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In the recent past we have seen the media hype over the proposed FTA with China on the sidelines of CHOGM. This development is key given that Sri Lanka, Vietnam and Bangladesh were at just $ 2 b in exports way back in 1990 but today Bangladesh as surged to $ 47 b whilst Vietnam is leading the way at $ 98 b whilst Sri Lanka is struggling with a $ 11 b performance.
If one examines the key success factor of the two countries mentioned above, the FTAs signed by them accounted for a major share.
Given this background, the proposed FTA with China is an important milestone in the export agenda of Sri Lanka. But a point to note is to understand the key pick-ups from the last FTA that was signed with Sri Lanka, so that we ensure that the issues we faced will not be repeated in the FTA with China.
Consultation time
One of the key picks from the last FTA that Sri Lanka signed (the Indo-Lanka Trade Agreement): It was the first FTA that each of the countries had entered into and it was signed within four months with just four to five consultations, according to Professor Ranjan Ratna of the Indian Institute of Foreign Trade (IIFT).
Normally, a country of the stature of India takes a minimum of two years to reach a trade agreement with a country and at best a minimum of 20 consultations by the two parties are required. In some instances, even after six years of consultations like the India-Thailand FTA it has not been signed, which gives an indication of the depth of thinking required for the effective implementation of trade agreement.
This was cited as the biggest reason for the obstacles that the Indo-Lanka FTA was challenged with post the signature that includes the Vanaspathy debacle to cite just one issue. Whilst very strongly supporting the proposed FTA with China, the question is: have we picked up this key lesson from the last FTA that Sri Lanka signed?
The issue – after 10 years
When doing a deep dive of the Indo-Lanka FTA after 10 years of signature placing, some interesting developments were seen. Sri Lanka’s exports that had increased to $ 515 million by 2007 registered a decline to $ 324 million in 2009. When doing an in-depth analysis for this reason on the product mix performance, it was clear that the export performances were not reflective of the comparative advantage. Most of the exports were in fact taking place due to differential external tariff which was not sustainable.
The quota utilisation of the strategic products of Sri Lanka – tea and garments – was at a low ebb, with Sri Lankan exporters up against non tariff barriers by Indian authorities like Tariff Rate Quantities (TRQs), delays in custom clearance of cargo, port restrictions and necessity for several tests to be carried out in India even though certificates are provided by the relevant authorities which could be attributed to the depth of negotiation that had taken place between the two countries. That this must be carefully examined in the proposed FTA with China is a key pick-up.
Another point that comes out is that of the almost 2.7 billion dollars of imports that come in from India, a high 70% of them happen outside the FTA, meaning that even without the FTA this business would have happened. Hence, one can question the architecture of the Indo-Lanka FTA that was signed way back in 1998. Even if one discounts the petroleum products that were imported, which skews the import picture, the rest of the products imported can be due to trade diversion rather than real imports, which again is a pointer for the proposed FTA with China.
Another area that is being hotly debated is the investments that have come in from India. Almost 67% of the investments that have happened in the service sector would have happened anyway without the FTA. So what incremental investments have come in due the strengths of the FTA signed can be questioned. Whether we should take this point into account in the proposed FTA with China is another interesting pointer.
Why an FTA?
If we go back in time, the original objectives of the Indo-Lanka FTA were based on the premise of a study done on the Regional Comparative Advantage (RCA) and the FTA was to drive equitable trade between regional partners so that each country can benefit from the comparative advantages that one possesses in a country. The only obstacle to this end was the gradual removal of trade barriers over a period of time.
However, both countries had agreed on a list of products which was to be in the negative list together with a phasing out list and zero duty lists with a timeframe to achieve the end objective of freer trade between the countries. The question is, has this become a reality after 15 years after implementation?
We need to make sure that this will not happen in the FTA with China and maybe we must include as objective on the employment that must be generated due to expanding of business after the FTA with China. This objective must be at milestones of a five year, 10-year and then at 20-year time horizons. This is important given that Sri Lanka’s unemployment level is at below 5% and a great deal of planning will be required so that continuity of supply can happen for exports out of Sri Lanka. Below are some specific recommendations for the FTA with China.
1. Involve the chambers
Whilst the facts may not be as attractive on the Indo-Lanka FTA, one of the key lessons to avoid future issues was for the policy makers to involve the chambers and real exporters when formulating the guidelines. In the event this engagement takes place, the private sector which actually activates the FTA must be involved in setting targets on exports from a product and overall value basis. This can lead to joint evaluation by the country chambers of commerce on the activation and realisation of impact. One of the key questions of the private sector was the depth and extend of engagement has happened on the FTA with China with the private sector. If this has not then it can lead to a repetition of the issues that Sri Lanka has been up against on the Indo-Lanka FTA.
2. Objective – Diversity of exports
There is no point of an FTA if we are going to focus on the traditional export areas like tea, rubber and apparel in an FTA with a country like China. We must think of diversifying the export base and working on the value added portfolio, such as value added tea, cinnamon, gem/jewellery, apparel and rubber-based products. If not the net realisation from exports will not justify the opened trade to China imports, which is exactly the argument that people are presenting on the Indo-Lanka FTA.
3. Set up a Trade Secretariat
Given the many issues that the Indo-Lanka FTA encountered post signing, the private sector recommended that a proactive Indo-Lanka trade secretariat be set up so that many non-tariff barrier issues could be solved as a matter of urgency by technocrats rather than having to be made a political issue where higher authorities needed to get involved. May be this can be factored into the proposed FTA with China.
4. Uniform duty rates
To avoid creating opportunity towards trade deflections on the basis of arbitrage on external tariff maybe a strategy that the proposed FTA with China can factor in will be external tariff harmonised or moving towards uniform external tariff rates
5. Raw material
It’s important that raw materials and intermediate goods are not included in the negative lists. If included, then product utilisation such as raw materials should not be liberalised. Maybe high potential product categories must also be taken out of the negative lists.
6. Rules of origin
Research reveals that every bilateral treaty brings with it innumerable procedures surrounding rules of origin and tariff reductions. These become the biggest entry barrier to new markets. A typical small manufacturer would therefore have to go through hundreds of clauses and conditions to really understand the impact of FTAs or to gain international access. This needs to be factored into the FTA with China especially for rules of origin to not become a disguised barrier to trade facilitation in the region.
7. Culture orientation
One of the biggest issues on the FTA with India was that Sri Lankan and Indians had a culture class that created many issues at the ground end. Given the language issue when dealing with Chinese business organisations, it is best that a culture orientation program be conducted via the business chambers of Sri Lanka and China so that some smoothening of behaviour can be done or sensitised.
Conclusion
Whilst we must commend the policymakers for the proposed FTA with China on the sidelines of CHOGM in November, and may the rest of the FTAs to come be with Russia and Japan, let’s first pick up the lessons of the last FTA signed by Sri Lanka so that we can ensure that the impacts of trade will hit the numbers quicker.
[The author is the Head of National Portfolio Development – Sri Lanka and Maldives at the United Nations Office (UNOPS). The thoughts are strictly his personal views.]
