Child’s guide to UK’s trade concessions to developing countries

Aseni, whiz kid interested in learning everything economic, has heard of the announcement by the UK government to facilitate trade between the UK and developing countries through a new trade concession titled Developing Countries Trading Scheme, abbreviated as DCTS, (available at: https://www.gov.uk/government/publications/developing-countries-trading-scheme-dcts-new-policy-report/developing-countries-trading-scheme-government-policy-response) and that Sri Lanka is one of the beneficiaries. She asked her grandfather, Sarath Mahatthaya, an ex-employee of the Ministry of Finance about this new scheme. The following is the conversation between them.

Now Sri Lanka is facing a serious economic crisis. It does not have any foreign exchange left with it to maintain even the minimum import program needed for industry to continue in production and people to satisfy their basic needs like transport, foods, medicines, energy, etc. So, it should export more to earn foreign exchange. Since Sri Lanka cannot curtail its imports from India and China without compromising those needs, it should cut the trade deficit with them or increase exports to the Western block. The former is a near impossibility. But it can follow the latter by increasing exports

Aseni: Grandpa, there are media reports that the UK government has announced a new trade facilitation package for developing countries upgrading its Generalised System of Preferences or GSP. Media had claimed that Sri Lanka has been one of the beneficiaries. What is this new scheme?

Sarath: Since around early 1970s, the developed world had been supporting, under the auspices of United Nations Conference on Trade and Development or UNCTAD, the developing countries to promote their exports by offering tariff concessions so that they can have access to their markets competitively. The US has the Generalized System of Preferences or GSP (available at: https://ustr.gov/issue-areas/trade-development/preference-programs/generalized-system-preference-gsp) to “provide opportunities for many of the world’s poorest countries to use trade to grow their economies and climb out of poverty”. Sri Lanka is one of the beneficiaries and, in this connection, the US government had presented a briefer in 2012 and a presentation in 2019 outlining how Sri Lanka could benefit out of this scheme. The beneficiaries can have access to the US market at zero tariff for some select commodities. 

Similar to the US scheme, the European Union or EU too had a trade concession scheme targeting the low-income countries. That scheme had two windows, one titled Generalized System of Preferences or simple GSP and an advanced system called GSP plus. You can access to the latter at https://trade.ec.europa.eu/access-to-markets/en/content/generalised-scheme-preferences-plus-gsp. But this scheme had been linked to ‘helping eligible countries attain sustainable development, while improving good governance’. The countries receiving this facility have to implement 27 international conventions relating to human rights, labour rights, the environment, and good governance. The 27 international conventions relating to these four categories have been attached as a condition for this facility to ensure quality economic development in the target countries. In addition to Sri Lanka, there are six other countries which have been admitted to GSP plus. However, this GSP plus is valid only till the end of 2023 and EU will replace it with another scheme if the need for it remains undiminished. 

The UK government also had a scheme similar to EU’s GSP to help developing countries have market access in the UK. This has now been replaced by DCTS after consultation with key stakeholders. Sri Lanka is a beneficiary of this new scheme as was the case with the previous scheme. 

The development of countries through trade and not through aid is a sustainable method of improving the welfare of the people of the world. 

Aseni: Why should Sri Lanka do trade with this block of countries, USA, UK, and EU? Why can’t it do trade with other countries, say, India and China?

Sarath: That is a good question. A fundamental rule in marketing is that one should sell his ware where the market is. This is common even to a small trader. Imagine a small trader who carries his leafy vegetables for sale in a box attached to a push bicycle. He will hang around houses where there are people who will buy his leafy vegetables. This rule is applicable to a country too. The market for goods that are being produced by Sri Lanka is in countries with high incomes. That block is USA, UK, and EU. 

Many years ago, Singapore’s miracle maker Lee Kuan Yew faced this choice as he has revealed in the Volume II of his autobiography, From Third World to First. He had been advised by those who had been around him that he should do trade with the two large neighbours – Malaysia, and Indonesia. But both of them were poor countries like Singapore. Hence, he chose a strategy called ‘leap frogging’ in which he jumped over these two neighbours to the West. That strategy paid him dividends and within a generation, Singapore became a rich country. 

