Lanka needs to get wiser on FTAs

FTAs did not drive significant growth to India and Pakistan in 2007:

Rohantha Athukorale

Whilst the whole of South Asia is hit by Terms of Trade shocks with a barrel of oil hitting a record 107 dollars last week, the vibrant and resilient export community in Sri Lanka continued drive growth bringing in a mammoth 7700 million dollars in 2007, and helping the country to cushion the impacts of the increasing energy bill.

What is required now is a quick in depth analysis of the export performance and then capture some key action points, to better this number in 2008.

We have to understand that the year is going to be a challenging one, given that Sri Lanka's major export destination -USA showing signs of a recession. For the 2nd month in succession retail sales declined to hit a low 6% in February. Job losses in the last two months in the US driving up to 85,000.

We also know that China will get quota free access to Garments that Sri Lanka now has leadership on. The electricity price hike will make our exports pricier by around 8-9% (the latest estimates coming out) which further add to the challenge. We all know the challenge that Sri Lanka faces in the EU -the key growth market last year.

The only positive sign is that the spirit and resiliency of our export community in absorbing challenges and the past track record of riding the wave of challenge successfully.

However, as the Chairman of the National Chamber of Exporters said "How much resiliency can this industry demonstrate?" is a question we will have to see in the years to come.

FTAs -failed?

Whilst we can be proud of the 2007 export performance, if we do a detail analysis on the strongly emphasised area last year - Free Trade Agreements (FTAs) with the South Asian counterparts, the export numbers are not at all encouraging. Exports to India in 2007 even though is up by five percent above 2006 it is below the 2005 revenue by 7.8% to 514 million dollars.

The quota utilisation of the strategic products of Sri Lanka- Tea and Garments is below 6%. Sri Lanka exporters experienced non tariff barriers by Indian authorities like tariff rate quantities (TRQs), delays in custom clearance of cargo, port restrictions, necessity for several tests to be carried out in India even though certificates are accompanied by the relevant authorities that resulted in many Sri Lankan exporters loosing confidence on bilateral agreements which are essentially designed to promote fair competition and equitable benefits.

The poor performance of Sri Lankan exports into India on the strategic sectors of Tea and Garment in 2007 was a repeat of the 2006 performance, which means that there has been no result on the many representations made by Sri Lanka authorities.

I strongly feel it's time that Sri Lanka must become tough and play the Man's game of business, with big brother and determine if cause is a Non tariff barrier (NTBs) or is it a Political tariff barrier (PTBs). Time has come for us to see reality.

Lessons Learned - SAARC agenda Item

As I said at the ADB-UNTAD Conference on trade in South Asia It's time that we capture "The lessons learned is the last five years of trade in South Asia" and make this a top priority in the agenda of the up and coming SAARC conference in August to be staged in Sri Lanka.

The learning's should not be only numbers an in-depth analysis behind the numbers like the social ramifications of trade namely the Vanaspathy debacle and the jobs lost.

The more recent ceiling on Pepper exports to India and the growers in Sri Lanka being up in arms. The reasons for the low quota utilisation in the strategic sectors of Sri Lanka on Garments and Tea.

May be one should also factor the loss in revenue to government of Sri Lanka due to the tariff barriers given extended to fellow countries. May be we will see that the costs, are greater than the benefits in real terms.

When it comes to Pakistan the performance is 5.2% below the 2006 performance to 55 million dollars export revenue. Once again the strategic sectors of sheet rubber, crepe rubber and block rubber has taken a beating. We need to understand why this has happen and the corrective action that is required. We need to drive harder the strategic sectors than just exporting intermediate products.

Original Objectives - FTA

If we go back in time the original objectives of the FTA in the case of India for instance it was based on the premise of a study done on the regional comparative advantage (RCA), to drive a equitable trade between regional partners so that each country can benefit from the comparative advantages that one posses in a country.

The key obstacle to this end was the gradual removal of trade barriers over a period of time.

Both countries agreed on a list of products which are in the negative list, phasing out list and zero duty lists and the time frame to achieve the end objective of freer trade between the countries.

The time frame was important so that suppliers can get adjusted to international competition and vice versa.

Currently, except for the 429 products in the negative list of India, all other products of Sri Lanka have a zero duty access technically into India. From a Indian point of view other than for the 1180 products in the negative list, all other products from India was entitled for duty free access into Sri Lanka.

Basket of Goods - skewed

After eight years when we look at the reality of the trade between Sri Lanka and India we see skewed basket of exports like Processed food(essentially Vanaspathy), Copper, Electrical machinery, Aluminum, articles of stone, Organic and inorganic products to name a few getting across to the Indian Market whilst the strong holds of Sri Lanka -Garments and Tea facing the wrath of the Indian authorities depriving Sri Lanka to do some serious brand building initiatives in an overseas market for sustainability.

A point to note is that 86.1% of the products exported to India are under concessionary duty rates which mean that the export performance is a direct reflection of the performance of the FTA.

Closing down of Factories

If we get into the brass-tacks of this romance between Sri Lanka and India on the FTA, we can see that a number of projects invested in Sri Lanka increased from 34 to 105 in 2006, however most of them closing down over time that actually off sets the benefits of international trade. After all many Sri Lankans were working in these companies and would have lost their jobs.

The sectors include bakery shortenings, energy saving bulbs and plastic products. Sri Lanka also experienced in midway the rules of the game changing where Tariff Rate Quotas (TRQs) being introduced by India. The latest victim being 'Pepper', to the already victimised product -Vanaspathy.

Even though Sri Lanka's share of the total Pepper market in India is only five percent, we saw India slamming a TRQ of 2500 MT per annum ceiling on Sri Lanka much against the vehement protest by Sri Lankan Pepper exporters that once again needs to be taken up at a FTA review session before we agree to any more tariff cuts for Indian products at this end.

Vanaspathy Saga continues

The latest is that 14 companies that manufacture Vanaspathy Ghee is on the verge of closing down as at now after having been closed for over 6 months in 2006 when the Indian Government issued a unilateral gazette notification and canalising the product through the National Agricultural Co-operative Marketing Federation of India.

It was only after many negotiations that re-entry happened and that also for only a specific quantity subject to applications by a company which may have been stop diversion of trade due to comparative advantage. It's time that Sri Lanka gets wiser on FTAs given the social costs that we have to face and not just the economic benefits financially.

The Challenge

A key point to note is that in any bilateral agreement we are dealing with entrepreneurs and hence there will be time of testing global markets and evaluating not only the financial opportunity, but the working relationships of agents/importers in the global market.

Hence there will be a time of test marketing that we need to provide for a potential exporter to mature out. But the key is to provide an environment for fair competition to take place.

If not we are doing more injustice to own exporters than facilitating export growth. Whilst supporting trade the ban on export of metal scrap from Sri Lanka is justifiable, given that the local foundry Industrialist require sufficient raw material at affordable prices for value addition.

However, we cannot hide behind this fact but search for new avenues for growth on our established products. We must drive the rubber sector harder into Pakistan.

Drive the world acclaimed garments sector into India. We also need to be cognisant of the probable trade agreement between the EU and India and the ramifications it can have on Sri Lankan exports. Will there be trade diversion. If this happens what impact will it have on the Sri Lankan workers.

Way forward - focus on key sectors The key question to ask is why Sri Lanka is dependant on the export of such consumables, than focus on traditional product categories that can benefit due to Sri Lanka's competitive advantage.

May be we need drive policy for high end apparel products targeting the upper Indian consumer so that a typical Sri Lankan exporter finds this opportunity attractive, than the EU or the US.

To be continued