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FTA potential
The potential to have a FTA between China and Sri Lanka is displayed in the present local scenario of Sri Lanka and the Chinese role in global economy.
The relationship between Sri Lanka and China has continued from long time. This relationship has been further strengthened with visits by the leaders of the two countries. President Mahinda Rajapaksa has been developing a very high profile diplomatic relationship with China and highlighting the importance of the Chinese market for Sri Lankan products. Chinese investment in Sri Lanka is significant and it carries out a lot of construction work in Sri Lanka.
On the other hand China economically has become a leading economic power in the world, achieving its expected target with greatest potential 25 years after the implementation of reforms. The Chinese economy has developed at unprecedented rate displaying its steady stand for the 21st century. China, the second largest economy in the world, has reached a target of US$ 9 trillion GDP in 2013, maintaining an average growth rate of 9%. China is also the biggest market in the world with a 1.4 billion population.
China has given priority to strengthen its powers in the Indian Ocean and strategically the location of Sri Lanka is an important factor for any power which strives to expand its powers in Indian Ocean. China as a global giant has also displayed its interest in expanding its powers in Indian Ocean.
The Strategic Plan 2010-2015 of the Sri Lanka Export Development Board, the National Plan for Export Development, indicates that one of the targets under the plan is to increase exports to markets other than the EU and the USA by over 50% by 2015. In order to achieve a massive increase, a lucrative background is needed with more exports to India, China, Japan, Korea and the Middle East markets.
In view of the above, it is apparent that there is a positive environment to develop a Free Trade Agreement with China for trade development between two counties.
Trade history
Highlights from a number of chronicles and archaeological findings are acceptable proof of evidence that trade between Sri Lanka and China goes far beyond the Christian era. The Silk Road route passing through the region and the abundance of resources of Sri Lanka encouraged the establishment of a strong trade relationship with Sri Lanka.
The trade relationship of both countries was strengthened with the Rice Rubber Pact signed in 1952. It was this agreement that developed the export of a large quantity of natural rubber and till 1976 China was the number one export market for Sri Lanka. With the opening of the economy, Western countries overtook the Chinese position and today it has become the 18th export market for Sri Lanka. In terms of Sri Lanka’s imports, China has grabbed rank one, equalling Indian imports.
Chinese policy
The social, political and economic systems of China were totally changed with the Chinese Revolution in 1949. The main purpose of the revolution was to create a socialist nation in terms of development – the economy, improving living standards of the people and equal distribution of income.
In order to achieve these objectives of creating socialism, China has followed a central planning economic system like other Communist countries. This is a system in which the total economy and all its sectors are controlled by the State. Due to this closed economic system and approach, the bulk of Chinese foreign trade was with former Soviet Union and its allied nations.
With the changes in the global economy, China was forced to change its policy and system to adopt new developments. In 1990 China introduced the socialist market economy to open up the market for foreign investors to expand production targeting the massive global market and to trade in a massive network covering the East to the West of the world. Some professionals called this system a duel system. It means political and administrative activities continued without any changes while opening the economy to the world.
After 1990 it clearly shows that foreign trade of China diverted from the former Soviet Union to Western countries with the new development of China’s trade policy. Presently the EU, ASEAN, Japan, Korea, Brazil, USA and Australia are a few of China’s leading trading partners.
With new tendencies, China also moved to sign Free Trade Agreements (FTAs). China considers Free Trade Agreements (FTAs) a new platform to further open international trade relationship and accelerate domestic reforms, which is an effective approach to integrate into global economy and strengthen economic cooperation with other economies as well as an important supplement to the multilateral trading system.
China implemented its first Free Trade Agreements in 2003 with its Government of Special Administration Regions Hong Kong and Macao. These agreements are wide and include service sectors as these regions are part of China.
In 2007 China signed a FTA with ASEAN and subsequently six bilateral FTAs were signed with countries like Chile in 2006, Pakistan in 2007, New Zealand in 2008, Singapore in 2008, Peru in 2009 and Costa Rica in 2011.
China’s FTAs
The Ministry of Commerce and Industry of Sri Lanka should highly concentrate and discuss with top Chinese authorities whether an FTA will be definitely implemented in 2014. All official information on Chinese FTAs is given via the China FTA Network. But according to this specific network there is no indication about an FTA with Sri Lanka even under the consideration list.
Presently, China is having final negations with the Gulf Cooperation Council (GCC) and Southern African Customs Union (SACU) to implement FTAs. In addition, FTAs with Australia, Iceland and Norway are on line. There are a few FTAs under the consideration list. China-India Regional Trade Arrangement Study, China-Korea FTA Joint Feasibility Study and China-Japan-Korea Joint Study are the FTAs in progress under the consideration list.
"Sri Lanka should avail of more opportunities to initiate a FTA with China due to the close relationship being maintained currently. China has displayed its willingness to support not only social and economic development, but also protect Sri Lanka’s interests in the global political arena"
China is giving priority to the China-India Regional Trade Arrangement Study and China-Japan-Korea Joint Study as the total trade among these four countries covers nearly US$ 1,000 billion. The officials of those countries have been having continuous discussions from 2012 to structure successful FTAs. However, the negotiations are slow sometimes due to territorial disputes. The negotiations for an FTA with Iceland started in 2006 and are still continuing, with over 10 major sessions of discussions. China’s last FTA was with Costa Rica in 2011 and during the last three years China did not sign any FTAs.
