FTAs drive exports
Given that Sri Lanka has just a few trade agreements under its belt whilst competitive countries like Bangladesh have over 10 FTAs, the recently-signed agreement with Singapore was a good move. The logic is that if we are to make Sri Lanka a 20 billion dollar export business from the current 11.4 billion dollar export performance, we must have more access to markets, driving market penetration.
In this light, the recently-signed FTA with Singapore is a good move. The reason being Sri Lanka can have access to large economies in the East Asian bloc like Indonesia and enter the global supply chain. But the question is, are we ready with a strong supply chain to enter such markets?
FTA with Singapore
The bone of contention by professional associations is that they are opposed to mode 4 or the movement of people. A point that needs to be understood is that with unemployment at below 5%, we have no option but accept that migration will be a reality that we have to live with. But, if we dig deeper, we will see that the real issue is the Sri Lanka not having a framework for governing migrant workers, especially on the area of evaluating the credentials on their qualifications. Hence, unless these basics are in order, what we will see is that people will be against the principle of FTAs, which is factually not correct.
FTA with India
Some quarters are citing that the FTA that was signed with India around a decade ago has not yielded the desired results with exports to India hovering at around six hundred million dollars with many nontariff barriers yet in play that need correction before ETCA is signed. An interesting argument, especially from tea exporters who have 15 million kilograms under FTA but utilisation is at single digit for the last seven years or more.
Once again the problem is not the FTA but the mechanism of addressing the issues from the FTA not being in place and hence affecting the overall imagery of FTAs as a strategy, which is unfortunate. A point to note is that if we dig deeper, the framework is in place for a constructive evaluation procedure in an FTA but the absence of a political will is what creates the confusion.
FTAs take 20-50 consultations
Whilst one can cite anomalies of the FTA with India like what the writer pinpointed, many forget the Indo-Lanka FTA was the first FTA that each of our countries had entered into and it was signed within four months with just four to five consultations, according to Indian Institute of Foreign Trade (IIFT) Professor Ranjan Ratna.
This means that it is bound to have many rough edges that need to be smoothened. Normally India takes a minimum of two to six years to reach a trade agreement with a minimum of 20 consultations which was drastically different what happened on the Indo-Lanka FTA.
A point to note is that as per table 1 we see that even after six years of consultation between India and Thailand, the proposed trade agreement between India-Thailand is yet to be concluded. This gives us an idea of the limitations of the Indo-Lanka FTA that was signed in under half a year and we must not allow ETCA to fall into this trap.
But the argument that some quarters are making is that the first 10-year plus honeymoon is ample time to clear the bottlenecks to be resolved between India and Sri Lanka on the FTA, provided that there is strong cooperation from both parties. In reality, Sri Lanka exports to India have been struggling at just over a half a million dollars with NBTs frustrating the export fraternity of Sri Lanka.
integration below 6%
Let's accept it, the current leadership must be commended for cutting through the clutter and taking a strong position that Sri Lanka is going ahead with ETCA irrespective of the opposition that it has garnered.
The logic for agreeing on same is due to that fact that South Asia's country trade integration is the lowest at around 5.3% as against the ASEAN country integration which is at 35%. EU country integration is at a high of 55% whilst NAFTA region is at a dizzy integration of 60% plus. This means that as a priority we in South Asia must link our economies together so that as a region we will be able to command a sizeable share of the global economy.
Whilst we can state this, given that I headed the Sri Lanka Export Development Board, the issue in my view is that in Sri Lanka we do not a marketing issue but a supply chain problem. The logic is that the appetite in the global market is strong and Sri Lanka's share is below 0.1% or even smaller from the global market, which means we have develop the supply chain to meet the demand.
market $ 1,000 b+
Whilst understanding the concerns of the GMOA on ETCA as well as the current FTA with Singapore, a fact that we cannot overlook is that the South Asian economy as a whole is estimated at 1,000 billion dollars plus and growing at 5% GDP for the past couple of years. We now need to carve out the growth agenda of the region towards Sri Lanka with smart partnerships if we are to correct the trade imbalance that Sri Lanka is up against with the looming conditions by the IMF that people are expecting.
