Can Sri Lankan domestic industries and service suppliers face up to Indian import competition?

Even without the accommodation of the asymmetry between the two countries, Sri Lanka should now be able to effectively compete with India. 

Sri Lanka now has nearly four decades of experience with an open economy compared to India’s two-and-a-half-decade experience

Following is an article by the Ministry of Development Strategies and International Trade to create awareness on how entering into trade agreements should be looked at objectively

The Ministry of Development Strategies and International Trade intends to make the general public aware on how entering into trade agreements should be looked at objectively, giving certain facts and figures and also bringing some case studies. 

In a previous article we presented how Sri Lanka is benefitted through India-Sri Lanka FTA (Free Trade Agreement).Then we elaborated how the Sri Lankan exporting entrepreneurs have been successful in the vast Indian market in the subsequent article although there are some non-tariff barriers in the Indian market that need to be addressed. This week we will look at how Sri Lankan entrepreneurs who cater to the domestic market have coped-up with competition from Indian imports to Sri Lanka. 

Frequently, the question is posed as to whether Sri Lankan local products can compete with Indian imported products and how imprudent it was to have a bilateral FTA with India. The next stage of the FTA that is the proposed, i.e., Economic and Technology Cooperation Agreement (ETCA) has been subjected to such statements.

Small country-large country FTAs

When an FTA is worked out between a small (or weak) and a large (or strong) country, the asymmetry between the two countries is normally accommodated in the regulatory framework governing the FTA. Such asymmetry accommodation is either based on granting non-reciprocity or Special and Differential Treatment (SDT) or a combination of both.

Many small countries have FTAs with larger countries as they are able to work out an arrangement to accommodate the existing asymmetries. Australia-New Zealand FTA, India-Thailand FTA, China-Pakistan FTA, etc., provide ample testimony for the existence of FTAs between small and large countries. Smaller countries also engage in RTAs (Regional Trade Agreements) with larger countries, for example, Mexico in NAFTA, Ireland in EU, Ecuador in MERCSOR, Maldives in SAARC, etc. Most often it is the small country that ends up as the winner under such arrangements. The example of Mexico in NAFTA can illustrate this point.

Mexico is much smaller than the US but turns out to be the biggest winner of NAFTA despite initial domestic scepticism. Prior to joining NAFTA in 1994, some people in Mexico argued that nascent and important industries would suffer, firms would lose to US competitors, unemployment will increase, etc. Twenty years later these sceptics were proved to be wrong. US imports from Mexico rose by 500%, more than twice as fast as imports from the rest of the world. US exports to Mexico also rose faster than exports to the rest of the world, many of these being product inputs needed by Mexican manufacturing industries, including the exporting sector that has a large foreign-value added component. 

Mexican exports are now $ 1 billion a day, more than 10 times their 1994 baseline; per capita income has increased by an average 1.2% annually, and Mexico is now the 13th largest economy in the world (http://documents.worldbank.org/curated/en/2015/01/23908853/opening-up-markets-neighbors-gains-smaller-countries-south-asia).

Accommodation of asymmetry between the two countries 

When Sri Lanka entered into an FTA with India, the asymmetry between the two countries was accommodated by India granting Special and Differential Treatment to Sri Lanka by allowing: (1) Sri Lanka to have a longer tariff phasing out period (eight years) compared to India (three years); (2) larger negative list (23% of tariff lines) compared to India (8% tariff lines); (3) more duty free access for Sri Lankan exports to the Indian market at the start of the agreement compared to a smaller number of Indian exports qualifying for duty free access to the Sri Lankan market, and so on. 

After extensive consultations, Sri Lanka managed to provide adequate protection to the small and medium industries (SMI) sector and kept the entire agriculture sector under its ‘negative’ list or the ‘reserved’ list of the FTA that was worked out.

With such regulatory framework governing the FTA, Sri Lanka was able to face Indian competition in the domestic market without much difficulty. For example, there were less complaints from the chillie, onion, and potato farmers in the agriculture sector, SMI entrepreneurs, and the cottage industry and they were able to withstand the competition from India without much problems.

Effectively facing competition from Indian imports

For bigger companies in the Sri Lankan market, competition from Indian products has been healthy – they have not only been able to withstand competition but also improve the quality of their product/services. 

A number of examples can be highlighted: (1) Plastic chair manufacturers like Damro have been able to compete with similar products from India; (2) Both Maliban and Ceylon Biscuits Ltd. (Munchee) biscuits have been able to effectively compete with comparable brands from India; (3) In the services sector, Dialog has been able to easily compete with Indian service providers which entered the Sri Lankan market; and (4) private hospitals like Nawaloka and Asiri were able to effectively compete with similar hospitals that entered the Sri Lankan market in 2002.

Moreover, competition improved quality of services. For example, the entry of Indian Oil Corporation (IOC) into the Sri Lankan market as a one-third shareholder of Ceylon Petroleum Corporation (CPC) has led to modernisation and improvement of services in the petrol sheds owned by the CPC. Even cottage industries producing joss sticks, beedi, etc., have been able to effectively compete with Indian imports of these corresponding items.

What these examples clearly show is that competition with India does not mean Sri Lanka getting swamped with Indian goods and domestic industries getting wiped out from the market. On most items that Sri Lanka competes with India, Sri Lanka has shown that it could effectively compete. The Government will also be passing anti-dumping legislation shortly. This will provide protection against unfair trade practices by Indian firms. In addition, safeguards can also be built into the proposed ETCA which will address disruptive import surges.

Some of the entrepreneurs seek additional protection for a temporary period and respective governments have accommodated such requests on a case-by-case basis by offering additional protection. Such protection cannot be given for a long period and it is necessary to make adjustments to face a more competitive environment in a future date. That the majority of Sri Lankan entrepreneurs are ready for more competition was clearly seen when the then Government signed the China-Sri Lanka FTA in mid-2013. In fact, most of the import substitution entrepreneurs have welcomed it.

Facing the challenge

Even without the accommodation of the asymmetry between the two countries, Sri Lanka should now be able to effectively compete with India. Sri Lanka now has nearly four decades of experience with an open economy compared to two-and-a-half-decade’s experience of India. Thus Sri Lankan producers have withstood competition from the world for a longer period compared to India. Thus Sri Lanka should consider the asymmetry between the two countries being accommodated in the India-Sri Lanka FTA as an additional bonus.

A country’s competitive power does not depend on its population or size; it depends on the strength and efficiency of firms that do business with the world. As the history shows, other than a few producers/service suppliers, the majority of Sri Lankan producers have proved that they could effectively compete with Indian products in the domestic market. Measures are also being introduced to ensure local firms can compete on a level playing field.