Why sign new FTAs and economic partnerships when existing FTAs have outstanding issues?

Following is an article by the Ministry of Development Strategies and International Trade on why Sri Lanka should move decisively to embark upon deeper economic agreements for its growth and development

The world around us is increasingly moving forward with regional and bilateral Free Trade Agreements (FTAs) as the multilateral trade liberalisation process led by the WTO has come to a standstill.

If one looks at the WTO website (www.wto.org), it can be seen that there are now 419 regional trade agreements and the bulk of them have come into operation after the WTO was born in 1995. In addition, we find that 133 of them have been now converted into an Economic Partnership Agreement (EPA) or Comprehensive Economic Partnership Agreement (CEPA) or other forms of deeper economic agreements. 

EPAs, CEPAs, and other such agreements basically deepen and broaden the FTA with selective reduction of the negative list and incorporating investment and services liberalisation. WTO estimates that nearly 50% of the global trading now takes place through regional or bilateral FTAs.

Changes in global trading

Why has this conversion taken place and why this hurry? The global trading environment is changing rapidly with global production networks and global value chains. These developments are a result of product fragmentation, i.e., cross-border dispersion of component production/assembly. Each country specialises in a particular stage of the production sequence and trades the value added components which ultimately result in the final product. 

Product fragmentation was first seen in apparel and electronics and now it has spread to automobiles, electrical machinery, telecommunications, and electronic products. The factors that have led to product fragmentation is rapid advancement in production technology, technology innovation in communications and transportation and liberalisation policy reforms in investment and services in both home and host countries.

Consequently, we see trade in goods getting closely linked to investment flows and trade in services. Increasingly the trade-investment nexus is becoming important to enhance trade flows because the volumes do matter when fragmentation of production becomes the norm. After all, it is investment that creates additional volumes or supplies for trade; thus investment-led trade will be in a better position to utilise preferential market access and make maximum use of an FTA. Sometimes investment follows trade but most often it is trade that follows investment.

Next, we are seeing that services account for a key component of value addition in manufacturing. The latest Asia-Pacific Investment Report 2015 published by ESCAP shows that on average 29.4% of value added in industrial exports is accounted for by services in the Asia-Pacific region. 

This new phenomenon is known as the ‘servicification’ of industrialised products. In fact, the ‘servicification’ of the industrial sector in EU averages at 55% and Asia-Pacific trade is moving in this direction of increasing the services component in industrial products.

Clearly, with such trends in global industrial exports, trade in services liberalisation is certainly going to assist the enhancement of the competitiveness of such exports. These are the key reasons why there is an urgency to convert FTAs to deeper economic partnerships. By such transition, member countries of an FTA could better utilise the preferential access offered by the FTA.

SATIS to support SAFTA and ETCA to support ISLFTA

Within the broader framework of an agreement, which is inclusive of services and investments, it is easier to address the shortcomings of an FTA. That is the reason for the rapid transition of FTAs to more comprehensive economic arrangements. That is the reason why SAARC leaders decided to move towards SATIS (South Asia Trade in Services) before addressing all the pending issues relating to the SAFTA (South Asia Free Trade Agreement). 

As is well known, SAFTA came into operation in 2006 and during its fourth year of operation intra-regional trade in the region remained almost stagnant at 6%. While issues related to non-tariff barriers in SAFTA remained, SATIS came into operation after four years of SAFTA operation in 2010. SATIS negotiations are on-going with the exchange of “offer” and “request” lists. Strangely, no one in Sri Lanka said the problems of SAFTA should be addressed before embarking on SATIS or that Sri Lanka should not be a party to SATIS.

In the case of the India-Sri Lanka FTA (ISLFTA), its broadening and deepening via the proposed Economic and Technology Cooperation Agreement (ECTA) will certainly assist Sri Lanka to address many of the current problems it is facing in fully utilising the FTA. ECTA can increase Sri Lanka’s competitiveness in industrial exports and also increase her supply capacity to better utilise the duty free market access to India. In addition, ETCA negotiations are addressing outstanding non-tariff barriers in the Indian market as well as many of the existing procedural barriers and delays in Indian ports of entry.

There are some who argue that the shortcomings of the India-Sri Lanka FTA should first be rectified before signing the ETCA agreement. Some others have argued that Sri Lanka should get its macroeconomic situation in order before embarking on FTAs. Another lot has argued that Sri Lanka should get its regulatory framework in order before embarking on FTAs. The assumption in all these arguments is that the rest of the world is going to wait till Sri Lanka gets its house in order. This is not going to be the case. 

Strangely, no such fuss was made before signing SATIS where services liberalisation in all four modes are clearly specified (http://saarc-sec.org/uploads/document/SAARC%20Agreement%20on%20Trade%20in%20Services%20 (signed)20121011091030.pdf). Former External Affairs Minister Prof. G.L. Peiris signed this agreement on behalf of Sri Lanka. SATIS was being signed without the various stipulations, which are now being invoked by some segments in society, before embarking on FTAs. 

It is also vital to note that the ISLFTA was signed in 1998 but it came into operation only after more than one year of negotiations in 2000, and similarly the Pakistan-Sri Lanka FTA was signed in 2002 but came into operation in 2005. It is a similar format that would be followed by the proposed ETCA – negotiations will begin after the framework is agreed upon.

Wider market access

If we look at South Asian countries in SAARC, Sri Lanka is far behind others in working out duty free or preferential market access to other countries. In SAARC, five countries, viz. Bangladesh, Nepal, Bhutan, Maldives, and Afghanistan, by virtue of them being LDCs qualify for duty free access to the EU and Indian markets through the EBA (Everything but Arms) and the 2008 Indian package, respectively. In fact, nearly 84% of SAARC LDC exports have duty free access to the world at large. 

India has preferential market access to ASEAN, Japan, South Korea, by various FTAs and CEPAs it has signed during the last decade. Pakistan has FTAs with China, Malaysia and Sri Lanka and benefit from GSP-plus in the EU market. In contrast, Sri Lanka has preferential market access only to India and Pakistan (and some preferential access to APTA members China and Korea to which Bangladesh and India also qualify). Clearly, Sri Lanka lags behind even its South Asian neighbours in having preferential market access to its trading partners.

When Sri Lanka’s standing in the global and regional framework is behind others, it becomes all the more important to sign more agreements to embark on negotiations. That is the reason why the China-Sri Lanka Agreement was signed in May 2013 to embark on trade negotiations. The China-Sri Lanka Agreement includes services and investment liberalisation. Sri Lanka has already signed the SATIS and the China-Sri Lanka Agreement to embark on deeper negotiations. 

This raises the question as to why there is so much concern regarding Sri Lanka embarking upon ETCA negotiations with India to extend the current FTA in goods to cover services, investment, technology, and training as well. A misrepresentation of facts and figures or a negative political agenda should not hold back the country’s development prospects. A transparent rules-based framework is the best way to take advantage of Sri Lanka’s proximity to the Indian market. The Indian economy is the fastest growing large economy in the world with a rapidly expanding middle class, particularly in the Southern States. 

It is time Sri Lanka moves decisively to embark upon deeper economic agreements for its growth and development. The rest of the world is not going to wait for us. Time is not on our side and we need to move fast.