China’s long march to the West

• An opportunity for South and East Asia? 

By Ajith D. Perera Impact of BRI on South Asia The Belt and Road Initiative (BRI) through land and sea, which stretches over 8,000 miles to Europe passing East and South Asia, is China’s modern, long-term vision to accomplish its geopolitical, economic, and social objectives. This also includes economic co-opertaion, building infrastructure, and creating bilateral relations to revive the trading system along the ancient Silk Road. On the other hand, economically least integrated SAARC (South Asian Association for Regional Co-operation) countries, which have a population of 1.8 billion representing 25% of the world population, need such strategic economic co-operation to uplift its economies and the quality of life of the people. It’s a well-known fact that South Asia struggle in attracting investment within the region. In the recent past, South Asia and Southeast Asia got the lion share of Chinese outbound foreign direct investment (FDI) to BRI countries. Chinese investments in South Asia as of 2018

Country	New construction contracts signed in 2018 (USD)	Total of construction (cumulative) projects signed by end-2018 (USD)
Afghanistan	470,000	1.28 billion
Bangladesh	9.11 billion	45.9 billion
Bhutan	0	0
India	2.89 billion	73.48 billion
The Maldives	1.39 billion	4.39 billion
Nepal	910 million	5.45 billion
Pakistan	4.32 billion	72.11 billion
Sri lanka	3.63 billion	23.42 billion

  (Blue Book on Economic and Trade Investment Promotion and Coo-peration between China [Yunnan] and South Asia, 11 June 2019. Kunming, China) Challenges posed by BRI to China Even though the BRI is a success, it also faces some challenges internally and externally. The internal issues include the absorption of overproduction during crisis situations like the pandemic, trade diversion through trade agreements by aid recipients, and externally mounting pressure by political and civil activities on issues such as depriving job opportunities for locals, increase in green field projects, and issues over land clearance and alleged permission granted for military involvement to protect Chinese investments in South Asian countries, etc. Despite China’s visionary BRI, which amply demonstrates its farsightedness and the might of China to the world, it still takes no chances but consolidates its local development too to meet  the global competition. In February 2019, China launched another initiative within its territories: It is the formation of Guangdong-Hong Kong-Macau Greater Bay Area (GBA). Under this move, China wants to strengthen the strategic development prototyping and fast engineering through creating synergies under one country, two systems. In fact, the GBA provides opportunities for multinational companies with regional headquarters in Hong Kong to leverage the connectivity within the GBA. Furthermore, if the plan works well, under the GBA, the redefined role of Hong Kong will be a competitor to Singapore where most of the multinationals have set up their head offices in the region. Hong Kong will provide the space for headquarters while Guangdong with nine cities will provide the space for plants and factories. China’s efforts to build a formidable economy on its own land while flexing its muscles to win the trade war with the West through BRI and other measures like the GBA remind us of a famous quote of ancient Chinese writer and philosopher Sun tzu (544 B.C.-496 B.C.), which goes as: “The good fighters of old first put themselves beyond the possibility of defeat, and then waited for an opportunity of defeating the enemy.” Today, in the South and East parts of the globe, China has an unbeatable edge over the US or the European Union (EU) on trade due to the robust approach of its foreign trade policy and opportunities provided by regional trade agreements such as the Regional Comprehensive Economic Partnership (RCEP), along with bilateral trade agreements signed with other countries. RCEP, regional trade agreements, trade policy implications for SL Sri Lanka is now in the process of formulating a new trade policy. In this context, Sri Lanka needs to be mindful of the latest trends and new developments taking place in the region due to RCEP or any other regional/bilateral trade agreement between China and other countries. At present, after India, China has already become the second-biggest sourcing destination for Sri Lanka. China’s imports from Sri Lanka recorded a nominal volume ($ 252 million only during 2020). China’s exports to Sri Lanka stood at $ 3.58 billion in 2020 (UN Comtrade). Sri Lanka’s main exports to China as of 2020 were apparel, tea, paper yarn and woven fabrics, activated carbon, electronic integrated circuits and microassemblies, retreaded/used pneumatic tires of rubber, and fish (frozen). In fact, except for Ceylon Tea, RCEP members produce almost every product in the above list. Therefore, it is a moot point whether policymakers have analysed