Reimagine Singapore as a trading hub

Singapore has long functioned as a trading hub for multinational corporations (MNCs). However, the fiscal certainties that have underpinned this model are under stress.

Unpredictable tariffs, increased pressures on supply chain resilience, and the introduction of a global minimum tax combine to exert significant challenges to established ways of doing business. For Singapore-based MNCs and policymakers alike, the questions are mounting.

Firstly, we are in an era of geopolitical trade wars, with punitive tariffs and restrictions on exports and imports emerging as key policy tools. What is most disruptive about these measures is their unpredictability, as they are frequently enacted to address geopolitical objectives, which may have little to do with trade considerations.

The immediate tariff actions of the US have been focused on Canada, China and Mexico, with the European Union possibly next in line. This has led to retaliatory measures against the US, either already implemented or threatened.

In addition to tariffs, export restrictions – such as those recently imposed on the most powerful chips coming out of the US, or those reported on semiconductor manufacturing equipment, rare metals, and even trained personnel from China – apply further pressure on the viability of many cross-border business models.

As an open economy, Singapore is acutely impacted, whether directly or indirectly, by trade and tariff measures wherever they are implemented. Companies based in the Republic should not underestimate the potential of such measures to undermine their business, and they need to plan for disruption.

Trading companies may suddenly find items they source and sell outside the city-state subject to tariffs. Manufacturers may find that export restrictions limit their ability to acquire components or equipment, regardless of whether production is in Singapore or elsewhere.

Indeed, it is not impossible to imagine a scenario where even products originating from Singapore may attract punitive tariffs, even in territories with which the Republic has a free-trade agreement (FTA).

Reassessing footprints

The pressures introduced by the threat of tariffs come at a time when the global minimum tax has already led many MNCs to re-evaluate the role played by their Singapore trading operations. For many, the high cost of doing business here has traditionally been offset by the tax incentives offered. The global minimum tax severely reduces the benefits of these incentives.

The new Refundable Investment Credit scheme is welcome, but it remains to be seen how valuable it may be. This has been a source of frustration to some MNCs, prompting a reassessment of their footprint.

Some companies are voting with their feet, scaling down their presence in Singapore and moving jobs back home, to low-cost centres of excellence, or into supply- or demand-side markets.

For others, the benefits of their trading hub still outweigh the costs – for now. The important question is: Will this remain the case in a tariff-laden environment?

The answer to this question will vary from company to company, no matter the industry. All companies will want to reassess their current set-up and understand the impact of tariffs on trade flows routed through Singapore.

At a tactical level, some may seek to reduce the incidence of tariffs by reducing the price at which they sell into customer end-markets. That would put a squeeze on the profitability of the trading hub and require some realignment of transfer pricing, operating models and, potentially, jobs.

At a strategic level, sourcing and supply chains could be reconfigured. If that results in domesticating or near-shoring supply to end-customer markets, it may call into question the value-add of a Singapore hub altogether.

In contrast, moving from sole sourcing to a diversified supply base may increase the rationale for a Singapore hub. The picture is therefore complex and nuanced.

In this fast-changing landscape, companies need to be fleet of foot. That does not mean aiming for perfection in predicting every new tariff or trade measure – that might be too much to ask in a world where the only certainty is uncertainty.

It is much more about understanding the quantitative and qualitative impact of a wide range of possible measures, and the short-, medium- and long-term options available to mitigate them.

Data-driven analysis is no longer a luxury – it is a business necessity. Impact assessment and scenario-planning must address questions such as: How much of a tariff can be absorbed instead of passed on to customers? Is there still a role for FTAs? Does the transfer pricing policy need to change? What are the alternative sources of supply? Should certain markets be prioritised over others? And how quickly can changes be made?

The strategic question sitting above all of that is, of course, whether the current business model remains fit for purpose.

Big policy questions

At the same time, policymakers are no doubt grappling with some big questions, seeking to understand the macroeconomic impact on Singapore and developing strategies to prevent the city-state from being caught in the middle.

They may also be thinking about what help they can offer companies as they adjust to new realities. For example, could the Refundable Investment Credit scheme be made more generous, perhaps linking tax credits to value-added outcomes rather than costs?

A further policy question now also looms large. Tariffs and trade measures have, predictably, spilt over to undermine the fragile consensus built by the Organisation for Economic Co-operation and Development around “base erosion and profit shifting”, tax competition and the taxation of MNCs.

Indeed, one of US President Donald Trump’s first executive orders was to withdraw US support for aspects of the global minimum tax. We can expect more disagreement in the months ahead on this and related matters, such as the threat of digital services taxes and the impact of “discriminatory income tax regimes”, to quote Trump.

If, under this pressure, the global consensus shatters, how might Singapore respond to regain its competitive edge? No options should be left off the table.

The writers are from PwC Singapore. Frank Debets is Asia-Pacific customs and trade leader, and Andrew Fairfoull is a tax partner.