Enhancing trade integration with the rest of the world

President Ranil Wickremesinghe on numerous occasions has disclosed the Government’s intention to transform Sri Lanka into a highly competitive, export-oriented economy. Enhancing trade integration with the rest of the world would be an integral element in achieving that objective. 

The island is heavily dependent on both the US and Europe in terms of export income, and those two market regions account for about 55% of merchandise exports. The over-reliance on few market areas is fraught with risk, as economic downturns in those regions could have a destabilising effect on the external sector of the economy. In that backdrop, the Wickremesinghe administration has undertaken measures to deepen its integration with markets in South Asia, South East Asia and East Asia – which are considered as Sri Lanka’s non-traditional export markets – by negotiating bilateral trade agreements.

Currently, Sri Lanka has bilateral trade agreements with India and Pakistan. Despite the initial fears expressed by many, the Indo-Sri Lanka Free Trade Agreement (ISLFTA) has favoured Sri Lanka more than India. More than 70% of the country’s exports to India take place through the agreement, while only 20% of Sri Lanka’s imports from India come through the free trade deal. However, under the current FTA, Sri Lanka is permitted to export 8 million pieces of ready-made apparel to India without the applicable duties. 

As apparel is the largest merchandise export commodity, the apparel industry leaders have repeatedly urged the Government to negotiate with the Indian authorities to increase the quota so that the industry can reap tangible benefits from the deal. Both countries held the 12th round of negotiations on the proposed Economic and Technology Cooperation Agreement (ETCA) early this month. The two Governments had 11 rounds of bilateral talks from 2016 to 2018 with regard to ETCA, but thereafter the negotiations were stalled due to the protests from Sri Lanka’s anti-free trade lobby.

The President’s efforts to negotiate free trade agreements when he was the Premier under Sirisena, faced huge opposition from groups with vested interests. Interestingly, the GMOA was at the forefront of the protests against attempts to sign ETCA during that period. Anti-free trade lobbyists were also enthusiastic participants of Gotabaya Rajapaksa’s election campaign, and during his administration, they occupied influential positions within the policymaking bodies. Well-known advocates of protectionism such as Anuruddha Padeniya, W.D. Lakshman, and Lalithasiri Gunaruwan were appointed as members of an expert committee to draft a national trade policy. Sri Lanka-Singapore FTA, which was signed in 2018, was suspended by former President Sirisena subsequent to a questionable report prepared by Professor Lakshman.

The resistance towards free trade by influential sections of the country has always blocked initiatives towards trade integration by successive governments. The anti-free trade lobby is composed of professionals, industrialists and nationalistic politicians. In a closed economy, producers become winners, while consumers end up as losers. Removing trade restrictions benefit consumers and particularly the low-income groups in a society. For Sri Lankan companies to achieve success in the international marketplace, the domestic market needs to reflect the competitiveness of the international market.

A competitive, domestic market is critical in terms of ensuring ongoing innovation as well as to achieve sustainable, competitive advantage. In order to develop a successful, export-oriented economy, our entrepreneurs must be prepared to compete with imported products in the local market. President Wickremesinghe alluded to this aspect when he addressed the National ICT Awards last month.

In 1995, both Vietnam and Sri Lanka earned $ 4 to 5 billion in merchandise exports, but by 2020, when Vietnam realised $ 283 billion in merchandise exports, Sri Lanka could only achieve $ 10 billion. Opening up the local market for competition and enhancing our exports with the rest of the world is imperative to become a competitive and dynamic economy with a strong focus on international trade.