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China-Sri Lanka FTA: Well-negotiated FTA would benefit SL: Experts

19 Mar 2022

By Asiri Fernando A well-negotiated Free Trade Agreement (FTA) between Sri Lanka and China would only be beneficial for Sri Lanka’s economic recovery and growth if the island nation commits to significant fiscal and structural reforms, experts opine.   China is the second largest economy in the world, with a GDP of about $ 15 trillion, and is the largest exporter of goods and services. According to the Foreign Ministry, Sri Lanka’s exports to China amount to $ 250-350 million per year, while imports of goods and services are valued at nearly $ 4 billion, thereby creating a significant trade deficit. Building confidence, attracting investment A well-negotiated FTA with a major industrial nation would help Sri Lanka build much-needed investor confidence and attract export-oriented investments, which may help Sri Lanka address the foreign currency crisis, said Policy Advisor and National University of Singapore Non-Resident Senior Fellow Dr. Ganeshan Wignaraja. “Presently Sri Lanka faces many difficult economic problems, with a worsening economic outlook for 2022. The country’s adverse foreign debt dynamics mean crippling interest payments in US Dollars are needed, and that scarce foreign exchange reserves are dwindling. A comprehensive FTA with a major trading partner can help attract export-oriented foreign investment, transfer technology from abroad, and create jobs. It can also provide market access for Sri Lankan firms and promote entry in global value chains. Thus, by attracting foreign investment and increasing exports, an FTA can lead to increased foreign exchange earnings. Bearing in mind the simmering debt problem, to make an FTA strategy viable at this point, Sri Lanka would need first to commence an IMF programme and implement structural reforms to tackle the difficult economic situation in the country,” Dr. Wignaraja said. Sri Lanka is in a desperate economic situation, with significant constraints to service debt and reduce balance of payment gaps. While there has been some discussion with members from the IMF about finding solutions to Sri Lanka’s economic crisis over the last two weeks, how much Sri Lanka is willing to work with the IMF and follow their recommendations remains to be seen. China-Sri Lanka FTA  The renewed interest in the stalled China-Sri Lanka FTA comes at a time when Sri Lanka is facing an unprecedented economic crisis. Both China and Sri Lanka have signalled their desire to pursue the stalled FTA negotiations which began in 2014 and have already seen six rounds of discussions. Earlier this year China signalled its keenness to renew the negotiation process, which was stalled in 2018 during the last Government’s tenure. Subsequently, a Cabinet Sub Committee on China recommended that Sri Lanka should fast-track the FTA negotiation process earlier this month. The new push to secure a China-Sri Lanka FTA also comes in the backdrop of President Gotabaya Rajapaksa requesting China to restructure Sri Lanka’s debt to the rising global giant. China currently holds about 10% of Sri Lanka’s external debt, and is a key investor in the island.   According to State Minister for Regional Cooperation Tharaka Balasuriya, the Cabinet had wanted to explore the possibility of entering into a Preferential Trade Agreement (PTA) instead of an FTA with China. However, China has not been keen on a PTA and has continued to promote the resumption of the stalled FTA negotiations.  “The Trade Ministry, with the Commerce Department and the Foreign Ministry, is cautiously moving ahead with the negotiations,” Balasuriya said. Minister Balasuriya pointed out that if an FTA were to be successfully negotiated, Chinese companies could invest in local Free Trade Zones (FTZs) and in the Colombo Port City, relocating some industries to Sri Lanka, where value addition and use of local components would enable goods to be sold in regional markets. He opined that such an outcome would bring much-needed employment opportunities and technology transfer and boost Sri Lanka’s exports. According to Minister of Trade Dr. Bandula Gunawardena, the preliminary discussions regarding renewing the FTA negotiations have begun, with Prime Minister’s Secretary Anura Dissanayaka tasked to coordinate local stakeholder consultations as the first step. China hopeful Upon contact, the Chinese Embassy in Colombo said it hoped that the negotiations would resume at an “early date”.   “After the launch of China-Sri Lanka FTA negotiation in 2014, the two countries have conducted six rounds of negotiation and made positive progress, laying a good foundation for the resumption of negotiation. A China-Sri Lanka FTA will eliminate or reduce tariff on products of export or import interest to both countries and establish an institutional framework for trade in goods, services and investment and economic and technical cooperation, which will reduce trade costs for enterprises of both countries, enhance trade and investment flows, optimise the overall business environment, and achieve sustainable economic growth and social development of both countries in the long run. So far, China has signed FTAs with 26 countries and regions. China sincerely hopes that the two countries could work closely and resume the negotiation at an early date,” Chinese Embassy in Colombo Spokesperson and Political Section Chief Luo Chong told The Sunday Morning. The negotiations According to the Foreign Ministry, the Trade Ministry will lead the negotiations with a chief negotiator and a competent team made up of Trade Ministry officials and officers from the Foreign Ministry. When asked if Sri Lanka had the relevant experts and expertise needed to effectively negotiate an FTA with China while ensuring Sri Lankan interests were well looked after, Minister Gunawardena said that the Trade Ministry and Foreign Ministry would employ experts and those who had prior experience for the negotiation process. Sources in the Foreign Ministry told The Sunday Morning that China wanted 90% of its exports to Sri Lanka to be made duty-free, whereas Sri Lanka is only insisting on 75% of Chinese imports being made duty-free. Sources indicate that 50% of Sri Lankan exports to China are apparel and tea, whereas 35% of China’s exports to Sri Lanka are iron, steel, fabric, fibre, and electronic Items. The Foreign Ministry source also said that informal stakeholder consultations, including with some of the chambers, had highlighted concerns that China would dominate the import market of Sri Lanka with its massive array and volume of goods and services. Concerns and possible downsides  When asked about concerns and possible downsides to entering an FTA at this stage in time, Dr. Wignaraja said: “Trade opening through an FTA can also lead to competition on the domestic market from increased imports. This creates winners and losers among economic sectors and firms in Sri Lanka. If losers exceed winners, which is possible in the immediate aftermath of trade liberalisation, this can create a backlash against trade opening. Accordingly, complementary policies such as retraining workers, social safety nets, and credit for small firms should be implemented to support losers from trade liberalisation. One expects gains from trade in the long run and winners to exceed losers.” Importance of a China-Sri Lanka FTA When asked about the importance of a China-Sri Lanka FTA, Dr. Wignaraja stated: “Historically Sri Lanka has enjoyed warm diplomatic relations with China dating to the Rubber-Rice Pact in 1952. With China’s global rise, relations transformed in a more commercial direction. Today, China is both a major provider of commercial loans for capital intensive infrastructure projects and a major source of imports for such projects. “One hopes that a China-Sri Lanka FTA will create the necessary confidence for Chinese and Hong Kong investors to want to invest in export-oriented manufacturing activities and create high-skilled jobs in Sri Lanka. The Hambantota Industrial Zone and other industrial zones offer this possibility. The Colombo Port City SEZ may also be attractive to Hong Kong investors in financial, IT, and professional services. “One also hopes that China will recognise the issue of asymmetric bargaining power as it did in the case of the ASEAN-China FTA and provide Sri Lanka with special and differential treatment for trade opening via a China-Sri Lanka FTA. This translates into Sri Lankan exports getting early preferential entry to the Chinese market, while Chinese imports come later to Sri Lanka. Increasing Sri Lankan exports to China can help to reduce Sri Lanka’s large trade deficit, which is in China’s favour. “I hope that China will give serious consideration to President Gotabaya Rajapaksa’s request to the Chinese Foreign Minister to restructure debt payments to help Sri Lanka through a crippling foreign debt crisis. Estimates suggest that China accounts for around 10% of Sri Lanka’s external debt and this figure could rise in the future with more commercial borrowing from China.”


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