Indian FTA and next steps

Tuesday, 29 July 2014 00:01 - - {{hitsCtrl.values.hits}}

In the recent past there have been many discussions on the proposed FTA with China. If one analyses the trade between India and Sri Lanka post the Indo-Lanka FTA even now after 12 years, the reality is that almost 75% of the imports from India happen outside the FTA. Sri Lankan exports into India have been hovering around the $ 500 million mark for years, whilst the majority of the investments into Sri Lanka have happened without direct links to the FTA. If we were to do a detailed export analysis on the Indo-Lanka exports out of Sri Lanka, we see that product mix performance does not reflect the comparative advantage for Sri Lanka but the exports are mostly due to the differential external tariff that has brought about this performance. This does not augur well for the makers of the first FTA that Sri Lanka has entered into. The quota utilisation of the strategic products of Sri Lanka tea and garments – being at a low ebb with Sri Lankan exporters up against non tariff barriers by Indian authorities like Tariff Rate Quantities (TRQs), delays in Customs clearance of cargo, port restrictions, necessity for several tests to be carried out in India even though certificates are provided by the relevant authorities justifies the apprehension that people have with regard to trade agreements by nature. Will CEPA help? If we take South Asia, it boasts a trillion dollar GDP with inter-regional trade at a low ebb of below 6% as against the ASEAN 35%, EU 55% and NAFTA at a mammoth 60% of inter-regional trade. Given that the Sri Lankan and Indian economies are strongly driven through the service sector, CEPA can be the best way out to make South Asia become more integrated. The logic for this statement is that CEPA is designed to enable the free flow of services as an extension to the Indo-Lanka Bilateral Free Trade Agreement. Hence, doors are opening up under CEPA for Sri Lankans in service sectors like accounting, tourism, telecom, architecture, research and development, management consultancy and engineering, to name a few of the opportunities available for growth. However, the issue at hand is that the current FTA with India has run into so many challenges that the authorities on both sides have failed to address, which has resulted in an erosion of confidence on how an agreement can support Sri Lanka exporters. The reality is that CEPA will be the first service partnership that Sri Lanka will get into, just like the FTA that was mainly on goods. In the event the CEPA comes into play and it succeeds in developing the service sector between the countries, it can be followed up with CEPA agreements with Pakistan and Bangladesh, which will certainly drive a new wave of economic growth in South Asia. However, we must keep in mind that ‘Is Sri Lanka ready for such a partnership given that our existing infrastructure and the institutional capacity is lower than India?’ is the question asked by many.

CEPA unplugged CEPA is an agreement between Sri Lanka and India where barriers are removed in a selective manner that will enable the exchange of services between suppliers and buyers, just like in the case of goods that we have experienced under the Indo-Lanka Free Trade Agreement. The proposed Comprehensive Economic Partnership Agreement (CEPA) will take place in four modes. The first is cross border services like energy, international telephony and BPO; in mode 2, it will extend to tourism and education; and at mode 3, it will include foreign bank operations and finally for sensitive areas like the temporary movement of expertise like foreign doctors; whilst in mode 4 the movement of natural persons is featured. In essence it is an agreement that reduces discrimination against foreign suppliers by providing market access. A key highlight of the agreement that needs our attention is that commitments can be altered after three years subject to compensation, which provides insulation to a country in the event there is an oversupply issue. This is a very important clause given the political economy that is at play not only Sri Lanka but also in India. I also strongly advocate that we use the weapon of domestic legislation to protect vulnerable industries of the country that can be harmful if open to global competitors. Will Sri Lanka benefit? On a broad basis Sri Lanka can benefit, provided it is implemented in the spirit that in which it is sketched out. India will offer Sri Lankans access to a wide range of service products that include accounting, architecture, urban planning, engineering, edical and dental, computer-related services, R&D, management consultancy, building cleaning services, packaging services, different telecom services, convention services, higher education, tourism-related services, environmental maritime services, construction and ICT. Sri Lanka will give access to Indians on broad areas like health, tourism and travel, freight forwarding, telecom, computer-related services, convention services and maintenance and repair opportunities. However, a point to note is that liberalisation will take place in stages so that each country can be ready for the new competition that will be confronted with, rather than facing an absolute influx of foreign nationals into the country, resulting in swamping. As mentioned before, domestic legislation is permitted to be exercised, which can be somewhat consoling to vulnerable industries. Key danger of CEPA The danger of CEPA is that it focuses on the liberalisation of the service sector, which is very dynamic in nature, and if Sri Lanka does not keep the cycle of innovation linked to the business world, there is a good chance that Sri Lanka can get swamped by the strong Indian companies that are well webbed to the university system and product development houses, which can make strong impacts on top consumer purchase. Given the many issues that were highlighted on the FTA agreement with India at the National Chamber of Exporters event, let me capture the essence of the concerns expressed.

Issue 1 – Correct FTA issues Whilst we must drive for economic partnerships with the world with FTAs and CEPAs, it is very clear that the anomalies of the current Indo-Lanka FTA must be addressed before moving to the next partnership agreement. All that the private sector is advocating is ‘make the corrective action on this FTA work at the ground end and then show us the details of this Indo-Lanka CEPA before signing same,’ which I feel is a very logical request. Tic-Tac production, the Vanaspathy debacle, the injustice to pepper exporters when a quota was suddenly introduced at the Indian end, the issue faced by the copper industry and the introduction of a sudden duty on floor tiles are some key confidence-shattering experiences that Sri Lankan businesses have faced and these need be addressed and corrected. Another would be the exports of Sri Lanka’s strategic products like tea and garments, where the quota utilisation has been below expectation in the last couple of years. Issue 2 – Set a target I strongly suggest that we set a target for this year, 2015 and 2016 so that by the end of three years we can make ensure 10 billion dollars of trade takes place between the countries on a comparative advantage rather than on tariff in equalities. However, what’s important is that it should be a bottom-up exercise to achieve these numbers rather than a dictate so that it forces the private and public sectors to work together, perhaps with the trade chambers facilitating the process. This is an important process so that social ramifications are taken into account whilst suggesting domestic legislation for protection of a given industry.

Issue 3 – Facilitating body Another idea mooted by the private sector is for the establishment of a proactive Indo-Lanka trade secretariat so that all issues can be solved as a matter of urgency than having to be made a political issue where higher authorities have to get involved, which is time-consuming and sometimes ineffective when it comes to implementation at the ground end. The Indo-Lanka FTA has a clause where the policymakers must review the performance every six months and once a year the ministers of the two countries must have a dialogue. The absence of such forums raises concerns within the private sector on why one is moving towards another trade agreement when the current process has not been functioning for the last two years. Conclusion Given that the private sector accounts for 75% percent of the economy in one single voice the cry is ‘correct the issues that the exporters have been faced with in the last 12 years and then we need to agree on the next agreement such as CEPA or for that matter the proposed FTA with China’. (The author is actively involved in the economic development of the country and is a Board Director in the private and public sector of Sri Lanka.)