Successful trade agreements take 3-5 years to launch

The buzz word in today’s media is the proposed agreement between Sri Lanka and India called ETCA. Just like any other innovation that policymakers try to launch in Sri Lanka, we see a share of media which is not that positive, to be honest. 

However, strangely the advocates of free trade are remaining statuesque, whilst stakeholders are voicing their opposition. I am quite surprised to see the mature attitude taken by the IT industry on ETCA but the GMOA’s strong share of voice against it needs some thinking by policymakers. 

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 around a six hundred million dollars with many nontariff barriers yet in play that needs 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. 

FTA’s 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 has 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 below half a year and we must not allow ETCA to fall into this trap.

But the argument that some quartets 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, as a person who has been at policy level in industry and commerce for the last 10 years, the PM 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 a 35%. The 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 given the crazy export performance of just 10.7 billion dollars recorded in 2015.

South Asian market $ 1,000 bill+

Whilst understanding the concerns of the GMOA on ETCA, a fact that we cannot overlook is that the South Asian economy as a whole is estimated at 1,000 billion dollars 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 billion, Sri Lanka’s economy is just about crossing the 80 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. But sadly we have not got our act together.

Sri Lanka must take cognisant of the fact that at least in 2016 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 drastic 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. This means a de-growth of around 20% on a year-on-year basis. 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. This may include valuing the prime distribution points that LIOC received as well as the share issue obligations. It is alleged that LIOC made Rs. 500 million nett from the Rs. 1,200 million worth share issue that resulted in a 70% ownership stake.

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. 

The timeframe was important so that suppliers could get adjusted to international competition and vice versa. Currently, except for the 429 products in the negative list of India, all other products of Sri Lanka have zero duty access technically into India. From an Indian point of view other than for the 1,180 products in the negative list, all other products from India are entitled for duty free access to Sri Lanka. 

Sadly there were no objectives set on the employment that had to be created at the end of a five-year or 10-year time period and hence has become a hotly-debated point. 

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. 

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 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 Lanka end, develop 10 export brands in the Indian market just like what Damro and Amante 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 two months 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 in 2009 with garments crossing the five million dollar mark which is a positive development. 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.

So ETCA?

I strongly feel Sri Lanka must sign the CETA and the other FTAs that come our way in the future with the new-found political stability and the only land that is free of terrorism in our part of the world. 

But it must done with consultation and on the merit of trade and not due to a political agenda. 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 thoughts are strictly the views of the author. Writing is a hobby he pursues.)