Strong trade agreements need 30-50 consultations

Wednesday, 20 June 2018

Coming from a multinational working background, I strongly support free trade
given that open competition tends to sharpen our skillset and thereby make us
sharper in our work whilst meeting high ethical standards.
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.
South Asian

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.
South Asian

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.
Indo-Lanka FTA?
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.
Original objectives

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

/set targets
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:

Raw material
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:

The WTO
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:

Culture orientation
Let’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.)
Posted by Thavam