC 00–12)
72
392.32 (2.26)
Crude materials (SITC 21–43)
96
−2537.54 (−2.49)
Manufactures (SITC 5, 6, 7, 8, 9)
210
−602.82 (−1.56)
Chemical and related products (SITC 51–59)
54
60.31 (0.15)
Basic manufactures (SITC 61–69)
54
−153.08 (−2.30)
Machines and transport (SITC 71–79)
54
−636.27 (−2.33)
Miscellaneous manufactured (SITC 81–89)
48
−168.58 (−2.54)
Note: N is the number of observations; due to the conversion from Harmonized System to SITC code and the difference in
general tariff rates, the number of observation is not following the pattern that within each year there are five observations
(for SITC 0, 1, 2, 3, 4). Estimators are tariff’s coefficients; numbers in the parentheses below the estimators are t-values.
is the year variable. This variable helps to account for changes in trade value that is attributed to
economic factors other than tariff and exchange rate.
Within the primary sector, there are five individual industries. Hence, four dummy variables
are introduced into the model. Dummy variables help to capture effects that are due to changes
in any industries within the primary sector. Three dummy variables are also introduced to the
manufacturing sector model for the same reason. The results are presented in Table 9. The results
show that Singapore is benefiting substantially in all manufactures with a rate from US$ 153,080
to 636,270 for each site two-digit item for 1% tariff reduction in China, and the current average
tariff of China is 11.3%. By the end of fifth year of China’s WTO entry, the average tariff rate
of China should fall to 9%, while once the China-ASEAN FTA is established in 2010, the tariff
will be removed completely. The biggest effect is for the large item of crude materials, which is
Singapore’s refined oil exports. If the tariff is eventually removed completely, the total stimulation
to Singapore’s exports will certainly experience a big impact.
2.6. Singapore investment in China
To develop the second wing of economic growth was one of the few strategies of Singapore since
late 1980s and early 1990s. China became one of the major destinations of Singapore’s investment
due to its abundant labor and land and the huge market potential. As at end of 2003, China is still
Singapore’s top investment destination, with total effective direct investment reaching US$ 24.4
billion,4 being a major investor in China after Hong Kong, Taiwan, US and Japan. Singapore’s
investment in China mostly went into manufacturing and real estate (Tables 10 and 11). More
specifically, according to China Development Gateway, major areas of Singapore’s investment
include machinery manufacture, industrial and agricultural production and food processing, rubber
production, textile, electronic, steel, real estate, etc.
Trade and FDI have traditionally been seen as alternative means of transferring goods and
services across countries. Outflow of capital is often viewed as a negative factor to home economy.
Recent literature, however, points out that these two activities could be interlinked either ways
as substitutes or complements (Helpman, 1984). Some imperial works also tried to integrate FDI
into the trade relationship. China’s case shows that imports are positively linked to FDI inflows,
4 Lianhe Zaobao, News, March 2, 2004.

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Document Outline

• Facing the challenge of rising China: Singapores responses
  • Introduction
    • The background of Singapore economy
    • Recently appeared problems
    • Challenges and opportunities with the rise of China
  • Challenges and opportunities to Singapore facing the rising China
    • Competition in world export market
    • Competition in attracting FDI
    • Increasing importance of Chinas market to Singapore
    • The composition of Singapores exports to China
    • The potentials of Chinas WTO entry and future FTA to exports of Singapore
    • Singapore investment in China
  • The responses of Singapore facing rising China
    • International policies
      • Setup Free Trade Agreements to maximize all potentials in export opportunity
    • Establish regional cooperations to overcome the constraint of being small in size
    • Internal policy changes
      • Restructure industries to increase competitiveness
      • Increase investment in new industries to foster comparative advantages
      • International talent policy
      • Reforming the education system adjusting to a knowledge-based economy
      • Cut business cost to maintain Singapore competitive
      • Special policies to develop Chinas market
    • Impacts of the policy change and implications
      • Impacts on economic structure
      • Possible impacts on income distribution and social security system
    • Different views
  • Concluding remarks
  • Acknowledgements
  • References

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