Tuesday, 28 October 2014 00:41
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PRESIDENT Mahinda Rajapaksa during the Budget reading in Parliament on Friday noted a Free Trade Agreement (FTA) with China would be signed by mid-2015. However, there are increasing concerns over what effect it will have on local manufacturing industries that will be pitted against the world’s largest factory.
Despite the Sri Lankan Government’s enthusiasm for FTAs with China and Japan concerns are yet to be adequately addressed. Discussions on negative lists are a key point that remains to be resolved with the Government attempting to promote Sri Lanka’s vibrant apparel industry, for preferential tariffs. The Government is also upbeat on negotiations focusing on getting a range of items with 100% tax exemptions but have declined to elaborate on what the goods were. This lack of transparency is surely worrying.
Despite the enthusiasm to fast track the FTA, which may be especially effective given that local manufacturers who were vociferous in lobbying against the Comprehensive Economic Partnership Agreement (CEPA) with India have so far been silent, it could well have extremely negative results.
Experts have already voiced concern that an FTA would be a massive disadvantage to local manufacturers. Local think tank Institute of Policy Studies (IPS) Executive Director Dr. Saman Kelegama told a gathering of businessmen in Colombo that while Sri Lanka’s exports would benefit from access to China’s emerging middle classes, imports would decimate the fledgling local manufacturers.
Dr. Kelegama called for a strong negative list to protect local manufacturers. He pointed out that Chinese imports are far more competitive and would decimate the local manufacturing market. Companies that are now engaged in import substitution products, even those as basic as pens and knickknacks, would find themselves in extremely difficult times.
Even India, which has a much stronger manufacturing base than Sri Lanka, has found their toy industry all but destroyed by Chinese imports. Unless special provisions are incorporated into the FTA to provide significant protection, Sri Lanka’s local businesses would face strong negative impacts, he has warned.
These are extremely valid concerns given that Sri Lanka’s exports have struggled to gain as a percentage of global exports. If domestic industries are hurt, then sustainable development will likely become a mirage for Sri Lanka.
Economists are already worried about the trade deficit and have insisted that worker remittances and income from the tourism sector are not adequate to fill the vacuum created by the dearth of manufacture. The Asian Development Bank in a recent study insisted that Asia Pacific countries should increase their manufacturing base to reach developed status. Highlighting Singapore and Malaysian development models, the ADB has called on governments to increase assistance to industries.
Sri Lanka’s Central Bank in September took stronger steps to encourage banks to reduce interest rates and push capital borrowing of the private sector. They hope investment will drive up local manufacturing capacity but these steps while laudable are still at a basic stage and unlikely to be able to absorb the full impact of a FTA.
Sri Lanka, especially, needs to improve its niche, high-end markets and put itself back on the global export map. The absence of a strong negative list in the China FTA, though, would mean a losing battle with the dragon.
