Overlapping Free Trade Agreements of Singapore-USA-Japan: A Computational Analysis

The proliferation of overlapping free trade agreements (FTA) in the recent years has led to hub-and-spokes (HAS) throughout the world. Being avid subscribers to FTAs, many countries in the Asia-Pacific region including the USA, Japan, Singapore, South Korea, Thailand and Australia have become trade hubs to their partners who are in turn relegated to spoke status. In this paper, we question whether being a hub is welfare optimal for a small and open economy like Singapore compared to membership in a single bilateral FTA or a multi- member free trade zone. Within this context, we use a computable general equilibrium model to examine the welfare implications of the triangular trade relationship of the USA, Singapore and Japan. This is facilitated by the Japan- Singapore Economic Partnership Agreement, the USA-Singapore Free Trade Agreement, and a hypothetical USA-Japan Economic Partnership Agreement. The analysis is extended to incorporate “super-hub” effects; that is, the spoke countries can be trade hubs in other HAS systems. The experiment reveals that hub status generates positive welfare gain and is the highest Singapore can get from the trade configurations considered. Meanwhile, Japan loses more than the USA when both are relegated to spoke status. These findings prove robust under different market structures and production technologies, deeper economic integration, “super-hub” effects, as well as, uncertainty in the key model parameters and the extent of trade liberalisation shocks.