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WHEN it comes to Free Trade Agreements (FTAs), Sri Lanka is spoilt for choice. Not only is the Government having discussions with China and the US over possible FTAs as underlined by the recent visit of Pakistan Prime Minister Nawaz Sharif, there is much interest in expanding the existing FTAs to include services as well. India has been negotiating with Sri Lanka for several years to push forward an agreement on services, which has been put on ice by the Sirisena administration, but talks are ongoing to include two sectors in a different treaty to be signed later this year.
All these possibilities are exciting and worrying for Sri Lanka’s private sector at the same time. As a small country, it does not want to be swamped under the production power of much larger economies but also does not want to be left behind in the global race for investment. As budget and trade deficits grow and loan repayment burdens increase in tandem with a depreciating currency, foreign investment to Sri Lanka becomes ever more important. In this context the plethora of new opportunities available to the country is welcome. However, the Government and private sector have to coordinate to ensure that these opportunities are used in the optimum way possible.
It was well recognised that there were concerns about Sri Lanka’s large trade deficit with India, Pakistan, US and others, therefore both sides attach high priority to working towards more balanced growth in trade. Both India and Pakistan have already announced they will make it ‘easier and smoother’ for Sri Lanka to access their markets.
Countries desiring stronger trade pacts with Sri Lanka have also recognised the asymmetry between the economies as a source of concern for Sri Lankans. Leaders of these countries have consistently advocated the early completion of services and trade agreements so that there can be rules based bilateral agreements founded on the principles of non-reciprocity and special and differential treatment.
The case for the early completion of trade agreements is even stronger now that Sri Lanka enjoys the goodwill of the international community and officials have given the assurance that steps would be taken to address concerns over the large trade imbalance. Skilful negotiations on the negative list and safeguard agreements against import surges can also build greater protection against the disadvantages associated with the asymmetry of the two economies.
Perhaps the best way to tackle the trade imbalance is to attract FDI from these countries to create competitive supplies to export back into the international market. This strengthens the case for moving from the current FTA in goods to agreements which also includes investment in services.
Sri Lanka is also studying the possibility of signing up for the Trans-Pacific Partnership (TPP), which will account for an estimated 40% of global trade and includes the largest economies on earth. While none of these can be done overnight setting them as targets will also assist the local economy to make the necessary liberalising measures and reforms to eventually be partners to a process that has the capacity to make Sri Lanka realise its potential.
India is currently the fastest growing economy in the world and the world’s engagement with India is at a ‘new level’. This offers greater opportunities for Sri Lanka to benefit from the advantages of proximity. The reduced transaction costs as a result of improved infrastructure in both countries increases the scope for leveraging proximity, particularly to plug into Indian supply chains.