Challenges for Sri Lankan exporters on exploiting Asian markets

The new government of Sri Lanka has announced a non-aligned foreign policy and also its desire to establish balanced political, economic and trade relationships, with all partner countries. At the same time the desire to strengthen political and trade relationships with her immediate neighbour India has become very clear.

Praise for new approach

The National Chamber of Exporters of Sri Lanka (NCE), which is the only Chamber exclusively serving Sri Lankan exporters, commend the approach of the new government in balancing its foreign policy, and economic policy with nations in a non-partisan, manner for the overall benefit of the country.

It is mutually beneficial to facilitate easy access to neighbouring markets through FTAs with special consideration to the small economy. But in the past may be due to lack of political will prevented freer moment of goods from Sri Lanka to partner countries, frustratingly to exporter community.

Repeated market entry hurdles faced by them compelled them to be away from the easy neighbouring markets to far away markets. With the new bilateral talks, once again a window of opportunity has come to push FTAs positively to change trade statistics and win back the exporter community.

Sri Lanka’s economic objectives were to increase trade ties with South Asia’s dominant economic powers, to induce transformation of Sri Lankan exports from low value goods to high value added goods aimed at niche markets, and also to benefit consumers with lower cost of living, strengthening welfare effect of FTAs

Sri Lanka also expected to attract Foreign Direct Investments (FDI) from third countries, by promoting herself as an effective entry point to access the larger Indian and Pakistan markets. Further India and Pakistan could invest in Sri Lanka and export to western markets exploiting favorable conditions conducive to those markets.

Grete LØchen, Ambassador for Norway in Sri Lanka in her address at the AGM of the NCE recently, pointed out that consumers in Europe are becoming much more conscious about labour, and environmental standards, and their voice is more powerful than ever before. She added that many Sri Lankan companies already have a good record on this front, compared to many in Asia, and this certainly becomes a competitive advantage to focus more on, if Sri Lanka is looking to pivot back European markets.

ISFTA, and PSFTA performances

Achievements under the ISFTA, and PSFTA over the past decade have not been up to expectations.

In this background it is necessary to objectively look at the trade performance of Sri Lanka in the two largest Asian markets (and in the world) viz China and India.

In the case of India, exports from Sri Lanka which comprise over 80 percent of products having duty free access under the ISFTA, increased steadily up to 2005 in absolute terms, and thereafter showed declining trend upto 2010. Thereafter, although recording marginal gains up to 2013, the value of exports is yet to reach the level achieved in 2005, 13 years after the ISFTA. On the other hand, imports from India grew substantially up to 2011, and have declined marginally thereafter. Nevertheless,

WITH THE NEW BILATERAL TALKS, ONCE AGAIN A WINDOW OF OPPORTUNITY HAS COME TO PUSH FTAS POSITIVELY

the balance of trade has remained excessively in favour of India to date. (US$ 2525 million as at end 2013).

Fifty percent of exports to India during the growth period up to 2005 arose out of Indian investments in Sri Lanka for the production of Vanaspati and refined Copper. These investments, as is well known, did more damage to the Sri Lankan Economy in terms of environmental and labour issues, as opposed to the benefits derived from re-exports to India. They were subsequently wound-up, due to the strong domestic lobby of the Indian industry opposing duty free imports. The other contributory factor has been the many unknown Non-Tariff barriers (NTB) encountered by Sri Lankan Exporters in India. Many of these remain in place to date. Some economists argue that the trade balance cannot be positive with all trade partners, depending on trading conditions. However, the fact remains that the trading pattern in respect of Sri Lanka’s largest Asian market partners remains heavily skewed in their favour. In the case of India, available literature indicates the concerns of India regarding the negative trade balance with South Korea related to the FTA with that country. The question therefore remains whether the same principle should not apply to a smaller trading partner like Sri Lanka.

The Institute for Social and Economic change of the Center for Economic Studies and Policy of India recently carried out a research study in Sri Lanka on NTB’s encountered by exporters in Sri Lanka, and India. According to the key findings of this study (which is still in the discussion stage), it is surmised that the number and nature of NTB’s encountered by Sri Lankan exporters, in respect of identified specific sectors, is more than those encountered by their Indian counterparts.

In the case of the Chinese market too, the balance of trade remains heavily in favour of China, with exports from Sri Lanka to China negligible in comparison to imports from China to Sri Lanka. (Trade balance in favour of China at the end of 2013 was US$ 2838 million). Also a major portion of exports from Sri Lanka were raw materials (Coir fiber) and not finished products. The above perceptions regarding the Indian market was the determining factor among a vociferous section of Sri Lankan entrepreneurs who resisted the proposed Comprehensive Economic Partnership Agreement (CEPA) with India.

However, according to a recent news report, Indian Prime Minister Narendra Modi has apparently focused his attention on the negative trade balance of Sri Lanka with India during discussions with the visiting Sri Lankan President Maithripala Sirisena.

In this background at a time when both India and Sri Lanka are focusing on rebuilding strong political and economic ties between the two countries, it is most opportune to correct the existing deficiencies, and misconceptions, related to trade between the two countries.

Indian interests

In the above context, and related to the discussions to strengthen the economic and trade relationship between India and Sri Lanka, concerns have been expressed in certain quarters in Sri Lanka, based on a perception, that India is keen to negotiate the following with Sri Lankan authorities. A) Agree on the implementation of the CEPA B) Promote Indian Investments in Sri Lanka to supply the Sri Lankan market relating to the following sectors. • Pharmaceuticals • Electric and electronic products • Rubber, plastic, and related chemical products C) Establish an exclusive industrial zone for

Indian investors.

Lankan exporter concerns

In this regard, the NCE as a responsible Chamber would urge the government to insist relevant officials to be mindful of the following during negotiations with Indian counterparts. 1. Ensure the correction of existing issues

related to the ISFTA. 2. Consult the Sri Lankan stakeholders adequately on specific aspects of the proposed CEPA before entering into an agreement. 3. Do not permit foreign investments to produce for the domestic market except under exceptional and justifiable circumstances, in order to protect domestic enterprises especially in the SME sector; but permit investments only for re-export. 4. Prevent the establishment of an exclusive zone in respect of any single country. However, where necessary investment zones for a particular sector for ex: the pharmaceutical sector may be allowed, provided it is open to investors from other countries as well. This approach will ensure healthy competition, as well as prevent bias to particular trading partners, in keeping with the announced balanced foreign policy, and trade relationships of the government with all countries. In regard to the pharmaceutical sector the policy announcement of the government to do away with brand names for drugs, and adopt generic names, is commendable from the consumer’s point of view, to overcome the many irregularities that prevail in the sector, and to reduce the cost of drugs. It is also proposed to encourage the local production of pharmaceuticals. In this background it may be desirable to permit select investments to produce for the domestic market, in the form of joint ventures with local partners on the condition of transfer of the related technology to the local counterparts within an agreed time frame, and specifically aimed at import substitution of the relevant pharmaceutical products. In regard to investments for the production of chemical products such as dyestuffs, it is important to be mindful of environmental issues, arising out of the discharge of effluents, by ensuring preventive measures, in the terms of approval of investments.