Trade negotiations: Sidelining the Bigots


By Echelon.

Published on July 07, 2013 with No Comments


THE MISTRUST IS A NATURAL reaction to intrusions, kidnappings, plundering and killing over millennia across the Palk Straits. Many of these incidents have undermined and embarrassed Sri Lankan rulers and leaders who had relatively smaller armies and lower economic might to war across the straits. For instance some years ago, the good looking sister of a Lankan ruler who had a crush on a married ruler of an Indian kingdom, had her nose cutoff.

Miffed at the treatment of his sister – who now had a ghastly hole in the centre of her face – the Lankan king kidnapped the wife, Sita, of this north Indian ruler. All hell broke loose after that. Ultimately the Indians sent a monkey god called Hanuman, to rescue Sita, who caused havoc in the island in the process.

More recently the Indians air dropped thousands of kilos of dhal over northern Sri Lanka to help improve the diets of people in the region. Despite the benefits of free food, rulers here were miffed at the incursion. Sabre-rattling across the straits has eased since, giving way to a cold war or cold truce depending on whose opinion it is. The mistrust continues but since the priorities of the states are evolving and, because their citizens are demanding it, economic ones have come to the forefront.

Naturally Sri Lankan leaders are still apprehensive about Indian intentions. The latest episode surrounds intentions to liberalize trade in services and investment. Its critics view liberalization as a Trojan horse that will swamp the island with thousands of Indian firms that will grab market share and hundreds of thousands of Indian workers willing to work for lower pay flooding the place, taking away jobs from locals.

For Sri Lanka, the smaller of the two, greater economic integration offers a huge opportunity if it can overcome insecurities and hang-ups about big brother India. Because the market at home is tiny, Sri Lanka will have to trade with the outside world to build competitive industries to meet economic and lifestyle aspirations of citizens. Across the pond in India it will find a massive market for its products and services.

Sri Lanka’s economic growth prospects are increasingly linked to the growth trajectory in Asia. India, China and ASEAN are particularly attractive trade partners because of large populations and growing wealth. There are a number of reasons to believe that creating something approaching a trans-Palk Strait single market for goods, services and investment could reenergize the Sri Lankan economy and may benefit Sri Lanka more than it does India.

Size asymmetry and disparity in available resources has been a cause for apprehension in Sri Lanka. So firstly it should be heartening that India’s trade negotiations with Sri Lanka, for the FTA, accounted for this disparity by applying ‘special and differential treatment’; the same basis that negotiations for deeper economic integration will also be on.

What this means is that Sri Lanka won’t be called on to grant as many matching concessions as those offered by India. The India-Sri Lanka Free Trade Agreement (FTA), which entered into force in 2000, is a fine example of this principle at work. India then offered 4,150 zero duty tariff lines for Sri Lankan exports while Sri Lanka only opened 1,208 zero duty tariff lines to Indian exports. In 2008 Sri Lanka cut duties on a further 2,700 products. Detractors would argue that India only lifted import duty on product lines where it had no domestic industry to protect. This observation isn’t entirely true and can be hugely misleading. The FTA’s impact on bilateral trade and its asymmetric growth favoring Sri Lanka debunks the theory that Indian concessions were eyewash.

Bilateral trade grew by eight times in the 13 years since the FTA. In addition to volume, the ratio of exports to imports from Sri Lanka to India has improved from 1:10 to 1:5 by 2012. This is because Sri Lankan exports to India grew at more than twice the pace of Indian export growth. Since the agreement Indian exports multiplied by seven times while Sri Lanka’s exports to India multiplied by 16 times.

Even more telling is that, on average, 70% of goods sent across the straits from here qualify for lower tariffs while 30% imports from Indian get preferential treatment here. Recently that average has shifted even more in Sri Lanka’s favor. In 2011, 82% Sri Lankan goods that went across the straights qualified for concessions while only 11% of Indian goods that arrived here benefited from the FTA.

Given the resoundingly successful record with free trade in goods it should be surprising that discussions for deeper economic integration, outlined in a Comprehensive Economic Partnership Agreement (CEPA) framework developed a decade ago, hasn’t found traction. Since the Indo-Lanka FTA, India has taken a wider approach to trade liberalization signing economic integration deals with Japan, South Korea, Singapore and Malaysia covering goods, services and investments. Canada, the EU and ASEAN are negotiating similar deeper access to the Indian market.

