ROAD TO FTAS BY SRI LANKAN GOVERNMENT - HOW RATIONAL IS IT?
Lessons from Asia Pacific
The graphic titled ‘Export product concentration’ shows the level of export concentration of the two largest product categories exported out of nearly 100 product categories from selected Asian countries, including Sri Lanka. The data reveals a heavy reliance on a few product categories is not unique to Sri Lanka and that other countries also show similar trends.
However, Sri Lanka in terms of product category differs from other Asia Pacific countries. Sri Lanka’s two leading exporting products such as apparel have a low unit cost but other two leading major exports of the Asia Pacific countries have a high unit cost giving bigger volumes to GDP. As a result, these Asia pacific countries have been identified as countries that have export success stories.
It’s noteworthy to remember, in 1988, the Vietnam exports (good and services) contributed only 3.95 percent to its GDP but in 2017, it was 101.56 percent.
Economic modelling
The Australian Foreign Affairs and Trade Department commissioned the Centre for International Economics (CIE) to conduct economic modelling of the benefits of Australia’s North Asian free trade agreements (FTAS). The aim of the project is to understand the combined implication of these agreements for the Australian economy, with a focus on macroeconomic indicators. The analysis considers the effects of liberalization of trade in goods, services and foreign investment.
The North Asian FTAS are the Korea-australia FTA (KAFTA), Japan-australia Economic Partnership Agreement (JAEPA) and Chinaaustralia FTA (CHAFTA).
Scenario 1 seeks to represent a situation in which Australia does not implement FTAS with Korea, Japan or China but other countries continue to implement trade agreements with these North Asian trading partners. The results of this scenario are compared to a baseline (or business as usual) scenario in which none of these FTAS with Korea, Japan or China are assumed to exist, so it provides insights into the implications for Australia of other countries pursuing bilateral trade liberalization with Australia’s North Asian trading partners while Australia does not pursue these trade agreements.
Scenario 2 seeks to illustrate the impacts of the FTAS Australia has recently completed with Korea (KAFTA), Japan (JAEPA) and China (CHAFTA). These FTAS are modelled in addition to the FTAS modelled in Scenario 1. The KAFTA and JAEPA are assumed to be implemented from 2015 and the CHAFTA implemented from 2016.
As the scenario aims to assess the impacts of the three FTAS as implemented, it is compared to Scenario 1, which most closely represents the current situation with all FTAS in place. Scenario 2 includes liberalization of trade in goods and liberalization of services trade.
According to the results/forecast for the North Asian FTAS on liberalization of goods and services, the three FTAS are expected:
■to lead to an increase in exports to North Asia of up to 11.1 percent, compared to what would be the case without the FTAS in 2035.
■to lead exports to all destinations of up to 1.5 percent, compared to what would be the case without the FTAS in 2035.
■ Together, the combined liberalization (goods and services) under the FTAS is projected to lead to a net increase in both GDP (a measure of economic output in Australia) and real household consumption – a measure of economic welfare of Australian households. (Page 2 of the executive summary of economic benefits of Australia’s North Asian FTAS by the CIE)
Now the question arises, has Sri Lanka done a scenario planning like this prior to signing of any FTAS? It’s also noteworthy to state that according to the report of the presidential committee of experts to evaluate the Sri Lanka-singapore FTA (SLSFTA) (Para 3.11), the “entre negotiation process was carried out without any feasibility and cost benefits of a trade agreement with Singapore from a Sri Lankan point of view.
As this is a deep bilateral agreement covering a wide range of beyond the boarder policies, it is extremely risky to conduct negotiations for an agreement of this nature without comprehensive feasibility and costbenefit studies.
Recent trends
During the 2016 presidential campaign, President Donald Trump repeatedly claimed that the United States was being taken advantage of by its trading partners. Bad trade deals, he said, were to blame for lost jobs and deepening trade deficits.
