Economic diplomacy and ETCA

Economic diplomacy is the use of the full spectrum economic tools of the state to achieve its national interest. Economic diplomacy includes all the economic activities, including but not limited to export, import, investment, lending, aid, free trade agreements, etc.

India

India has engaged in economic diplomacy primarily through the use of trade and aid. India set up a development wing in its government in January 2012. The Development Partners Administration (DPA), is a primary way India uses economic diplomacy, in this case development aid, as a way to engage diplomatically. The DPA is building 50,000 housing units in Sri Lanka. Economic diplomacy and the DPA are very important to Indian foreign policy. 

Credibility of leadership

Sri Lanka is moving at rapid pace, paving way for economic development with the leadership of Prime Minister Ranil Wickremesinghe’s programs and strategies including industry targeting, commercial and industrial development and competition benchmarking roads, airports, marine ports, railroad facilities and public transportation, lighting up the way are energy programs and projects – including renewable energy generation and distribution facilities, and energy efficiency programs, road development, highways, ports, increase in the arrival of tourists, the beginning of the acceptance by Western countries and stability of Government which attracts foreign investments are all triggered to enhance the standards of living. Sri Lanka is on the track of economics for development.

Economics for development

Economic growth signifies the increase in per capita income or increase in GNP. In present times, the term economic growth refers to sustained increase in a country’s output of goods and services, or more precisely product per capita. Output is generally measured in terms of GNP. The term economic development is far more comprehensive. It implies progressive changes in the socio-economic structure of a country. Hence, compared to the objective of development, economic growth is at rapid pace. By a larger mobilisation of resources and raising their productivity, output level can be raised. 

The process of development is far more extensive. Apart from a rise in output, it involves changes in composition of output, shift in the allocation of productive resources, and elimination or reduction of poverty, inequalities and unemployment. As a concept, economic development can be seen as a complex multi-dimensional concept involving improvements in human well-being. Producing more life sustaining necessities such as food shelter and health care and broadening their distribution, raising standards of living and individual self-esteem, expanding economic and social choice and reducing fear. 

ETCA

Much has been discussed about the ETCA and its disadvantages which have been grossly exaggerated and magnified to deter the people. The two areas of profession which Sri Lanka will have assistance from India is computer and computer related services and ship building and repairs. There is a dire need for research statistics which are an important tool. In recent years innovation has moved to the centre stage. However, India will open up 20 professions for Sri Lankans initially and expand later. Research statistics are an important policy planning tool for industrialised countries emerging economies and developing countries alike. Both countries have ensured that the interests of professionals are well protected.

Even as certain sections of Sri Lanka continue to view sceptically the proposed Economic and Technology Cooperation Agreement (ETCA) with India, the pact, which would be an improvement over the existing Free Trade Agreement (FTA) will soon be a reality.

Indicating this, High Commissioner of India Y.K. Sinha used the 70th Independence Day as the occasion to tell critics and sceptics of the ETCA that “it is up to Sri Lankans themselves to decide on the contours of any agreement that they sign with a foreign country.” However, there had to be “genuine debate and discussion” among stakeholders in Sri Lanka. High Commissioner Sinha, referred to the latest round of discussion on the pact in Colombo and expressed the hope that the agreement, when signed, would be of mutual benefit to both countries.

Bilateral trade

On bilateral trade, the High Commissioner said it was $4.6 billion last year, of which Indian exports were valued at about $ four billion and Sri Lankan exports — $645 million. Nearly 60% of Sri Lankan exports were making use of the FTA whereas 90% Indian exports did not use the channel. 

The 4th Commerce Secretary level meeting between India and Sri Lanka took place in Delhi. The new framework called the Economic and Technology Cooperation Agreement (ETCA), that takes the current India-Sri Lanka Free Trade Agreement (ISLFTA) to the next level, was discussed by both parties. The proposed framework envisages exclusion of professional labour liberalisation by Sri Lanka other than in two subsectors, viz., ship builders and IT professionals.

MRA

The signing of Mutual Recognition Agreements (MRAs) on standards was also discussed. Moreover, the Indian side will organise workshops in Sri Lanka for Sri Lankan exporters/officials to increase awareness of Indian standards, regulations and certificate of origin. 

