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It’s FTA or the highway, or is it?

12 Jan 2022

  • Assessing whether FTAs are the only way to boost our trade and economy in the backdrop of renewed calls for a SL-China agreement
BY Sumudu Chamara The prevailing economic situation has prompted Sri Lanka to seek more and more external financial support, especially in the form of loans and currency swaps, and during the past few months, external financial support has helped Sri Lanka immensely. Despite the fact that there are more disputes than consensus with regard to the advantages and disadvantages of these agreements as well as the bodies and countries that come forward to enter into such agreements with Sri Lanka, such forms of support have become an integral part of Sri Lanka’s economic revival. The latest discussion concerning which such an agreement was discussed took place last week, when the Chinese authorities met the Sri Lankan authorities. Proposed China-Sri Lanka FTA It was reported that China’s Foreign Affairs Minister and State Council Member Wang Yi has urged the Sri Lankan Government leaders to resume the stalled negotiations between the two countries with regard to the proposed China-Sri Lanka Free Trade Agreement (FTA). This has been revealed by Chinese Ambassador to Sri Lanka Qi Zhenhong during a meeting with a group of newspaper editors on Sunday (9). According to The Morning’s news report about the matter, Yi had proposed to the Sri Lankan leaders that experts and professionals study this FTA and resume discussions, and that China was open to discuss any concerns Sri Lanka has in order to facilitate a resumption of negotiations. Moreover, Zhenhong has mentioned that Yi had discussed a comprehensive economic and technical co-operation framework with Sri Lanka’s leaders, in addition to the discussion on the FTA. Zhenhong was quoted as saying: “Free trade now is a global trend and Sri Lanka has a very unique, strategic advantage in geopolitics. I think that if we reach a FTA, Sri Lanka can gain access to a market of $ 1.4 billion for its exports. Sri Lanka will also take advantage of China’s development.” Further, Yi has expressed confidence that smaller countries have benefitted from FTAs with China, while Zhenhong has stated that it was understood that Sri Lanka had been taken advantage of by other nations through FTAs in the past, while assuring that it would not be the case with the proposed China-Sri Lanka FTA. The FTA between Sri Lanka and China was first proposed in 2014. After three rounds of negotiations held between September and December of the same year, the negotiations came to a standstill. In 2016, following the Government change in Sri Lanka, negotiations resumed. However, again, negotiations came to a halt after three more rounds of negotiations between August 2016 and January 2017.  Sri Lanka’s trade agreements Sri Lanka has been a part of several trade agreements including FTAs. Among them are multilateral agreements such as the South Asian FTA (SAFTA) and the Asia Pacific Trade Agreement (APTA), as well as bilateral agreements such as the Indo Sri Lanka FTA (ISFTA), the Singapore-Sri Lanka FTA (SSLFTA), and the Pakistan-Sri Lanka FTA (PSLFTA).  SAFTA, which aims at enhancing regional economic integration programmes through the promotion of preferential trade, was signed on 6 January 2004, and came into effect on 1 January 2006. Other countries in the South Asian region, namely, India, Pakistan, Afghanistan, Bangladesh, Bhutan, the Maldives, and Nepal are also part of it. All countries completed a Trade Liberalisation Programme (TLP) under Phase I and II of this FTA, which involved decreasing tariffs to a level between 0% to 5% on all products other than a group of selected products identified as the “Sensitive List”. Sri Lanka is a founding member of the APTA, which was previously known as the “Bangkok Agreement”. It was initially signed in 1975, and is considered the oldest preferential trade agreement among developing countries in the Asia Pacific region. In 2005, its name was changed to APTA. Among other objectives, it aims at promoting economic development through the adoption of mutually beneficial trade liberalisation measures. In addition to Sri Lanka, Bangladesh, China, India, the Republic of Korea, Lao People’s Democratic Republic, and Mongolia are also parties to this agreement. It covers over 10,000 products.  SSLFTA was signed at the ministerial level in January 2018. The SSLFTA covers goods, services, investments, intellectual property, telecommunications, electronic commerce, trade facilitation, government procurement, competition, and economic and technical co-operation. Basic customs duties (BCDs) on the import of all products except motor vehicles, liquor, and tobacco are free into Singapore on the most favoured nation (MFN) basis. Due to certain disagreements regarding certain clauses of the SSLFTA, later, the Sri Lankan Government took measures to identify what amendments need to be done to this agreement. The ISFTA was signed on 28 December 1998 and came into effect on 1 March 2000. It provides duty free concessions to a number of goods traded between India and Sri Lanka. The ISFTA has been fully implemented as both the countries have completed their phasing out commitments under the TLP of the agreement. Under the ISFTA, Sri Lanka has exported a large number of goods including animal feed, apparel, furniture, rubber gloves, non-alcoholic beverages, cinnamon, pepper, tea, waste paper, areca nut, glassware, and cocoa-related products. Due to the duty free access to the Indian markets that Sri Lanka received through this FTA, Sri Lanka can export more than 4,000 product lines to India on a duty free basis.  