India-Sri Lanka Free Trade Agreement: An Analysis of Merchandise Trade

Presented at Research Information System for Developing Countries

Dr. Subrata Kumar Behera&

Prof. I N Mukherji

13 June 2011

ADB RETA 6472: STRATEGIC PARTNERSHIP FOR POLICY DEVELOPMENT AND ACTION TO FOSTER REGIONAL COOPERATION IN SOUTH ASIA

Structure of the presentation

• Objective & Methodology• Overall trade pattern • Changing structure of trade• Macro-analysis of the FTA• Revision of the ‘Negative List’• Declining margin of preference• Finding and policy implications

Terms of Reference/objective

TOR for this study is to investigate, over the decade 1998-99-2008-09;• The overall trend in bilateral trade between India and Sri Lanka • The changing structure of bilateral trade• The emergence of new products and decline of old ones in the

composition of trade• The trade potential between the two countries given the supply-demand

balances and existing trade• To work out the revealed comparative advantage of the identified

potential products and further, to assess their competitiveness in respective markets

• On the basis of such analysis, suggest modalities for pruning products in the respective Negative Lists of the Contracting States

• To assess the role of decline in preferential margins in the operation of ILFTA.

Methodology

• UN COMTRADE database has been used for trade data

• TRAINS database has been used for tariff data• Analytical tools used:– Potential Trade – Revealed Comparative Advantage – Export Specialization Index – Trade Intensity Index

0

500

1,000

1,500

2,000

2,500

3,000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

India's trade with Sri Lanka (million $)

Exports Imports Trade Balance (right axis)

1,500

1,700

1,900

2,100

2,300

2,500

2,700

2,900

3,100

3,300

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

India's exports to Sri Lanka Trade Value (million $)

No. of items at HS6 level (right axis)

0

100

200

300

400

500

600

700

800

900

1,000

0

200

400

600

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

India's imports from Sri Lanka

Trade Value (million $)

No. of items at HS6 level (rightaxis)

Agricultural Products

19%

Mineral Products 1%

Chemical and Related Products

16%

Non-Consumable Animal and Plant

Products 10%

Textiles and Apparel

3%

Non-Metallic Mineral Products

4% Metals and

Manufactured Articles Made

Mostly of Metal 45%

Other Highly Manufactured

and Special-Purpose Goods

2%

Structure of India's imports from Sri Lanka: 2005 (excl. copper & vegeteble oil)

Agricultural Products

21%

Mineral Products 1%

Chemical and Related Products

9% Non-Consumable Animal and Plant

Products 7%

Textiles and Apparel

4%

Non-Metallic Mineral Products

3%

Metals and Manufactured Articles Made

Mostly of Metal 53%

Other Highly Manufactured

and Special-Purpose Goods

2%

Structure of India's imports from Sri Lanka: 2008 (excl. copper & vegeteble oil)

Major Sri Lankan products loosing competitiveness in the Indian market due to fall in India’s MFN rates

• HS Code Product Description • 7403 Refined copper and copper alloys, products

7605 Aluminium wire.• 72 to 73 Iron or steel & its' articles • 7601 Aluminium products 68 Marble 282490 Lead

oxide • 740811 Copper wire. • 740400 Copper waste & scrap • Source:

http://www.doc.gov.lk/web/indusrilanka_freetrade_introduction.php as on 12 Dec 2010.

•

Compound annual growth rate of imports of the two contracting states under different product categories (2001-

2009)

India’s importsSri

Lanka RoWSri Lanka’s imports India RoW

Negative list 23.10% 18.00%Negative list 9.20% 8.10%

Residual list 24.50% 20.60%Residual list 12.80% 3.20%

Textiles

34.70% 11.00%Zero-duty 10.80% 5.30%(Chapters 51-56, 58-60, & 63)

Zero-duty 30.80% 19.40%Cement -15.80% 30.10%

Total 26.40% 19.60%Total 14.10% 6.10%

PRUNING THE NEGATIVE LIST : PRODUCTS IN ILFTA NL NOT IN SAFTA NL

• It is assumed that tariff cuts are generally deeper in bilateral arrangements compared to multilateral/regional trading systems. However, it was observed that there are number of items that are not listed under the SAFTA sensitive list is found under the Negative List of ISLFTA.

• There are 97 products in the Negative List of India under ILFTA which don’t figure in the Sensitive List of India under the SAFTA. Annex 4 of the present study enlists such products. This study recommends removal these products from the Negative List. These lists include 49 products in the readymade garments (chapter 61 & 62) on which India allowed duty free import up-to a limit of 3 million pieces in the bilateral sensitive list in 2008.

• Similarly, there are 201 products in the Negative List of Sri Lanka which don’t figure in the Sensitive List of Sri Lanka under the SAFTA. Annex 5 of the present study enlists such products. The present study recommends removal these products from the Negative List.

