Making trade agreements work for smaller countries

Moderator Tony Nash, UNESCAP Investment and Innovation Division Director Dr. Susan Stone, Somany Ceramics Chairman Shreekant Somany, Commonwealth Secretariat Economic and Social Development Deputy Secretary General Deodat Maharaj and MAS Chairman Dr. Mahesh Amalean at the Panel

Impact of mega trade deals on small countries and how they can navigate the pitfalls to stronger trade took centre stage at WEDF panel discussions 

By Uditha Jayasinghe 

Small ambitious countries need to tap into trade facilitation and logistics to make the best of regional integration but run the risk of being elbowed out by complicated systems and procedures of large trade agreements such as the proposed Trans-Pacific Partnership (TPP) agreement warned a panel of experts yesterday. 

Attending the World Export Development Forum (WEDF) and speaking at the first session titled ‘Trade facilitation and logistics in regional integration’, experts warned that countries would have to be vigilant about the possible challenges of sweeping trade agreements but also counter these negatives by planning ahead.    

At a time when intra-Commonwealth trade is growing at $ 592 billion and is expected to double by 2020, studies have shown it is also more cost-effective to trade within the bloc because of shared language, culture and heritage. However, one of the concerns is that 31 of the 50-odd members are classified as “small members” and while they have the right to be part of trade agreements  they can nonetheless face negative results of being part of complex trade arrangements that could be exacerbated by large agreements such as the TPP, noted panellists.  

Different impacts in different regions 

United Nations Economic and Social Commission for Asia and Pacific (UNESCAP) Investment and Innovation Division Director Dr. Susan Stone pointed out that most of the research from large agreements show small impacts overall with even the Institute for Policy Studies (IPS) in Sri Lanka finding that TPP could impact 9% of its trade even though the agreement would only be implemented over 20 years. 

“Textile trade with US for example could be affected and while overall the research shows small positives that story can change with detailed information that can show that there is a personalised and complicated impact.”

“Countries need to understand there is not the same situation in all countries and all sectors. Large transnational agreements are not only about tariffs, its more about standards and where trade can happen, and transparency for SMEs especially can be impacted when they are complicated by new regulations or overlaps. In that sense they can be prohibitive for FDI as well because if the local market is subjected to conflicting rules then it can be negative for foreign investment as well.” 

Policy is always two steps behind business and policy makers need to be aware of this to make policies happen in a positive way. Creating value chains, e-commerce and new regulations are changing the way companies do business. This means that companies need to have access to easier bankruptcy laws and it must be fairly easy to start up businesses,” Dr. Stone observed. 

“So there could be situations where companies only exist for five years or less. So an enabling environment would mean that companies are also given the freedom to change and change rapidly,” she advocated. 

“For a long time services were not measured but Governments are now more interested in tracking it and we know now services contribute to about 70% of the manufacturing trade. Being able to unbundle these services can lead to more streamlining of global value chains but they are becoming more included and pervasive in trade agreements. The TPP is trying to make these services more trackable and more easily compared across markets so the line between services and investment can become blurred,” she cautioned, adding that this could pose additional challenges to companies seeking to do business overseas.   

The Sri Lanka experience 

Participating in the discussion, MAS Chairman Mahesh Amalean however was upbeat about Sri Lanka’s experiences with international trade agreements, pointing out that the global multi-fibre agreement was one of the main reasons for the country’s apparel industry to take root and grow to the behemoth it is today.  The apparel industry in Sri Lanka accounts for $ 5 billion of trade and is the second-largest foreign exchange earner, employing hundreds of thousands of people, mainly women.    

“In Sri Lanka the impact of trade relationships has been meaningful with the Indian and Pakistan free trade agreements.  But the most impact was undoubtedly GSP+ that Sri Lanka had with the European Union. Its suspension has impacted the industry. It led to an increase in exports and at the same time there has been an increase in FDI. “

Trade financing is one aspect and the other is facilitation, he noted. Amalean was also positive of automation processors where online documentation can bring a huge benefit to small companies. If this can be implemented it would certainly assist many countries. As more and more countries become economically powerful, developing countries will become stronger trade negotiators and they will change the trade dynamic. Asia is on the rise, was the view of the panellists, and this would push developing country concerns further.

Less developed countries did get advantages from trade agreements but such relationships do help, insisted Amalean, who backed Government efforts to reinstate GSP+ and said the industry was encouraged by the possibility. 

“Improving the relationship with the EU and forging new agreements with other countries is important as they will give access to almost 30%-40% of the world and these are large economies which Sri Lanka would not get otherwise. These relationships in some way or form benefit countries. It may put other countries out but Sri Lanka is out of TPP and we are mitigating that impact by looking for bilateral trade agreements with other countries such as India and China,” he added.  

