Last Thursday, the Professionals’ National Front (PNF) which brings together professionals from the medical, engineering, banking, IT, architectural, and many other spheres held a seminar to a packed audience at the Sri Sambuddhathwa Jayanthi Mandiraya in Thunmulla on the SL-Singapore Free Trade Agreement ahead of the debate in parliament on the same matter scheduled for the afternoon of July 17. The PNF is a body that took shape through agitation against the attempt by the present government to expand the free trade agreement with India to include the trade in services. One of the main demands by the PNF from its very inception is that Sri Lanka should have a national trade policy on the lines of which any free trade agreement should be entered into.
Since the government was dragging its feet in the matter of formulating a national trade policy, the PNF took the initiative to appoint a people’s commission to make recommendations for the formation of such a policy. In the meantime, a document styled ‘New Trade Policy’ appeared last year on the website of the Ministry of Strategic Development and International Trade purporting to be Sri Lanka’s national trade policy. It was supposed to be in accordance with this policy that the SL-Singapore FTA had been entered into. Speaker after speaker at last Thursday’s event bitterly criticized both the so called National Trade Policy formulated by Minister Malik Samarawickrema and the SL-Singapore FTA that the government entered into. One of the main criticisms made by the PNF against the purported national trade policy of the present government is that nobody had been consulted in its preparation and that it was only ‘an essay’ written by an expatriate Sri Lankan.
When the Indian government updated its Foreign Trade Policy last year, they got all stakeholders including exporters, trade associations, state governments, and even foreign missions involved in the process. But Sri Lanka’s New Trade Policy seems to have been formulated without any such process and had appeared suddenly on Malik Samarawickrema’s ministry website. This was tantamount to a deliberate insult to the professional organizations that had been agitating for a properly formulated national trade policy. In the midst of all this, the government entered into the SL-Singapore FTA without any consultation or discussion with stakeholders. In fact very few people were even aware that such a thing was on the cards until it was suddenly sprung on all of us. Even though a parliamentary debate is to be held next Tuesday on the SL-Singapore FTA, it’s being held after the FTA has been signed and the Customs Dept. instructed to adhere to its provisions. It was this FTA that for the first time opened up virtually the entire Sri Lankan services sector to competition from Singapore. To say that the professional associations have reached boiling point is an understatement.
New Trade Policy from nowhere
Among the main criticisms made at that seminar about the SL-Singapore FTA was the fact that Sri Lanka has undertaken to provide zero duty access to Singapore for 50% of all product lines immediately, and increase this proportion to 80% within various time frames going up to 12 years, without however obtaining any comparable concession for Sri Lanka. All product lines could be exported completely duty free to Singapore even before the FTA. The other matter taken up was the mandatory opening up of the movement of natural persons in categories such as managers, executives and specialists in a context where these phrases are not defined anywhere, not even in the legal text of the SL-Singapore FTA which defines the word ‘day’ but not the words manager, executive or specialist.
It’s no great wonder that such criticism would be made of the SL-Singapore when it was based on the so called ‘New Trade Policy’ of the present government which itself is a document lacking focus or depth. The Foreign Trade Policy of India is 150 pages long and is very focused whereas Sri Lanka’s new trade policy is just 29 pages and inconsistent in its assertions. This is why the PNF calls it an ‘essay’. The expatriate Sri Lankan who is supposed to have penned this trade policy starts off with the claim that in recent years (meaning the years before the present government came into power) Sri Lanka’s openness to international trade and investment has declined sharply and that the increased ‘protectionism and inward orientation’ have slowed economic growth.
The NTP states that the main reason for the inward orientation was Sri Lanka’s tariffs and para-tariffs which have increased the level of protection for Sri Lankan domestic industries at the cost of production for exports. It then goes on to state that this results in consumers having to pay more and local producers not being under any pressure to match international quality standards. It states that high levels of protection divert resources from production for export and that tariffs and other measures that protect domestic industries create disincentives to exports by directly raising the price of imported inputs and raw materials and intermediate and capital goods. However, it is a well known fact that any export oriented industry can import inputs and raw materials from overseas for their industries duty free and that this was the whole purpose in establishing free trade zones.
