Road to FTAS by Sri Lankan government...
The policy debate towards negotiations on free trade agreements (FTA) has been intensified after Sri Lanka signed an FTA with Singapore in 2018. Almost two decades ago, Sri Lanka entered into the firstever FTA with India, followed by a similar trade pact with Pakistan.
After a period of long salience, negotiations are currently underway with an openended list for negotiation of more FTAS, the rationality of which has come under heavy criticism without the backing of empiricalevidence-based research work. The gravity of such criticism has even led to the appointment of a presidential committee to evaluate the Sri Lanka-singapore FTA (SLSFTA) and make recommendations.
The FTAS typically seek to reduce trade barriers between partner countries and the new trend is that many of liberalization commitments of these trade agreements go beyond the trade in good to include broader scope on provisions on services, intellectual property, trade facilitation, customs cooperation, government procurement, ecommerce and investments as well.
The FTAS have been seen by many as promoting broader economic integration. Globally, these wide-ranging and controversial bilateral and regional trade arrangements have thus emerged as part of the trade policy landscape.
In the backdrop of these recent developments, the main objective of this article by the Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) to shed some light on the strategic approach, preparatory process and matters of concerns of other countries when entering into FTAS and finally to provide a set of recommendations for the Government of Sri Lanka (GOSL) to develop a more pragmatic approach towards FTAS, so that the Sri Lankan business community would hopefully achieve tangible economic advantage and commercial benefits across the wide spectrum of industries and services.
In simple terms, an FTA is an agreement between two or more countries to establish a free trade area, where commerce in goods and services can be conducted across their common borders, without tariffs or hindrances.
Types of trade agreements
Broadly, there are three types of trade agreements. 1. Unilateral trade agreement: It occurs when a country dismantles trade restrictions with partner countries without any reciprocity from other partner country. It would put the country, which is receiving tax reliefs at a competitive advantage – e.g. GSP Plus by the European Union (EU) to Sri Lanka. The United States and other developed countries only do this as a type of foreign aid. They want to help emerging markets strengthen certain industries. It helps the emerging market’s economy grow. 2. Bilateral trade agreements: this is happening between two countries. Both countries agree to loosen trade restrictions to expand business opportunities between them. They lower tariffs and confer preferred trade status with each other. The sticking point usually centres on key protected or subsidized domestic industries. For most countries, these are in the automotive, oil or food production industries as of today the United States has 16 bilateral agreements.
3. Multilateral trade agreements: These are among three countries or more and are the most difficult to negotiate. The World Trade Organisation (WTO) agreements are typically multilateral agreements involving its member countries. The greater the number of participants, the more difficult the negotiations are. They are also more complex since each country has its own needs and requests and once negotiated, multilateral agreements are more powerful than bilateral trade agreements. They cover a larger geographic area. That confers a greater competitive advantage on the signatories. All countries also give each other most favoured nation status. They agree to treat each other equally – e.g. Asia Pacific Trade Agreement, in which Sri Lanka is also a signatory. The largest multilateral agreement is the North American Free Trade Agreement (NAFTA). It is between the United States, Canada and Mexico, which is however to be replaced by an agreement called the United States– Mexico–canada Agreement. Regional trade agreements (RTAS) and FTAS coexist and consistent with the rules of the Wto/general Agreement on Tariffs and Trade (GATT) multilateral trading system as provided in Article 24 and Article 5 of the General Agreement on Trade in Services, though such agreements constitute a departure from the most favoured nation (MFN) rule which is the fundamental principle of non-discrimination of the WTO agreements.
Under this MFN commitment, countries are not allowed to discriminate between their trading partners simply implying that if country grants a special favour (such as a lower customs duty rate for one of their products) to a country, then it has to be extended for all other WTO members.
The RTAS and FTAS have become a key trade policy instrument for most countries and thus a major feature of today’s trade landscape. The number of bilateral FTAS negotiated between the developed countries and developing countries has increased dramatically during the recent years. All WTO members are involved in at least one RTA and bit more than half have at least five RTAS. It is reported that as of October 2017 globally there are about 284 ‘physical’ RTAS in force of which the majority are from the Asia Pacific region.
