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Figure 1: Current status of trade negotiations in Sri Lanka
By Subhashini Abeysinghe
The Comprehensive Economic Partnership Agreement (CEPA) between India and Sri Lanka seems to have woken up from a deep slumber. In 2008, amidst protests by a group of Sri Lankan businesses, Sri Lanka decided not to go ahead with an almost finalised agreement which was ready to be inked by the heads of the two countries. 
After six years, with the changes taking place in the political landscape of the country, CEPA is back on the table. The agreement seeks to expand the current Free Trade Agreement (FTA) to cover both trade in services and investment.
CEPA was a topic that led to heated debates and discussions in 2008. Back then and now, sadly, the discussions centre around the ant in the room, not the elephant. Continuation of this will lead to Sri Lanka making the same blunders they did when signing FTA with India in 1998.
What will Sri Lanka export under CEPA?
Trade agreements are signed by countries for a number of reasons; some economic and some political. For example, countries like China and the United States may enter into trade agreements with partner countries who are not important economic partners, but important political partners.
For Sri Lanka, finding ways to revive the stagnating exports of the country is a critical need of the hour. Therefore this article is written on the assumption that the key objective of CEPA from the point of view of Sri Lanka is economic, i.e. to increase the export revenue of the country by increasing exports to India.
If this assumption is correct, then discussions on CEPA should centre be around the question ‘What are we going to export to India under CEPA?’ Sadly, this is what is being least discussed and is the exact question the country does not have a clear and convincing answer for. Identifying current and potential exports, the current and potential barriers to export and how the proposed agreement can bring down the identified barriers is critical to the success of CEPA or any other agreement. If Sri Lanka does not have clear and convincing answers to these questions, then the agreement will fail to increase exports to India.
Fool me once shame on you, fool me twice shame on me
This is the same blunder Sri Lanka made when negotiating the FTA with India. As a result of the failure of the Government and the private sector to ask this critical question, the country agreed to terms that limited the ability of the exporters to reap the benefits of the agreement.
For example, if the Government had answers to the question of exports, then they would not have agreed to the condition that tea exported from Sri Lanka could enter India duty-free only through specified ports, or apparel exported from Sri Lanka could enjoy duty concessions only if they were made using Indian fabric.
As a result of these two conditions, not a single kilo of tea or a single piece of apparel was exported from Sri Lanka to India under the FTA during the first few years. This is despite these two products alone accounting for over 50% of Sri Lanka’s total exports.
Furthermore, Sri Lankans failed to identify potential exports (e.g. processed food products) and potential barriers (e.g. standards and certification requirements).
As a result, both current and potential exports to India have performed poorly. The smart and shrewd Indians took the ill-prepared Sri Lankans for a ride. It took years to undo what was done.
For example the Indian fabric rule was taken away only in 2013, thirteen years after the signing of the agreement. Who should we blame, the Indians who did their homework, or the Sri Lankans who did not?
If Sri Lanka has not learnt its lesson, it is likely that we will fall into the same trap by not being able to recognise the hidden barriers and agreeing to terms and conditions that are not in the best interest of the country. The only way this can be avoided is to focus discussion on exports and reducing barriers to exports.
Protecting the domestic market vs. succeeding in the Indian market
Imports come into the discussion only after the country has a clear agenda on exports. Sri Lanka does not need an agreement to import goods or services from India. This can be done without an agreement. The country needs an agreement in order to get access to its exports.
Access to imports from the other country is what is given in return for access to exports from Sri Lanka. It is trading of concessions: Sri Lanka will agree to exchange concessions for product/service ‘A’ from India in return for concessions being given for product/service ‘B’ from Sri Lanka.
However, CEPA discussions then and now centre more on imports than on exports. It is more about protecting the small cake we have: the domestic market of 20 million people.
The discussion has failed to focus on how to get a slice of a much bigger cake: the Indian market of 2 billion people. This is a grave concern. The voices that are heard loud and clear are of those who feel they stand to lose from the agreement, not those who feel they stand to gain.
Figure 1 captures the status of trade negotiations of Sri Lanka. The main bottleneck is the low export capacity (volume) and competitiveness (value) of local products and services.
In order to revive exports through trade agreements, increasing capacity and competiveness of local products and services is critical. When local producers of goods and services have low capacity and competitiveness, it is natural for them to fear competition and seek protection, not market access.
Forgetting the elephant in the room
The elephant in the room therefore is barriers to trade or barriers that prevent expansion of capacity and competitiveness of exports. The barriers to trade are twofold: barriers faced within the country (internal) and barriers faced in the importing country (external).
Trade deals focus on removing external barriers imposed by the importing country. For this, the basic step is to identify the barriers. This is easier with relation to trade in goods than for trade in services.
For example, information about tariffs imposed by the importing country on goods is freely accessible. Even NTBs such as standards, testing and certification requirements are relatively easy to find out.
Barriers to trade in services are far more difficult to identify. The trade in services is governed by domestic legislation, rules and regulations. The services trade involves a multitude of agencies that will be responsible for regulating different aspects of service delivery.
For example the barriers can vary from limitations on foreign ownership, limitations on branch network, restrictions on employing foreign nationals, restrictions on geographical locations, restrictions on mode of delivery and restrictions on type of services, etc. The tendency to discriminate foreign service providers is far greater and the ability to identify in advance the measures that will lead to such discrimination is far more difficult in services than in the case of trade in goods. Therefore, the likelihood of reducing the export potential by not doing homework can be higher in services than in goods.
As mentioned at the beginning, barriers imposed by the importing country are only part of the problem. There are many internal barriers faced within the country that reduce the capacity and competitiveness of exports. These vary from taxes, rules and regulations, ad hoc revisions to inefficiencies with which border agencies execute their functions.
These are barriers faced in Sri Lanka that exporters are familiar with. In practice, the ability of the country to address the barriers within the country is higher than the ability to address barriers outside the country.
Sri Lanka has a dismal record in terms of removing internal barriers to trade. The best example is a delay in automating and streamlining customs and other border agency procedures. The time and money saved by this can provide a significant boost to export competitiveness. Thus, Sri Lanka has not only failed to focus on the elephant in the room (i.e. barriers to export competitiveness) but when it does, it has focused only on parts of the elephant (i.e. addressing external barriers and neglecting the internal).
Shunning India: Cutting off the nose to spite the face
Sri Lanka boasts of its geographical location but has failed to reap the benefits of this. In the past and now, the other countries wanted to engage with Sri Lanka, economically and politically mainly because of its location.
The location advantage is often placed on being located closer to major shipping routes, and not enough emphasis is put on the advantage of being in close proximity to India. The presence of India makes Sri Lanka more attractive for business leaders from other countries because of the easy access it provides to the large and fast-growing Indian subcontinent.
The Colombo port has sustained its hub status because of India. The major shipping lines visit the port because of the transshipments from and to India. The port and logistics services of the country would not have done so well if the country had to depend only on cargo generated to and from Sri Lanka.
Integrating with the Indian economy, therefore, is an economic necessity not a choice. Continuously shunning economic engagements with India is like cutting off the nose to spite the face.
It is a folly to assume that Sri Lanka can economically succeed and reap the benefits of its location without engaging with India. Improved market access to India and integration with the Indian economy is critical for Sri Lanka to sustain its economic growth by increasing foreign investments and export revenue.
CEPA is one instrument of economic engagement with India. However, it will be effective only if the CEPA debate starts focusing on the elephant in the room and not the ant.
(The writer is the head of economic research of Verité Research, an independent inter-disciplinary think tank providing strategic analysis and advice to decision-makers and opinion-formers in Asia)