Sri Lanka’s main export market is in this block of countries. Its exports to this block are more than the imports from them. As a result, Sri Lanka had been maintaining a trade surplus with them continuously. For instance, during 2017 to 2021, Sri Lanka had on average an annual trade surplus of $ 2,432 million with USA, $ 682 million with the UK, and $ 1,571 million with EU. The total annual trade surplus with them was $ 4,685 million. 

In contrast, Sri Lanka had had a trade deficit with China and India because its imports from this block were more than its exports to them. This does not mean that Sri Lanka should have a trade surplus with every country. A deficit with one country can be set-off with a surplus with another. During 2017 through 2021, Sri Lanka’s average annual trade deficit with China amounted to $ 3,845 million and with India, $ 3,339 million. The total had been $ 7,184 million annually. Of this deficit, 65% was financed out of the surplus it had with USA, the UK, and EU. Without that trade surplus, Sri Lanka could not have maintained its import program. 

Hence, the preferential trade concessions to be given by this block is very important to Sri Lanka. 

Managing the local politics is a gigantic task. This divergence between what is done and how it is perceived by society should not be there. That gap should be eliminated if Sri Lanka is to prove to the rest of the world that it is sincerely following those international conventions. There comes the more serious challenge of managing geopolitics

Aseni: Is it automatic or are there conditions which Sri Lanka should satisfy to get it from the UK government?

Sarath: It is not automatic. Following GSP plus from EU, Sri Lanka should satisfy that it has effectively implemented the 27 global conventions which EU has stipulated for extending that facility. These 27 conventions can be classified under four main areas, namely, maintaining human rights, adhering to labour rights, the protection of the environment, and observance of good governance. Sri Lanka is a signatory to these conventions and therefore they are not planted on it from outside. But the present Government run by President Ranil Wickremesinghe should satisfy the UK government that they have been effectively implemented. This is not an easy task because those outside authorities should be convinced that Sri Lanka Government is serious in its commitment to implementing them. Mere words of promises will not help it. 

Aseni: But isn’t it unfair for these governments to attach conditions of human rights, labour rights, environmental factors, and good governance requirements to concessions to be extended to poor countries?

Sarath: As I mentioned earlier, these are international conventions which the whole world has agreed to follow to improve the quality of life of people. Human rights are fundamental to a quality life. They all have been proclaimed by the United Nations as inviolable natural rights of people. Following them, Sri Lanka also has codified them in its Constitution. Hence, what Sri Lanka should do is to show by deed and not by mere word that it is respecting these rights. It is not an unnecessary burden or intervention of the sovereign rights of a nation. In this respect, Sri Lanka as well as the global community is in the same wavelength. 

But Sri Lanka faces a different issue now. 

Aseni: A different issue? What is it?

Sarath: Now Sri Lanka is facing a serious economic crisis. It does not have any foreign exchange left with it to maintain even the minimum import program needed for industry to continue in production and people to satisfy their basic needs like transport, foods, medicines, energy, etc. So, it should export more to earn foreign exchange. Since Sri Lanka cannot curtail its imports from India and China without compromising those needs, it should cut the trade deficit with them or increase exports to the Western block. The former is a near impossibility. But it can follow the latter by increasing exports. 

Since foreign exchange is so valuable to the country, it will have to prove to them that it is serious in adhering to those international conventions. They include freedom of choice, freedom of assembly, freedom of thought, and freedom of expression. These are what the intellectuals of the country and the youth that have been protesting the Government have been demanding. Therefore, the problem faced by the Government is management of both local politics and global politics. This is not an easy task. 

Aseni: Why do you say that it is not an easy task? I thought that since the Sri Lanka Government led by President Ranil Wickremesinghe has reiterated that it is for respecting those rights, it can easily fulfil the requirement. 