Reasons for surge in RTAS/FTAS
A complex mix of external and internal factors, as well as economic, political and security-related factors, is behind the expansion, intensification and diversification of RTAS/FTAS in the world.
External factors: Securing markets and providing export opportunities for domestic companies by dismantling the trade barriers between participating nations. The expansion of production that results from increased export opportunities enables companies to reap the benefits of economies of scale, which in turn leads to produce more competitive (price wise) products. Access to markets and the expansion of export opportunities are particularly important for companies from smaller country. For example, it was very important for companies in Canada and Mexico to gain access to the US market and Sri Lankan companies to enter into India, China and the EU. The importance of securing markets as a motive for participating in RTAS has become even greater as regionalism has expanded day by day. Internal factors: Economic growth from increased efficiency due to greater competition as a result of the markets being opened. Since the 1970s, policymakers have come to recognize the benefits of liberalization of foreign trade and investment, deregulation and the removal of domestic regulations have facilitated high economic growth in the developing countries of East Asia, as well as industrial nations such as the US and UK.
Role of WTO
The WTO provides a forum for negotiating amendments aimed at reducing obstacles to international trade and ensuring a level playing field for all, thus contributing to economic growth and development. The WTO also provides a legal and institutional framework for the implementation and monitoring of these agreements, as well as for settling disputes arising from their interpretation and application.
The WTO, which was established in 1995 and its predecessor organisation, the GATT, have helped to create a strong and prosperous international trading system, thereby contributing to unprecedented global economic growth.
Sri Lanka’s case
The way countries viewed these trade blocks such as RTAS and FTAS have changed over time. For some reasons, if the current policymakers of the GOSL believe FTAS would bring meaningful benefits to the country by way of promoting trade and accelerate economic growth, it is of paramount importance that our negotiators to learn from good practices adopted in other countries in negotiating FTAS.
Following a very brief survey, the section below attempts to highlight some perspectives as to the inclusive consultation and analytical process, safeguarding defensive interest or even back off from negotiation, if the desired goals of FTAS are not likely to yield meaningful benefit for the country.
We have selected countries – two from our own region and a few developed countries where there are systematic approaches and domestic trade interest-driven approaches are adopted by well-experienced negotiating teams for pursuing bilateral FTAS.
Australian approach to free trade
Australia has adopted a cautious approach in selecting countries for entering into FTA. The Australian government’s approach has been to negotiate comprehensive agreements that seek substantial reductions in trade barriers and included provisions on matters such as intellectual property, competition policy and trade facilitation.
In line with global trends, Australia has been pursuing bilateral and regional agreements enhancing Australia is broader economic, foreign and security policy interests. Australia has entered into 10 FTAS with both individual countries and groups of countries. A number of other agreements are currently under negotiation.
In 2009, the Australian government requested the productivity commission to provide advice on the effectiveness of trade agreements in responding to national and global economic and trade developments and in contributing to efforts to boost Australia’s engagement in the region and evolving regional economic architecture.
(The productivity commission having consulted all key stakeholders and having conducted studies in the academic literature and research and quantitative analysis submitted a detailed report to the government.)
Key findings
Some important key findings of the report (the term–regional/preferential Trade Agreements in fact refers to FTAS throughout the report). Theoretical and quantitative analysis suggests that tariff preferences in BRTAS, if fully utilized, can significantly increase trade flows between partner countries, although some of this increase is typically offset by trade diversion from other countries.
The increase in national income from preferential agreements is likely to be modest.
The commission has received little evidence from business to indicate that bilateral agreements to date have provided substantial commercial benefits. This may be because the main factors that influence decisions to do business in other countries lie outside the scope of BRTAS.
While BRTAS can reduce trade barriers and help meet other objectives, their potential impact is limited and other options often may be more cost-effective.
Current processes for assessing and prioritizing BRTAS lack transparency and tend to oversell the likely benefits. (XX of the report)
Australia’s existing model
The key learning points from the Australian model is selection of potential RTA/FTA partner, feasibility studies, economic modelling and parliamentary review by the federal parliament.
Politics of FTAS
Suppose that an opportunity arises for two countries to negotiate an FTA. Will an FTA between these countries be politically and economically viable? And if so, what form will it take? These questions take us into the realm of international relations and the hard realities of international economic diplomacy and bargaining parity and power.