FDI

India is Sri Lanka’s largest as well as the most balanced trading partner. Overall bilateral trade between the two countries exceeded $ 4.5 billion in 2014. India is the largest source of imports to Sri Lanka and the third largest destination for Sri Lankan exports. It is among the first five largest investors in Sri Lanka and bulk of the Sri Lankan FDI overseas is located in India. 

ETCA framework

ETCA will support by building on this solid foundation taking into account the asymmetry between the two countries, Sri Lanka and India will engage in rules-based trading and ETCA will provide that framework for deeper economic engagement with India. Further discussions will focus on the content and scope of the Framework Agreement and an “early harvest,” of addressing some non-tariff barriers which have been constraining Sri Lankan exports to India.

India has opened its economy to the world which will result in several new networks being formulated, which would be advantageous to Sri Lanka. The infrastructure in both countries are rapidly developing which will result in reducing the cost of production.

Support from Ceylon Chamber of Commerce

The Ceylon Chamber has reaffirmed its fullest support towards an agreement that widens and deepens our economic engagement with India, while reiterating the need for systematic stakeholder consultations, clear and coherent communications, and firm commitment to tackling issues faced by businesses. The statement issued by the Ceylon Chamber of Commerce follows: 

“The Ceylon Chamber of Commerce has consistently supported the expansion of Sri Lanka’s trade interests through signing mutually beneficial and well-designed trade agreements, and this has been clearly articulated in our ‘10 Principles’ on the economy. The Chamber believes that such agreements are an important tool in deepening trade and investment opportunities for our businesses, within a rules-based framework. The Ceylon Chamber welcomes the Hon. Prime Minister’s statement in Parliament explaining the Government of Sri Lanka’s (GoSL) stance on the proposed Economic and Technology Cooperation Agreement (ETCA) with India. This statement can help allay misperceptions around the proposed ETCA. The Chamber now urges the authorities involved in the ETCA process to build on this by adopting a systematic consultative and information sharing process with the private sector. Any bilateral or regional agreement that Sri Lanka forges must be supportive of the country’s holistic economic interests (rather than cater to individual business interests); must recognise size asymmetry of the economy; and must take a phased approach to liberalisation where domestic regulatory systems need updating (for instance, on movement of natural persons in professional services).”

A dialogue process that is well structured and includes all relevant stakeholders can mitigate the risks of the current ETCA process suffering from the difficulties that the earlier proposed Comprehensive Economic Partnership Agreement (CEPA) suffered. We call on the Government ministries and departments involved in the process to adopt a more systematic approach to private sector consultations, so that we may mobilise evidence-based representations from the private sector.

The Chamber also encourages technical experts from the Government (particularly the Department of Commerce) to play a more active role in educating the public, addressing queries/concerns of the private sector, and providing relevant information in a timely manner. While we recognise that the final text of an agreement cannot be made public due to the nature of bilateral trade negotiations, the GoSL can consider publishing a ‘White Paper’ on ‘Expanding trade in services, investment and economic cooperation with India’, which captures the GoSL thinking on the issue, and clarifies the approach to be taken. The Department of Commerce can consider setting up an ‘Inquiry Desk’ either in person or on a dedicated website where questions and clarifications on the ETCA can be directed.

Opposition to ETCA

Meanwhile, opposition to the ETCA – and indeed further overall liberalisation of trade in goods and services – citing ‘national interest concerns’ must be carefully examined alongside the potential gains to consumers and firms in Sri Lanka. The latter too is ultimately a matter of national interest. The Chamber urges GoSL to not entertain protectionism that may come under the guise of national interest concerns. It is important that GoSL looks beyond the narrow commercial interests of the few and instead focus on the broader economic imperatives of exports, investments, and job creation to set a course for the future prosperity of the economy.

Expanding markets

The Prime Minister’s comments in his recent statement that Sri Lanka needs to focus on expanding the markets for our exports and tap in to the growing middle class in emerging economies in Asia and Europe. Over the last decade and a half, the Sri Lankan economy has become more closed and more inward looking than before, resulting in a falling share of global exports and a declining exports-to-GDP ratio. As a small economy with a limited domestic market, trading more with the world and welcoming more business and investment partnerships from abroad is our only path to prosperity. In this, greater openness to trade in services cannot be ignored, owing to its strong and growing link to goods trade and investment. Services liberalisation needs to be pursued, within a mutually-beneficial framework and following stakeholder discussions.

