The Impact of Global Industrial Policies on Singapore’s Economy

Laying out the steps for Singapore's economic future in an age of volatility and fragmentation.

Introduction to New Industrial Policies

Industrial policies have been making a comeback onto the global stage, especially in the wake of the climate crisis, post-pandemic economic downturns, and geopolitical tensions - all of which have led governments to adopt a more active role in resource allocation in order to protect supply chain resilience, and on a more macro level, economic and national security. Key examples stretch from China’s ‘Made In China 2025’ programme seeking to support domestic high-technology industries to Thailand’s ‘Thailand 4.0’ development plan focusing on developing the nation’s Eastern Economic Corridor into an investment-attracting zone with high-quality human resources, and the EU’s ‘Horizon Europe’ boosting regional competitiveness and growth while achieving the UN’ SDGs and climate change targets.

These substantive targeted interventions have not only become more pervasive, but have also shifted significantly in the reach of the policies; industrial policies were previously largely domestically-oriented, but with the development of a globalized trade network, policies have manifested extensive effects beyond the boundary of national markets, and into the cross-border flows of goods and services. Structurally, new industrial policies have transformed from the common import tariffs of the past to trade financing, state loans, financial grants, local sourcing, capital injection and equity stakes, tax relief, and anti-dumping measures. 

New industrial policies can thus be qualified as government policies directing resource allocation towards domestic firms, industries or activities that market forces fail to promote in a socially efficient way, encouraging the development and growth of the economy in pursuit of both economic and non-economic public goals, with direct domestic and far-reaching international consequences. 

It is thus imperative to examine these consequences, specifically upon Singapore’s economy and people, and seek a suitable direction for Singapore’s economic and policy action. 

Effects Of Global Industrial Policies And Suggested Responses For Singapore

Any major industrial policy implemented in the modern globalized economy, be it by advanced economies or emerging markets, has major trade spillover effects due to changes in comparative advantage and other forms of market or trade distortion. The current oversight in industrial policies is twofold. New industrial policies displays a grave lack of coherence since many economic conceptions and tools are simultaneously in use; additionally, a proliferated culture of layered policies creates a complex web that poses challenges for restructuring without disturbing interdependent frameworks. Hence, Singapore navigation to protect its economy and maintain competitiveness in the new era of global industrial policies has to take a multi-pronged approach, executing policies and plans and working towards objectives faithful to the nations' foundational economic goals. Amidst these global developments, there are stakeholders' interests from enterprises, sectors, investors, and consumers that must be protected with the involvement of government and non-government agencies, such as statutory boards, economic groups and regional collaborations to successfully safeguard Singapore's economic interests.

Domino Effects Of Retaliatory Policies And How Singapore Can Mitigate Them

The issue with industrial policies lies in their impact beyond national markets - in the international scope of affairs, an industrial policy targeting an import-competing sector pushed by one country in order to boost domestic production and curtail imports in an import-substitution strategy risks triggering a domino effect of retaliatory policies from other countries. Recent data for the US, EU and China exhibit that on average, there is a 74.8% probability where a subsidy for a given product by one major economy is met with a subsidy for the exact same product by a competing economy within a year.

Fortunately, insofar as the impact of foreign policy moves inducing counteractive industrial policy equivalents, Singapore has long had its own industrial policies independent of responsive governmental actions such as ‘Design 2025’, ‘Manufacturing 2030’, and various other boosts to biotechnology and fintech sectors. Singapore has traditionally been lauded as a successful example of non-retaliatory, independent industrial policy application, and must continue in this course. Granted the sufficient protection of Singapore’s economy under the 1996 CADD, engagement in unnecessary retaliatory approaches will only serve to disadvantage Singapore’s economy, and the Economic Development Board (EDB) should strictly avoid this approach.

