Saturday, 21 February 2015 00:28
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Sri Lanka is resetting its ties with the world not just in political terms but economic development as well, but in doing so it has to engage in a tightrope walk between the proposed Chinese Free Trade Agreement (FTA) and the Comprehensive Economic Partnership Agreement with India.
The Chinese FTA, despite being much younger than the CEPA proposal, was pushed forward under the previous Government. Policy Planning and Economic Affairs Deputy Minister Dr. Harsha de Silva this week assured it would not be disregarded but acknowledged a more prudent approach would be taken.
CEPA, on the other hand, has garnered vociferous disapproval previously from local business leaders, but economists may see it as essential to gain from the one billion marketplace on Sri Lanka’s doorstep. It could well come in handy to attract targeted Indian investment with a view to assisting Sri Lanka widen its export base and enabling integration into regional supply chains, including in the automobile parts, light engineering and pharmaceutical sector that India has already expressed keenness on.
Sri Lanka would also benefit from more investments in the form of joint venture projects to encourage the Sri Lankan private sector and State enterprises to work together, like in the case of the sugar refinery in Hambantota, which will replace imports as well as expand exports. It is also somewhat easier for local businesses to work with India due to common language and business culture rather than China.
A Chinese FTA without a strong Negative List could well have extremely dangerous 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.
He pointed out that Chinese imports were 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 its 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.
Economists are already worried about Sri Lanka’s 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, especially, needs to improve its niche, high-end markets and put itself back on the global export map. However, that also needs significant booster shots of “yahapalanaya.” Trade agreements need to be transparent and engage more with stakeholders. Pundits have suggested a phased-out approach that would give time and resources for local companies to upgrade their products as well as expand deals to include services so there would be a more balanced playing field. Right now Sri Lanka has lots of options but few means of using them.