CEPA and ETCA

Such confusion and speculation is in the air with regard to the proposed ETCA with India. The origins of this uncertainty are traceable to the now disowned Comprehensive Economic Partnership Agreement (CEPA). In 2002, Sri Lanka and India agreed to expand the existing India Sri Lanka Free Trade Agreement (ISLFTA) into a CEPA. The Sri Lankan leadership may have expected wide benefits in developing closer linkages with the rapidly expanding Indian economy. Negotiations proceeded and the Sri Lankan government participated actively. Originally the CEPA was scheduled to be signed in 2008 during the SAARC summit.

Sri Lankan industry and professional bodies, not having been adequately engaged, began expressing considerable opposition to the proposed agreement. The Government of Mahinda Rajapaksa balked and did not proceed to conclude the CEPA. Latent nationalist tendencies contributed to the uncertainty.

The opposition to the CEPA continued despite the change of government, and the new government, elected in 2015, also came under the same pressure. On December 9, 2015, the Prime Minister said in Parliament that Sri Lanka will not sign the CEPA but will enter in to an Economic/Technical Co-operation Framework Agreement with India.

Trade agreements

Sri Lanka is not a stranger to bilateral and multilateral trade agreements.

Sri Lanka has concluded many goods and services liberalisation agreements e.g. SAFTA, the FTA with Pakistan, the FTA with India, the APTA, and the BIMSTEC (Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation).

Sri Lanka has concluded over 25 Investment Promotion and Protection Agreements, including with India. It is already a party to the SAARC Agreement on Trade in Services 2010 (SATS). The SATS promotes further agreements liberalising the trade in services progressively in the SAARC region. Liberalisation is expected to happen on the basis of a positive list on a request and offer basis.

These liberalisation agreements must be consistent with Art V of the General Agreement on Trade in Services (GATS). All this entails a commitment to continue liberalising except in the circumstances provided. E.g. security issues, balance of payment issues, etc. Thus, Sri Lanka is already committed to opening up its services sector to SAARC parties in principle. Sri Lanka is a party to the GATS. The GATS recognises the increasingly overwhelming importance of services in the global economy. Services account for about 58% of the Sri Lankan economy.

ETCA

The goal of the proposed ETCA and the ETCFA is to enhance economic, trade and investment cooperation. The Draft ETCA covers a range of sectors, including the trade in goods and services, the movement of natural persons, economic relations, and investment and technology cooperation. It aligns itself with the WTO GATT and states that any non-tariff barriers, anti-dumping measures, national treatment must be consistent with GATT 1994. It contains detailed provisions on anti-dumping actions (Art X). Art VI of the GATT is incorporated. (The chapters on investments and the movement of persons have been removed in the publicly available draft of the ETCA).

Under the proposed ETCA, services liberalisation will be on a case by case requests and on the basis of a positive list. Serious reservations exist on whether the Sri Lankan legal and other structures are ready to contemplate the liberalisation of the services sector as envisaged in the draft ETCA.

Importance of India

India is now the third biggest export destination for Sri Lanka after the US and the EU. It is the second biggest investor in Sri Lanka. Indian investments are prominent in the areas of petroleum (IOC), vehicle assembly, telecoms, banking, hotels (Taj), etc. India is also the main destination for Sri Lankan outward investors, e.g. Damro, Dankotuwa, John Keells, Brandix, Aitken Spence etc. Tourist arrivals from India exceeded 170,000 in 2015. This is a factor that can be exploited to Sri Lanka’s trading advantage.

The relevant trade and industry bodies of a country should be closely involved during negotiations so that their concerns and objectives can be reflected to the extent possible in the texts. Their endorsement is essential for the success of the agreements. The experience of successful exporters to India could be shared for the benefit of all. Trade facilitation must be included in a future ETCA.

Prime Minister’s economic diplomacy

PM Ranil Wickremesinghe’s leadership and his confidence on ETCA would pave the way for economic diplomacy with India.