Governments all over the world have been meeting frequently of late to discuss the possibility of their forming bilateral or RTAS. These trade negotiations have never been easy, nor have they always been successful. Such activity towards bilateral and regional FTAS reflect in part the failure of the multilateral trading system and to make any progress in market access and trade negotiations, where the intransigence and protective interests of the developed and powerful countries reign supreme.
It’s noteworthy to quote that studies of the United Nations Conference on Trade and Development (UNCTAD) evaluating the failure of many developing countries to obtain substantial benefit from FTAS, attribute such failures to the predominance of vested business interests/groups, which influence political authorities to enter into agreements and concede high levels of liberalization adversely affecting the majority of industry/agriculture/in return for the concessions received by these few vested interests groups.
In case of Sri Lanka, it is a well-known fact that during the FTA negotiations with Singapore, Sri Lankan large-scale exporters and conglomerates, especially in the apparel sector, encouraged the GOSL for signing the agreement for likely economic benefits for them.
The FCCISL has no reasons to doubt the efforts of the GOSL in their efforts to maximize aggregate national welfare and economy-wide benefits for enhancing the living standard of the people through creation of trade using FTAS. However, this great intention is not enough. The GOSL should also understand the nature of the game between governments as well.
Lessons from Pakistan-china FTA
Pakistan and China signed up an FTA in 2006 and made it effective in 2007. Under Phase (1) of the agreement, China agreed to eliminate/reduce tariffs on 6418 product lines and Pakistan was to eliminate on 6711 product lines over a period of five years.
As of end-2013, bilateral trade reached little over US $ 9 billion, as compared to US $ 3.5 billion in 2006, prior to the FTA being implemented, while the trade imbalance has grown in favour of China during this time. It’s noteworthy to mention that during Phase (1), China made substantial use of the FTA and has managed to utilize 57 percent of the concessions under the FTA, compared to mere 5 percent in the case of Pakistan. (See Table 1)
Under the FTA, has effectively China increased buying from Pakistan? What is Pakistan’s position as an exporter to China, compared to other countries that export goods to China after signing similar FTAS? The graph titled ‘Chinese imports from Pakistan and the rest of the world’ tells the story. As evident from this graphical presentation on bilateral trade between the two countries over the last decade, Pakistan has failed to derive the benefits out of the FTA with China. In March 2017, Lahore School of Economics and Pakistan Business Council have attributed the following factors for poor performance of Pakistan:
In the same year (2007), China entered into an FTA with the Association of Southeast Asian Nations (ASEAN) and awarded higher or equal tariff reductions to compete the ASEAN countries for products for which Pakistan possesses a big export potential in the Chinese market. As a result, the tariff preferences enjoyed by Pakistan under the FTA has been eroded and similar products of the ASEAN countries became more attractive to Chinese importers.
During the negotiations, Pakistan’s top exports to the world (and China) have been placed in China’s negative list despite the demand for such goods is high in China.
The FTA concessions offered by Pakistan seem to be more beneficial for China both in terms of the number of product lines utilized and the variety of type of product lines utilized. In this context, the theory of give and take has not applied equally to both countries.
At the time of signing the FTA between the two countries, during Phase (2), it was agreed to remove 90 percent of tariff lines. However, no negotiation was begun, even three years after the lapse of the phase, due to the refusal by Pakistan to commence the negotiations, due to the negative impact created on the Pakistan economy by Phase (1).
Approach to FTAS of other counties
Lessons from India-eu FTA
negotiations: It is good for Sri Lankan negotiators to learn from their counter parts in India and the EU. This is an exemplary occasion where negotiators from both India and the EU showed their commitment to the cause of each country at the negotiating table and how the Eu-india trade negations ended up abruptly.
According to Times of India, a wellrespected newspaper in India, negotiations on India’s FTA with the EU had started in 2007 and since then, 16 rounds of discussions have been held at the chief negotiator level.
