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FTA with China: Government in discussion following Yi’s visit  

22 Jan 2022

  • Cabinet favours a PTA with China: State Minister Balasuriya
  • Says FTAs with BIMSTEC countries would be favourable to SL
  • FTA tariff concessions to China may trigger other FTA parties to renegotiate
  • Properly negotiated FTAs can be beneficial to Sri Lanka: Advocata
  • Economic diplomacy the need of the hour: Fernando
By Skandha Gunasekara The Government is currently at a crossroads on whether to enter into a Free trade Agreement (FTA) with China, with the Cabinet favouring a Preferential Trade Agreement (PTA) between the two countries.  State Minister of Foreign Affairs Tharaka Balasuriya told The Sunday Morning that the Government had decided to seek a PTA with China before the recent visit of Chinese Foreign Minister Wang Yi. According to him, several rounds of negotiations with China on an FTA have already been held. “There have been some concerns by the Cabinet of Ministers regarding an FTA with China. The Cabinet is of the view that it would be better to go for a PTA while China is keen on going for an FTA. After the recent visit of the Chinese Foreign Minister there had been three or four rounds of talks pertaining to the FTA and we will have more talks on how we can best proceed.” He said that several issues had been raised such as the length of the process of entering into an FTA. “Concerns were mainly that FTAs are far more complicated where tariffs are lifted on products across the board while there is a Negative List where certain products would be included that would be taxed when exporting/importing. It’s a blanket agreement where only those in the Negative List would be taxed. A PTA has a number of HS Codes where selected products and items would get duty concessions. Also, before an FTA is signed feasibility economic reports are submitted and those things take time. For example, I was told that the FTA between China and Australia took 10 years to negotiate. That is why it’s far more complicated to get into an FTA,” Minister Balasuriya explained. He also pointed out that an FTA with a country like China could risk harming some local industries at a time the Government was looking to boost local industries. However, he noted that an FTA was helpful for Sri Lanka to properly integrate into the global supply chain. “We need to be mindful when we go for an FTA and make sure they don’t affect our domestic industries. We are trying to nurture our infant industries so we need to be mindful. On the other hand, we need to look at local consumers. By supporting local industries, usually local consumers pay a higher price. There are obviously more local consumers than local producers, so we need to be mindful of local consumers as well. We need to integrate into the world’s supply chains and if we are to effectively do so the FTAs are a must.” He opined that an FTA would ultimately be beneficial to the country despite uninformed perceptions that such agreements were bad for the country. “Personally, I believe that we should go for an FTA with China because some of the regional countries are also moving into FTAs. Even though there is a notion in Sri Lanka that FTAs are bad, if you look at FTAs we have signed with India and Pakistan – all of them are favourable to us. Of course, the trade balance is not always favourable to us. Now, if you take the FTA with India for example, the highly-skewed trade balance in favour of India is not because of the FTA but because in recent years they’ve been exporting more motor vehicles to Sri Lanka. If you look at the items that are exported to India, using the FTA has been favourable for Sri Lanka,” Balasuriya opined. The Minister said that as things stand, the Cabinet was deliberating on how best to move forward with regard to a trade agreement with China. “Right now, we are waiting for direction from the Cabinet on what we are going to do. Whether we are going to go for an FTA at this juncture – certainly I would think that even at a future date an FTA with China will take place – or when we are going to take this step is the critical question we need to answer.” Further, the Minister revealed that trade agreements with other countries were also in pipeline with PTAs with the Maldives and Bangladesh set to be signed this year.   “We are negotiating a PTA with Bangladesh as well as with the Maldives. Regionally, the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) is looking at an FTA within BIMSTEC countries. We are also looking at PTAs with other countries similar in size to Sri Lanka. We feel that signing PTAs with countries similar in size will be beneficial. The Maldivian Speaker, during his recent visit, expressed keenness on a PTA with Sri Lanka. I think the Maldives and Bangladesh PTAs will be concluded this year.” Meanwhile, Economist and University of Colombo Department of Economics Lecturer Umesh Moramudali, noting that previous negotiations may have stalled due to China’s demand for waiver of tariffs on 90% of its exports to Sri Lanka, also pointed out that such an agreement could impact local industries. “There have