In one of his first official acts, Trump withdrew the United States from the Trans-pacific Partnership (TPP). It’s noteworthy to state that Trump’s election opponent, Hillary Clinton, also opposed the deal. He took this precipitous step without even considering renegotiating or rebranding the pact. Other countries have continued to implement the agreement, leaving the United States outside the major trade deal in the Pacific.
Trump also threatened to withdraw the United States from the North American Free Trade Agreement (NAFTA). Yet, in this case, he opted to continue negotiations. Despite the administration’s hostile stance during the talks, the renegotiation of what Trump called the “worst trade agreement ever” succeeded with few significant changes to the original deal.
The new United States-mexico Canada Agreement increases the proportion of an automobile’s parts that must be sourced inside North America for the vehicle to count as made inside the bloc, slightly opens Canada’s dairy market to American and Mexican exporters, strips out some protections for foreign investors in Mexico and updates the old preinternet NAFTA with provisions on e-commerce and digital data from the TPP. Although some parts of the renegotiated agreement will promote more trade within North America, others seem to restrict it.
The move to protect the American industry from unfair trade practices was the latest salvo in Trump’s ‘America First’ trade agenda.
Dumping and subsidies
The Trump administration has ramped up efforts to clamp down on dumping and unfair subsidies of foreign goods sold in the US market. US Commerce Secretary Wilbur Ross said he has doubled the cases compared to the prior administration. This has meant a steady drum beat of announcements of tariffs on goods from Chinese aluminum foil to Spanish olives to Vietnamese tool chests.
Trump in January 2018 slapped tariffs of up to 30 percent on imports of solar panels over four years and up to 50 percent on washing machines over three years, saying foreignmade goods had left the US producers hanging by a thread.
Korea-us FTA
Like the NAFTA, Trump said the agreement with Korea, the sixth-largest US trading partner, is a “horrible” deal that should be renegotiated or scrapped entirely.
The US and South Korean officials are currently in talks to revamp the 2012 pact. The Korea-us FTA, also known as Korus, is now one of the only trade pacts still standing in the Pacific region, since the USA withdrew from the TPP.
Summery
FTAS are highly regarded as a mechanism to promote international trade between countries but its strengths and weaknesses are now known to everybody. It is a fact that regional trade agreements/ bilateral FTAS can have incremental, positive or negative effects on trade, depending on their design and implementation.
It is foolish to think that without adequate preparation or analysis, a nation can presume gains in FTAS, on the basis of mere gut feelings or wishful thinking of policymakers. The interesting policy question then is not whether FTAS are categorically good or bad but what determines their success?
Many believe that FTAS are meant for business only. This is only a partly correct assumption. In fact, several external and internal factors, as well as economic, political and securityrelated factors are driving nations to enter into FTAS.
It is not a secret that some countries show a great deal of interest in signing an FTA with Sri Lanka, due to its geopolitical interest. In this context, the question that comes to our mind is, are FTAS actually free?
The Sri Lankan government needs to learn from its mistakes related to FTA negotiations made so far, when negotiating with prospective partner countries.
It is interesting to remember what President Washington, the first president of the USA, said in his Farewell Address to nation. He warned his fellow citizens that when it comes to trade negotiations, “There can be no greater error than to expect or calculate upon, real favours from nation to nation.”
He also advised that trade agreements should be “temporary” and “abandoned or varied, as experience and circumstances shall dictate”. Today, the USA has come back to this reality, having paid a high price on its FTAS signed with other partner countries.
The Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL) in principle stands for free flow of goods and services without impediments and barriers among countries but admit the right of any country to safeguard its local industry, against excessive imports.
The FCCISL in the best interest of Sri Lankan entrepreneurs wish to call firstly for a more transparent approach to trade agreements and secondly call for an effort to convince rationality of adopting FTAS with a particular country with a strong analytical and realistic justification that may even change the negative perception (if any) of the business community.
Unfortunately, such meaningful justification is yet to be seen but valiant efforts are being made after concluding the trade deals to assess the impact of the FTA. A good example is the appointment of the presidential committee of experts on the SLSFTA.
