11/8/2017 How Sri Lanka benefits from preferential trade - Ceylontoday.lk

http://www.ceylontoday.lk/print20170401CT20170630.php?id=27234 1/7

By Saman Kelegama

The objective of a free trade agreement (FTA) is not to bring about a balance in trade, but to work out a'win-win' situation for both producers and consumers in the FTA member countries. In doing so, therecan be instances where the trade deficit increases for one partner. For instance, the inflow of necessaryconsumer goods, machinery and spare parts for industrial activity and intermediate goods like textilesand oil, to one trading partner can be huge, while the supply capacity of the same trading nation maybe limited and cannot immediately expand its exports to match the import flow.

In the case of the India-Sri Lanka Free Trade Agreement (ISFTA), Sri Lanka has been able to reapbenefits from the FTA, contrary to general belief, if one looks beyond Sri Lanka's trade deficit vis-a-visIndia.

Usage of the Preferential Tariffs in the Free Trade Agreement If one looks at the composition of imports from India to Sri Lanka, the bulk of it comes mainly to fulfilconsumer needs, such as vehicles, pharmaceuticals, sugar, etc. Some other imports are intermediateimports for the industry, like textiles, vehicle parts, and oil. For example, Sri Lanka annually importsclose to US$60 million worth of yarn and US$300 million of fabric from India as inputs in the apparelindustry. All these items constitute, on average, nearly 80% of Sri Lankan imports from India, and theyare imported outside the provisions of the ISFTA. In other words, these items are subject to normalcustoms duties and they do not benefit from any tariff concessions. Hence, they enter the Sri Lankanmarket because they are the most competitive input source, and provide value for money forintermediate and/or final products for local producers and consumers.

Contrary to imports, nearly 70% of Sri Lanka's exports go to India using FTA provisions. Thus, theseexports benefit from the zero tariffs granted by India. Clearly, Sri Lanka has been using the FTA morethan India (Figure 1). Plotting the goods traded between the two countries under the FTA shows thatthere is hardly any deficit between the two countries (Figure 2). In fact, Sri Lanka has enjoyed a surpluson trade conducted under the bilateral FTA with India in six of the 16 years since the FTA came intoforce.

Trade Balance and the Export Basket On the basis of the above data, one can convincingly argue that the trade balance between the twocountries would have been more in favour of India if the FTA did not in exist. These facts demonstratethat it is misleading and incorrect to claim that India has benefited much more from the FTA, merely byciting the size of the overall bilateral trade deficit.

If we look at the import/export ratio between the two countries, we can clearly see that the ratio hasdeclined from 10.3 in 2000 to 6.6 in 2015 (reaching a peak favourable ratio of 3.2 in 2005, as shown inTable 1). This indicates that the Sri Lankan exports to India have grown faster than Indian exports to SriLanka (Table 1). While India has been the largest source of imports for Sri Lanka (even before the FTA)for many years, India has acquired the position of being the third largest destination for Sri Lankanexports – a rank achieved through the benefit of the tariff preferences in the FTA. In that sense, India isthe most balanced trading partner for Sri Lanka – ranking high in both imports and exports of Sri Lanka.

If one looks at the Sri Lankan export basket destined for India before the FTA, which was dominated byagricultural products such as cloves, peppers, areca nuts, dried fruits and nutmeg exports have now(after the FTA) become more diversified. It includes boats/ships, wires and cables, glass andglassware, apparel and woven fabric. In 2013, the largest Sri Lankan export to India was boats andships. Critics of the India-Sri Lanka FTA often state that Sri Lanka does not export items to India similarto those exported to the European Union or the United States (apparel, leather products, etc.). Thepoint to note here is that the export basket may vary from country to country, but what eventually

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11/8/2017 How Sri Lanka benefits from preferential trade - Ceylontoday.lk

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matters is the overall exports. There was a time when copper was the largest export to India (in 2003),likewise vanaspathi (in 2005) and areca nuts (in 2014). These fluctuations do occur in FTAs, especiallywhen shrewd entrepreneurs exploit loopholes in such Agreements. The case of vanaspathi (a type ofprocessed vegetable oil) highlights the volatility that can sometimes be brought about by distortionaryprotectionist measures in place.

Indian investors began to process vanaspathi in Sri Lanka for export to India, due to the low preferentialtariff rates that were available to Sri Lankan exporters, contributing to the surge in exports between2003 and 2006. This eventually caused an outcry in India, leading to an imposition of quotas onvanaspathi imports from Sri Lanka. This eventual imposition of quotas negatively affected close to4,000 jobs in Sri Lanka.

Having said that, the available data shows that, while Sri Lanka exported 505 product items to Indiabefore the FTA in 1999, the product items exported increased to 1,062 by 2005, and to 2,100 productitems by 2012, after the implementation of the FTA. This quadrupling of the product items during 1999-2012 provides further evidence for Sri Lanka diversifying its export basket to India after the FTA cameinto operation in 2000.

Moving forward Sri Lanka should not lament about the trade deficit or the export basket, but move forward with the restof the world to gain maximum benefits from FTAs. The India-Sri Lanka FTA has certainly worked infavour of Sri Lanka, but more work needs to be done to broaden and deepen it to reap the maximumbenefits from it for Sri Lanka in an equitable manner.

One of the key areas currently being addressed are non-tariff barriers in the Indian market. Non-tariffmeasures are not barriers to all Sri Lankan exports, but for some of them, like marble, maggie boards,and perishable food items. These barriers have been clearly identified through stakeholder consultationby the Department of Commerce. Trade facilitation shortcomings were identified by an extensive surveyin the report prepared by the Institute of Policy Studies of Sri Lanka (IPS). All such findings have nowbeen submitted to the Indian Commerce Department for early resolution. The Government of Sri Lankais attaching high priority to resolving these issues expeditiously.

What needs to be noted is that even with some non-tariff barriers in the Indian market, Sri Lankanexports have made a mark in that market. Based on this, one can argue that a deeper economicengagement with India can generate even more positive and beneficial outcomes provided thenegotiations ensure that Sri Lanka's interests are pursued vigorously. That is precisely what is beingattempted through the proposal of the Economic and Technology Cooperation Agreement (ETCA). Itwill lay the foundation for Sri Lankan exports and investments to benefit more from the rapidly growingIndian market.

*Dr. Saman Kelegama was Executive Director, Institute of Policy Studies of Sri Lanka (IPS). Dr.Kelegama passed away on 23 June 2017 in Bangkok. This blog is an abridged version of the Asia-Pacific Research and Training Network on Trade (ARTNeT) Policy Brief (No. 50, July 2017), which wassubmitted prior to his passing. It was subsequently prepared by Panit Buranawijarn, a researchassistant at the ARTNeT secretariat and published posthumously. The Policy Brief can be accessed at:http://www.unescap.org/sites/default/files/polibrief50.pdf

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