No Urgency for Sri Lanka’s ETCA Response to Brexit

Analysis by Dr Palitha Kohona

The writer is former Permanent Representative of Sri Lanka to the United Nations in New York, previously Head of the UN Treaty Section. Dr Kohona was closely involved with the Uruguay Round of Trade negotiations.

COLOMBO (IDN) – The Prime Minister, Ranil Wickremasingha, has declared that Sri Lanka will sign the proposed Economic and Technical Cooperation Agreement (ETCA) with India urgently as a means of cushioning the possible negative effects of Brexit on the country.

As to whether the proposed ETCA will be effective in realising this goal has not been properly discussed. Nor have the deeply felt reservations of the Sri Lankan business and professional communities about the ETCA been adequately addressed.

Much confusion and speculation is in the air with regard to the proposed ETCA with India. The origins of this uncertainty are traceable to the now disowned Comprehensive Economic Partnership Agreement (CEPA).

In 2002, Sri Lanka and India agreed to expand the existing India Sri Lanka Free Trade Agreement (ISLFTA) in to a CEPA. The Sri Lankan leadership may have expected wide benefits in developing closer linkages with the rapidly expanding Indian economy. India also clearly anticipated advantages in locking Sri Lanka into its economic sphere of influence.

Negotiations proceeded and the Sri Lankan government participated actively. Originally the CEPA was scheduled to be signed in 2008 during the SAARC summit.

Sri Lankan industry and professional bodies, not having been adequately engaged, began expressing considerable opposition to the proposed agreement. The Government of Mahinda Rajapaksa balked and did not proceed to conclude the CEPA. Latent nationalist tendencies and a genuine fear of being swallowed up by Indian businesses contributed to the uncertainty.

The opposition to the CEPA continued despite the change of government, and the new government, elected in 2015, also came under the same pressure. On December 9, 2015, the Prime Minister said in Parliament that Sri Lanka will not sign the CEPA but will enter in to an Economic/Technical Co-operation Framework Agreement with India.

The Development Strategies and International Trade Minister, Malik Samarawickreme, said later that Sri Lanka will ink an Indo-Lanka Economic and Technical Cooperation Agreement (ETCA) by mid year and a Framework Agreement in February 2016. Now we are told that Sri Lanka will sign an ETCA this month. It would appear that a draft Economic and Technical Cooperation Agreement (ETCA) and a Draft Economic and Technical Cooperation Framework Agreement (ETCFA) are on the table.

No urgency

One could ask whether there is a particular urgency to conclude the ETCA following the Brexit? The short answer appears to be that there is no such urgency.

Article 50 of the European Union Treaty (Lisbon Treaty) states clearly that the withdrawal of a member state of the EU has to be effected on the basis of an agreement and will take effect on the entry in to force of that agreement or on the completion of two years from notice.

In addition to the grace period of two years provided, after 43 years with the EU, UK laws are closely interlinked with the EU’s legal framework. These will take awhile to be untangled, especially in sectors where the EU had exclusive powers of legislation.

Another difficult area would be the common tariff schedules that the EU would have negotiated within the WTO, which the UK will have to renegotiate as an individual country. Incidentally. India is negotiating an FTA with the EU currently and is stuck on TRIPS and investment issues.

Some areas of shared competency and supporting competency of the EU have also to be kept in mind. The customs union, competition rules, the common monetary policy, the common commercial policy and the conservation of marine resources fall within the EU’s exclusive jurisdiction.

These areas will take time to disentangle. Recognising the difficulties, Christine Lagarde, the head of the IMF, soothingly asked the leaders of the EU and the Britain to reach arrangements without delay. Given this background, it would not appear to be necessary for Sri Lanka to rush to conclude the ETCA on account of the Brexit.

Sri Lanka’s exports to the EU are unlikely to be affected by Brexit. Exports to the UK will take at least two years to be affected, if at all.

India is unlikely to be a substitute market for what we export to the UK. Developing new markets in Asia is always a good thing. But this has to be done with Sri Lanka’s interests uppermost.

Sri Lanka is is not a stranger to bilateral and multilateral trade agreements and is already party to a range of such agreements affecting its trade.

Sri Lanka has concluded many goods and services liberalisation agreements. Eg. The SAFTA, the FTA with Pakistan, the FTA with India, the APTA, and the BIMSTEC (Bay of Bengal Initiative for Multi-sectoral Technical and Economic Cooperation).

The FTA with India, concluded in 1998, entered in to force in 2000. It covers the trade in goods. Now Sri Lanka is negotiating a FTA with China. Keen interest has been.demonstrated in the the recently concluded Trans Pacific Partnership (TPP) by the business community. Political and industry commentators have expressed strong support for Sri Lanka joining it.

