South Asia inter-trade is only 2% of GDP

It is estimated that the potential trade between countries in the South Asia region is around US$ 9,000 million based on the averages of the recent past, whilst the actual trade registered hovers around US$ 4,000 million, which is just half the potential value.

This information is very interesting given that Sri Lanka is up against the EU GSP+ challenge and the downturn of the US economy that has resulted in driving down Sri Lankan exports by almost 10 per cent in 2012.

South Asia inter-trade – 2% of GDP

Even though there is a US$ 4,500 million opportunity in the South Asian region that needs to be tapped, the fact remains that inter-regional trade accounts for only 5.5% or a mere 2% of the South Asian region’s GDP. In contrast in East Asia, this number stands at a mammoth 55% of trade coming only from the East Asian countries, which is an indication of the strong integration that exists in that part of the world.

A point to note is that the 55% trade accounts for a staggering 20% of the GDP, which further justifies the integration that we do not see in South Asia. This gives an idea of the trade potential in our part of the world and the potential for private sector business growth for brands such as DHL in South Asia.

SL-India FTA – opportunities?

Whilst from a macro end trade between India and Sri Lanka hovers around US$ 3 billion, if we do a detailed analysis of the Free Trade Agreement (FTA) with India, we see that the quota utilisation of the strategic products of Sri Lanka – tea and garments – is below 15, which means that there is yet opportunity based on the FTA though in reality it can be different, as the market conditions may have changed since the FTA was signed.

Some of the reasons cited for the garments and tea not going through to India are not tariff barriers, like delays in customs clearance, port restrictions, necessity for several tests to be carried out in India even though certificates are accompanied by the relevant authorities, bureaucratic processes that have resulted in many Sri Lankan exporters losing confidence in bilateral agreements, which are essentially designed to promote fair competition and equitable benefits.

The current process in place which is designed to address disputes settlement like NTB issue faced by Sri Lankan exporters is also complicated and long drawn that it actually defeats the purpose it is designed to address, says some exporters.

Disputes of SAARC countries are expected to be resolved within 330 days, whilst in the case of our counterparts it is different and more efficient like ASEAN countries resolve disputes within 290 days and NAFTA in 310 days. These are some of the issues that need to be resolved. May be the first step is to accept that there are NTBs; then it can be chased after and resolved, which is the best option.

Original objectives – FTA

If we go back in time to the original objectives of the FTA, in the case of India for instance it was based on the premise of a study done on the Regional Comparative Advantage (RCA), to drive equitable trade between regional partners so that each country can benefit from the comparative advantages that one possesses in a country.

The key obstacle to this end was the gradual removal of trade barriers over a period of time. Both countries agreed on a list of products which are in the negative list, phasing out list and zero duty lists and the timeframe to achieve the end objective of freer trade between the countries.

The timeframe was important so that suppliers can get adjusted to international competition and vice versa. Currently, except for a few products in the negative list of India, most of the products of Sri Lanka have zero duty access technically into India.

From an Indian point of view, other than for around 800 odd SKUs in the negative list, all other products from India are entitled for duty free access into Sri Lanka, but why is the business growing exponentially is the key question to be asked by many private sector companies.

Did the FTA benefit Sri Lanka?

Obviously the answer to the question is yes, the FTA has supported the growth of trade, but not to its true potential. After many years, when we look at the reality of the trade between Sri Lanka and India, we see a skewed basket of exports like processed food, copper, electrical machinery, aluminium, articles of stone, organic and inorganic products to name a few getting across to the Indian market, whilst the strong holds of Sri Lanka, garments and tea, are facing the wrath of the Indian authorities depriving Sri Lanka from doing some serious brand building initiatives in an overseas market for sustainability.

A point to note is that 86.1% of the products exported to India are under concessionary duty rates, which means that the export performance is a direct reflection of the performance of the FTA.

The challenge – find new opportunities

A key point to note is that in any bilateral agreement, we are dealing with entrepreneurs and hence there will be a time of testing global markets and evaluating not only the financial opportunity, but the working relationships of agents/importers in the global market. Hence there will be a time of test marketing that we need to provide for a potential exporter to mature out. But the key is to provide an environment for fair competition to take place.

However, we cannot hide behind this fact but search for new avenues for growth in our established products from a Sri Lankan point of view. We must drive the world-acclaimed garments sector into India. We also need to be cognisant of the probable trade agreement between the EU and India and the ramifications it can have on Sri Lankan exports.

Will there be trade diversion? If this happens, what impact will it have on the Sri Lankan workers? Sri Lanka should also pursue extending the well-established service sector products into India, which contributed to almost 63 per cent GDP to Sri Lanka.

Case in point – DHL

To take a private sector perspective on the trade interaction in the South Asian region, if we take the courier giant DHL as a case in point, the organisation with even just 2% of GDP trade employs 1,000 people in India today and operates 15 network flights, whilst in Sri Lanka alone accounts for 22 flights per day (inbound and outbound), which gives us an idea of the value creation that has been fuelled by economic growth.

From a customer service perspective the call centre dedicated to DHL activities employing 2,000 youngsters all trained to global standards and earning salaries as per the global salary scale on decent wage rate explains the human capital development that happens due to increased trade. In fact, the Indian business of DHL was the first 24-hour customer care hotline to open and the first air express company in India to have in-house co-located with the customer clearance unit.

Hardware way back in the company is powered by 870 vans and 450 retails, once again only in India, which has refashioned the delivery business in India. This indicates how the macro development agenda gets tied to the private sector performance of companies. May be the next step is for the company to calculate the carbon footprint and thereby work towards a carbon neutral objective so that the pristine environment of South Asia can be preserved.

Way forward

Whilst the policyholders debate the way forward on South Asia that is very strongly entrenched with a political economy at play, I feel it’s time for the Sri Lankan representatives to work through forums like SAARC and the Chamber of Commerce and Industry so that these institutions start playing an active role in the facilitating trade in the region, perhaps under the fabric of the SAFTA architecture.

I strongly feel there is opportunity for more trade between countries like Sri Lanka and India but the challenge is, how do we break down the NTBs and the PTBs and make it happen?

(The author is an award winning business personality, who is on the boards of directors in the private and public sector pushing the growth agenda of Sri Lanka. The thoughts shared are strictly his personal views based on his doctorate studies and not the views of the organisations he serves.)