Has SL-India trade saturated?

Rohantha N.A. Athukorala

A study done by UNCTAD-India with ADB has estimated the potential trade between countries in the South Asia region is at 8,000 million dollars based on the averages from 1995-2005, whilst the actual trade is only 3,500 million dollars.

This gives us an idea of the potential trade that Sri Lanka can harness only in South Asia, if proper facilitation is done by organizations like SAARC.

This throws out a new dimension to Sri Lanka, given that there is new business opportunities in the proposed CEPA agreement. This opportunity will be initially between Sri Lanka and India and thereafter may be a CEPA between Sri Lanka and Pakistan.

This new business opportunity can in fact off set some impact if a fall out happens in trade in the EU and may be even US in the future.

However, a point to note is that the issues faced on the EU/ US side are not essentially trade related but of political nature.

Which is an interesting development that the world is witnessing after a country has defeated one of the most ruthless terrorist organizations of the world that has cost the country $ 200 billion. What Sri Lanka requires is support from the world to recover and not obstacles. Indian support is a must in this context.

South Asia Inter trade - 2 percent of GDP

Even though there is a 4,500 million dollar opportunity yet to be captured in the South Asian region, the fact remains that inter-regional trade accounts for only 5.5 percent or a mere 2 percent of the South Asian Regions GDP.

In contrast in East Asia, this number stands at a mammoth 55 percent of trade coming only from the East Asian countries which is an indication of the strong integration that exists in that part of the world.

A point to note is that the 55 percent trade accounts for a staggering 20 percent of the GDP that further justifies that there is opportunity for South Asian countries to grow by way of import/export trade. The question is why has this not happened.

Trade Saturated with India?

Whilst the South Asian region lags behind the world on integration a UNCTAD -India/ ADB study of 2008 throws out an alarming revelation that the trade potential between Sri Lanka and India is at saturation point.

The study states that the trade potential is at 871 million dollars whilst the actual trade(goods) based on the 1995-2005 average registers 969 million dollars.

This means that we have exhausted the potential trade with India. In fact the indicator is negative at a 11.2 percent.

The need for CEPA?

May be this could be the reason why exports out of Sri Lanka are hovering at a 500 million dollars in the last year with a meagre growth. In fact in 2009 it declined to 324 million dollars.

Latest statistics further reveal that the SAARC countries contribute to 17.1 percent of Sri Lanka’s trade but, in this basket of goods 91 percent is from India which further justifies the trade saturation argument.

One way out is to quickly launch into new businesses with India namely Energy, Transport and the all important service sector through such agreements such as the CEPA.

However, this needs to be done with caution given that Sri Lanka is coming out of a thirty year war and we need to give a chance for businesses to strengthen and link with the Knowledge economy to drive innovation.

SLINTEC’s work on Nano Technology and the scheduled patents that Sri Lankan businesses will generate will sure help Sri Lanka to be competitive against Indians.

May be we need to extent this facility to a Nano Park so that Sri Lanka can take the high ground in South Asia.

Squeeze SL-India FTA?

Whilst from a macro end trade between India and Sri Lanka looks saturated, if we do a detail analysis of the Free Trade Agreement (FTA) with India, we see that the quota utilization of the strategic products of Sri Lanka -Tea and Garments is below 10 percent which means that there is more to squeeze out of the existing Indo Lanka FTA.

Some of the reasons cited for the Garments and Teas not going through to India are not tariff barriers like delays in custom clearance, port restrictions, necessity for several tests to be carried out in India even though certificates are accompanied by the relevant authorities which are essentially NTBs. But can this be due to the more deeper issue of trade saturation is worth researching.

The logic of researching this is stronger is because the Indo-Lanka trade agreement was the first FTA that each of our country have entered into and, it was signed within four months with just four to five consultations according to Professor Ranjan Ratna of the Indian Institute of Foreign Trade (IIFT).

Which means that it is bound have many rough edges that need to be corrected.

Normally India takes a minimum of two years to reach a trade agreement with a minimum of twenty consultations by the two parties.

