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FTAs: Are we gaining or giving?

06 Feb 2022

By Imesh Ranasinghe  In the past few months, the Government of Sri Lanka has started to negotiate trade agreements with the countries in the region as well as outside the region with the intention of easing the current economic crisis. Some of these countries include Iran, Bangladesh, Hungary, and Pakistan. Sri Lanka is a signatory to several regional and bilateral trade agreements. The South Asian Free Trade Area (SAFTA) and Asia-Pacific Trade Agreement (APTA) are notable regional trade agreements. Moreover, Sri Lanka has bilateral trade agreements with India and Pakistan. However, the recently signed Singapore-Sri Lanka Free Trade Agreement (FTA) currently faces some setbacks. In addition to these reciprocal trade deals, Sri Lanka benefits from non-reciprocal preferential access to the EU market (GSP+). The Pakistan-Sri Lanka FTA came into force in 2005 and Sri Lanka now has duty-free market access to more than 4,500 products. The Indo-Sri Lanka FTA came into force in 2000, and has allowed Sri Lanka to export more than 4,000 product lines to the Indian market on a duty-free basis. Sri Lanka has already entered into Double Tax Avoidance Agreements (DTAA) with 44 countries and recently it started negotiations with Hungary for a DTAA that will help taxpayers avoid paying double taxes on the same income. However, has Sri Lanka got everything right when it comes to these trade agreements? Has Sri Lanka chosen the correct countries to enter into agreements with?   Impact of South Asia’s existing trade agreements not positive    Speaking to The Sunday Morning Business, Institute of Policy Studies (IPS) Research Fellow Asanka Wijesinghe said that the impact of South Asia’s existing regional trade agreements is not a positive one. He noted that related trade studies questioned the ability of regional trade deals to increase intra-regional trade of South Asia on two grounds. Firstly, South Asian countries have similar productive sectors; thus, they lack trade complementarity (i.e. a match between one’s export profile with the other’s import profile). The regional economies have a comparative advantage in similar sectors. Secondly, trade agreements are supposed to lower trade costs mainly by reducing trade tariffs. However, the trade agreements in the region did not come only with reduced tariffs. He added that there are many regulatory measures attached to the agreements, for example, rules of origin clauses, while the countries are allowed to keep sensitive lists that have products that are not eligible for tariff cuts.  According to Wijesinghe, due to political and economic reasons, sectors that have significance in revenue and employment creation are included on the sensitive lists. In this process, sectors with comparative advantage are not subjected to tariff cuts. Further, he said that gravity model-based analyses show that the trade agreements in the region have no significant effect on trade. Thus, the effectiveness of Sri Lanka’s existing trade agreements is questionable. However, he pointed out that trade agreements in the broader context (globally and even in the Asian context) have a significant positive effect on bilateral trade. Thus, the problem is not with the trade agreements in general, but with trade agreements of Sri Lanka and South Asian countries. Additionally, non-reciprocal GSP+ and Everything But Arms (EBA) trade arrangements show a significant positive impact on trade in specific sectors. In summary, he added that Sri Lanka can benefit from trade agreements if they were signed with suitable trade partners willing to reduce tariffs in sectors that Sri Lanka has a comparative advantage. “Similarly, as a middle-income country, if Sri Lanka enters into trade agreements with countries it trades with the most, it may generate more benefits,” he said.   Sri Lanka should try to gain access to the EU    University of Peradeniya Professor of Economics and Dean of the Faculty of Arts Prof. O.G. Dayaratna-Banda said that a trade agreement is signed between two countries to eliminate or reduce tariff and non-tariff barriers with the purpose of gaining market access following a very serious economic analysis.  He said that one of the solutions for Sri Lanka’s economic crisis would be to sign bilateral trade agreements to gain export market access for countries that already have increased demand for Sri Lankan products. However, he noted that Sri Lanka was granted the GSP+ concession which was mainly beneficial for the apparel industry. “If Sri Lanka could reach a trade agreement with the European Union (EU), it would be beneficial for Sri Lanka, as the EU is a major export market of the country. But the EU does not give us market access,” he added. The EU has a tight policy in giving market access to countries outside the EU as it has rules to protect European companies from unfair trade practices.  