PRUNING NEGATIVE LIST: TRADE POTENTIAL AND COMPETITIVENESS APPROACH

Indices Threshold value

Potential trade >$1602,000 for Indian Exports[1]

>605,000 for Sri Lankan Exports[2]Exports Specialisation Index (ESI) >1

RCA >1

Trade Intensity Index >1

Unit value import value from the FTA partner < import value from the world

India's Potential vs. Sri Lanka's Negative list

HS Code Product Descriptions

040229MLK & CRM IN PWDR GTNLS/OTHR SOLID FORMS CONTNG ADDED SUGAR OR OTHR SWENG MATTER CONTNG FAT EXCEEDNG 1.5% BY WT

090240 OTHR BLCK TEA/OTHR PRTLY FRMNTD TEA

100630 SEMI/WHOLLY MILED RICE W/N POLISHED/GLAZED

691090 OTHR SANITARY FIXTURES(EXCL OF PORCELAIN)

730820 TOWERS & LATTICE MASTS

871499 OTHR PRTS&ACCSSRS OF BICYCLES& OTHR CYCLES

Sri Lanka's Potential vs. India's Negative listHS Code Product Descriptions400121 NATRL RUBR IN SMKD SHEETS400821 PLTS SHTS STRPS OF NON-CELLULAR RUBR401699 ARTCLS OF VULCANISED RBR EXCL HRD RBR NES482110 PRINTED LABELS610510 MEN'S/BOYS' SHIRTS OF COTTON610610 BLOUSE ETC OF COTTON610910 T-SHIRTS ETC OF COTTON610990 T-SHIRT ETC OF OTHER TEXTILE MATERIALS611519 PANTY HOSE & TIGHTS OF OTHR TXTL MATRLS620332 JACKETS & BLAZERS OF COTTON620333 JACKTS & BLAZERS OF SYNTHETIC FIBRES

620342 TROUSERS BIB & BRACE OVERALLS BREECHES & SHORTS OF COTTON FOR MEN'S & BOYS'

620349TROUSERS BIB & BRACE OVERALLS,BREECHES & SHORTS OF OTHER TXTL MATERIALS-MEN'S/BOYS'

620442 DRESSES OF COTTON620462 TROUSERS,BIB AND BRACE OVERALLS, BREECHES AND SHORTS OF COTTON

620469TROUSERS,BIB AND BRACE OVERALLS,BREECHES AND SHORTS OF OTHER TEXTILE MATERIALS

620520 MEN'S OR BOYS' SHIRTS OF COTTON 620590 SHIRTS OF OTHER TEXTILE MATERIALS 620630 BLOUSES,SHIRTS & SHIRTS-BLOUSES OF COTTON 620640 BLOUSES,SHIRTS ETC OF MAN-MADE FIBRES 620920 BABIES' GRMNTS & CLOTHNG ACCSSRS OF COTTON 621210 BRASSIERES

India's Tariff Barrier

Simple Average Weighted Average

Year MFN Preferential MFN Preferential

2001 32.3 17.7 26.5 9.7

2005 18.3 2.1 13.4 0.3

2009 12.4 1.3 7.7 1.3

Sri Lanka's Tariff Barrier

Simple Average Weighted Average

Year MFN Preferential MFN Preferential

2001 9.25 n/a 6.68 n/a

2005 10.94 5.16 7.54 6.27

2009 10.54 0.77 7.05 2.99

Differential between India's MFN (≥50%) and preferential tariff (duty-free) vis-à-vis Sri Lanka's MFN tariff (2009)

Product Product Description India Sri Lanka

210690 Other specialized food preparation 150 16.14

020713 Cuts and offal, fresh or chilled 100 28

020714 Cuts and offal, frozen 100 28

070320 Garlic 100 15

080620 Dried grapes 100 28

090111 Coffee-Not decaffeinated 100 28

090112 Coffee-Decaffeinated 100 28

090121 Coffee-Not decaffeinated 100 28

090122 Coffee-Decaffeinated 100 28

090190 Other coffee 100 28

151110 Crude palm oil & its fractions 100 28

160100 Sausages and similar products, of meat, meat offal 100 28

160232 Of fowls of the species Gallus domesticus 100 28

870310 Vehicles specially designed for travelling on snow 100 30

870321 Of a cylinder capacity not exceeding 1,000 cc 100 30

870322 Of a cylinder capacity exceeding 1,000 cc but not 100 30

870323 Of a cylinder capacity exceeding 1,500 cc but not 100 30

Major Findings

• The overall trend in bilateral trade have increased over the years in relation to world trade.– India became the most favoured import source for the Sri Lankan importers

immediately after the implementation of the FTA – On the other hand, rank of Sri Lanka as an export destination of India’s

products improved but remained beyond 10 (from 18th in 2000 to 13th in 2005)

• The structure of bilateral trade has undergone a change since the agreement. The study highlights Sri Lanka’s export diversification to Indian market, the overall concentration in copper and vegetable oil notwithstanding.

Major Findings (cont..)• Trade in number of products has increased considerably in

spite being in the negative list.

• The study lists out the products to be removed from the negative list from either side .

• The importance of bilateral margin of preference has gone down as a result of declining MFN rates, pointing to the need for more comprehensive bilateral engagement. Further, the study cautions of possible trade deflection in identified products not in the negative list and suggests preemptive measures to forestall such attempts.

Policy Implications• Rationalization of the negative list could be undertaken• Since external tariff differential still exist, there is need for strict

administration of the Rules of Origin and to rationalize the MFN rate as far as possible

• Competitiveness of goods is declining in each others market due to greater liberalization of the economies (specifically the tariff rates). Hence, it is high time to enter into the areas of mutual cooperation like trade in services and investment.

• The urgency to negotiate a Comprehensive Economic Partnership Agreement (CEPA) arises not merely to widen the scope of cooperation in non-trade matters, but to further deepen cooperation in trade-related issues as well to address existing anomalies that exist. It may be recalled that a number of non-tariff barriers operating in India such as restrictions on ports of entry, restrictions on sourcing of inputs for duty-free entry to Indian market were addressed within the context of such negotiations.

Thank you.