Some even after six years of consultation like India-Thailand FTA, is yet to be concluded which gives us an idea of the limitation of the Indo-Lanka FTA that was signed.

But an argument that some make is that a ten year honeymoon is ample time to clear the bottlenecks to be resolved yet Sri Lanka continues to hover around a 500 million dollar trade.

If we go back in time the original objectives of the FTA in the case of India for instance it was based on the premise of a study done on the regional comparative advantage (RCA), to drive an equitable trade between regional partners so that each country can benefit from the comparative advantages that one posses in a country.

The key obstacle to this end was the gradual removal of trade barriers over a period of time.

Both countries agreed on a list of products which are in the negative list, phasing out list and zero duty lists and the time frame to achieve the end objective of freer trade between the countries.

The time frame was important so that suppliers can get adjusted to international competition and vice versa.

Currently, except for the 429 products in the negative list of India, all other products of Sri Lanka have a zero duty access technically into India. From an Indian point of view other than for the 1180 products in the negative list, all other products from India were entitled for duty free access into Sri Lanka but why is the business growing exponentially is the key question to be asked.

Could this direct to the logic of trade saturation, as per the UNCTAD/ADB study of 2008. It is also an interesting argurement as to why we need to sign up CEPA.

Is it an FTA issue then?

On the other hand we can also point out that serious trade did not happen due to the problem of the architecture of the Indo Lanka FTA which means it is a systemic issue than trade saturation.

For instance if we get into the brass-tacks of FTA, we see that a number of projects invested in Sri Lanka increased from 34 to 105 and then most of them closing down over time that actually off set the benefits of international trade which would have had its own social ramifications not only in Sri Lanka but also in India. And most of this trade was based on tariff rate in equalities than actual comparative advantages of trade which means the FTA in structure was flawed.

Apart from the Sri Lankan exports declining from $515 million to 324 million and the analogy of trade saturation, if we examine the 2.7 billion dollars of imports that come in from India, almost 70 percent of them happens outside the FTA meaning that even without the FTA this business would have happened.

Hence, one can question the architecture of the Indo-Lanka FTA that was signed way back in 1998. Even if one discounts the petroleum products that was imported which skews the import picture, the rest of the products imported can be due to trade diversion than real imports.

Which means that the FTA needs to be re-crafted that will stimulate trade between the two countries than actually trade saturation taking place.

Whatever the reason may be, be it an FTA architecture issue or trade saturation many Sri Lankan exporters have lost confidence on bilateral agreements which are essentially designed to promote fair competition and equitable benefits.

The process in place to address disputes settlement like the NTB issues faced by Sri Lankan exporters are also very complicated and long drawn.

For instance disputes of the SAARC countries are expected to be resolved within 330 days, whilst in the case of our counter parts it’s different and more efficient like ASEAN countries resolve disputes within 290 days and NAFTA in 310 days.

Which are also reasons why industrialists are questioning these types of bilateral agreements.

Get help from WB and ADB

I feel we must stop hiding behind issues such as Non tariff barrier (NTB’s) or Political tariff barrier (PTB’s) and face reality. Let’s reach up to organizations like ADB and WB who can support countries achieve the best with trade and thereby reduce poverty levels by driving up employment.

Maybe institutions like these coming into the discussion will move the discussion from the top line trade numbers like exports and imports and drive towards more sustainable success stories like employment created and reduction of poverty in a country.

Sri Lanka must give leadership

The time has come for us to accept reality and invest our time in markets where we can expect quick returns.

Sri Lanka requires money coming into the country so that we can drive down the budget deficit to below 5 percent. We need quick wins now and not long reports and studies

Whilst the debate on what changes are required for CEPA continues, I feel it’s time for the Sri Lankan representatives to develop a strong Chamber - Government dialogue forum so that we can see how far Sri Lanka can exploit the current FTA for our benefit.

Thereafter Sri Lanka must champion CEPA with India and Pakistan to suit Sri Lankan enterprises.

I strongly feel there is opportunity for more trade between countries like Sri Lanka and India and for driving stronger integration in the South Asian region but it requires a strong will from the policy makers of SAARC.