FTAs alone not enough to boost exports: Economist

By Himal Kotelawala

Free Trade Agreements (FTAs) have a tendency to focus solely on tariff-related barriers at the border of the importing country while ignoring the numerous other obstructions that hinder export growth, and if Sri Lanka’s exports are to see a significant improvement, companies need to build capacity and competitiveness of their exports, Head of Economic Research at Verité Research Subhashini Abeyinsghe said.

Delivering a presentation titled ‘A Ship Without Sails: Trade Access without Competitiveness’ last week, Abeysinghe said that Sri Lanka “has a problem with its exports,” with apparel and tea exports accounting for about 50%. Despite the apparel sector’s commendable performance, she added, Sri Lanka’s exports have been stagnating since 2000. 



“Our apparel sector has done well. But it did not go unscathed. It did face problems. Before 2000, the apparel sector was the pulling factor of our export growth. After 2005, the quota system was phased out. All of a sudden, the apparel sector was thrown open to a very competitive environment, with countries where cost of production was lower, such as Bangladesh and Vietnam,” said Abeysinghe.

“Other exports did not fill the vacuum that apparel left behind,” she added.

While diversifying a country’s products and markets is a solution that has been touted like a mantra, exactly how said diversification must be carried out must be examined. Another strategy that has been suggested is that barriers that prevent certain sectors’ exports from doing better need to be removed in order for the sectors in question to take off.

“Trade barriers are anything that is beyond the control of the company that undermines its export competitiveness. If your companies are lazy, if they’re not innovative, if they’re not improving their processes, if they’re not investing in their skills and quality, that’s a problem nobody can address. But if companies are doing all of that and there are still factors beyond their control, then that affects their competitiveness,” said Abeysinghe.

Competitiveness, she explained, is determined by price, quality, quantity and timeliness of delivery. 

“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, complying with various government requirements: all of this can affect competitiveness of markets,” she said.

Barriers – which can be anything from taxes to red tape to corruption – can occur at different stages of the export process. 

“Lots of bottlenecks within the country. Behind your border, at your border, at the importer’s border and beyond their border there are barriers which need to be considered,” said Abeysinghe.

Some barriers are within the control of the exporter’s government, while the rest are the responsibility of the importer’s government.

The Government of Sri Lanka has been working towards introducing measures to reduce these barriers but given the need for better results, a different strategy ought to be adopted.

“Maybe it’s time for us to look at our own strategies and think, should we do things differently?” said Abeysinghe.

The most significant difference has been in trade agreements, at least visibly, she said, adding that that there has been a definite shift about the way trade agreements are approached.

“The last two agreements Sri Lanka signed was in 2006. For 10 years, Sri Lanka has not entered an agreement. Other countries have been singing agreements, but we have been out of this process for 10 years,” she said.

Trade agreements are fundamentally about market access. But does market access necessarily translate to market success? This includes attracting foreign direct investment (FDIs) into the country, said Abeysinghe, adding that market access to large countries will help bring more export oriented FDIs.

“Sri Lanka’s track record of FDI has been rather poor. For a long time we thought it was the war that prevented FDI coming into the country, but even after 2010, we don’t see a massive increase in FDIs. Even the FDI that has come in is largely domestic market oriented, infrastructure oriented and real estate driven. Somehow we have failed to bring FDI that wants to manufacture from Sri Lanka to export. And when you look at the experience of most other countries, you see that export oriented FDI has played a big role in actually giving a boost to exports,” she said.

According to Abeysinghe, export-oriented FDI favours countries with multiple trade agreements. Sri Lanka’s current FTAs focus on the border at the importing country, with heavy emphasis on Customs duty and not much else.

“Customs duty can create unfair competition, can penalise even the efficient producers; it’s quite a discriminatory practice in the international trading regime, because you can no longer rely on your own competitiveness to succeed in foreign markets,” said Abeysinghe.

“You enter into FTAs to at least to get an equal playing field. Right now, Sri Lanka, being a latecomer, is not actually getting into markets to get preferential access anymore. Because your competitors already have free trade. So you’re actually trying to enter to get an equal playing field. Most of our apparel sector – one sector that remains rather bullish about FTAs compared to most other sectors – their biggest problem is all their competitors have FTAs with most of these countries. Now we have to face this unfair competition,” she elaborated. 

Just removing the Customs duty has not given a boost to Sri Lanka’s exports.

“Somehow, our trade agreements have not really delivered, either because of their structure or the level of liberalisation, the trade coverage; so many factors could contribute,” she said.

Abeysinghe reiterated that market access is not the same as market success. Sri Lanka’s current trade agreements are being utilised at differing rates and aren’t impacting growth at a desirable level, she said. Modern trade deals go beyond goods and the border and they also incorporate non-tariff barriers as well as Customs duties, she added.

In order to translate market access to market success, the factors that impede competitiveness and attractiveness to FDI must be looked at, said Abeysinghe.

“Behind the border, at the border issues are important for investors. Even to boost export-oriented FDIs dealing with these inefficiencies is as important as FTAs. But you don’t hear the emphasis put on that,” she said.

Trade agreements also require FTA plus support, as certain markets are very challenging due to their complex regulations, she added.

Once the agreement is signed, it’s not just the government that can help. Other players too can help exporters succeed, by finding buyers, showcasing products at international export exhibitions and trade fairs. Export credit lines can also help, said Abeysinghe, by giving exporters a first mover advantage. 

“Borrow from us to buy our own products.” Sri Lanka needs to strengthen commercial sections to be the eyes and ears of companies abroad, she said.

Diversification shouldn’t necessarily mean moving to another industry or different market. Rather, increase competitiveness through product choice. Generic products can be swapped for branded products; there can be a shift of focus from mass markets to niche markets.

“Rethink diversification,” she said.

FTAs have always and will continue to attract opposition, said Abeysinghe, but this may be a good thing, as it leads to trade policies and can solidify a country’s vision.

“This is positive. If somebody doesn’t challenge and question, certain things can be taken for granted,” she said.

“One positive outcome is the emergence of the government thinking in terms of ‘we need to have a trade policy.’ Sri Lanka needed a trade policy for a long time, because we have a large number of organisations dealing in trade and they were totally in isolation without any synergy and without a proper vision,” she said.

Criticism and discourse is good, noted Abeysinghe, reiterating that, while FTAs are important, if Sri Lanka is to succeed on the export front, the country needs to build capacity and competitiveness of its exports.