However, retaliatory measures amongst other countries still implicate Singapore’s trade in the global economy. Singapore should thus utilize her position as not only a non-G20 advanced economy actively engaged in the WTO but also a regional power within ASEAN to enhance multilateral cooperation in order to prevent governments from engaging in detrimental countervailing actions, which can rapidly down-spiral into subsidy wars.

Furthermore, empirical trends suggest that retaliation-inducing industrial policies are mostly sectorial subsidies implemented independent of past export performance. Singapore should thus encourage fellow nations to remain grounded in selecting industries to nurture. This, however, has to take a balanced approach rather than opting for models which only favor the most immediately lucrative industries and thus distort the pattern of potentially lucrative industries.

Trade Distortion As A Result Of International Industrial Policies

Of nearly 2500 industrial policy interventions last year, more than 66% were trade-distorting as they compromised foreign economic interests.  

Thus, Singapore’s sagacious refrainment from being drawn into the tit-for-tat whirlpool of retaliatory industrial policies does not signify that Singapore is insulated from global industrial policies; the essence of global industrial policies themselves is set to largely negatively impact Singapore - with the allocation of resources within markets, and the allocations of resources away from Singaporean markets, our FDI-centric, trade-driven nation is placed in a vulnerable position. 

Export controls on raw materials could heavily impact the production-based portions of the Singaporean economy, with a pertinent example being Indonesia's 2018 ban on palm oil exports in a bid to stabilize local prices and promote domestic processing, which led to a disruption in Singapore's supply chain and imports, affecting core industries such as food processing, hospitality and biodiesel production. Similar effects erupted in the wake of China's industrial policies and the imposition of quotas on the export of rare earth elements (REES). Intending to distribute these resources towards domestic clean-energy and high-technology sectors, as well as aiming to increase profit by the REES processing sector rather than the prior focus upon rare earth elements exports, China's cut of export quotas by 35% in 2011 led to supply shortages, increased costs and disruptions in the supply chain for Singaporean industries. For a country that relies heavily on REES for its electronics manufacturing industries and high-technology businesses, the detriments were indubitably severe since the competitiveness of local firms was impacted, causing both job losses and reduced investments.

While at times industrial policies may be implemented to reduce reliance on countries other than Singapore, our economy is still indubitably affected. In the semiconductor industry, key players have been using industrial policies to pivot towards prioritizing domestic production in upholding national security given the critical nature of such industries. For instance, Japan provides over $500 million worth of subsidies to 57 Japanese companies, encouraging them to invest domestically as part of its efforts to reduce reliance on China. However, as a nation hinging upon semiconductor production and distribution to attract chip investors, Singapore stands to be tangibly affected as an unfortunate byproduct - the overwhelming influx of incentives and intra-Japan production development could lead to an oversupply of semiconductors, drawing needs away from Singaporean exports. With the wait-and-see attitude oft-adopted by investors in such industries, there would be a decline in attracting FDI. Subsequent fall in price would then extend a multi-decade trend of dwindling semiconductor prices, a loss which one of Singapore’s most lucrative  industries and businesses within would be unable to absorb. 

Singapore is recommended to strengthen herself as a promising mediator for foreign investors looking for opportunities in Asia, fostering both investor confidence and overall activity into the region through its development as an economic hub with a strong, highly skilled workforce. To that extent, economic regionalisation is also a promising consideration. In the scenario of drastic FDI decline, this external wing of the economy will counterbalance the vulnerability of the local economy by relocating low value-added and labor-intensive production. The increased linkages between domestic industry clusters and regional development projects would also benefit domestic firms, potentially allowing some sectors to achieve economies of scale.

Increased Competition And Siphoning Of Trade Opportunities

Beyond nationalistic trends, net zero transitions and heightened environmental protection rules have also played a part in inducing global industrial policies. The EU, specifically, has placed sustainable green initiatives at the forefront, leading to promulgation of the relevant regulations and regional actions in the European Council’s 2020 industrial policy package and the previously mentioned ‘Horizon Europe’. By virtue of boosting the EU’s industrial competitiveness and encouraging greater reliance on internal production, the trade opportunities are thus siphoned away from other international stakeholders, including Singaporean industries and businesses.

