US-Singapore Free Trade Agreement and Trade in Pharmaceuticals

Abstract

As the first free trade agreement between the United States and its Asian trade partners, the US-Singapore Free Trade Agreement (USSFTA) that came into force in 2004 has played a critical role in the bilateral pharmaceutical trade between the US and Singapore. This paper investigates the effects of USSFTA on trade volume between the US and Singapore, domestic employment in the US pharmaceutical industry, and the price of US pharmaceutical goods. The paper also tests how well the estimates match classical and neoclassical trade theories. The effects on trade volume are estimated by Difference-in-Differences (DID) and Ordinary Least Square (OLS), and the effects on employment and price are estimated by OLS. USSFTA increased the US pharmaceutical imports from Singapore but did not meaningfully impact the exports. Although the USSFTA did not lead to a statistically significant reduction in pharmaceuticals’ price in the US, it is associated with higher employment in the US pharmaceutical industry. The estimates on trade volume, especially imports from Singapore, are consistent with the theory of comparative advantage, but the estimate of employment contradicts trade theories. The violation of trade theories implies that demand-side factors may be more important for the employment variable. This paper evaluated the effects of USSFTA on several important economic variables. Further research may be required to fix potential endogeneity threats and to present both the short-term and long-term effects.

Keywords: US-Singapore Free Trade Agreement, pharmaceuticals, trade volume, price level and employment, trade theories