This shows that the implementation of an FTA takes long discussions and studies. It is not an easy task to reach a conclusion on FTA. Therefore the Sri Lankan authorities should continue the dialogue with China in positive manner on the proposed FTA.
Sri Lankan experience
It is also important to look back at the Sri Lankan experience with FTAs. Sri Lanka’s first FTA was signed with India and it was the first bilateral FTA of India. Then the implementation of the Sri Lanka-Pakistan FTA became effective from 2005.
As a member of SAARC, Sri Lanka became a member of the South Asian Free Trade Area (SAFTA), which came into force in 2006. Sri Lanka had discussions and negotiations with Bangladesh and Egypt for FTAs in early 2000, but did not continue discussions.
The next positive FTA may be The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC). BIMSTEC clearly had positive discussions to create free trade area among the members. Today Japan had shown interest in joining BIMSTEC. If Japan joins BIMSTEC, an FTA will be more beneficial for Sri Lanka after the implementation of an FTA of BIMSTEC.
It is difficult to see any benefit of a Sri Lanka-Pakistan FTA as the trade between two countries is less than 1%. The best FTA to look into Sri Lanka’s FTA experience is the Sri Lanka-India FTA. Sri Lanka’s exports to India were worth US$ 570 and US$ 544 in 2012 and 2013 respectively, maintaining the fifth rank of Sri Lanka’s exports and US$ 3 billion imports to Sri Lanka as the No. 1 importer equal to imports from China.
Even though the exports of India were in fluctuation, some opine that the products under the duty zero benefits managed to have a continued increase. On the other hand even Indian investment has increased to obtain the indirect result of SLIFTA; the increase of employment opportunities and transferring technology were not as successful as expected. It is more important to carry out a thorough study to determine if Sri Lanka benefited from the SAFTA and the other two FTAs.
Advantages and disadvantages
Sri Lanka as a small country should consider the advantages and disadvantages of signing an FTA with a world giant like China. China also maintains a very favourable trade balance in its total trade. The total value of Chinese exports is over US$ 2 trillion and it imports only over US$ 1 trillion. Sri Lanka’s trade compared to Chinese total trade is miniscule.
As far as Sri Lanka exports are concerned, China is the 18th largest export market for Sri Lanka with exports of US$ 121 million in 2013 – just 1% of total exports of Sri Lanka – and with US$ 3 billion Chinese imports to Sri Lanka equalling number one importer India. This shows that there is a huge unfavourable trade balance between the two countries.
The favourable positive list of products may include the large number of products in the proposed FTA, but the issue is whether Sri Lanka has the capability to supply all the products. As a matter of fact, China has the capability to supply any volume of products. Even in the product list of present exports to China of nearly 30 products, only apparel (US$ 22 m), tea (US$ 20 m), fibre ( US$ 22 m), tobacco (US$ 7 m) and rubber (US$ 6 m) as the five major products cover nearly 75% of total exports to China. Mineral sands, activated carbon, footwear, frozen fish, diamonds, spices and woven fabrics are listed as other key exports, but each product export value is less than US$ 3 million.
The list of imported products from China covers over 300 products. China’s largest imports to Sri Lanka in 2013 were woven fabric (US$ 596 m), electrical items (US$ 435 m), telephone video equipment (US$ 250 m), base metal products (US$ 200 m), fertiliser (US$ 97 m), automatic data processing machines (US$ 97 m) and boat building (US$ 81 m). Nearly key 180 products imported from China were of over one million value imports of each product. This displays the huge trade gap and our exports are limited to China.
Huge opportunity
The most viable advantage to have an FTA with China is that it provides a huge opportunity to enter the world’s largest market in a very competitive manner. China also gets more opportunities to enter the Sri Lankan market. But Sri Lanka has to do a lot of homework to turn the proposed FTA in its favour by applying correct promotional strategies, innovative productivity to promote existing Sri Lankan products and introduce new products to the Chinese market.
Sri Lanka should invite more investors to invest in export-oriented projects in Sri Lanka to get the real benefits of agreements of this nature. On the other hand, Sri Lanka should be vigilant if China gets all the benefits of investment, especially employment opportunities and absorbing new technology.
Sri Lanka should avail of more opportunities to initiate a FTA with China due to the close relationship being maintained currently. The political leadership of both countries has developed a cordial relationship during meetings they had during the past few years. China has displayed its willingness to support not only social and economic development, but also protect Sri Lanka’s interests in the global political arena.
It is worthy to note here how Sri Lanka benefited under the China-Sri Lanka Rubber Rice Agreement. China provided rice to Sri Lanka offering a very attractive price at one-third of the world market price at a difficult period of rice production in Asia due to World War II. Sri Lanka was able to recover the lost market share of natural rubber after the Korean War as it was offered at a highly competitive price 40% higher than the price offered by the Western countries under this agreement.
Finally, the proposed FTA should be in the interest of both parties not only trade wise but also to further strengthen the relationship for another century.
(The writer is the retired former Head of Corporate Affairs and Communications – Sri Lanka Export Development Board and Ex-Director of the Sri Lanka Trade Centre in Maldives. He can be reached at [email protected].)
