Lanka needs to get wiser on FTAs

Rohantha Athukorale

(Continued from Wednesday)

May be we should also evaluate the options of exporting soft drinks where the local market leader has credentials of being the one of the three select countries that has beaten the global giant Coca Cola. We must penetrate more strongly the confectionary business and biscuits where Sri Lanka is very strong on the manufacturing and marketing.

Sri Lanka should also pursue extending the well established service sector products into India, which in 2007 contributed to almost 63 per cent GDP to Sri Lanka. Multi branded Cargill's and Keells Super must be allowed to enter the multi million dollar retailing sector of India.

This exposure will help Sri Lankan supermarket chains get the much needed horning skills of competing in this entrenched industry before expanding to the rest of the region. We also need to review the performance of the on going sectors under the FTA- for instance Tea.

Key issues to be addressed in future FTAs - Reactive time

Apart from lower input costs, the other aspects that will effect FTA agreements for countries like Sri Lanka in relation to the giants of India are flexible laws. In countries like Vietnam the flexible laws helps an organisation change to the changing consumer requirements faster.

I strongly feel those areas that Sri Lanka must open its doors to in an FTA are the ones that will benefit the economy but outweighs the challenges it offers. Sectors which provide considerable employment and can be vulnerable should be kept out of the agreement so that FTA's do not create social issues in a country.

We need to be mindful of the possible FTA's looming out between the EU and China, India and China that can lead to drastic changes in the economic landscape between countries and the impact it can have already existing trade partnerships.

A FTA must also provide for tariff structures to be inverted if the duties on finished products are brought down under the FTA agreement, whilst those on raw materials and intermediate goods that go into the production of these goods remain at high levels. If not Sri Lanka's SME's can become uncompetitive, compared with those countries with low duties on raw materials or if its home grown

Uniform duty

When FTAs are discussed the focus should be more on the finished product and low priority should be given to the raw material. In some instances powerful lobbies from large raw material manufacturers, primarily large companies, the raw material is pegged at very high levels, whilst the finished product would attract zero duty on under the FTA by 2009.

The only way forward in this case is to have a uniform rate of duty for all products, with the lowest possible slab of 5% or 8%. One needs to have simple procedures and remove discretion or discrimination that can hurt the SMEs. This can also help the key issue in our part of the world where porous borders exist.

Studies carried out by ICRIER and other key trade bodies have revealed that the magnitude of such parallel trade in goods is depriving the exchequers of SAFTA members.

One way out is to sufficiently incentivise actors engaged in parallel trade, to trade their products using legal channels. The other way is to create a trade facilitating architecture that can arrest such parallel trade.

Even a bigger challenge lies clearly defining what qualifies as raw material, immediate and finished products. Such ambiguity in definitions is one of the loopholes generally used by some powerful lobbies. Recently the problem of rules of origin, weighed heavily on the SMEs.

Depending on the partner country, FTAs has different clauses under rules of origin with regard to amount of value addition that qualifies a product to be of the same origin as the country with whom the FTA is being signed.

Rules of Origin

To my mind every bilateral treaty brings with it innumerable procedures surrounding rules of origin and tariff reductions. These become the biggest entry barrier to new markets. A typical small manufacturer would, therefore, have to go through hundreds of clauses and conditions to really understand the impact of FTAs or to gain international access.

Given this backdrop, care will have to be taken so that rules of origin so not become a disguised barrier to trade facilitation in the region, whilst at the same time, are not flouted at the cost of the industry. One way out is a multilateral treaty under WTO that holds for large number of countries may be the ideal solution.

The WTO

There are some systems being developed by countries where a mechanism to gauge the impact of duty change of raw materials on finished goods and vice versa. A recent study reveals that even if all duties are removed on Sri Lanka the loss of revenue from South Asian counterparts will be and 0.1 billion.

I feel this should be available on line so that there is transparency and drive open trade among SMEs in stronger platform. I also feel that an FTA should be developed on a Economic interest than a political footing whilst the recent thrusts we see where there are FTA's being eyed between Canada and Sri Lanka and also Bangladesh is because the slow progress of WTO in forming a consensus for multilateral agreements.

Whilst the policyholders debate the way forward, I feel it's time for the Sri Lankan representatives on forums like the SAARC Chamber of Commerce and Industry (SCCI) to start playing an active role in facilitating trade in the region, under the fabric of may be the SAFTA architecture.

These members will have to ensure the guidance is given to the policy makers so that Sri Lanka become wiser when it comes to FTAs so that the evolving trade regime does not surrender its predictability and flexibility to myopic ambitions of a few.