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Looking at Sri Lanka’s Existing Trade Agreements and Lessons for the FTA with China : IPS
10 Sep, 2014 10:35:29
September 10, 2014 (LBO) – Sri Lanka and China in talks to finalize a free-trade agreement which would bring substantial economic and trade benefits to the two countries, with both governments expressing hope that the deal will be implemented at an early date.
China is the second largest economy in the world has reached a target of nine trillion US dollars of gross domestic product (GDP) in 2013 maintaining an average growth rate of nine percent. China is the biggest market in the world with 1.4 billion population.

The Institute of Policy Studies of Sri Lanka (IPS) discusses key lessons that can be learned from Sri Lanka’s experience with existing free trade agreements with South Asia and Asia Pacific and two bilateral trade agreements with India and Pakistan that must be borne in mind when negotiating a trade agreement with China.

IPS is an autonomous institution that aims to promote policy-oriented economic research and to strengthen the capacity for medium-term policy analysis in Sri Lanka.

Press Release by Janaka Wijayasiri and Dharshani Premaratne – IPS

While Sri Lanka has been actively engaged in all multilateral trade negotiations and has been undertaking trade reforms in keeping with the WTO’s GATT principles, Sri Lanka also has been involved in a number of regional trade liberalization initiatives. Sri Lanka participates in two regional agreements, the South Asian Free Trade Agreement (SAFTA) and the Asia-Pacific Trade Agreement (APTA), and two bilateral agreements, the Indo-Sri Lanka Free Trade Agreement (ISFTA), and the Pakistan-Sri Lanka Free Trade Agreement (PSFTA).

This article highlights some of the key lessons from Sri Lanka’s experience with these existing FTAs that must be borne in mind when negotiating a trade agreement with China.

Special and Differential Treatment

Given the asymmetry of economic size, Sri Lanka received special and differential treatment under each of the existing FTAs. For instance, Sri Lanka as a small economy was allowed a longer tariff phase-out period, a longer negative list, immediate duty free access for several products at the start of the agreement, and more favourable rules of origin under SAFTA, ISFTA and PSFTA. For example, India had a three-year tariff phase-out period, while Sri Lanka liberalized its tariff schedule over an eight-year period. Similarly, Pakistan liberalized products over a three-year period, while Sri Lanka liberalized its products over a five-year period. Under SAFTA, Sri Lanka was given eight years to phase-out its tariffs compared to seven years for non-LDC members.

Rules of Origin

Rules of origin criteria, which are used to determine country of origin under a FTA, have varied among the FTAs in South Asia. SAFTA and ISFTA require a change of tariff classification at the 4-digit level. This rule has been difficult to meet given the substantial transformation required of the product; for example, Sri Lankan tea exporters found they could not adhere to this rule even if they blended Sri Lankan tea with Indian tea. Having the experience with ISFTA, PSFTA negotiations adopted less restrictive rules of origin criteria. The major difference between the rules of origin of the ILFTA and PSFTA is the change of tariff classification criteria - the PSFTA adopts a change of tariff heading at the HS 6-digit level, which is more favourable to Sri Lanka.

As a consequence, more value-added exports from Sri Lanka have received duty-free treatment to access the Pakistani market. Additionally, all three agreements have adopted the same domestic value addition criteria - 35% of the FOB value of the product.

In negotiating a trade agreement, it is therefore important to relax and simplify the rules of origin so that they are easy for traders to understand and to comply with, while ensuring the necessary controls are in place to prevent fraud.

Negative List

This list contains sensitive products which are exempted from tariff concessions under the agreement. The negative list should be prepared in consultation with local stakeholders by weighing revenue considerations as well as implications for local industries and livelihoods which may be adversely affected by trade liberalisation. However, it is important to keep the negative lists to a minimum to ensure that a substantial proportion of tariff lines and products are covered under the agreement.