With a fiscal deficit exceeding $ 8-10 billion, Sri Lanka's economy is just about crossing the 90 billion dollars mark. Hence, unless we link ourselves to the top growth economies like India, we will lose out on enjoying the synergy effect from the long-term growth of the region.
In this background, we have no option but to pursue every opportunity to sign FTAs and now ETCA to have some scope of the future. Sri Lanka being the only country in the region with a combination of political stability and freedom from the clutches of terrorism should have been a 100 dollar economy by now. But sadly, we have not got our act together.
In year 2014 we registered $11 billion and as at end 2017 we crossed $ 11.4 billion. If we can achieve $ 13 billion in 2018 at a growth of around 15%, it will be great. As at end March 2018 it is at 7.7%.
Sri Lanka must take cognisance of the fact that at least in 2018 emotional actions like protest campaigns must be stopped and engaging in healthy debate must be the way forward. What's important is for the outcome of such a debate to be taken to the hierarchy for strong policy decisions. But, wisdom has made me also learn that emotional protests are engraved in the culture of South Asian countries and what is required is aggressive decision making.
Be that as it may, let me get into the brass-tacks of the FTA and the pickups to the proposed ETCA.
While understanding the global reality, if we focus on the facts of the performance of the Indo-Lanka FTA, after 10 years what we see is a mixed bag. Sri Lanka's exports have been hovering around $500-600 million dollars. The overall exports to India continue to occupy just a 5% slice of the total exports of Sri Lanka even after 10 long years of trade between the two countries, which needs to be corrected.
If one analyses in-depth the product mix performance, it is clear that it does not reflect the comparative advantage for Sri Lankan merchandise but the exports are mostly due to the differential external tariff that has brought about this performance which does not augur well for the makers of the Agreement.
The quota utilisation of the strategic products of Sri Lanka - tea and garments - being at the low ebb with Sri Lankan exporters up against non-tariff barriers by Indian authorities such as Tariff Rate Quantities (TRQs), delays in Customs clearance of cargo, port restrictions, and necessity for several tests to be carried out in India even though certificates are accompanied by the relevant authorities justifies the apprehension that people have regarding trade agreements by nature.
After all, bilateral agreements are essentially designed to promote fair competition and equitable benefits which Sri Lanka has not experienced from the Indian end under that FTA which has to be addressed.
On the other hand, if one examines the four billion dollars of imports that come in from India, almost 70% of them happen outside the FTA, meaning that even without the FTA this business would have happened.
Hence, one can question the very 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.
If this is so, then we should include these products so that all products fall into some degree of regulation under the mandate of the FTA. Another area that is being hotly debated is the investments that have come in from India. As 67% of the investments have been in the service sector, a question asked by many is if the ISFTA agreement had impacted this behaviour or whether this would have happened anyway. However, there are many success stories such at CEAT-Kelani that are success stories from the FTA.
Another point that must be highlighted is that success must not be judged on the value generated but on the employment created so that we stay aligned to the original objectives of the ISFTA that was signed way back in 1998.
of the 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 could 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 agreed on a list of products which would 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. This needs to evaluated on a private sector agenda between chambers as end of the day business is been done by private sector and policy makers need to be flexible to adjust national strategy. This is the core issue that professional associations are arguing on the recently signed FTA with Singapore.
On the issue of objectives set on the employment, that has to be created at the end of a five-year or 10-year time period has become a reality and thus is also a key issue debated in the recent past given that some organisations like China Mainland restaurant have begun to recruit restaurant staff from India. Which is interesting. Can this same thing be done at the Indian end by Sri Lankan companies?
Way forward 1:
Correct the FTA issues
The first key point to be addressed is that we must be sensitive to the issues that have been practically raised by industrialists who have faced barriers in operating in India. We must solve them as a priority so that Sri Lanka will look at the FTA with Singapore and the next possible FTAs positively.
