The rationale for the Sri Lanka-Singapore FTA | Sunday Observer

The rationale for the Sri Lanka-Singapore FTA

Export oriented investment is important in smaller countries as it offers a chance to overcome the limitations of size, through access to larger markets and opportunities to achieve economies of scale in production.
Export oriented investment is important in smaller countries as it offers a chance to overcome the limitations of size, through access to larger markets and opportunities to achieve economies of scale in production.

Sri Lanka’s economy has lagged behind its potential for decades. After a brief post-war boom, growth has reverted back to the long-term average (4 per cent) in each of the five years from 2013-2017 and 2018 will not be any better.

Post-conflict countries expect to experience a sustained ‘peace dividend’ but Sri Lanka’s was surprisingly limited in scale and duration.

It is necessary to attract new investment to create jobs and improve living standards. Export oriented investment is especially important in smaller countries as it offers a chance to overcome the limitations of size, through access to larger markets and opportunities to achieve economies of scale in production. Moreover, openness to foreign investment generally promotes long run growth through knowledge and technology transfers from foreign to domestic firms.

Sri Lanka retreated from a policy of openness since the 2000’s, raising tariff and regulatory barriers resulting in a sharp contraction in exports as a share of GDP which fell from a high of 33.3 per cent to about 12.7 per cent of GDP in 2016. The Sri Lankan share in global exports has also declined.

The country’s share in world manufacturing exports increased from 0.05 per cent in the mid-1980s to about 0.11 per cent in 1999, but has since declined, reverting to the level of the 1980s.

Therefore, the Government is right to re-prioritise growth in international trade: the new National Trade Policy approved by the Cabinet in August 2017 focuses on stimulating economic growth and creating jobs by fostering an environment that is conducive for firms to export and compete for domestic markets.

Free Trade Agreements

FTAs are a part of the process of expanding trade as they open opportunities for Sri Lankan exporters and investors to expand their businesses into overseas markets— and help to maintain and stimulate the competitiveness of Sri Lankan firms.

This benefits Sri Lankan consumers through access to an increased range of better value goods and services.

Sri Lanka’s largest trade partners are the US, EU and the UK, all of which may face turmoil in the near future due to the protectionist policies of President Trump and Brexit. Therefore, it is prudent to seek to increase regional trade to offset the potential decline in our key markets.

Singapore is the current Chair of ASEAN and one of its most respected members. For a small country, thus far ignored by ASEAN due to the conflict and inconsistent policies the FTA provides an important signal of a policy orientation towards greater trade and investment with the region.

Therefore, for both immediate commercial and longer term strategic reasons the FTA is to be welcomed.

However, it is well-known that there are winners and losers in any trade liberalisation process which need to be addressed.

The Ministry of Development Strategies and International Trade has prepared a draft Trade Adjustment Program (TAP) which sets a framework to address the potential negative impact of trade liberalisation.

Many stakeholders are affected by tariffs so it is necessary to ensure that the interests of all stakeholders, as elaborated below, are considered.

Para tariffs

The customs tariff together with the para tariffs of PAL, cess are taxes which are imposed on imported products that are not applied to the domestic equivalent.

Since foreign exporters do not change the price that they charge for the product, the domestic price of the imported product rises by the amount of the tariff.

Domestic producers

Domestic producers competing with equivalent imports do not have to pay the para tariffs so have an advantage over the imported product.

As the price of imported products rise, domestic producers have the opportunity to raise their own selling prices because competing imported products now cost more. It is always the case that the prices of domestic products rises as tariffs are imposed on imports. If it were otherwise it would make no sense.

The domestic producer who maintains prices at exactly the same level if imports were not taxed would have no advantage in seeking a tariff to be imposed on imports. The very purpose of the tariff is to enable the domestic producer to sell his product at a higher price.

Therefore, domestic producers gain when the Government imposes a tariff on competing imports.

Domestic consumers of the product are equally affected by the imposition of the tariff. They must pay a higher price for both imported and local products. Thus, the protection of domestic producers is paid for by domestic consumers.

Government

The Government collects tariff revenue, on whatever quantity is imported, although they do not collect it on the local product. The benefit that the Government creates for the local producer by raising the price of imports is collected by the producer.

There are two domestic winners (domestic producers and the Government) and one domestic loser (domestic consumers) because of the imposition of a tariff.

The number of consumers in any industry far exceeds the number producers or employees but consumers are unorganised and unlikely to be well informed on tariff structures. Thus, consumer interests may easily be overlooked with minimal consequences. While this is convenient it does not make for sound policy.

As the FTA with Singapore has only been recently signed it is not possible to offer any empirical evidence as to its impact.

However, the much-criticised FTA with India that was signed in 1999 may indicate some of the potential. A report by IPS on the FTA with India notes that export volumes have grown and India has become the third largest destination for Sri Lankan exports:

“…nearly 70 per cent of Sri Lanka’s exports go to India using FTA provisions….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 Lankan exports – a rank achieved through the benefit of the tariff preferences in the FTA.”

The export basket has also diversified:

“ ...if one looks at the Sri Lankan export basket destined for India before the FTA, which was dominated by agricultural products such as cloves, peppers, arecanuts, dried fruits, nutmeg, etc., exports have now (after the FTA) become more diversified. It includes boats/ships, wires and cables, glass and glassware, apparel, woven fabric, etc. In 2013, the largest Sri Lankan export to India was boats and ships.”

“Sri Lanka exported 505 products to India before the FTA in 1999, the products exported increased to 1,062 by 2005, and to 2,100 items 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 came into operation in 2000.”

Given sufficient time, the the FTA with Singapore will have similarly beneficial outcomes. 

Comments