The FCCISL, together with its 63 chamber members (from national, sectoral and regional business associations) recommend the following suggestions for the Government of Sri Lanka to seriously consider at future trade negotiations with partner countries.
National trade policy in place
It is important that before engaging in further FTA negotiations, the Sri Lankan government should formally develop and publish a comprehensive national trade policy strategy.
The strategy is to consider trade policy developments and opportunities in the broad and where they are identified, key issues with priority partner countries or regional groupings.
The strategy document should provide an overall view of Sri Lanka’s actual and potential trade policy initiatives and the governmental efforts devoted to them, including options for multilateral, bilateral and unilateral reductions in trade.
Designing and implementing a sound trade policy should be consistent with the national development strategies and needs. The national trade strategies should not be the end but should be seen as means to accomplish larger development goals of the country, cross cutting issues in attaining SDGS, hence the developmental aspects of FTAS should be built into the analysis.
Hence, formulation and designing of trade policy should be done through a fully inclusive process with all stakeholders, which may take some time. The new trade policy of the Sri Lankan government has many weaknesses and those have been identified in Report of Presidential Committee of Experts to Evaluate SLSFTA – Page 21-32.
Selection of chief negotiator
Due to the seriousness and significance of the decisions and its impact on the national economy, it’s best that the Sri Lankan government introduce a selection process similar to that of the process for the selection of secretaries and ambassadors (e.g. parliamentary committee on high posts) to select the chief negotiator and the members to serve on the national trade negotiation committee.
Partner country selection
In the case of Sri Lanka, the selection of the partner country for an FTA is not strategically prioritized. This has always been a political decision. Ideally, selection of a prospective partner country has to be recommended to the Cabinet by a team of independent experts, having done an adequate assessment of all viable options (other than FTAS) for achieving trade policy objectives with partner countries. The list of such partner countries can be termed as priority list for the government with the minimum acceptable outcomes and exit strategies for each country.
Selecting right agreement
In case of Sri Lanka, the country considers only FTAS as an instrument for international trade. If however we look at India, it gives us an excellent example as to how to choose the instrument. India signed up a multilateral Asia Pacific Trade Agreement – a preferential trade agreement with seven countries, followed by an FTA with Sri Lanka and then signed up a Comprehensive Economic Partnership Agreement with South Korea. Sri Lanka also needs to consider options to suit its strategic objectives.
Negotiation process
■ Pre-negotiations: As Australia Productivity Commission has recently proposed, the prenegotiations should be backed by economic modelling with realistic scenarios and be overseen by an independent body. This should take place after the Cabinet decision to trigger a negotiation.
■ A review clause has to be included in the trade agreements to minimize the ill-effects of any trade agreement.
represetatives from major trade chambers should be included at all negotiations, as observers.
■ A full and public assessment of a proposed agreement should be made after negotiations have concluded — covering all of the actual negotiated provisions.
■ After finalizing the agreement, the text needs to be subject to independent and transparent analysis by an independent body.
Parliamentary process
■ It is important to brief the progress about the trade negotiations to the members of Parliament from time to time.
■ The signed agreement has to be tabled at Parliament for parliamentary review, before enabling the legislation. There is a need for independent analysis as an input to the pre-ratification, which should be done at parliamentary level.
■ It is important to amend the Right to Information Act, which excludes the availability of trade negotiations for public information.
■ The Government of Sri Lanka needs to respect the complex and time-consuming nature of FTA negotiations and should avoid putting FTAS on fast track models.
■ The Government of Sri Lanka should avoid overselling the likely benefits of the trade agreement to the public before finalization and instead to have a fruitful and constructive dialogue with the business community.
■ Sri Lanka, when signing FTAS, should ensure that the leading exports of the country have the access to the export destination without being discouraged by trade barriers.
■ Sri Lanka needs to introduce a proper monitoring and review mechanism after signing FTAS and the finding should be reviewed on a regular basis.
(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)