Tough times for trade?

Sri Lanka’s ambitions to improve trade and investment are likely to struggle in global crosswinds of protectionism that is blowing stronger across Asia. The country would need to reform faster and be more nimble to adjust itself to be competitive in a tougher fight for trade, especially in a region that is less integrated and more likely to adopt non-tariff barriers and other measures to close off trade.   

According to the Global Enabling Trade Report 2016 published by the influential World Economic Forum and the Global Alliance for Trade Facilitation, Sri Lanka was ranked 103rd out of 136 countries. In the previous ranking released in 2014, Sri Lanka was placed 96.

Sri Lanka’s deterioration is despite several other South Asian nations improving in their efforts at enabling global trade whilst Vietnam was the second best performer. As with ease of doing business rankings Sri Lanka is simply not moving fast enough to outrun dozens of other emerging markets that are embracing change faster. 

An ADB report this week notes that the anaemic global economic recovery continues to weigh on the region’s trade growth, which continues to decelerate. Last year, trade growth in Asia slowed to 2.3% in 2015, below the global average of 2.7%. The structural transformation underway in China has also contributed to the region’s trade slowdown. The risk of rising protectionism has increased and nontariff barriers have become major obstacles to trade.

The report highlights that greater trade openness and FDI can strengthen the region’s resilience to slow global growth, but countries need to improve their institutional quality, business environment and policy effectiveness to encourage FDI. 

Asia and the Pacific attracts almost a third of global FDI, among which more than half is now intraregional, driven by the expansion of global and regional value chains. Greater trade openness through more regional trade agreements and bilateral investment treaties can also increase FDI, which is what Sri Lanka is also banking on but liberalising its economy will be tougher given the backtracking seen from major economies. 

Earlier this year the World Trade Organisation (WTO) said in a report that between mid-October of last year and mid-May of 2016 G20 economies had introduced new protectionist trade measures at the fastest pace seen since the 2008 financial crisis, rolling out the equivalent of five each week.

That trend coincided with a slowdown in global trade now in its fifth year. Moreover, it was contributing to the persistent slow growth in the global economy, the WTO said, and the fact it was coinciding with an increase in protectionist political rhetoric around the world ought to be worrying.

G20 leaders pledged in the wake of the 2008 financial crisis not to repeat the mistakes of the 1930s and erect the sort of trade barriers that are now widely believed to have contributed to making the Great Depression worse. That pledge has largely held.

But since 2008, according to the WTO, G20 economies have introduced 1,583 new trade restricting measures and removed just 387. Between mid-October of 2015 and mid-May of this year they introduced 145 new protectionist measures — a monthly average of just under 21, the worst seen since the WTO began monitoring G20 economies in 2009.

In such a situation Sri Lanka will have to work harder than ever to spot opportunities and move faster to develop trade or lose the chance of faster growth.