Trade-negotiations2Detractors of a sub-continental free market include trade unions concerned about a race to the bottom and protectionist industrialists. However, trade negotiations are government-to-government affairs and cannot directly involve the private sector or trade unions. Special interest groups will quickly drive negotiations in to deadlock with their maneuvering for protectionism while demanding access overseas, if they were part of deal making.

In Sri Lanka special interest has hijacked the debate and the government, which has to take leadership in these negotiations, reduced to a nervous bystander. To be meaningful India-Sri Lanka CEPA negotiators will also have to be bolder and seek deeper integration than India has with other CEPA partners.

This is because 13 years of the FTA have brought the two economies remarkably close. Sri Lanka is also a service dominated economy (accounting for half of economic activity) and should be more confident about liberalization in this area than it was about opening the industrial sector to greater competition.

As a tiny economy Sri Lanka also has more to gain and Indians less to fear. The asymmetry will grow and it’s in Sri Lanka’s interest to put the framework into a rule-based one with the necessary safeguards. By allowing bigots to hijack the trade debate the government is denying businesses and entrepreneurs an opportunity to get a foothold in the second largest consumer market in the world, which lies across the straits. Indian workers haven’t flooded Japan, South Korea, Singapore and Malaysia all of which have freer trade in services and investment with India than does Sri Lanka. Why should Sri Lanka’s experience be any different?

Some migratory labour to plug acute skills shortages will improve quality and make services affordable for all citizens, a good thing. It’s mere fear mongering however to contend CEPA will automatically force Sri Lankan negotiators to agree to a flood of Indian labour.

Some also argue that accessing the Indian market is challenging and Sri Lankan businesses won’t be able to benefit from economic integration. Indeed, India is a somewhat challenging market to access because of its famous bureaucracy; just like was China 10 years ago and Japan 50 years ago.

Yet the countries around Japan and China found a way of benefiting from the rise of these economies through vertical integration with manufacturing supply chains and horizontal integration through services. Entrepreneurial persistence was rewarded in Japan and China and latecomers found the cost of entry more than they could afford.

Despite not having the advantage of an FTA, Chinese exports to India grew 35 times to $50 billion in the same period it took Sri Lankan companies to grow exports by 16 times. This statistic proves what most people already know; that most firms here aren’t as internationally competitive as Chinese ones even with the benefit of geographical proximity and import tariff-free access that India has offered. It’s a fear of competition that drives vitriolic opposition to liberalization; far easier than innovation and productivity improvement.

There is genuine weariness particularly among the Indians at the lack of enthusiasm from Colombo. A discussion to set up a Joint Task Force to look at investment-led exports in automotive and pharmaceutical sectors took place in September 2012 when Indian Commerce Minister Anand Sharma visited Colombo. Despite being approved by the Sri Lankan government the taskforce didn’t meet for over a year.

Few politicians oppose the lowering of trade barriers, at least in principle. However, they sometimes find it not a practical thing to do during their watch because the rewards of barrier-less trade are more long term than is an election cycle. The easiest deals have already been struck and the farm and industrial lobbies – accounting for a large swathe of votes – have banded together with other inefficient sectors to block any more liberalization. CEPA is now a bit of a dirty word.

Supply chains between the two have been converging when governments have generally stayed away from meddling. For instance Colombo’s port accounts for one-fourth of India’s transshipment cargo. Cargo destined for India or coming from India accounts for 70% of the transshipment volume at the Colombo Port too. In aviation SriLankan Airlines brings thousands of Indian passengers who take connecting flights from here to Europe and the rest of Asia.

The only reason to ignore piecemeal regional integration would be if a larger trade pact were at hand that would also provide tariff free access to Sri Lanka’s larger export markets. The moribund Doha round of the World Trade Organisation is in its 12th inconclusive year, and offers no hope. Neither will pinning the future on austerity-blighted Europe or half a world away low-growth US help keep exports and economic growth ticking.


Services trade is also far broader than most people realize. It includes transport, travel, financial services, information services, communications, professional services and royalties & license fees. Like seen in aviation, it also fits well with the government’s hub policy for Sri Lanka and makes the state’s reluctance for greater market integration paradoxical.

Geopolitical tensions persist, but the relationship with India was always fraught with these challenges. Despite these, Indians are keen for a CEPA deal. Spurning the opportunity of something closer to a single market, due to apprehensions about tactless Indian leadership that sent monkey gods on rescue mission and air dropped dhal, would be a huge missed opportunity. Worse, allowing apprehension to govern thinking and inaction, has allowed the bigots in the fringes to hijack the debate.




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