For example, Sri Lanka’s negative list under PSFTA consists of 697 products, mostly in agriculture, rubber products, paper products, footwear, ceramic products, motor vehicles and parts, and metal products. Pakistan’s negative list, which consists of 540 tariff lines, contained many of Sri Lanka’s main exports to Pakistan including tea, rubber products, certain ceramics, paper products and several textile and garment products. Under the ILFTA, India has maintained a smaller negative list with 429 tariff lines compared to Sri Lanka’s long negative list of 1,220 tariff lines.

Non-tariff Measures

When tariffs are brought down through negotiations, non-tariff measures (NTMs) or ‘behind the border barriers’ can reduce the use of the agreements if they are not effectively dealt with. NTMs should be identified at the onset and addressed along with tariff reductions/eliminations. In this regard, there should be binding commitments. Many Sri Lankan exporters have faced difficulties in entering the Indian market due to the prevalence of NTMs such as state taxes, standards, and administrative procedures, which are outside the scope of tariff reductions under the ILFTA.

Tariff-rate Quotas

Although tariff schedules have been liberalized to a certain extent under ILFTA and PSFTA, Sri Lanka’s trade expansion with India and Pakistan has been impeded by tariff-rate quotas agreed under the Agreements. India has maintained tariff-rate quotas for tea, garments, and textiles while Pakistan maintained tariff-rate quotas for tea, garments, and betel. Hence, a bulk of the tea exports from Sri Lanka to India and Pakistan have been outside the FTAs.

Mutual Recognition of Standards

Lack of mutual recognition of standards between two countries in an FTA is another obstacle exporters encounter, especially exporters of perishable goods. Lack of a Mutual Recognition Agreement (MRA) for standards between Sri Lanka and its FTA partners has resulted in various additional checks/certifications on the goods at the importing country, even though they have been previously tested and certified by the relevant authorities in Sri Lanka. Some of the issues faced by traders include intergovernmental non-acceptance of testing methods and standards; packaging, labeling and markings; and duplication of health and safety checks in India and Sri Lanka. This has resulted in delays and additional costs.

Supply-side Constraints

There is little point in getting concessions under a trade agreement if the country does not have the capacity to supply the goods in demand – this can be a constraint in the case of a small country like Sri Lanka. This was demonstrated in the case of strawberry exports from Sri Lanka to India.

Awareness

The lack of knowledge and awareness among traders of the concessions offered by the FTAs has been a key impediment to Sri Lanka garnering maximum benefits of existing FTAs. Although a majority of exporters/importers were aware of the FTAs, many SMEs lack awareness of specific information on the duty concessions offered and the processes in acquiring the preference (ROO, tariff rate quotas, etc.).

Visas

Traders have highlighted the need to facilitate the visa processes between two countries if trade relationships between them are to be enhanced. Sri Lankan exporters to India for instance have stated that getting business visas to India is extremely difficult and have highlighted the need to promote businessmen visiting India and to obtain multiple entry visas.

Institutional Support

The absence of a fixed body to address problems arising when trading under the agreement is an impediment to using the FTAs better. When problems arise regarding a shipment - with documentation, for instance - there is no formal body of authority that takes up the complaints and addresses them quickly. Quick response is essential due to high costs of delays, and if the cost benefit under the FTA is negated then traders will not be encouraged to export/import further.

Consultation

Experience with the ILFTA, and attempts to extend the agreement into a Comprehensive Economic Partnership Agreement (CEPA), highlights the need for greater private-public dialogue in Sri Lanka on trade agreements, on an on-going and regular basis. Consultations should not be reserved exclusively to the level of governments - finance, commerce, or and trade departments, but rather with stakeholders at large. This can ease exporter-importer concerns, demonstrate that challenges in the agreements can be addressed in a participatory manner, and help create broader public awareness of, and confidence in, the opportunities and benefits of the agreements.

(Janaka Wijayasiri is a Research Fellow and Dharshani Premaratne is a Research officer at the Institute of Policy Studies of Sri Lanka.)

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