Is Sri Lanka ready for Free Trade Agreements? Part I

Developing global antipathy towards free trade is motivated by the outsourcing of jobs from the rich industrialised world to other countries, and fast-spreading automation, and resulting greater efficiency leading to higher productivity, which is creating multitudes of losers from another technological revolution now in full swing

By C.R. de Silva

Introduction and economic context

The economic philosophy propagated by the International Monetary Fund (IMF) to any and all developing countries which are unfortunate enough to require its financial bail-outs due to governments living on ‘maxing the credit card’ and ending up in Balance of Payments (BOP) crises, or near ‘bankruptcy’ in plain language, is to comply with its wide-ranging neo-liberal ‘conditionality’, which principally includes, inter alia, liberalisation of markets, largely through free trade, expressed in this day and age, mostly by Free Trade Agreements (FTAs), bilaterally or regionally – a policy being assiduously followed by Sri Lanka now for some time – but compellingly now, since the IMF made an EFF commitment of a grossly inadequate $ 1.5 billion in mid-2016 – a rescue operation, then expected to catalyse huge amounts of additional foreign exchange and FDI, which have certainly not materialised, leading to promised “take-off” of the economy, contrary to IMF and Government expectations. 

Meanwhile, fundamental tenets of IMF’s basic philosophy, on which Sri Lanka’s economic reform program is based, have also come into serious question both internally within the IMF, and among distinguished economic thinkers and at least one, well known Nobel Laureate in Economics, whose counsel this Government has sought. (See the writer’s ‘IMF-directed Slow Development Strategy,’ Daily FT, 1 March 2017 et seq). However, since Sri Lanka came under the IMF’s “intensive surveillance” once again in mid-2016 through being subjected to the standard economic and financial policies of the IMF, given the country’s serious foreign exchange crisis and current, serious export and FDI slowdown, the question arises whether targeted free trade under FTAs is the correct antidote to rush into, before a viable industrial base able to export competitive manufactured products, is established in Sri Lanka? 

This essay reviews the wisdom of the free trade path this country has now committed itself to follow in the waning days of the Western concept of globalisation and free markets, which has spread universally, resulting in a few haves and many more have-nots, both in the prosperous, highly industrialised countries as well as in the developing world, including Sri Lanka, which is the particular focus of the commentary that follows. 

Global order at historic crossroads

There is abundant evidence now that history repeats itself and that the politico-economic world order, conceived and established by the Western nations who won WWII in 1945, is clearly collapsing. One significant enduring outcome of the Western adherence to a neo-colonial and neo-liberal global policy architecture, is the ensuing, long-standing and stark division of the post-colonial world into the highly industrialised and rich countries, essentially of North America and Europe, a club later joined by Japan and Australia on the one hand, and on the other, the developing countries of the so-called Third World – these two diverging groups, divided by their glaring disparity in income differentials and living standards. 

This global dichotomy is breaking down with the centre of economic progress shifting to another continent in this Asian Century, with the decline in western economic power, following the above-mentioned neo-liberal policy prescriptions, principally incorporated in IMF theory and its application.

Substantially unregulated capitalism as an economic dogma, later reinforced by globalisation and the denial of a level playing field to the post-colonial developing world, decreed and perpetuated by an entire panoply of globally enforced policies and disciplined by a set of multilateral institutions, established and controlled by these same WWII victors, who set themselves up as the veto-wielding UN Security Council, is a system breaking down in the wake of the severe financial depression of 2007-08, caused by a runaway capitalism in the US; and contributing to the phenomenal rise of populism, a new nationalism, emerging trade protectionism and greater economic and financial direction through activist State intervention in economic policies, in the wake of globalisation’s creation of a small class of haves and a huge class of have-nots, through the selective and unjust enrichment of a small elite at the expense of the vast majority. 