Singapore must bolster its own economy to ensure continued competitiveness. The next decade bears immense growth potential which Singapore must seize, given the post-COVID opportunity window which has reinforced the shift of markets to Asia. Singapore should endeavor, through strategic combinations of government and private initiatives, to maximize economic growth and establish itself as a regional trade and investment hub.

A More Positive Outlook: The Creation Of New Opportunities In A New Global Economy 

In some fortunate instances, industrial policies implemented by other nations open opportunities for Singaporean enterprises. An example illustrating this would be Australia’s imposition of the 2009 ‘Nation Building and Jobs Plan’ focusing on domestic development, which generated a simultaneous demand for related goods. Singaporean construction firm Tat Hong was thus able to benefit from the demand for cranes and equipment for Australia’s construction projects, even though policy restricted manpower to being drawn from Australian nationals only. 

Singapore’s value proposition must therefore be strengthened, both in the success of its economic stakeholders and quality of labor force. Companies must also be supported in expanding to capitalize upon overseas opportunities when they do arise.

In Looking At Singapore’s Own Industrial Policies And The Future Of The Nation’s Economic Policymaking

It is imperative for Singapore to grasp opportunities created by the rising demand for services in China, ASEAN, India and beyond. While other countries may eventually catch up, at the present moment Singapore is advantageously positioned with sound government financing and a strong economy. What we must strive to ensure is the rise in productivity of our sectors, and resilience to all the faults of global industrial policies as outlined above. Fundamentally, Singapore should seek to uphold its safety and security given the increased premium which international stakeholders are placing on jurisdictions providing stability and safety in the current volatile climate. The government, while unable to prescribe which industries or companies should grow, can work in continuation of its existing approach of undertaking some form of market intervention, and provide the right price signals, in forms such as levies or grants, to enable market forces to reallocate scarce resources to where they can be most productively used. 

There are several aspects to focus upon in government-catalyzed economic restructuring: developing local entrepreneurship and bolstering Small and Medium Enterprises (SMEs) development, supporting Singaporean businesses looking to venture abroad, investing in the fundamentals to increase workforce productivity, and forging deeper inter-sectoral and inter-organisational strategic partnerships. 

From A Macro-Outlook: Engaging Actively And Leading Productivity In High-Value Sectors

Singapore’s core economic interests as set out in the Economic Strategies Commitee’s latest report lie in supporting innovation and skilled labor, piloting and scaling transformative solutions, catalyzing investment in growth enterprises and supporting companies in their effort to internationalize. Singapore should thus remain and increase engagement in G3 markets with its role as a key global center for high value manufacturing and services, while seeking to raise its priority in those sectors through investing ahead in the foundational elements pivotal to Singapore's prosperity: prioritizing high-caliber education, sophisticated skill-sets, robust research capabilities, and the infrastructural and connective attributes inherent to a cosmopolitan hub. 

The EDB should also streamline and improve existing industrial policies; existing industrial policies can be categorized into three branches: policies that improve local labor force quality, policies focused on industrialisation and the global economy, and policies focused on developing and sharing technological advancements. 

Developing SMEs, Emboldening MNCs And Maximizing Cross-Organizational Mutual Benefit