the impact of trade in the RCEP vis-à-vis the Association of Southeast Asian Nations (ASEAN) free trade area, and the implications thereof to Sri Lanka’s interests in the region. Moreover, considering that the direction of Sri Lanka’s major markets are neither in the ASEAN nor in the RCEP, it is vital to conduct studies into the trade competitiveness and compatibility between the countries of the Far East that are engaged in these regional agreements and Sri Lanka. Now, the interesting question is: What will be the short-term and long-term impacts on Sri Lankan exports to China and East Asia due to RCEP? The writer’s answer is that even if Sri Lanka retains its market share in the short term, Sri Lanka’s chances for future export growth to China and other RCEP countries can be substantially affected if no remedial action is taken by Sri Lanka. Strategic approach and remedial actions available for SL Sri Lanka needs to first develop a strategy to retain the current export market share and secondly to develop a strategy to capture more export volumes through new markets. Option A: Use of APTA (includes India, Bangladesh, South Korea, Lao, and Mongolia) to promote export to China (1) The Sri Lankan Government needs to address the issue of non-tariff barriers with China and win more concessions available under the Asia Pacific Trade Agreement’s (APTA) Special and Differentiated Treatment (SDT) and Small and Vulnerable Economies (SVE), both within an agreed time period (2) The Sri Lankan Government can consider subject to World Trade Organisation (WTO) compliances on the granting of subsidies, granting incentives/marketing arrangements for selected Sri Lankan products to enter into the Chinese market for a particular period (3) Aggressive trade awareness campaigns could be arranged through Sri Lankan missions in China and elsewhere to meet buyers and sellers (not only confined to the Chinese market) to secure more volumes for Sri Lankan products. Available resources and the commitment of Sri Lankan Foreign Service and the Department of Commerce have to be effectively used through motivation and recognition. Inclusion of capable professionals from other streams may be a good option, but what is finally important is building competences required to achieve the goal (4) Such trade awareness campaigns should include making the prospective exporter to China obtain a detailed knowledge of the process, procedures, and regulations involving entering the Chinese market. Understanding and communications between Sri Lankan exporters and Chinese importers/traders should be given additional focus through detailed exposition of Chinese language/provincial dialect for business communications/actual business practices in China Option B: Negotiating an early harvest agreement to reduce the trade deficit gap as a precursor for any future comprehensive trade agreement This is especially the case with China and India, where already there is a big trade deficit unfavorable to Sri Lanka. This could take the form of a bilateral preferential trade agreement on goods, which was earlier mooted, between the two countries. The primary advantage of a bilateral preferential trade agreement on goods over a more comprehensive free trade agreement (FTA) that covers an array of sectors is that it takes into account the vast asymmetries existing between the giant Chinese economy and the SVE of Sri Lanka. This would then allow Sri Lanka to liberalise in accordance with its capacities and also lend mutual compatibility between imports of selected products in return for export market access between the two countries. Under the multilateral trade rules of the General Agreement on Tariffs and Trade (GATT) or the Enabling Clause of WTO, it is possible for developing countries such as Sri Lanka to liberalise only selected sectors in keeping with its status as a small developing trading partner without undertaking vast-scale liberalising initiatives that would make its domestic production vulnerable to massive a influx of cheap and competitive imports of trading partners who have advantage of  vast economies of scale. Suggestions to improve capacity of SL’s trade (a) Establishment of a national single window: This is to expedite the much-talked-about digital platform for trade to reduce the cost of transaction and improve the efficiency for exporters and importers, especially SMEs. Meanwhile, the Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) is to introduce a trusted trader platform to Sri Lankan trade in collaboration with the China Council for the Promotion of International Trade (CCPIT) to address the issue of credit worthiness and repayment capacity between traders in both countries (b) Rationalisation of HS codes: Sri Lanka’s HS codes are very complex by nature, so the identification of products using HS codes is very difficult. When this situation exists, Sri Lanka is at a disadvantage at trade negotiations and the threat of agreeing to