been five or six negotiation rounds and then it stopped. As far as I know it was stopped because China wants 90% of their tariff lines to be tariff free. But we haven’t made such a big commitment to any of the other countries with which we have entered into trade agreements – not with India, Pakistan or even Singapore. If we enter into such an agreement there is a potential threat of liberalising the tariff regime which could have an impact on local manufacturers. We will have to introduce a mechanism on how to address this.” He also noted that giving such tariff lines to China could also result in other countries with which Sri Lanka had FTAs demanding renegotiations of those agreements. Speaking on benefits of an FTA with China, Moramudali opined that it was an opportunity to draw Foreign Direct Investments (FDIs) into Sri Lanka where an investor could benefit from cheap raw material imported from China for production and profit through exports to Western markets where Sri Lanka has other trade facilities already in place. “However, there are many benefits to entering into an FTA, depending on what market access we get to China. Then we will also be able to export products to China tariff free and if that goes well potentially we can attract a lot of FDI. Sri Lanka would be a country with tariff free access to India and China both as well as the EU and US through the GSP+ and GSP facilities. An investor can have a manufacturing plant in Sri Lanka and because of the tariff free imports from China they can get raw materials at a cheaper cost, produce it here, and export to other countries at a profitable price because of the GSP and similar trade facilities. That is a big incentive for global investors to manufacture in Sri Lanka.” Advocata Institute’s Chief Executive Officer Dhananth Fernando said that a false perception of FTAs had emerged in Sri Lanka, noting that negotiators only looked at the trade deficit with the country in question and should instead should look at Sri Lanka’s net imports and exports and how an FTA could have an overall impact. “China is one of our main importers because what we export to China is far less than what we import from China. But that is not a good way to compare when it comes to negotiating a trade agreement. If you look at MAS Holdings, since they import a lot from China, it allows them to export more to the US and EU. They are getting raw materials at a cheap rate from China, enabling them to be price competitive in a Western market. It’s not a good thing to compare what we export vs. what we import when we are considering an FTA. Our trade negotiators are only looking at the trade deficit. That is not the right way to do it. If we go by that same logic, if the US thinks Sri Lanka is one of its main importers so it should stop imports from Sri Lanka, then pretty much all our exports will be down. Same with the EU. You have to look at the net import and net exports because you are importing from one country which allows you to be price competitive when exporting to another market where you can earn more. That is how our major exporters benefit.” He said that research by an eminent Sri Lankan economist abroad had shown that some companies were unwilling to do business under FTAs due to heavy regulations but that FTAs had benefits if negotiated properly. “There are regulatory processes that must be followed to get the benefits of FTAs and Professor Prema-chanda Athukorala – a Sri Lankan-born, globally-reputed trade economist – has done a study in Malaysia and his conclusion is that when you do an FTA sometimes businesses are reluctant to do export-import under that agreement because in regulatory terms it is very expensive. What we recommend is to do unilateral trade reforms where you bring down tariff rates across the board. That will boost the entire economy, according to his research. But it doesn’t mean that we shouldn’t enter into FTAs.”   According to Fernando, tapping into the Chinese markets would significantly help Lankan exports due its large population. “In terms of benefits, we can get most of our imports from China at a far cheaper rate. At the same time, depending on what they allow us to export, it will be a very big boost for our exporters because China is a very big market. Even if we somehow penetrate a good three or four-line items or HS Codes – with China’s billion plus population – it will be a big boost for our exports.” He then urged the Government to ensure that the Sri Lankan diplomatic mission looked at economic opportunities in other countries for exports and other trade. “An important factor that we should develop is international diplomacy where our foreign missions actively look for new markets in other countries like China. For example, the German Embassy’s Chamber of Commerce is always looking for business opportunities, but I don’t think this kind of thing is happening through our foreign missions. Our missions should evaluate markets, conduct sessions, and identify market opportunities and then we have to penetrate. Our diplomatic missions have a big role to play in international trade.”

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