Following on the heels of a slowdown in global integration over the past few years, the collapse of the Doha Round, developing countries face an increasingly uncertain landscape for their own trade integration. The major drivers of global integration are now in further retreat with Brexit and the new US Administration’s more protectionist policy leanings, from border adjustment, taxes on importers and punitive tariffs on major trading partners like Mexico, to an increased focus on bilateral reciprocal deals where the US wields its power and leverage to push for a more favourable deal for US exporters. With the appointment of his proposed team of economic and trade advisors—Peter Navarro (National Trade Council), Robert Lighthizer (US Trade Representative), and Wilbur Ross (U.S. Trade Representative)—it is expected that President Trump will make good on his campaign promises. The impending talks of bilateral deals between the US and Great Britain, and the newly concluded EU-Canada FTA signal the change in focus, which is expected to be extended to large developing countries, as well, with new deals between the EU and China, and the EU and India on the table.
With progress under the multilateral system stalled and the expected policy shakeup from the largest markets in the world, many smaller and poorer developing countries are likely to be left behind. Both, the developed and the developing countries, alike, are now reevaluating their own trade strategies and alliances, including potential retaliatory or “copycat” measures, which will further alter the global trade landscape and increase uncertainty.
While the WTO Trade Facilitation Agreement (TFA) and some of the key plurilateral agreements (e.g. covering trade in telecommunications, information technology, and government procurement, among others), will continue to garner commitment to the multilateral system, progress toward free trade under the WTO will be piecemeal, at best, for the immediate future. Yet, access to markets, capital and technology remain critical drivers for the smaller countries to sustain their economic development and poverty reduction—by promoting competition, achieving scale economies and increase efficiencies.
What policy options are available for smaller and poor developing countries to mitigate the potential impacts from this evolving trade landscape and support their ongoing trade-led economic development?
Sri Lanka’s Integration Options
Unilateral reforms would enable smaller countries to reap all the benefits and fewer costs (in terms of welfare losses from trade diversion) than the alternatives, but can be a hard sell in the reciprocity era, given that domestic industries often oppose opening the market to competition—this option will be further constrained in an environment where major markets are putting up barriers and putting export-led development at risk. Reciprocal regional and bilateral agreements are, therefore, often a more palatable means to open protected markets, providing in return, preferential, or for late-comers, reestablishing a level playing field with respect to market access in partner countries. Reforms of behind-the-border regulations, that impede both domestic and foreign trade however, can garner support at home as they directly reduce the cost of doing business and increase efficiency without any threat of competition.
Bilateral agreements, with the right partners, can act as a platform for wider regional or mega-regional trading blocs.There has also been a proliferation of bilateral FTAs. Experience suggests, that an agreement with more advanced economies is likely to yield the most gains for a small developing country like Sri Lanka. It is unlikely that smaller countries will be given negotiating priority by the US and EU,unless significant security elements are at play. This leaves Sri Lanka with its current set of bilateral agreements it is negotiating with India, Pakistan, Malaysia and Singapore, and others on the radar.
A successfully-concluded ECTA (with sufficient safeguards against import surges) from India provides Sri Lanka with a market, its size and diversity akin to a regional bloc. From a static perspective, India, as a market, is larger than MENA, LAC or African regional trading blocs. India is currently the third largest economy in the world and is set to become the second largest economy by 2050. Recent projections by Price Waterhouse Coopers suggest that, by 2021, India’s emerging and middle-class segments combined will comprise nearly 900m people, on par with the EU. However, past apprehensions from some corners have distracted from the true benefits of such an agreement to the Sri Lankan economy. Securing an arrangement will provide Sri Lanka with both, a market and early linkages to production structures and service markets that will grow from the“Make India” initiative. Sri Lanka can ride on India’s coattails, so to speak, by integrating with its production and service base early on. This will not only help Sri Lanka’s own industrial goals, by providing opportunities for technology transfer and learning-by-doing., but, as India likely moves toward a broader regional or pan-regional framework, Sri Lanka will be in a better position to negotiate its interests.