However, since 2014, when the 16th round was held, the negotiations have been suspended, as the negotiators were not able to arrive at a compromise solution to address the EU’S key demands. As of today, neither party has shown any interest to resume negotiations. Reasons for negotiation standoff:
Part 1
According to informed sources, it happened due to the EU’S demands for India to eliminate duties on dairy, automobiles, wines and spirits, while India’s main demands included those on the data security status, which are key for India’s information technology sector. India had also sought easier temporary movement of professionals in the services sector.
India is of the view that the EU has been rigid in giving access to services, while new data security and transparency laws will affect many Indian companies. For many scholars and experts, the India-eu FTA is on the verge of death. It is widely believed that the formal announcement on closure of business on trade negotiation is expected in the near future.
This is an excellent example that if negotiators feel that the FTA negotiations cannot bring the expected benefits to their respective countries, they should not be afraid or hesitant to pull off from trade negotiations.
Lessons from USA: In this context, we draw the example from the US process adopted at the NAFTA negotiations. The US government, with a view to expediting negotiations under the NAFTA, used the fast track approach but only after getting the approval from the Congress.
What is fast track authority? In the US, if the president negotiates a trade agreement that requires changes in the US tariffs or in other domestic laws that the trade agreement’s implementing legislation must be submitted to the Congress or the president must have Congress’ advance approval of such changes.
Fast track authority is given by the Congress to the president with a view to expedite the negotiation and finalize the trade agreement. It requires the Congress to approve or disapprove the trade agreement without reopening any of its provisions or changing negotiating points!
Ultimately, fast track gives the president credibility to negotiate tough trade deals, while ensuring the Congress a central role before, during and after negotiations. The authority puts America in a strong position to negotiate major trade agreements and maintains a partnership between the president and Congress that has worked for more than 20 years.
However, even after introducing this fast track model, still the trade negotiations for the NAFTA passed through the times of three presidents – namely President Ronald Reagan, President George H.W. Bush and President Bill Clinton.
Sri Lankan experience
It is evident that the practice adopted in Sri Lanka clearly deviates from the standard practice and accepted norms of trade negotiations. Though such practices can vary from country to country but certain minimum standard practices should be maintained.
During the SLSFTA negotiations, the GOSL introduced a similar model of ‘fast track’ to finalize the FTA. However, in case of Sri Lanka’s fast track model for FTA negotiations, has there been an accepted mechanism on the part of the government to grant such approval?
In the first place, as per the presidential committee of experts to evaluate the SLSFTA, it should be remembered that negotiations on the SLSFTA were begun even without a proper Cabinet-approved mandate.
The FCCISL learn that in the case of Sri Lanka’s FTA negotiations with Singapore, the GOSL exerted the pressure on the negotiating committee to work according to a tough set of dates to conclude negotiations.
This unusual practice of setting a tight time schedule for completion of negotiation without giving a breathing space for any preparatory process or to formulate rational strategy for negotiating such FTA may have certainly put Sri Lanka at a disadvantage.
According to the informed sources, Sri Lanka seems to have agreed for a cut off date to conclude the negotiations. This is not an accepted principle that when a country is negotiating for an FTA with another country to divulge or disclose the end date for negotiations.because of this unwanted disclosure, Sri Lanka’s chances of negotiations and bargaining power were considerably reduced since other party (Singapore) was sure that the agreement would follow by the due date for signing of the agreement in whatever form. We have reasons to believe that there would have been more unresolved issues than solved issues in the FTA though it was signed on the due date.
According to the informed sources the negotiating committee had to merely engage in time-bound exercise and not guided by the implications of binding commitment, which should have been thoroughly understood perhaps with the backing of sectoral studies. These require in-depth understanding of implications and hence hard negotiation to gain tangible benefits and promote trade and economic interest of the country. It is no doubt these deviations from the standard practice and accepted norms of trade negotiations had been more advantageous to Singapore.today, the SLSFTA stands as a controversial FTA with more questions than answers to trade and with less credibility. Finally it’s now seen by the majority of business community as an FTA hostile to the Sri Lankan business interest. (Compiled and written by Federation of Chambers of Commerce and Industry of Sri Lanka Secretary General/ceo Ajith D. Perera. He was a member of the National Trade Facilitation Committee study tour to Australia in 2018, organised by the International Trade Centre/ European Union)