Commenting on the controversial Singapore-Sri Lanka FTA, Prof. Dayaratna-Banda said that signing agreements with a country like Singapore which does mainly tech-related business, which is not a major industry in Sri Lanka, would not be beneficial to Sri Lanka while it would also not be beneficial for Singapore in certain aspects. However, he noted that Sri Lanka would have a big opportunity if it could push products like tea, rubber, coconut, and apparel to Singapore which are not produced there. “The other parties are also signing an agreement with us to gain something, no agreement will be signed that is beneficial only for us,” he added. The opposition to the Singapore FTA was issued primarily on two grounds. The first was that the agreement endangered Sri Lankan jobs by allowing the entrance of Singaporean skilled labour and professionals. The second was that it would open the floodgates to the importation of clinical and nuclear waste, making Sri Lanka a dumping ground for Singapore. Following this, committees were appointed by successive governments since the end of 2018 to look into the matter. Bilateral trade in goods between Singapore and Sri Lanka was valued at $ 1.1 billion in 2017. Sri Lankan imports from Singapore were valued at $ 1 billion in 2016, accounting for 5% of all Sri Lankan imports. However, 58% of imports were mineral fuels and petroleum-related commodities, which energy-dependent Sri Lanka would have to import nonetheless. Singapore is Sri Lanka’s fourth-largest source of imports. Singapore is Sri Lanka’s 20th largest export destination. Sri Lankan exports to Singapore were valued at $ 115 million in 2016 or 1% of all Sri Lankan exports. Sri Lanka’s main exports to Singapore are mineral fuel and oils, textiles, precious and semi-precious stones, and ships and boats.   Trade agreements with China, Japan, Singapore, South Korea, and Dubai would be beneficial    “I believe if we could reach free trade agreements with countries such as China, South Korea, Japan, Singapore, and Dubai, it would be more beneficial for Sri Lanka,” Prof. Dayaratna-Banda said. He said the labour migration agreement that already exists with South Korea is very beneficial to Sri Lanka. According to the Sri Lanka Bureau of Foreign Employment, more than 22,000 Sri Lankans have gone to South Korea as labourers under this agreement since 2014. On intra-regional trade agreements such as SAFTA and APTA, he said that he personally thinks that Sri Lanka does not get a large market access as imagined, since all the South Asian countries produce similar products and have similar major industries (apparel industry in Bangladesh and Sri Lanka). “Through the South Asian FTAs we have signed, including with Pakistan, we do not get a big market access as imagined because our major export markets are still not in South Asia but we import more from the South Asian countries,” he said. Moreover, he shared that the FTA with Pakistan is controversial since more illegal drugs would find their way to Sri Lanka as the supervision gets reduced with tariff removal. “We should sign trade agreements with countries which are among our export markets,” he said.  In 2020, the Finance Ministry announced that in the first six months of 2020, Sri Lanka had exported Rs. 93.7 billion under the SAFTA, APTA, and FTAs with India and Pakistan while only Rs. 26.64 billion was imported, making exports three and a half times greater than imports. Prof. Dayaratna-Banda opined that Sri Lanka also needs a comprehensive economic partnership with countries in Southeast Asia, which has not yet been developed.   Trade Ministry working with many countries for trade agreements    Trade Minister Bandula Gunawardana told The Sunday Morning Business that with the current Balance of Payment (BOP) crisis in the country, the Government was trying to go for more trade agreements as quickly as possible. He said the Trade Ministry was looking to enhance existing trade agreements and looking to make amendments to the Pakistan FTA while seven rounds of discussions had been held over the China FTA. He said that Sri Lanka was looking forward to signing trade agreements with the Maldives, Myanmar, Indonesia, Russia, and Bangladesh. The Minister shared that the Department of Commerce, alongside the respective foreign embassies, was conducting the process of identifying suitable items along with tariffs. “We are interested in markets that have a good place for our exports because it is important for us to develop the export markets; we already have enough imports,” Gunawardana said. Further, commenting on the Singapore FTA, he said that Sri Lanka was not prioritising this FTA at present, although certain amendments that are required have already been identified. “We have identified certain amendments that should be made but priority has not been given because we are looking to remove the barriers for our exports,” he added. Gunawardana noted that many countries have signed FTAs with countries to which Sri Lankan exporters send their products, which has made the exporters unable to approach a competitive market. “When countries are sending products to countries like China, Indonesia, and Bangladesh without tariffs it is difficult for us to enter those markets while paying tariffs,” he said. 


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