Sri Lanka's Free Trade Agreement with Pakistan
BY SAMAN Kelegama
THE Pakistan-Sri Lanka Bilateral FTA (PSLFTA) was signed in July 2002
and came into operation on June 12, 2005. As in the case of the
India-Sri Lanka Bilateral FTA (ISLBFTA), the PSLFTA accommodates the
asymmetry between the two nations.
Hence, Special and Differential treatment in favour of Sri Lanka is
in-built to the FTA - Pakistan offered 206 items duty free immediately
after the FTA came into operation compared to 102 items by Sri Lanka,
Sri Lanka has been given a 5-year period to phase out tariffs compared
to the 3 years given to Pakistan, and 697 items are included in the Sri
Lankan negative list compared to 540 items in Pakistan's negative list.
Until 1984, Sri Lanka maintained a trade surplus with Pakistan; since
then it has been operating at a trade deficit. Currently, Pakistan
receives 0.6 per cent of Sri Lankan exports and 0.7 per cent of
Pakistani exports is destined to Sri Lanka.
Despite Sri Lanka and Pakistan not being major trading partners, for
specific products, their respective export markets are crucial.
For example, Pakistan is an important export market for tea, followed
by copra, rubber, betel leaves and tamarind; similarly, for Pakistan,
Sri Lanka is an important market for textiles, pharmaceuticals,
machinery and agricultural items.
Major Sri Lankan exports have been granted preferences by the FTA. It
allows duty free entry for 10,000 tons of tea per year. Pakistan is the
third largest tea importing nation in the world.
In 1975, 67 per cent of Pakistani tea imports came from Sri Lanka. By
2003 this had declined to 2.6 per cent due to Kenyan tea gradually
capturing up to 64 per cent of the Pakistani tea market.
The increase in demand for Kenyan tea was a result of an aggressive
marketing campaign conducted by a multinational company to change the
preferences of Pakistani consumers from bulk teas to CTC teas, of which
Kenya is a major producer.
In order to recapture the lost market, Sri Lanka must engage in a
prominent marketing campaign to change the preference of the Pakistani
consumer to bulk tea. If not, Sri Lanka may not satisfy their full quota
regardless of the duty free allowance.
The FTA allows 1200 tons of betel leaves per annum. The duty for
betel leaves in Pakistan is approximately Rs. 150 per Kg. A preferential
margin of 35 per cent has been granted to Sri Lanka.
This is a major concession for a high demand product with many other
betel producers including Bangladesh competing to capture a larger share
of the Pakistani market.
Besides tea and betel, for a defined 21 categories of apparel
products, 200,000 pieces are granted 35 per cent duty preference without
rules of origin on fabric usage.
This will enable the Sri Lankan apparel exports to capture a notable
proportion of the Pakistani market. 20 per cent duty preference on some
ceramics export items has been granted, however, porcelain tableware -
the primary Sri Lankan ceramic export item - has been excluded from duty
concessions.
A duty free status for copra and raw rubber exports from Sri Lanka is
in operation. Approximately 10 per cent of Sri Lankan coconut products
(copra, coconut oil, brooms and ekels) are currently exported to
Pakistan and this sector can gain from the FTA.
Presently there is an international rubber cartel operating in
Pakistan pushing up prices. This creates an opportunity for Sri Lankan
raw rubber exporters to capture a larger share of the Pakistani market.
In regard to Sri Lankan imports from Pakistan, the following offers
by Sri Lanka are noteworthy: (a) 6000 metric tons of Basmati rice per
annum on duty free basis, (b) apples and mandarins are allowed duty free
entry without quota restrictions, and (c) 1000 metric tons of Pakistani
potato per year is permitted duty free entry during the local off-season
period so that it does not adversely impact domestic production.
Basmati rice does not compete with local rice such as samba because
it is a more expensive category of rice, hence will not impact adversely
on domestic rice production.
Apples and mandarins are not produced in great quantity in Sri Lanka,
instead Pakistani imports will apply competitive pressure on fruits
imported from India and Australia, lowering the overall price in the
domestic market.
Industrial products, including PVC, carbon, machinery and transport
items not manufactured in Sri Lanka have also been granted preferential
duty under the FTA. They will compete with similar goods arriving from
India.
Textiles & pharmaceuticals are under the zero tariff band, thus the
FTA will not affect these Pakistani exports into Sri Lanka.
Agricultural items, including fish, sugar, non-Basmati rice and milk
products are in the Sri Lanka negative list. This will protect the
domestic production base of these goods.
By having preferential access to the two major markets in South Asia
- India and Pakistan - Sri Lanka can now position itself as the conduit
for Indo-Pakistan trade that has diminished due to political problems
centred around the Most Favoured Nation treatment.
Currently, trade between India and Pakistan takes place mostly via
Singapore or Dubai. If Sri Lanka can promote Indo-Pakistan trade by
encouraging Pakistani investors to open operations in Sri Lanka in order
to trade with India using the ISLBFTA and vice versa, then Sri Lanka can
gradually acquire the hub status in South Asia.
All tariff preferences in the PSLFTA are at the 6 digit HS code
level. Initial response to the PSLFTA appears positive. The Department
of Commerce has already issued over 400 Certificates of Origin for Sri
Lankan exporters for Pakistan.
A number of Pakistani betel traders have arrived in Sri Lanka to
identify reliable betel suppliers and Indian investors have made
inquiries about investing in Sri Lanka to export items to Pakistan using
the PSLFTA.
Despite political instability in Sri Lanka, the government and
private sector should maximize the use of these inquiries and benefit
from the increased trade and investment opportunities arising from the
PSLBFTA. |