How then can Sri Lanka’s tariff regime be a dampener on exports? This talk of tariffs protecting local industry applies only to a few product lines such as footware where there are established local industries and the removal of those tarrifs will result in a flood of imported goods that will result in those industries being wiped out. Obviously the writer of this NTP is opposed to giving these few local industries any form of protection. While talking about reducing Sri Lankan tariffs to open the Sri Lankan economy to the outside world, the NTP at the same time talks of the protectionism that is ‘spreading globally’, particularly in the industrialized countries. But it has not said what we should learn from this wave of protectionism that is sweeping through the very countries that once advocated free trade.
While talking about opening foreign markets for Sri Lanka’s exporters through multilateral, regional and bilateral trade agreements, the NTP acknowledges the sub-optimal performance of the four existing FTAs (now five with the SL-Singapore FTA) with India, Pakistan, SAFTA and APTA. The NTP acknowledges that the preferences accorded under these FTAs are ‘partial and limited’ and are vastly underutilized by Sri Lankan exporters. Non-tariff barriers and stringent rules of origin are said to be among the reasons for the failure of these FTAs. While acknowledging that the FTAs that Sri Lanka have not succeeded because of protectionism at the other end, the NTP still says that most countries have become ‘more open to trade’ whereas Sri Lanka’s economy has become inward-oriented and markedly more protected.
Tripping over one’s own buzz words
How is it that the top professions that Sri Lanka has deployed to negotiate FTAs could not find countries that have become ‘more open to trade’ to sign FTAs with? If other countries have become more open, why is Sri Lanka having so much trouble trying to export to those countries? This NTP that Minister Malik Samarawickrema has got written, is a classic case of people tripping up over their own buzz words and platitudes. The NTP itself acknowledges that Sri Lanka will take a more strategic approach in future trade and partnership agreements, drawing on the lessons of experience, while simultaneously addressing shortcomings in existing ones. This means that negotiators will identify non-tariff barriers at the onset and address them along with tariff reductions, specify the mutually recognized or agreed standards, clarify and negotiate rules of origin that best serve its industry requirements, and aim to make market access more predictable for Sri Lankan exporters.
What the NTP has failed to state is that if it so difficult to negotiate more openness, then there must be less openness in the world than we think there is! It is observed in ths NTP that Sri Lanka’s high tariffs and para-tariffs are also motivated by the need to raise revenue for the government through trade taxes at the border which is relatively easy to levy. This is true. The biggest single item of revenue for the Customs Dept are the taxes on vehicles which the present government too has been plumbing for all they are worth. There is nothing in the NTP which shows how the government is going to meet the shortfall in revenue caused by the reduction or elimination of tariffs. The NTP is replete with the usual jargon such as improving firms’ ability to compete with imports, but without any indication as to how this will be achieved by removing tarrifs.
One concession to commonsense made in the NTP is with regard to the agricultural sector where it is observed that because any change in import policy may have a negative impact on incomes of farmers and prices of essential consumer goods, the government needs to be cautious in reforming tariffs and other levies at the border and that given the importance of agriculture in Sri Lanka, it is imperative for the government to formulate the long-term trade policy as an integral part of a comprehensive agricultural development strategy for the country. Such a policy should accord high priority to food security, livelihood and rural development, employment, and poverty reduction on one hand, and the improvement of productivity on the other.
The NTP observes that many of the poor can benefit greatly from trade liberalization insofar as it reduces the cost of staples, or creates new export opportunities but some can also be hurt by the lower prices of that which they produce. Trade reforms in the most sensitive sectors will be carried out cautiously with these considerations in mind and, where possible, mechanisms will be put in place to facilitate the migration of workers out of those sectors. This last point seems to indicate that whoever wrote this ‘essay’ on trade policy has the Singapore model in mind and forgets that this is a real country and not a city state. We have a semi-urban and rural hinterland unlike Singapore. The PNF is right in rejecting the NTP that the yahapalana government has put forward. What this country needs is a proper foreign trade policy modeled on that of neighbouring India which is formulated after taking the needs of the economy of the country and after extensive consultations with all stakeholders.