Indo-Lanka Free Trade Agreement:

'Outcome depends on proper implementation'

The ultimate benefit and outcome of the Indo-Lanka Free Trade Agreement depends on the skills of negotiators to achieve fair deals and its proper implementation. In this context the asymmetry between India and Sri Lanka assumes great significance, National Chamber of Exporters of Sri Lanka (NCE) said in a media release.

Excerpts from the media release.

According to a media report, a high-powered bilateral committee is to be set up to prepare a new draft framework for fresh negotiations between India and Sri Lanka related to the Comprehensive Economic Partnership Agreement (CEPA).

The committee comprises representatives of the Ministries of Finance, Industry and Commerce, External Affairs, and the Departments of Immigration, Civil Aviation, Board of Investment and the Attorney General. The original objective of CEPA was to deepen the Free Trade Agreement (FTA) between the two countries to exploit opportunities in addition to trade, in the two areas of Services and Investments.

Bilateral and multilateral trade agreements, particularly bilateral Free Trade Agreements (FTAs) and Preferential Trade Agreements (PTAs) are considered to be a sound approach to promote and expand trade because they provide for rules-based and an orderly trading environment.

However, the ultimate benefit and outcome of such agreements depend on the skills of negotiators to achieve fair deals for trading partners, and more importantly its proper implementation. In this context, the asymmetry between two trading partners as in the case of India and Sri Lanka assumes great significance.

In such instances, a bilateral agreement that is negotiated, needs to be founded on the principles of non-reciprocity and special and differential treatment to support the partner country which is at a disadvantage and to achieve a win-win situation for both trading partners.

Undue advantage

India being a very large country in size and population, compared to Sri Lanka has been of great concern to Sri Lankan businessmen from the outset, due to among, other things, the undue advantage enjoyed by Indian enterprises related to economies of scale.

Under the Indo-Lanka FTA, Sri Lanka was allowed a larger negative list (1,180 tariff lines) than India (429 tariff lines). According to the media report referred to, under the proposed CEPA, India has to reduce her negative list by another 114 items while Sri Lanka has to reduce only 32 items.

In the services sector, India is said to have agreed to provide more access than Sri Lanka by opening 80 sub sectors with many concessions in each of them, while Sri Lanka will have to open only 20 sub sectors with restricted access. However, details of these sectors, and their implications are not known. In this promising background those who are inclined to paint a rosy picture of the performance of the Indo-Lanka FTA say that exports from Sri Lanka to India since the implementation of the FTA in 2000 has increased several fold. (Sixteen times according to a recent news report).

Those who wish to distort the ground realities regarding the FTA prefer to present performance in percentages and ratios as opposed to absolute figures.

In regard to the stated increase of exports 16 times from Sri Lanka to India, take three hypothetical scenarios of an increase in exports from 'one unit to sixteen units', one thousand units to 16,000 units, or one million units to sixteen million units.

In all three scenarios, the increase is 16 times.

However, the reader is kept in the dark has to which scenario is the correct one. This amounts to a misrepresentation of statistics to support one's argument, underlining the celebrated statement 'Lies, Damn Lies and Statistics'.

Unsatisfactory

The reality is that exports from Sri Lanka to India according to available figures has increased from US $ 70 million in 2001, since the implementation of the FTA, to US $ 543 million in 2013, which is approximately an eight-fold increase.

On the other hand, imports from India to Sri Lanka during the same period increased from US $ 601 million in 2001 to US $ 3,088 million in 2013 which is approximately only a five-fold increase. However, the absolute figures show the vast disparity and the widening trade gap between the two countries, against Sri Lanka.

The unsatisfactory performance of the Indo-Lanka FTA related to the original expectations is known to be due to numerous Non-Tariff Barriers (NTBs), the strong protectionist domestic lobby of Indian businessmen and resistance to goods of Sri Lankan origin.

Several important issues under the Indo-Lanka FTA still remain unresolved 15 years after implementation of the FTA, while only a few have been resolved to a certain extent following protracted negotiations.

Such issues led to resistance to the implementation of CEPA when it was first proposed, by a section of vociferous Sri Lankan businessman (exporters), who wished to see the resolution of these issues before embarking on CEPA to convince them, since they feared the opening of the services sector under such circumstances, would be detrimental to the interests of Sri Lanka.

Some conventional and main export product of Sri Lanka such as tea, garments and spices have restricted access under the FTA. Also around 70% of the top exports from Sri Lanka under the FTA are not effected by Sri Lankan exporters, but by enterprises which are linked to its trading partner.

Trading partners usually graduate from an FTA to a CEPA, based on positive experiences to consolidate mutual benefits.

In the case of the Indo-Lanka FTA, after 15 years of experience it is not the case. It is, therefore, necessary to strengthen the FTA, to improve the negative trade balance, by fast tracking the resolution of current bottle necks.

Trade imbalance

The FTA between China and Switzerland contains articles to address transparency, product specific rules of origin, simplification of international trade procedures, consular transactions, subsides and countervailing measures, technical barriers to trade, and rules related to central, regional and local governments. These could be emulated to strengthen the FTA.

The Indian Prime Minister during his recent visit to Sri Lanka was receptive to the concerns of Sri Lanka on the huge trade imbalance and has indicated the desire of India to address the issue of balanced growth in trade, to make it easier and smoother to access the Indian market.

He said that Sri Lanka should attract investments from India for re-export to India. The recent agreement in Customs Cooperation between the two countries is hopefully a manifestation of the desire of the Indian Premier although the nature and extent of the cooperation is not known.

On the other hand, President Maithripala Sirisena recently told the Sri Lankan business community that he would not enter into any agreement that would adversely affect the interests of domestic enterprises.

Among the main issues that are yet to be addressed and resolved under the Indo-Lanka FTA are the Mutual Recognition Agreements (MRAs) on testing of products and standards, Frequent revision of rules and regulations on classification of products by Indian Customs, labelling and quarantine regulations.

Difficulties in obtaining vital information related to trade from designated trade points, Revision of the Rules of Origin (ROO) criteria of minimum value addition, and a change of tariff heading at the four digit level, which hinders exports from Sri Lanka of some products with potential, Dismantling of identified Non-Tariff Barriers which hinder trade and Implementation of effective dispute resolution mechanisms to facilitate trade.

In the this context it is of paramount importance that the high-powered Bilateral Committee set-up to prepare the new draft framework for fresh negotiations related to CEPA, has at its disposal all pertinent information on the Free Trade Agreement including details of NTBs and other outstanding unresolved issues, to effectively address them and determine outcomes of deepening the existing trade agreement related to products and expansion to the two new areas of Services and Investments.

Such an approach will ensure the best possible deal for Sri Lankan business and prevent any detrimental outcomes. This objective could be achieved by including in the Bilateral Committee, representatives of the relevant trade chambers, particularly the NCE, since it is the only Chamber which exclusively serves Sri Lankan exporters and looks after their interests as the 'Voice of the Exporter' covering all products and services sectors making a vital contribution to the economy of Sri Lanka by accounting for over 50 percent of the foreign exchange earnings from exports.

It is also important to include a representative of the Department of Commerce (DoC) in the Committee as the DoC has a wealth of knowledge and experience related to the operational aspects of FTAs, which is vital for negotiations.