Strengthening SMEs 

India has to help its SMEs to upgrade themselves because they are currently not competitive enough for global trade and to go forward in a new TPP-included environment, pointed out panel member Somany Ceramics Chairman Shreekant Somany. 

“There are clusters that are going well but as a country we need to more,” he acknowledged.  

Other countries are also feeling the adverse effects of large trade agreements. For example the Caribbean accounts for less than 1% of global trade and smaller islands in Asia Pacific also account for less than 2% of global trade. The reality is that standards set by agreements like TPP have to be followed by everyone and smaller countries can struggle in that race. Sri Lanka has a slight advantage in that it already has a set of agreements that help to make it more resilient. 

“This is why we at the Commonwealth are trying to push for practical assistance for smaller countries with clear access to trade finance so that they can weather these complex processors. For example in Jamaica the Commonwealth has helped them to come up with an export strategy and more of these efforts need to be made so that these countries are not left behind,” said Commonwealth Secretariat Economic and Social Development Deputy Secretary General Deodat Maharaj.   

Trade agreements are more and more on labour and environment points that smaller companies would find hard to comply with and quantifying trade agreements is challenging, meaning it is very hard for policy makers to understand the difficulties they face in different countries. 

Trade is a two-way street so it is essential that companies have access to imports and exports and be able to measure access to those markets, making non-tariff barriers a “big deal”. Most of the benefits seen from trade agreements don’t essential capture these issues across countries. 

Countries need to debate whether mega agreements are inhibitors or promoters of trade and economic growth. Sri Lanka has always had a great reputation on labour and other social indicators and while the process was self-regulated Sri Lanka’s apparel industry took on board a third party to evaluate it. 

“So even at the end of the multi-fibre agreement even though everyone expected the industry to collapse a lot of international parties continued to remain partners with Sri Lankan companies. At the end of the multi-fibre agreement while growth slowed it did not collapse because we focused very early on maintaining or even pioneering international standards,” noted Amalean, weighing in with the Sri Lankan experience.  

Other panellists acknowledged there had been evidence that compliance helps countries retain their business. Even in Bangladesh some companies talk about standards before they talk about price and this provides them with market access. More companies can also engage in the services side and what Commonwealth research has shown is that in countries such as Fiji more than 57% of their IT professionals are out of the country. The same is the case for many countries in the Caribbean so it is important for countries to put the right policies in place to build transparent systems that give incentives to services investors and provide good salaries. Financial sector for example because of “de-risking” banks are moving out of certain countries so it is harder for companies to find capital. While services are important countries have to understand sophisticated markets and find their niche to stem the flow of precious human capital.    

Reversing brain drain 

Both Sri Lanka and India have had a surge of services while being outside of service-oriented global regions, which is largely due to an enabling environment and taking advantage of policy measures. India was one of the few countries that managed to turn around its migration so more and more Indians chose to return and export their services rather than exporting their labour. 

“The rapid take-off of start-ups has given incentives for Indians to return and the level of opportunities given to young people to start their own companies. The entire knowledge base of IT in youngsters in India is impressive and that has attracted larger companies to set up shop in the subcontinent,” noted Somany. 

Tourism remains the foundation of many Commonwealth countries but they still need to brand their destinations differently and work on different products. But it remains viable. For any country to flourish there has to be an enabling environment and successive Governments have done this so companies can create and add value so they can compete internationally. 

In the services sector, with India being a large provider of services, Sri Lanka’s approach was to focus on niche services such as financial services and create specific areas. The other point is in order for any services or industry to prosper there have to be resources, which in Sri Lanka is limited and the approach has been to keep focusing on niche markets to leverage this point. 

One window for exports 

Economist and Institute of Policy Studies (IPS) Executive Director Dr. Saman Kelegama outlined plans by the Government to create a window where all exports would be facilitated online and be linked with 15 key institutions including Customs, the Inland Revenue Department, major State banks and even the registrar of motor vehicles.   

“There are a lot of advantages in reducing trade cost to stimulate trade. This has been well recognised in Sri Lanka, especially at a time when they are focused on exports. The first measure is to change legislation, already the Customs Ordinance has had several changes to reflect IT use, and the Government is working on replacing the export and import ordinance with a Trade Facilitation Act.”

“The Government is also supporting anti-dumping policies. A transparent consultation is also happening where the grievances of exporters are being addressed and an ease of doing business forum where companies can voice their problems, which compliment the reforms that the Government has pledged to undertake.” 

Implementation of the trade facilitation agreement under WTO is the next step of the Government, noted Dr. Kelegama, adding that technical assistance would likely be requested from the WTO. Sri Lanka would continue to build stronger links to global trade as the vision of the Government is to become the hub between Dubai and Singapore. 

-Pix by Upul Abayasekara and Lasantha Kumara