Getting the full FTA benefit

As Sri Lanka prepares to sign a Free Trade Agreement (FTA) with Singapore before the end of this year, the Government will also have to take a closer look at liberalising the economy to promote competitiveness. 

Development Strategies and International Trade Minister Malik Samarawickrama has said the Government is considering giving a trade adjustment package to local businesses but working out the kinks in the process in a timely manner will be both challenging and crucial.    

Sri Lanka’s economy is notorious for its protectionism, which has ironically become worse despite the island being the first in South Asia to embrace a free market economy. Strange and often illogical tax exemptions and other perks have been handed out by successive governments, some under the mistaken guise of patriotism and others under the assumption of protecting domestic companies. 

Many professional bodies as well as companies have objected to trade liberalisation on the grounds that it would take away jobs from Sri Lankans and it was one of the main points of contention regarding the Economic and Technology Cooperation Agreement (ETCA) with India. 

Singapore and Japan as well as many other countries the Government plans to ink FTAs with are unlikely to provoke the same ire as ETCA but if Sri Lanka is to gain tangible results from these documents they need to concentrate on far more than reducing tariff-related barriers at the border of the importing country. 

In a nutshell if Sri Lanka’s exports are to see a significant improvement, companies need to build the capacity and competitiveness of their exports, which would mean attracting significant Foreign Direct Investment (FDI) to the manufacturing and service industries. 

Previously, the assumption was FDI was stymied by the war but even eight years after the conflict Sri Lanka’s foreign investment has remained in the doldrums, indicating that something much harder to fix is suffocating growth. This has also been reflected in repeated Ease of Doing Business rankings where Sri Lanka has failed to advance significantly because competing countries are implementing reforms faster. 

Trade barriers are anything that is beyond the control of the company that undermines its export competitiveness. There can be lots of barriers that make companies non-competitive. It can be institutional inefficiencies, it can be the more macroeconomic environment, tax policy, infrastructure, lack of information, rules and regulations and complying with various government requirements; all of which can affect competitiveness of markets.

Barriers – which can be anything from taxes and red tape to corruption – can occur at different stages of the export process. Some barriers are within the control of the exporter’s Government while the rest are the responsibility of the importer’s Government.

The Sri Lankan Government has been working towards introducing measures to reduce trade barriers but given the need for better results, perhaps needs a different strategy. Sri Lanka signed its last FTA in 2006 and in the last decade many other countries have moved forward and signed agreements with their key markets. In such a scenario the country is simply playing catch up because it needs access to a level playing field enjoyed by competitors. Certain industries, including apparel, could benefit from Sri Lanka just becoming a member of the FTA club. 

However, if trade agreements are to be optimally utilised then they need to have a broader impact. In a world facing a globalisation backlash it is no longer enough to simply be part of the crowd.