A highly-regulated world order, based on unethical premises and enforced by military power, but lacking moral authority, was destined to fracture in the wake of the big players perpetuating a universally unfair and unevenly competitive economic and commercial trading system, disadvantaging hundreds of millions of people in the earlier subjugated, colonised countries of the Third World – in a globalised, neo-liberal, economic system lacking equality of opportunity, both domestically with ruling elites, and internationally, facing exploitation and even moral ‘intimidation’ applying human rights colonialism, at the hands of the rich west and its superficially multilateral architecture.

The philosophical and multilateral institutional control of the world order, enforced through the application of neo-liberal dogma based on open markets, free trade, fiscal conservatism or austerity, free exchange regimes (without controls), privatisation of state assets and minimal regulation of financial markets, continued to impoverish the former colonies and create a global underclass, regulated by the pervasive, sometimes ‘imperially intimidatory’ UN system, including the IMF in economic policy, is clearly disintegrating. Recent official pronouncements indicate a strong resistance to this trend by the multilateral agencies charged with the maintenance of the neo-liberal world order, under which the rich, industrialised countries benefited strongly from globalisation.

The start of the West’s eclipse saw the rise of Asia, Latin America and even large African economies, symbolised by the emergence in the last several decades by the establishment of regional politico-economic groupings like ASEAN, the BRICS five, IOZ grouping of Indian Ocean littorals, BIMSTEC in South Asia, regional banks such as ADB and Inter-American Development Bank, and AIIB recently formed by China; the phenomenal and quick rise of India and centrally-planned China as regional powers, and the ‘miracle’ economies of seven East Asian tigers, which spurned neo-liberalism and followed the established precedent of Japan to pioneer a different, speedy, sustainable and inclusive, and therefore unique, development strategy, to challenge the IMF’s neo-liberal, strategy of slow-motion economic development. The prospective failure of TPP, an American initiative to elbow out China from global and regional trade was also decisive blow, simultaneous with the rising prospect of China-led RCEP trade grouping, out of the ashes of the established world order. 

China, forecast soon to emerge as the largest and dominant economy in the world, established the earlier mentioned Asian Infrastructure Investment Bank (AIIB), with the membership and capital participation of 56 other countries, in the face of fierce and vocal American opposition, challenging the Bretton Woods international development twins (still dominated by the decision-making power of the WWII victor-shareholders), and China’s proposed formation of the Regional Comprehensive Economic Partnership (RCEP), linking up with several Asian members, signals the arrival on the fast changing, now Asia-centric, global stage of a new world power player. 

These developments mirror the global overreach of a declining super power, which dominated the world stage since 1945. The Chinese President of the AIIB declared at its mid-2015 inaugural meeting: “History has never set any precedent that an Empire is capable of governing the world forever.”

The convulsions caused in the Islamic societies of Afghanistan, the Middle East and Libya by unsuccessful and destabilising Anglo-American invasions, occupation and destruction, causing anarchy and civilian distress in those ancient Islamic civilisations, has triggered close to a two million exodus and flight of homeless refugees to Western Europe, itself causing socio-economic distress and dislocation of stable, prosperous, near-homogenous societies; a wave of defensive anti-immigrant backlashes, and strains to the very concept of European Confederation and instability to the Euro as a competing world currency; consequent anti-globalisation backlash, nationalism, populism, border closures, Brexit and regime change in the US in a popular electoral revolt against the status quo, and most significantly for the purposes of this essay, the widespread rise of trade protectionism in the West, which will trigger reciprocal reactions elsewhere, quite adverse to developing country export trade, which may be a dominating feature of future international commerce.

The continued importance of global free trade to the industrialised West in its quest to retain dominance through its renewed emphasis on globalisation’s advantages, was explicitly expressed in April 2017 by the IMF, World Bank, WTO, OECD, and ILO issuing a joint statement defending free trade against creeping protectionist trends in the wake of growing alarm over changing US policies, signified by a refusal to renew a long-standing anti-protectionist pledge, as well as disappointing international trade growth .