Singapore must grow a resilient and diverse ecosystem of local companies with the potential to become leaders in the Asian economy. The government must encourage firms to expand abroad to grow high-value activities in Singapore while relocating lower cost activities overseas, creating and retaining more high-value jobs in Singapore. Developing SMEs with the potential to expand abroad are critical to this aim, but are currently facing difficulties in maintaining sustainable growth and in cross-border financing capabilities. A 2023 Singapore Chinese Chamber of Commerce & Industry (SCCCI) survey found SMES foreseeing rising business costs, shortages of suitable manpower, inflationary pressures, geopolitical uncertainties, and a slowdown of global and regional economies. In an economic climate where SMEs heavily rely foreign syndicated loans, bond issuances in international markets and other heavy borrowing from foreign institutions, the financial structures of local firms become highly leveraged and vulnerable to external shocks. SMEs such as Creative Technology and Aztech have accessed foreign financing for research and development, product innovation, international expansion initiatives, manufacturing investments, and technology upgrades. Herein, a distinction should be made between FDI and foreign loans - the former is significantly safer to draw upon than the latter, and should continue to be encouraged to develop Singapore into a global investment hub.

The EDB should increase loans or subsidies to emerging local businesses in order to reduce their reliance on foreign loans and enable their growth, helping the market plug gaps in cross-border financing. It should extend schemes due to lapse in March 2024, such as the SME Working Capital Loan and Trade Loan. The maximum loan quantum under the Enterprise Financing Scheme should also be raised for high-growth SMEs. Funding can be drawn via public divestment in sectors which have been phased out, and reinvestment of funds to stimulate SME growth within key sectors to adapt to the evolving markets and global economy. An increase in the corporate tax rebate threshold (currently standing at 50% and capped at $40,000) as per Budget 2024 can potentially also aid SMEs. Since companies not profiting each year risk being left out of the scheme, the existing system allows companies that “employed at least one local employee in 2023” to receive a minimum of $2000. However, companies struggling to break even or profit are unlikely to be sourcing additional manpower, and thus there should be greater accommodation for such SMEs requiring financial support under the national budget.

Beyond pumping of funds, SMEs also require support in terms of entrepreneurship resources. This can come in the form of encouraging mergers and acquisitions of SMEs forming stronger organizations, and the Ministry of Trade and Industry (MTI) should allow for tax deduction of acquisition costs as an incentivising factor. The EDB should further promote alliances between large and small players to promote technology transfer, test-bedding and commercialisation. The partnerships will help SMEs develop capabilities in the local market through transference of technology and industry capabilities which they can then deploy abroad; the arising network supply chain relationships will also benefit the larger MNCs and help root them in Singapore, where they can help plug Singapore into developed country markets which will remain sizable for the near future, and develop Singapore as a pan-Asian management operations hub. Governmental encouragement of strategic mutual dependencies -investment between MNCs, Asian enterprises, global mid-sized companies and other Singapore-based enterprises to exploit external economics arising from subcontracting relations and strengthen the industry cluster ecosystem.

Policies For A High-Value Workforce Maximizing Local Productivity And Attracting FDI

A high-value, highly-skilled workforce is integral to maximizing the efficiency of local labor and thus boosting local industries or shaping conditions critical attracting FDI - indeed, the solution to the current overall need for greater productivity cannot be met through the expansion of the labor force but must rather be reached via the upskilling of local workers. While existing upskilling programmes exist under SSG and WSG, there lacks a clear incentive for employers to fully utilize these programmes rather than the more convenient option of utilizing foreign talent. 

The Ministry of Manpower (MOM) should progressively raise foreign worker levies, to incentivise companies to invest in improving productivity. The Central Provident Fund (CPF) Board should increase amounts provided under the WIS scheme to encourage continued employment and upskilling of the local workforce. This will also ensure that our economy’s dependence on the foreign workforce over the long term does not grow inexorably. Simultaneously, Singapore must raise the quality of the foreign workforce, to give employers incentives to retain experienced and skilled foreign workers. 

Moving Towards Ensuring An Adaptable And Growing, Resilient And Thriving Singaporean Economy

In conclusion, it is only through strategic evolution of domestic policies, governmental engagement in providing signals for the market, and cross-sectoral collaboration that Singapore can thrive in an era of emerging volatilities, global industrial policies, and economic competition. Governmental agencies must act in tandem with research institutes, statutory boards, public and private enterprises to shape Singapore into a resilient, attractive and lucrative system.

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