Sarath: There is a big difference between what is said and what is done. It is true that the present administration has made that pronouncement. But what is being done in practice, according to outside observers, is far from the ideal situation. Hence, managing the local politics is a gigantic task. This divergence between what is done and how it is perceived by society should not be there. That gap should be eliminated if Sri Lanka is to prove to the rest of the world that it is sincerely following those international conventions. There comes the more serious challenge of managing geopolitics. 

Human rights are fundamental to a quality life. They all have been proclaimed by the United Nations as inviolable natural rights of people. Following them, Sri Lanka also has codified them in its Constitution. Hence, what Sri Lanka should do is to show by deed and not by mere word that it is respecting these rights. It is not an unnecessary burden or intervention of the sovereign rights of a nation. In this respect, Sri Lanka as well as the global community is in the same wavelength

Aseni: Sri Lanka is a non-aligned country, and it should remain so. I understand that Sri Lanka should play this non-aligned card properly but at the same time should seek economic support from different countries without antagonising others. Is it the problem that you are highlighting Grandpa?

Sarath: Yes, indeed. Sri Lanka is seeking a quick bailout from IMF. One of the preconditions for this bailout is that Sri Lanka should have a viable foreign debt restructuring program in place. In this exercise, Sri Lanka should get China on board to satisfy the other creditors. That is because, China as a rule does not approve of extending haircuts to its borrowers. Instead, it follows the policy of refinancing the existing loans so that the loan liabilities are just postponed.

For instance, it will give a new loan to Sri Lanka so that it can repay the old loan and get in its books a new loan which should be repaid as before. If this concession is extended to China, other creditors will demand that they should also be given the same under the principle of equal treatment. Hence, playing the non-aligned card is very crucial for Sri Lanka in its management of geopolitics. In other words, Sri Lanka cannot antagonise none but should seek the help of all. 

Following GSP plus from EU, Sri Lanka should satisfy that it has effectively implemented the 27 global conventions which EU has stipulated for extending that facility. These 27 conventions can be classified under four main areas, namely, maintaining human rights, adhering to labour rights, the protection of the environment, and observance of good governance. Sri Lanka is a signatory to these conventions and therefore they are not planted on it from outside. But the present Government run by President Ranil Wickremesinghe should satisfy the UK government that they have been effectively implemented. This is not an easy task because those outside authorities should be convinced that Sri Lanka Government is serious in its commitment to implementing them. Mere words of promises will not help it

Aseni: Have the human rights and good governance issues come up in the IMF bailout negotiations

Sarath: In a way, yes. The US Senate Committee on Foreign Relations has made an announcement that there should be three preconditions for any bailout package from IMF for Sri Lanka. They are making Sri Lanka’s Central Bank independent, observing the rule of law, and implementation of an effective anti-corruption mechanism. It has further said, I quote, “without these critical reforms, Sri Lanka could suffer further economic mismanagement & uncontrollable debt” and I end quote. These are essential features of those 27 international conventions which Sri Lanka should now follow to get the trade concessions from the UK government. Hence, it appears that both IMF bailout package and human right issues have been linked together. 

So far, there is no response from the Government to this pronouncement. It may be buying time, but that strategy will be very costly if it is brought to the forefront when the IMF Executive Board is to approve of the bailout facility. That is because USA and its allies have more than 50% of the voting power at the Executive Board. Hence, by following the 27 international conventions to the letter, Sri Lanka can kill two birds with one stone. That is, it can get the UK trade concessions as well as the IMF bailout. 

Aseni: I now understand the basic issue. Sri Lanka is no longer an island located in isolation from the rest of the world. When we deal with the rest of the world, either in trade or in geopolitics, we cannot take sides, on one hand, or ignore the crucial need for respecting human rights. This message should be conveyed to all those in the current administration. 

(The writer, a former Deputy Governor of the Central Bank of Sri Lanka, can be reached at [email protected].)