Sri Lanka has concluded over 25 Investment Promotion and Protection Agreements, including with India. It is already a party to the SAARC Agreement on Trade in Services 2010 (SATS). The SATS promotes further agreements liberalising the trade in services progressively in the SAARC region. Liberalisation is expected to happen on the basis of a positive list, on a request and offer basis.

These liberalisation agreements must be consistent with Art V of the General Agreement on Trade in Services (GATS). All this entails a commitment to continue liberalizing except in the circumstances provided. E.g. security issues, balance of payment issues, etc.

Thus, Sri Lanka is already committed to opening up its services sector to SAARC parties in principle. Sri Lanka is a party to the GATS. The GATS recognises the increasingly overwhelming importance of services in the global economy. Services account for about 58% of the Sri Lankan economy.

A close look at ETCA

The goal of the proposed ETCA and the ETCFA is to enhance economic, trade and investment cooperation. The Draft ETCA covers a range of sectors, including the trade in goods and services, the movement of natural persons, economic relations, and investment and technology cooperation. It aligns itself with the WTO GATT and states that any non-tariff barriers, anti dumping measures, national treatment must be consistent with GATT 1994. It contains detailed provisions on anti dumping actions (Art X). Art VI of the GATT is incorporated. (The chapters on investments and the movement of persons have been removed in the publicly available draft of the ETCA).

The draft ETCA also aims to reduce tariffs and restrictions to trade in goods and services. The ISLFTA is incorporated by specific reference in Article II of the ETCA. Provisions of the GATT and the GATS are specifically incorporated. Services cover a wide range of business activities – Transport, warehousing, information, securities, commodities, banking, insurance, investment, accountancy, IT, education, arts, entertainment, recreation, hotels and restaurants, heath, legal, etc.

Under the proposed ETCA, services liberalisation will be on a case by case requests and on the basis of a positive list. Serious reservations exist on whether the Sri Lankan legal and other structures are ready to contemplate the liberalisation of the services sector as envisaged in the draft ETCA.

Many professional bodies in Sri Lanka have their own rules on accreditation and require national accreditation for an individual or firm to practice that profession, eg. lawyers, doctors, accountants, architects, et al. These rules have been used to restrict foreign qualified professionals and those without recognised qualifications from practicing in the country.

At the same time there are many professional categories with no national accreditation requirements, eg. builders, artisans, etc. Professionals practicing such trades do not have the possibility of controlling outsiders who seek to practice in Sri Lanka.

The ETCFA and the ETCA, as currently formulated, will have an impact on the existing control mechanisms on Indian qualified professionals seeking to work in Sri Lanka. The State Governments of India have the ability to control professionals and professional bodies. Eg. Tamil Nadu used these powers to prevent Sri Lankan cricketers from playing there.

No positive experience with ISLFTA

One specific reason for the reservations of the Sri Lankan business and professional communities is their experience with the ISLFTA since 2000, which has not been positive. This could be instructive in implementing a future ETCA.

The ISLFTA is based on a negative list approach. Tariff concessions / elimination were offered except for items on the negative list. Special and Differential Treatment provisions were built in favour of Sri Lanka and Sri Lanka enjoys a longer negative list than the Indian side, longer periods for liberalisation, and more favorable rules of origin requirements.

On the face of it, the trade figures are impressive. The bilateral trade grew to over $ 4.5 billion in 2013-2014. India exported $ 3.98 billion. Sri Lanka exported $ 678 million. Much of it in re-exports. 2100 tariff lines were exported to India in 2012. Up from 505 in 1999.

This figure includes value added products like furniture, tyres, insulated cables, waste paper, refrigerators, confectionary, etc. However, in 2007, almost 50% of exports to India, consisted of vanaspathi and copper. This was more a case of trade diversion to take advantage of the Indian customs duty structure.

India is now the 3rd biggest export destination for Sri Lanka after the U.S. and the EU. It is the second biggest investor in Sri Lanka. Indian investments are prominent in the areas of petroleum (IOC), vehicle assembly, telecoms, banking, hotels (Taj), etc. India is also the main destination for Sri Lankan outward investors Eg. Damro, Dankotuwa, John Keells, Brandix, etc. Tourist arrivals from India exceeded 170,000 in 2015. This is a factor that can be exploited to Sri Lanka’s trading advantage.

Despite the favourable treatment provided in the ISLFTA for Sri Lanka, serious concerns have remained. Bland statistics, by themselves, may not be helpful to determine whether the ISLFTA has been an actual success for Sri Lanka as Sri Lankan exporters continue to have reservations with regard to the ISLFTA.