International trade slowed by global disruptions

The data shows that as the growth of international trade plateaued about 2007-08 with the major global depression, (originating in the US), which slowed trade progression, free trade agreements (FTAs) also ceased being popular, and free trade intensity regressed to the 1983 level by 2015. For reasons already articulated, free trade as one ingredient of globalisation, also had an unfavourable 2016 in the wake of a trend towards widespread, defensive nationalism-motivated protectionism, and the signs are that 2017 and the coming years may prove to be even worse. The main reason is that globalisation is interpreted today to symbolise the victimisation by the affluent elite, of the economic interests of the middle and working classes, which has now been in vogue for several decades now. 

Following in this anti-globalisation tsunami, the current phenomenon has sought expression in about 350 protectionist measures, passed by the members of the club of G-20 rich countries, mainly through changes in trade regulations and new anti-dumping procedures, while the collapse of the Trans-Pacific Partnership (TPP), President Obama’s brain wave for stopping China emerging as a major force in inter-Asian trade, and the imminent Trump emasculation of the North American Free Trade Agreement (NAFTA), in operation since the Clinton era of the 1990s, will doubtless lead to a reinvigorated wave of serious new barriers to liberalised international trade, business and migration, important pillars of globalisation and neo-liberal thought, at the foundation of IMF dogma Sri Lanka has been practicing for some time now, with very little economic progress to show for it.

In addition, since Brexiit’s ‘hard’ exit from the EU has been followed by UK’s withdrawal from EU’s single trading market, the possible re-imposition of tariffs and like barriers on EU-UK mutual movement of goods is very likely – causing all these Western developments to send a very negative signal to developing countries like Sri Lanka, whose leading politicians and bureaucrats are too slow to foresee the imminent future, meaning in plain language that, even well-established free trade pacts are collapsing in the wake of the rising anti-globalisation wave, unrecognised by the IMF and political leaders, who are jointly still pushing extensive trade liberalisation on Sri Lanka. (See Anti-Globalisation on the March, Free Trade Under Fire, The Economist, which convened a meeting on the subject last year in Hong Kong, which the Prime Minister attended).

Despite a ‘bewildering array’ of 137 bilateral free trade agreements now in force in Asia region alone (‘from the perspective of trade theory, described as sub-optimal, a jumbled overlapping mess’, according to The Economist cited above), with another 68 or so under negotiation, including between Sri Lanka and more industrialised Asian countries with stronger export regimes, the World Trade Organization (WTO), forecasts a miniscule 0.3% growth in regional export volumes in 2017.

Developing global antipathy towards free trade is motivated by the outsourcing of jobs from the rich industrialised world to other countries, and fast-spreading automation, and resulting greater efficiency leading to higher productivity, which is creating multitudes of losers from another technological revolution now in full swing (see the writer’s ‘The new Technology Revolution’, 29 March 2017 et seq). The consequent lack of growth in household incomes throughout the US, Japan and Western Europe, compounded by the slowing Chinese export economy, and political issues and economic stagnation in the Eurozone, have together given rise to the above-mentioned decline in world trade since the financial crisis of 2007-08. 

The last decade, becoming the longest period of trade stagnation since the end of WWII, most countries are moving to insulate local industry, imposing tariffs and other trade restrictions, intensifying resort recently to trade distortions, offering government export subsidies to stimulate local industry, and introducing import barriers through the imposition of rules of origin, domestic value-added and such new local standards for imports. All these measures, are together masquerading as revised industrial policy, not protectionism, in many countries – except in Sri Lanka, which is more and more becoming heavily committed to free trade, as advised by the IMF. Before the US even formally enacts feared protectionist measures, the expectation is that international trade will continue to flat-line even in 2017, unless governments rev-up their economies with substantial fiscal stimulus, and accelerate global economic growth.

(The writer, a member of the former C.C.S., was later a senior professional at World Bank Headquarters for over 30 years). 

(Part II of this article will be published tomorrow.)