I strongly recommend that a proactive Indo-Lanka Trade Secretariat be set up, so that all such issues can be solved as a matter of urgency rather than having to be made a political issue where higher authorities need to get involved. If we can solve some of the burning issues before signing ETCA, it will give a lot of confidence to the system.
Way forward 2:
Involve the chambers
Whilst the facts even after 15 years of the FTA may not be as attractive as what we expected them to be, the challenge now is to make the best of it than keep bickering.
The first step is for the policymakers and chambers to get together and agree on a set of ground-based targets such as to set up five to seven joint ventures within the next 10 years and from a Sri Lankan end, develop 10 export brands in the Indian market just like what Damro and Munche brands have done in the recent past.
We must also set some targets on the employment that we intend creating together with the impact that can be made on consumers. At the end of the day if the quality of life does not improve with business and trade, there can be serious social issues that can emerge in the years to come.
Way forward 3:
Diversity of exports
When we look back at the last 15 years what we see is that a skewed basket of exports like processed food (essentially Vanaspathy and now poultry feed), copper, electrical machinery, aluminium, articles of stone, organic and inorganic products to name a few getting across to the Indian market whilst the strong product categories of Sri Lanka like garments and tea are facing non-tariff barriers that upset the exporters from Sri Lanka.
The good news is that this is getting corrected. Right now we see increasing exports of apparel and tea from Sri Lanka in the first quarter of this year, which is encouraging.
Way forward 4:
Focus on key sectors
One of the key questions asked is why Sri Lanka is dependent on exporting consumables and primary goods rather than focusing on driving value-added products that achieve a competitive advantage for the country. The past performance based on the quota granted clearly justifies this.
But the good news is that exports of tea and apparels have substantially increased. We must now sustain this performance.
Way forward 5:
Uniform duty rates
We must avoid creating opportunity towards trade deflections on the basis of arbitrage on external tariff. This can be done by either external tariff harmonised or moving towards a uniform external tariff rate.
Way forward 6:
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.
Way forward 7:
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.
In this backdrop let's re-examine the current FTA so that rules of origin does not become a disguised barrier to trade facilitation in the region.
Way forward 8:
There are some systems being developed by countries where a mechanism to gauge the impact of duty change of raw materials on finished goods and vice versa. A recent study reveals that even if all duties are removed on Sri Lanka the loss of revenue from South Asian counterparts will be a mere 0.1 billion dollars. I feel this should be available online so that there is transparency and help drive open trade among SMEs.
Way forward 9:
et's accept it; the culture of business in Sri Lanka or for that matter life in general in Sri Lanka is different to India. Most say the quality of life in Sri Lanka is way above India, which is true. We also need to preserve this culture which is unique and deep-rooted to family values. If Indians are coming to do business in Sri Lanka, it's best that an orientation program is done before coming over so that social issues can be avoided due to the very aggressive behaviour of most Indians. There is many research studies done at Colombo University on this area.
Way forward 10:
WTO centre in SL
Even at this late hour it will be Susil to set up an WTO centre in Sri Lanka so that educating the public on the benefits of global trade such as FTA's can be done by a neutral body. Whilst politicians, bureaucrats and private sector can be educated with consultation so that misunderstandings and weaknesses can be corrected with dialog. The WTO will act not as a watch dog but more as a facilitator and proponent of free trade.
So ETCA and
FTA with China
I strongly feel Sri Lanka must sign the CETA and the other FTAs that come our way in the future such as the FTA with China but it's very important to involve the private sector in the consultations.
The challenge is for Sri Lanka to accept that globalisation will happen with or without our approval and we must drive the fourth Industrial Revolution stronger if we have the appetite to make money.
My ethos of trade and commerce is that the only way to insulate ourselves is by making ourselves strongly competitive.
(The author is the Country Director for South Asia in a multinational entity and was the eighth Chairman of the Sri Lanka Export Development Board.)