Sri Lanka’s trade costs still too high - UNESCAP | Sunday Observer

Sri Lanka’s trade costs still too high - UNESCAP

The cost of trade in Sri Lanka remains high, mainly because of high tariffs, with serious implications for the competitiveness of the country’s exporters, according to the latest Asia Pacific Trade and Investment Report (APTIR) 2016.

Intra-regional trade costs recorded by Sri Lanka remained considerably higher than the costs of most efficient major traders in Asia and the Pacific, declining only slightly during 2009-2013, the report, by the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) said.

“Trade costs incurred by Sri Lanka are, on average, more than twice as high as those of East Asian countries like China, Japan and the Republic of Korea, and around 87.8% higher than those of European Union nations like Germany, France and the United Kingdom in reaching major trading economies of Asia and the Pacific such as China, India, Indonesia and the Russian Federation,” it said. Much of the high costs of trade was a result of high tariffs, according to the report released last week.

Sri Lanka’s average Most Favoured Nation (MFN) applied and effective tariffs at 8.1% and 7.8%, respectively, were higher than the Asia-Pacific region’s averages of 6.9% and 5.9%, it said.

“Average WTO bound duty, at 28.6%, remained higher than the Asia-Pacific region’s average of 20%.

Despite being a WTO member, tariffs continue to contribute substantially to trade costs for Sri Lanka whose binding coverage of 37.9% of its tariff lines is considerably lower than the Asia-Pacific region’s average of 84.9%.”

The Bound tariff rate is the Most Favoured Nation tariff rate resulting from negotiations under the General Agreement on Tariffs and Trade (GATT) and incorporated as an integral component of a country’s schedule of concessions or commitments to other World Trade Organization members. According to APTIR 2016, Sri Lanka’s exports to countries with which it has free trade deals is also lower than that of other countries in the region.

Sri Lanka has five preferential trade agreements (PTAs) in force, which is less than the Asia-Pacific average of 7.6 agreements. Of total exports, 10.3% were to PTA partners, compared with 33.3% in the Asia-Pacific region, the report said. Of total imports, 52.1% were from PTA partners, compared with 44% for the Asia-Pacific region.

Last year, 25.9% of Sri Lanka’s goods exports were taken by countries in the Asia-Pacific region. Sri Lanka’s largest export markets are the United States (29.9%) and the United Kingdom (10.7%), while India (8.4%) is the largest intraregional export market. In terms of goods imports in 2015, 77.7% of imports were sourced from Asia-Pacific countries, with India (30.1%) and China (23.6%) as the largest intra-regional import partners. The trade structure of Sri Lanka is dominated by merchandise trade, which in 2015 accounted for 70.7% of total trade, the APTIR 2016 report said. Merchandise exports – which accounted for 62.1% of total exports – grew by 5% on average during 2010-2015. However, merchandise exports contracted by 7.3% in 2015 which was in line with the Asia-Pacific average exports decline of 9.7% in 2015. The main export base of Sri Lanka is dominated by tea (the world’s third-largest tea exporter), rubber, and a relatively diverse range of ready-made garments.

Falling export volumes of tea and rubber were due to continued lower world commodity prices which were exacerbated by a gradual strengthening of the United States dollar, and lower demand from major tea export markets, such as the Russian Federation and Turkey, the APTIR 2016 report said. “This contributed the most to the overall export contraction, despite higher export volumes and earnings recorded by the textile and garment sectors. Likewise, while merchandise imports grew substantially by 9%, on average, during 2010-2015, in 2015 imports fell modestly by 1.9% compared with the Asia-Pacific region’s average import decline of 15%.”

The import base of Sri Lanka was dominated by aircraft, petroleum oils and motor vehicles. The import contraction was largely driven by lower import bills due to the decline in fuel prices as well as a recent tax hike on imports of motor vehicles for personal use and investment purposes.

Sri Lanka’s services trade share of total trade in 2015 increased to 29.3%, up from 28.5% in 2014 and remaining slightly above the South and South-West Asia sub region’s average of 23.9%.

Services exports – which accounted for 37.8% of total exports – grew substantially in 2015 by 14.2% compared with the Asia-Pacific region’s average decline of 4.8%, continuing a trend of strong services export growth of 21%, on average, during 2010-2015.

Likewise, services imports in 2015 grew solidly by 5.3%, continuing the trend of import growth of 13.9%, on average, during 2010-2015. Growing services trade in 2015 was largely driven by rising travel services exports and imports – largely boosted by the recent unilateral visa liberalization for Indian tourists as well as a growing number of tourist arrivals from China.