New import laws to build economic freedoms through trade

Two new trade laws aim to protect domestic industry from unfair trade practices and potentially eliminate protectionist lobbying so that consumers can benefit from cheaper foreign goods

Sri Lanka has introduced new laws to protect domestic industries from certain kinds of cheap imports; in doing so, the government has demonstrated its commitment to trade liberalisation and enhancing the economic freedoms of citizens. In March 2018, Parliament passed two new trade protection laws – the Safeguard Measures Act and the Anti-Dumping and Countervailing Duties Act – 17 years after these laws were first drafted. Briefly, the Safeguard Measures Act intends to protect domestic industries from a sudden surge in imports of a particular item from one country or several. The Anti-Dumping and Countervailing Duties Act intends to protect domestic manufacturers from foreign businesses dumping cheap goods here. Being cheap, however, is not necessarily bad.

“When efficiency or productivity gains allow importing countries to price their products lower than domestic prices, domestic industries will not be protected under the new law. Nor would consumers be punished for the inefficiency and inability of domestic businesses to compete with imports,” says Gothami Silva, Director of Commerce at Sri Lanka’s Department of Commerce.

High customs duties and other taxes called para tariffs like cess and the Port and Aviation Levy are imposed on several items like ceramic tiles, shoes and steel for the sake of protecting domestic industry, but actually hurt consumers. For example, a two square foot tile that costs around Rs72 in India costs about Rs260 when imported to Sri Lanka because of the import taxes. Shoemakers have successfully lobbied government for high import tariffs so that they can make profits, but poorer consumers are cornered. Import taxes on shoes are as high as 285%.

The government is keen to eventually end this trend.

Anti-dumping and countervailing duties will apply to imported goods that are cheaper than those manufactured locally provided they benefit from subsidies or tax breaks given to businesses in importing countries. Businesses that undercut prices even below to what they sell at home just to capture a foreign market by driving local manufacturers out of business are also liable to anti-dumping laws.

The new laws bring clarity that cheap imports – or those of substandard quality – don’t necessarily mean dumping, and therefore will not play into the hands of the nationalistic protectionist lobby.

Imported goods can be cheaper than similar goods manufactured in Sri Lanka for several reasons: raw materials may be cheaper, manufacturers in importing countries may enjoy scale, or have much more efficient processes, or energy prices may be cheaper. The new anti-dumping rules won’t apply for these reasons, and Sri Lankan consumers can enjoy the benefits without rent-seeking lobbyists destroying their freedoms.

In fact, consumer interests will be considered over the protectionist lobby when the Director General of Commerce considers an anti-dumping complaint.

The two new laws also address the issue of substandard imports. Quality has many subjective elements and anti-dumping measures will take aim at substandard imports that pose a threat to health and safety of Sri Lankan consumers, rejecting another argument of nationalistic enterprises for a blanket ban on substandard or inferior quality imported goods in favour of better quality and therefore more expensive domestic goods.

The government is committed to liberalising trade and is negotiating several free trade agreements (FTAs) while removing nuisance taxes on imports. “The two new laws will create a level playing field for both domestic and foreign producers to compete under fair conditions,” says Gothami Silva. The Safeguard Measures and Anti-Dumping and Countervailing Duties laws will make it easier for the government to sell the FTAs, especially with China, which could otherwise be politically contentious as the case with deepening trade ties with India has shown.

“The two new laws were long overdue. With the government negotiating comprehensive free trade deals with China, India and Singapore and committing to trade liberalisation, rules-based measures to protect domestic industries are important,” says Shiran Fernando, Chief Economist at Ceylon Chamber of Commerce, a business body.

The two new laws also address the issue of substandard imports. Quality has many subjective elements and anti-dumping measures will take aim at substandard imports that pose a threat to health and safety of Sri Lankan consumers

The FTA with Singapore requires Sri Lanka to eliminate customs duties on 50% of items imported from that country, gradually increasing it to 80% in 12 years. Singapore already provides duty-free access to 99% of exports from Sri Lanka. In November 2017, the government announced that it would abolish para tariffs on 1,200 imported items from all countries. Para tariffs are additional taxes, apart from import duties like the Port and Aviation Levy and Cess. The previous year, para tariffs on 240 items were abolished.

Sri Lanka still has many para tariffs that could potentially make the new anti-dumping rules less effective, Fernando believes. “But we’re moving in the right direction,” he says. Making a case for dumping can be challenging, but Sri Lanka’s new laws follow global norms on safeguard measures and anti-dumping. While they’re designed to protect, they also try to avoid frivolous complaints and eliminate rent-seeking.

Domestic producers supporting an anti-dumping investigation must provide evidence that there is dumping and it’s causing harm to domestic producers. Businesses filing a complaint must account for more than 25% of total domestic output of the item in question; they must also show that businesses accounting for more than 50% of production of the item in question are affected by dumping.

Businesses must show how dumping has caused declining sales, prices, profits or market share, or falling production and capacity utilization. They must prove that the normal price of an item is higher than the price at which it was being exported to Sri Lanka. If dumping is proven, the government can impose duties up to the difference between the normal value and export price, which is called the margin of dumping.

However, the Department of Commerce will not investigate if the margin of dumping is less than 2% of the export price, or if the imports in question account for less than 3% of similar imports from the same country.

Similar rules apply elsewhere, and have benefited countries like Sri Lanka from potentially ad hoc policies of other countries.In February 2018, the US said it was investigating Sri Lanka along with China and Thailand to determine whether rubber bands were being dumped in the United States.

The investigation was triggered after a US-based manufacturer alleged that rubber bands from the three countries were selling at lower than normal prices because they benefited from subsidies.

“The two new laws were long overdue. With the government negotiating comprehensive free trade deals with China, India and Singapore and committing to trade liberalisation, rulesbased measures to protect domestic industries are important” ]
Shiran Fernando

Sri Lanka’s Department of Commerce and the Attorney General’s office made submissions on behalf of Sri Lankan exporters, successfully arguing that rubber band exports to the US were below minimum thresholds in terms of value and volume to warrant an investigation. The US withdrew the investigation.

The World Trade Organisation is often maligned, but since 1995 it has heard 500 disputes and issued 350 rulings. The system may be imperfect but having a set of common rules helps.

The two new laws, together with proposed improvements to trade facilitation – the ease of moving goods across borders – and customs reforms, can improve Sri Lanka’s economic prospects exponentially.

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