undesirable tariff lines remains high. In this context, as a matter of national priority, we have to rationalise the HS codes before negotiating any trade agreement. This measure would also help the country to comply with WTO requirements (c) Appointment of a productivity commission: This is needed to be set up to address the issue of low productivity of our major industries. The commission can appoint relevant experts and industry leaders who know about productivity improvement. This unit should be used as the advisory body to improve the macroeconomic policy of the government. Framework for a new trade policy Any future trade policy of Sri Lanka must have a robust and practical approach to solve the issue of exports to China and India as well as the SME contribution to export. The writer suggests that the Ministry of Trade firstly focus on a export-oriented framework for foreign trade based on the creation of wealth, technology, innovation, inclusiveness, investments, and productivity. Therefore, any new trade policy document needs to provide provisions for a proper  study on economic modelling for future trade agreements; assessing the overall export competitiveness of the Sri Lankan product offer and how good Sri Lanka is in matching the competitors’ product offers come from RCEP or any other bilateral trade agreements signed by countries such as China and India. It’s also pertinent to have an impact analysis of existing trade agreements, review of rules of origin to avoid circumvention and fraud that happened in the past, and future prospects. The country also needs to set up a high-powered National Advisory Committee for trade. The writer also suggests approving transparent procedural and regulatory infrastructure for the implementation of rules of origin prior to FTA negotiations. Some time back, the Department of Commerce developed an International Trade Negotiations’ Toolkit in collaboration with WTO, United Nations Conference on Trade and Development (UNCTAD), and the International Trade Centre (ITC) to give the proper direction to the negotiation process, and it is the responsibility of the government to create a conducive environment to use these guidelines for the betterment of the country. It is an apparent fact that general trade negotiations are entered into by Sri Lanka at the behest of narrow geopolitical interests without actually engaging in economic and pragmatic business outlook for such decisions. More often than not, “joint studies” are done merely to wrap up a decision to enter into trade agreements without conducting a proper analysis, assessment of the ground situation, and cost-benefit analysis – e.g. in the case of the negotiation on the India-Sri Lanka FTA on Goods, it was found out that inter-state non-tariff barriers and regulations were not even thought of long after the agreement was inked, but only when such impediments via the media and trade sources were brought to the attention of exporters/investors who became the actual trade practitioners of this agreement. It is also recommended to study the policies of other countries’ regional trade agreements, giving direction to the involvement of the country’s legislature, selection of countries for agreements, appointment of negotiators, stakeholder consultation, provision for periodical review of the trade agreement, etc. In fact, the checklist for Sri Lanka to upgrade the capacity goes on and on – e.g. Sri Lanka’s position in the global value chain, developing the country’s production capacity, and productivity. Further, a mechanism to promote a point of difference/overseas protection of branding for Sri Lankan products and services (GIS), paying a “reward” for encouraging innovation and a strategy to mitigate the ill effects of Covid-19 (such as clearance issues at ports and freight rates) need to be considered without hesitation. The production of high-tech items and the extensive use of the exclusive economic zone at sea perhaps can create a change in Sri Lanka’s export landscape. The writer is of the view that the new trade policy has to help Sri Lankan trade agencies and the private sector reach the required capacity to join a big league like RCEP, or sign effective trade agreements within a specific period. Signing any trade agreement without enhancing the country’s capacity will only result in another ineffective trade agreement like the Indo-Sri Lanka FTA or the South Asian Free Trade Agreement (SAFTA). Finally, it’s worthy to note the saying of British politician, Exchequer Chancellor (2016-2019), and Foreign Minister (2014-2016) Philip Hammond: “While I believe firmly in open markets and free trade, I also believe an open market needs a level playing field.” (The writer is a scholar, writer, and speaker on trade agreements and holds an MBA [UK], EDBA [SL], PGDA [UK], and Diploma in Credit Management [SL]. He presently serves at FCCISL in the capacity of Secretary General and CEO. He can be reached via ajithspeak@gmail.com)