For example, the nature of the negative lists for India, conditions attached to the of Rules of Origin and concessions that were offered on the basis of quotas. Only a percentage of the overall trade between the two countries is effected under the ISLFTA. There are Irritating access issues – Indian bureaucrats are sometimes unaware of the details of the ISLFTA, endless difficulties have been experienced with obtaining Indian visas and administrative hostility in India has also been encountered.

Concessions were provided in the ISLFTA for items that Sri Lanka can not supply while many items which Sri Lanka could supply came under the negative list. For example, Sri Lanka is strong on tea, ready made garments and textiles. These were placed under quota in the ISLFTA.

Even the quotas came under stringent ROO requirements and port restrictions. For example, the export of ready-made garments was limited to 8 million pieces. There are also regional requirements to be met – Non-tariff barriers. In Tamil Nadu, the sales tax on Sri Lankan exports is 21%. On local products it is 10.5%.

Unilateral quota and port restrictions imposed by India have disrupted trade – Vanaspathi exports were unilaterally limited to 100,000 tons in 2007. Vanaspathi has now disappeared as a major trading item between the two countries as India has liberalized the import of palm oil. Similarly, copper has become an insignificant export. A 2500 ton limit on pepper imports was imposed in 2006 and, even then, only through the port of Kochi.

Complicating factors

The lack of professional institutional support has also disadvantaged Sri Lankan exporters.

There are further complicating factors for Sri Lankan exporters:

– Unfamiliarity of Indian bureaucrats with Sri LankAn trade descriptions, (an initiative was launched recently to provide training at this end on properly complying with Indian requirements).

– Non acceptance of Sri Lankan certification, (Sri Lanka recognizes Indian certification for 80 items. The same does not apply on the Indian side),

– Excessive paperwork required at Indian ports of entry,

– The time taken to sample and test perishable items like strawberries. (Testing may be done far from the port.),

– Difficulties in obtaining information, e.g. on labeling requirements, etc.,

– Lack of border coordination, (Different ports demand different documentation). THERE is also no effective help desk established under the ISLFTA.

Sri Lankan exports to other countries of the world have expanded substantially. There is a feeling that the exports to India have not kept pace despite the ISLFTA.

The bulk of Sri Lankan imports from India are not covered by the ISLFTA: Vehicles, petroleum products, steel, etc. Only 13% of imports fall under the ISLFTA.

At the Sri Lanka end, other issues have emerged. Foreign businesses sometimes bring only a minimum of funds to Sri Lanka for investment purposes and try to raise the required capital locally. FDI inflows would be marginal in these cases.

There is no trade agreement between India and China. Nevertheless bilateral trade exceeds $80 billion, raising the question of the necessity for the proposed international trade and services agreements with India.

The proposed ETCA and the ETCFA, if carefully and sensitively drafted and implemented, could address many of these concerns. The provisions of the drafts are worth careful re-examination, especially given the difficulties faced by Sri Lankan exporters in the past.

The draft ETCA, which purports that to enhance the ISLFTA runs in to 43 pages in small font. This agreement could turn in to a trade lawyers’ paradise. The chapter on dispute settlement is one of the longest in the agreement. India has considerable experience in fighting cases at the WTO and in foreign courts. The Sri Lankan experience in these areas may be much more limited.

What can Sri Lanka do? Trade agreements, per se, should not be viewed negatively. There are thousands of trade agreements facilitating trade among countries. They are intended to enhance trade, especially in the goods and services sectors.

But the relevant trade and industry bodies of a country should be closely involved during negotiations so that their concerns and objectives can be reflected to the extent possible in the texts. Their endorsement is essential for the success of the agreements. The experience of successful exporters to India could be shared for the benefit of all. Trade facilitation must be included in a future ETCA.

A help desk

A help desk with officers skilled in trade and international trade law matters must be established. The help desk must take a proactive approach in promoting the national interest. The Institute of Policy Studies suggests that Sri Lanka needs to make better use of the existing ISLFTA. But for this to happen, government machinery must be proactive.

Undoubtedly, Sri Lanka needs to move in to less traditional markets. India is a non-traditional market and an increasingly lucrative one. 160 million Indians are estimated to be in the INR 20,000 – 100,000 income bracket. India’s increasing prosperity provides a ready-made market for goods and services. Already, India is Sri Lanka’s biggest source of FDI, the largest source of imports and the third largest destination for SL exports.

Sri Lankan exports have duty free access to India except for 429 products. But for this access to be beneficial to Sri Lanka, the existing obstacles need to be ironed out first. A treaty by itself will not iron out the wrinkles. [IDN-InDepthNews – 7 July 2016]

Photo: President Maithripala Sirisena with Prime Minister Narendra Modi in February 2015. Credit: Wikimedia Commons.

IDN is flagship agency of the International Press Syndicate.

2016 IDN-InDepthNews | Analysis That Matters

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