The PSLFTA, the second bilateral FTA Sri Lanka entered into, was signed on 1 August 2002 and came into effect on 12 June 2005. Under this agreement, Sri Lanka exported to Pakistan a number of products including betel leaves, coconut, natural rubber and rubber products, copra, bags, and tamarind. Benefits of a FTA To look into how a FTA works, The Morning spoke to Advocata Institute Chief Operations Officer (COO) Dhananath Fernando. He explained how a FTA usually works, noting: “When entering into a FTA, most of the time what happens is countries that are party to such agreements reduce duties. For example, if Sri Lanka imports goods from China under such an agreement, we reduce duties for certain items we import from China. China also does the same for certain goods imported from Sri Lanka. However, an agreement has to be reached between the two countries as to what goods this agreement will be applicable to.” One of the advantages of such an agreement, according to Fernando, is goods imported under a FTA being in a position to compete with goods imported from other countries (that have not signed a FTA with the country that imports goods). “When the prices of goods imported from Sri Lanka decrease due to them not being subject to duties (under a FTA) while goods imported from other countries remain relatively more expensive due to them being subject to duties, our goods are more likely to have a better market. The same happens in the case of goods imported from that country to Sri Lanka.” However, that is not the only way goods Sri Lanka exports can have a more beneficial market in foreign countries. According to Fernando, importing goods under a FTA can sometimes help strengthen a country’s exports as well. He explained that in a context where Sri Lanka imports certain goods that are necessary for the manufacture of certain goods that primarily target export markets, when the prices of these imported goods decline due to them being imported under a FTA, the cost of production of what Sri Lanka exports also declines. He explained: “For example, if we export tea and import polythene that is used to package tea, when the duties applicable to polythene decrease, it helps increase our tea exports, as we can provide the product at a lower price due to the cost of inputs being lower.” Challenges However, a FTA is a very complex form of agreement, and therefore, there is a lot more to do even after entering into such an agreement to see to it that businesses actually benefit from it, according to Fernando. He said that even though FTAs can be beneficial in several ways, ensuring the practicality of an agreement is as important as its legal validity. He explained: “Most of the time, it is not the Government that imports and exports goods, and private importers and exporters are very much involved in this process. In order to get the full benefit of a trade agreement, importers and exporters have to adhere to the guidelines set out in the relevant agreement. However, FTAs are a complex form of agreement. According to a study by Prof. Prema-chandra Athukorala, even though trade agreements are signed often, due to their complexity, most parties including importers and exporters do not use it.  “Trade agreements are usually signed after a massive consultation process with experts in trade and stakeholders, and it takes some time. That is why trade agreements with Singapore and India are taking a long time. Merely because we signed a trade agreement, we cannot benefit from it, and we have to keep pushing for trade activities under those agreements. After entering into an agreement, it is crucial to ensure that normal businesses benefit from it. Although agreements have a validity once signed, there is little understanding about their practicality.” However, Fernando added that despite these practical challenges, trade agreements are extremely important or can be immensely beneficial. He noted that countries like Vietnam developed by entering into trade agreements with many countries, which reduced the prices of goods that were imported to that country. Foreign reserves and importing goods Fernando also discussed how agreements can be beneficial in dealing with Sri Lanka’s foreign reserves crisis. In response to a question whether a FTA can help Sri Lanka manage the foreign reserves situation, he said: “FTAs are mainly aimed at strengthening and increasing trade activities between countries. It is difficult to get some help regarding the foreign reserves issue through a FTA unless another country entering into a FTA with Sri Lanka agrees to do business with Sri Lanka on credit or the FTA actually helps increase Sri Lanka’s exports.” He explained a more suitable form of agreement that can help Sri Lanka’s lack of ability to import goods, noting: “Sri Lanka has the opportunity to avail itself of certain facilities, under which Sri Lanka receives another country’s currency and in return Sri Lanka gives that country’s central bank Sri Lankan rupees equivalent to the amount of the foreign currency we received. That country can either use those rupees to import goods from Sri Lanka or invest that money in Sri Lanka including in bonds. Sri Lanka too can use that country’s foreign currency to invest in that country’s bonds. However, most of the time, we get money that way because we do not have money to import goods. In that case, we can pay that country in its own currency and import goods from that country.” He added that usually, these forms of agreements are short-term ones that last a few months, and that after that period, both the countries return each other their currencies. He noted that sometimes, depending on the conditions of the agreement, a small interest may also be applicable. Although different parties have expressed different opinions regarding Sri Lanka’s economic and trade agreements with other nations and foreign entities, at the end of the day, what matters most is how useful these agreements are to manage the present economic situation, and what their long-term effects are. We cannot also forget that it is largely such external financial support that has kept Sri Lanka’s economy from collapsing completely. Moreover, if the Government decides to resume the FTA with China, it has to ensure that this FTA not only helps to manage the dire economic situation Sri Lanka is in but also does not impose restrictions that can affect Sri Lanka adversely. 


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