The agreements with China, Thailand, Singapore and Malaysia, for example, provide synergies that complement their manufacturing competencies with India’s services competency, both, directly and indirectly. First, they are at a much more advanced stage of development and their economic structures are complementary to Sri Lanka, making them ‘natural trading partners’. Moreover, China is a powerhouse in manufacturing across-the-board. A phased reform agenda with ASEAN and China can mitigate any negative economic effects, such as so-called trade diversion that may arise out of bilateral agreements with India or Pakistan.
Compliance costs
While a bilateral deal can provide the much-needed market access to complementary and growing economies, the resulting “spaghetti bowl” of multiple bilateral reduces their efficiency, both, by creating an administrative burden in complying with multiple rules of origin and the absence of opportunities to cumulate origin with multiple trading partners. The latter is particularly important in sectors dependant on multi-country value chain linkages. Therefore, the optimum platform would be to avoid single bilateral agreements but regional agreements, such as an ASEAN-wide arrangement and ASEAN+1 that reduces the administrative compliance costs of individual agreements and better promote integration into regional production chains across ASEAN and China.
The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), involving Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan and Nepal, remains a relevant regional vehicle, to the extent it provides for contiguity among member states through multimodal maritime connectivity, such as, an expanded Bangladesh-Bhutan-Nepal-India Motor Vehicle Agreement. Sri Lanka’s transport services sector can be further enhanced through a formalized Trade and Transit Facilitation Agreement—the Bangladesh-India Coastal Agreement may be a useful template that can be regionalized. However, the BIMSTEC FTA is unlikely to increase the intra-BIMSTEC trade in the short run unless the preferences are broadened and deepened to activate production links between the countries, which would ultimately generate regional value chains.
While the priorities for regional integration are as varied as the underlying drivers, it will be critical, moving forward, that these agreements serve not as a substitute for multilateral liberalization, but as enablers of multilateral liberalization, if they are going to serve the longer-term interests of its members to build resilient economies that have the flexibility to respond to changing global dynamics and future upheavals. This will require a careful balancing of regional priorities with the fundamentals of multilateralism that will serve their longer-term interests. All of these agreements—including any new ones that may be concluded with prospective partners, such as, New Zealand or Turkey—should therefore be viewed as a platform for multilateralizing in the future, whether through mega-trading blocs or inter-regional initiatives, along the lines of the China-backed Regional Comprehensive Economic Partnership (RCEP). One step in that direction may be efforts to negotiate cross-regional rules of origin among a coalition of the willing, which would open opportunities for cumulation to exploit regional value chain linkages. This would be a much easier way to move toward harmonization without re-negotiating existing agreements and/or negotiating new agreements that can take many years to achieve. It also would not require that all member countries agree—it would allow for so-called “variable geometry”, whereby the willing can move faster toward inter-regional integration.
Reciprocal nature
In parallel, Sri Lanka should seek to accede to plurilateral agreement and conventions, whether under the WTO, the Kyoto Convention or other trade-facilitating bodies. Like trade agreements, the reciprocal nature of many of these plurilaterals can act as a ‘carrot’ to align domestic policies with international standards. The a la carte nature of these agreements also allow countries to pick and choose so-called WTO-plus integration options, at their own pace, while opening new avenues of market access. For example, the Information Technology Agreement now has 82 signatories and has eliminated tariffs on covering some $2.5 trillion of annual trade, benefitting both, members and non-members, as the reductions apply on an MFN basis. Given Sri Lanka’s emerging IT sector, membership in this plurilateral would provide Sri Lanka with immediate benefits at a very minimal cost.
In summary, Sri Lanka must take a more strategic and comprehensive approach to regionalism and integration with a longer-term view that enables multilateral progress in the future. Sri Lanka can leverage key bilateral, regional and plurilateral agreements that can approximate, to some extent, the benefits of multilateral integration—including a move toward international standards—while building coalitions for the future. These agreements can also provide a platform for bringing Sri Lanka closer to international standards. It is critical, however, that these agreements are properly sequenced to minimize the administrative burden on traders and increase opportunities to forge sustainable market linkages.
(The writer is a former Advisor to the BOI and is currently a consultant to the World Bank and USAID on trade and development. The views expressed herein are the author’s own and do not necessarily reflect those of the World Bank.)